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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

Unocal Corporation, a Delaware corporation, Defendant Below, Appellant, v. Mesa Petroleum Co., a Delaware corporation, Mesa Asset Co., a Delaware corporation, Mesa Eastern, Inc., a Delaware corporation and Mesa Partners II, a Texas partnership, Plaintiffs Below, Appellees.

Headnote

Board decisions typically receive the deferential presumption of business judgment. However, in some sets of facts it may be difficult to ascertain immediately whether actions taken by the board are in fact acts taken by a fully informed, disinterested board acting in the best interests of the corporation or if they are acting to entrench themselves and not in the best interests of the corporation. 

For example, when a board unilaterally adopts defensive measures in response to a perceived threat to its corporate policy or effectiveness, that decision might be motivated by a desire to protect the corporation from some outside threat (best case scenario) or it could also be motivated by a desire to entrench disloyal managers (worst case scenario).

In such situations, those board decisions will be subject to a preliminary review (the intermediate standard) before the court determines whether to subject those decisions to deferential business judgment or the more exacting entire fairness standard. The nature of this review is an inquiry into the motivations behind board actions and then a determination about the reasonableness of the means adopted by the board. In testing the motive and means of the board, the burden is on the board to show that it was properly motivated and that the means it adopted were reasonable.

To the extent the board is able to establish it was properly motivated and acted reasonably, the board's actions will receive the presumption of business judgment. On the other hand, if the board was not properly motivated or if the defensive measures adopted by the board are not reasonable, the board's decision will be subject to entire fairness review. Because entire fairness review places such a heavy burden on defendants, resolution of the preliminary inquiry laid out in Unocal will often times be outcome determinative.