A. Gilchrist Sparks, III (argued), and Kenneth J. Nachbar of Morris, Nichols, Arsht & Tunnell, Wilmington, James R. Martin and Mitchell A. Karlan of Gibson, Dunn & Crutcher and Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., of counsel, for appellant.

Charles F. Richards, Jr. (argued), Samuel A. Nolen, and Gregory P. Williams of Richards, Layton & Finger, Wilmington, for appellees.

Before McNEILLY and MOORE, JJ., and TAYLOR, Judge (Sitting by designation pursuant to Del. Const., Art. 4, § 12.)

[949] MOORE, Justice.

We confront an issue of first impression in Delaware — the validity of a corporation's self-tender for its own shares which excludes from participation a stockholder making a hostile tender offer for the company's stock.

The Court of Chancery granted a preliminary injunction to the plaintiffs, Mesa Petroleum Co., Mesa Asset Co., Mesa Partners II, and Mesa Eastern, Inc. (collectively "Mesa")^[1], enjoining an exchange offer of the defendant, Unocal Corporation (Unocal) for its own stock. The trial court concluded that a selective exchange offer, excluding Mesa, was legally impermissible. We cannot agree with such a blanket rule. The factual findings of the Vice Chancellor, fully supported by the record, establish that Unocal's board, consisting of a majority of independent directors, acted in good faith, and after reasonable investigation found that Mesa's tender offer was both inadequate and coercive. Under the circumstances the board had both the power and duty to oppose a bid it perceived to be harmful to the corporate enterprise. On this record we are satisfied that the device Unocal adopted is reasonable in relation to the threat posed, and that the board acted in the proper exercise of sound business judgment. We will not substitute our views for those of the board if the latter's decision can be "attributed to any rational business purpose." Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971). Accordingly, we reverse the decision of the Court of Chancery and order the preliminary injunction vacated.^[2]

I.

The factual background of this matter bears a significant relationship to its ultimate outcome.

On April 8, 1985, Mesa, the owner of approximately 13% of Unocal's stock, commenced a two-tier "front loaded" cash tender offer for 64 million shares, or approximately 37%, of Unocal's outstanding stock at a price of $54 per share. The "back-end" was designed to eliminate the remaining publicly held shares by an exchange of securities purportedly worth $54 per share. However, pursuant to an order entered by the United States District Court for the Central District of California on April 26, 1985, Mesa issued a supplemental proxy statement to Unocal's stockholders disclosing that the securities offered in the second-step merger would be highly subordinated, and that Unocal's capitalization would differ significantly from its present [950] structure. Unocal has rather aptly termed such securities "junk bonds".^[3]

Unocal's board consists of eight independent outside directors and six insiders. It met on April 13, 1985, to consider the Mesa tender offer. Thirteen directors were present, and the meeting lasted nine and one-half hours. The directors were given no agenda or written materials prior to the session. However, detailed presentations were made by legal counsel regarding the board's obligations under both Delaware corporate law and the federal securities laws. The board then received a presentation from Peter Sachs on behalf of Goldman Sachs & Co. (Goldman Sachs) and Dillon, Read & Co. (Dillon Read) discussing the bases for their opinions that the Mesa proposal was wholly inadequate. Mr. Sachs opined that the minimum cash value that could be expected from a sale or orderly liquidation for 100% of Unocal's stock was in excess of $60 per share. In making his presentation, Mr. Sachs showed slides outlining the valuation techniques used by the financial advisors, and others, depicting recent business combinations in the oil and gas industry. The Court of Chancery found that the Sachs presentation was designed to apprise the directors of the scope of the analyses performed rather than the facts and numbers used in reaching the conclusion that Mesa's tender offer price was inadequate.

Mr. Sachs also presented various defensive strategies available to the board if it concluded that Mesa's two-step tender offer was inadequate and should be opposed. One of the devices outlined was a self-tender by Unocal for its own stock with a reasonable price range of $70 to $75 per share. The cost of such a proposal would cause the company to incur $6.1-6.5 billion of additional debt, and a presentation was made informing the board of Unocal's ability to handle it. The directors were told that the primary effect of this obligation would be to reduce exploratory drilling, but that the company would nonetheless remain a viable entity.

The eight outside directors, comprising a clear majority of the thirteen members present, then met separately with Unocal's financial advisors and attorneys. Thereafter, they unanimously agreed to advise the board that it should reject Mesa's tender offer as inadequate, and that Unocal should pursue a self-tender to provide the stockholders with a fairly priced alternative to the Mesa proposal. The board then reconvened and unanimously adopted a resolution rejecting as grossly inadequate Mesa's tender offer. Despite the nine and one-half hour length of the meeting, no formal decision was made on the proposed defensive self-tender.

On April 15, the board met again with four of the directors present by telephone [951] and one member still absent.^[4] This session lasted two hours. Unocal's Vice President of Finance and its Assistant General Counsel made a detailed presentation of the proposed terms of the exchange offer. A price range between $70 and $80 per share was considered, and ultimately the directors agreed upon $72. The board was also advised about the debt securities that would be issued, and the necessity of placing restrictive covenants upon certain corporate activities until the obligations were paid. The board's decisions were made in reliance on the advice of its investment bankers, including the terms and conditions upon which the securities were to be issued. Based upon this advice, and the board's own deliberations, the directors unanimously approved the exchange offer. Their resolution provided that if Mesa acquired 64 million shares of Unocal stock through its own offer (the Mesa Purchase Condition), Unocal would buy the remaining 49% outstanding for an exchange of debt securities having an aggregate par value of $72 per share. The board resolution also stated that the offer would be subject to other conditions that had been described to the board at the meeting, or which were deemed necessary by Unocal's officers, including the exclusion of Mesa from the proposal (the Mesa exclusion). Any such conditions were required to be in accordance with the "purport and intent" of the offer.

Unocal's exchange offer was commenced on April 17, 1985, and Mesa promptly challenged it by filing this suit in the Court of Chancery. On April 22, the Unocal board met again and was advised by Goldman Sachs and Dillon Read to waive the Mesa Purchase Condition as to 50 million shares. This recommendation was in response to a perceived concern of the shareholders that, if shares were tendered to Unocal, no shares would be purchased by either offeror. The directors were also advised that they should tender their own Unocal stock into the exchange offer as a mark of their confidence in it.

Another focus of the board was the Mesa exclusion. Legal counsel advised that under Delaware law Mesa could only be excluded for what the directors reasonably believed to be a valid corporate purpose. The directors' discussion centered on the objective of adequately compensating shareholders at the "back-end" of Mesa's proposal, which the latter would finance with "junk bonds". To include Mesa would defeat that goal, because under the proration aspect of the exchange offer (49%) every Mesa share accepted by Unocal would displace one held by another stockholder. Further, if Mesa were permitted to tender to Unocal, the latter would in effect be financing Mesa's own inadequate proposal.

On April 24, 1985 Unocal issued a supplement to the exchange offer describing the partial waiver of the Mesa Purchase Condition. On May 1, 1985, in another supplement, Unocal extended the withdrawal, proration and expiration dates of its exchange offer to May 17, 1985.

Meanwhile, on April 22, 1985, Mesa amended its complaint in this action to challenge the Mesa exclusion. A preliminary injunction hearing was scheduled for May 8, 1985. However, on April 23, 1985, Mesa moved for a temporary restraining order in response to Unocal's announcement that it was partially waiving the Mesa Purchase Condition. After expedited briefing, the Court of Chancery heard Mesa's motion on April 26.

[952] On April 29, 1985, the Vice Chancellor temporarily restrained Unocal from proceeding with the exchange offer unless it included Mesa. The trial court recognized that directors could oppose, and attempt to defeat, a hostile takeover which they considered adverse to the best interests of the corporation. However, the Vice Chancellor decided that in a selective purchase of the company's stock, the corporation bears the burden of showing: (1) a valid corporate purpose, and (2) that the transaction was fair to all of the stockholders, including those excluded.

Unocal immediately sought certification of an interlocutory appeal to this Court pursuant to Supreme Court Rule 42(b). On May 1, 1985, the Vice Chancellor declined to certify the appeal on the grounds that the decision granting a temporary restraining order did not decide a legal issue of first impression, and was not a matter to which the decisions of the Court of Chancery were in conflict.

However, in an Order dated May 2, 1985, this Court ruled that the Chancery decision was clearly determinative of substantive rights of the parties, and in fact decided the main question of law before the Vice Chancellor, which was indeed a question of first impression. We therefore concluded that the temporary restraining order was an appealable decision. However, because the Court of Chancery was scheduled to hold a preliminary injunction hearing on May 8 at which there would be an enlarged record on the various issues, action on the interlocutory appeal was deferred pending an outcome of those proceedings.

In deferring action on the interlocutory appeal, we noted that on the record before us we could not determine whether the parties had articulated certain issues which the Vice Chancellor should have an opportunity to consider in the first instance. These included the following:

a) Does the directors' duty of care to the corporation extend to protecting the corporate enterprise in good faith from perceived depredations of others, including persons who may own stock in the company?

b) Have one or more of the plaintiffs, their affiliates, or persons acting in concert with them, either in dealing with Unocal or others, demonstrated a pattern of conduct sufficient to justify a reasonable inference by defendants that a principle objective of the plaintiffs is to achieve selective treatment for themselves by the repurchase of their Unocal shares at a substantial premium?

c) If so, may the directors of Unocal in the proper exercise of business judgment employ the exchange offer to protect the corporation and its shareholders from such tactics? See Pogostin v. Rice, Del. Supr., 480 A.2d 619 (1984).

d) If it is determined that the purpose of the exchange offer was not illegal as a matter of law, have the directors of Unocal carried their burden of showing that they acted in good faith? See Martin v. American Potash & Chemical Corp., 33 Del.Ch. 234, 92 A.2d 295 at 302.

After the May 8 hearing the Vice Chancellor issued an unreported opinion on May 13, 1985 granting Mesa a preliminary injunction. Specifically, the trial court noted that "[t]he parties basically agree that the directors' duty of care extends to protecting the corporation from perceived harm whether it be from third parties or shareholders." The trial court also concluded in response to the second inquiry in the Supreme Court's May 2 order, that "[a]lthough the facts, ... do not appear to be sufficient to prove that Mesa's principle objective is to be bought off at a substantial premium, they do justify a reasonable inference to the same effect."

As to the third and fourth questions posed by this Court, the Vice Chancellor stated that they "appear to raise the more fundamental issue of whether directors owe fiduciary duties to shareholders who they perceive to be acting contrary to the best interests of the corporation as a whole." While determining that the directors' decision to oppose Mesa's tender [953] offer was made in a good faith belief that the Mesa proposal was inadequate, the court stated that the business judgment rule does not apply to a selective exchange offer such as this.

On May 13, 1985 the Court of Chancery certified this interlocutory appeal to us as a question of first impression, and we accepted it on May 14. The entire matter was scheduled on an expedited basis.^[5]

II.

The issues we address involve these fundamental questions: Did the Unocal board have the power and duty to oppose a takeover threat it reasonably perceived to be harmful to the corporate enterprise, and if so, is its action here entitled to the protection of the business judgment rule?

Mesa contends that the discriminatory exchange offer violates the fiduciary duties Unocal owes it. Mesa argues that because of the Mesa exclusion the business judgment rule is inapplicable, because the directors by tendering their own shares will derive a financial benefit that is not available to all Unocal stockholders. Thus, it is Mesa's ultimate contention that Unocal cannot establish that the exchange offer is fair to all shareholders, and argues that the Court of Chancery was correct in concluding that Unocal was unable to meet this burden.

Unocal answers that it does not owe a duty of "fairness" to Mesa, given the facts here. Specifically, Unocal contends that its board of directors reasonably and in good faith concluded that Mesa's $54 two-tier tender offer was coercive and inadequate, and that Mesa sought selective treatment for itself. Furthermore, Unocal argues that the board's approval of the exchange offer was made in good faith, on an informed basis, and in the exercise of due care. Under these circumstances, Unocal contends that its directors properly employed this device to protect the company and its stockholders from Mesa's harmful tactics.

III.

We begin with the basic issue of the power of a board of directors of a Delaware corporation to adopt a defensive measure of this type. Absent such authority, all other questions are moot. Neither issues of fairness nor business judgment are pertinent without the basic underpinning of a board's legal power to act.

The board has a large reservoir of authority upon which to draw. Its duties and responsibilities proceed from the inherent powers conferred by 8 Del.C. § 141(a), respecting management of the corporation's "business and affairs".^[6] Additionally, the powers here being exercised derive from 8 Del.C. § 160(a), conferring broad authority upon a corporation to deal in its own stock.^[7] From this it is now well established that in the acquisition of its shares a [954] Delaware corporation may deal selectively with its stockholders, provided the directors have not acted out of a sole or primary purpose to entrench themselves in office. Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964); Bennett v. Propp, Del.Supr., 187 A.2d 405, 408 (1962); Martin v. American Potash & Chemical Corporation, Del.Supr., 92 A.2d 295, 302 (1952); Kaplan v. Goldsamt, Del.Ch., 380 A.2d 556, 568-569 (1977); Kors v. Carey, Del. Ch., 158 A.2d 136, 140-141 (1960).

Finally, the board's power to act derives from its fundamental duty and obligation to protect the corporate enterprise, which includes stockholders, from harm reasonably perceived, irrespective of its source. See e.g. Panter v. Marshall Field & Co., 646 F.2d 271, 297 (7th Cir.1981); Crouse-Hinds Co. v. Internorth, Inc., 634 F.2d 690, 704 (2d Cir.1980); Heit v. Baird, 567 F.2d 1157, 1161 (1st Cir.1977); Cheff v. Mathes, 199 A.2d at 556; Martin v. American Potash & Chemical Corp., 92 A.2d at 302; Kaplan v. Goldsamt, 380 A.2d at 568-69; Kors v. Carey, 158 A.2d at 141; Northwest Industries, Inc. v. B.F. Goodrich Co., 301 F.Supp. 706, 712 (M.D.Ill. 1969). Thus, we are satisfied that in the broad context of corporate governance, including issues of fundamental corporate change, a board of directors is not a passive instrumentality.^[8]

Given the foregoing principles, we turn to the standards by which director action is to be measured. In Pogostin v. Rice, Del.Supr., 480 A.2d 619 (1984), we held that the business judgment rule, including the standards by which director conduct is judged, is applicable in the context of a takeover. Id. at 627. The business judgment rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984) (citations omitted). A hallmark of the business judgment rule is that a court will not substitute its judgment for that of the board if the latter's decision can be "attributed to any rational business purpose." Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971).

When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.^[9]See also Johnson v. Trueblood, 629 F.2d 287, 292-293 (3d Cir.1980). There are, however, certain caveats to a proper exercise of this function. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.

This Court has long recognized that:

[955] We must bear in mind the inherent danger in the purchase of shares with corporate funds to remove a threat to corporate policy when a threat to control is involved. The directors are of necessity confronted with a conflict of interest, and an objective decision is difficult.

Bennett v. Propp, Del.Supr., 187 A.2d 405, 409 (1962). In the face of this inherent conflict directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person's stock ownership. Cheff v. Mathes, 199 A.2d at 554-55. However, they satisfy that burden "by showing good faith and reasonable investigation...." Id. at 555. Furthermore, such proof is materially enhanced, as here, by the approval of a board comprised of a majority of outside independent directors who have acted in accordance with the foregoing standards. See Aronson v. Lewis, 473 A.2d at 812, 815; Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971); Panter v. Marshall Field & Co., 646 F.2d 271, 295 (7th Cir.1981).

IV.

A.

In the board's exercise of corporate power to forestall a takeover bid our analysis begins with the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation's stockholders. Guth v. Loft, Inc., Del. Supr., 5 A.2d 503, 510 (1939). As we have noted, their duty of care extends to protecting the corporation and its owners from perceived harm whether a threat originates from third parties or other shareholders.^[10] But such powers are not absolute. A corporation does not have unbridled discretion to defeat any perceived threat by any Draconian means available.

The restriction placed upon a selective stock repurchase is that the directors may not have acted solely or primarily out of a desire to perpetuate themselves in office. See Cheff v. Mathes, 199 A.2d at 556; Kors v. Carey, 158 A.2d at 140. Of course, to this is added the further caveat that inequitable action may not be taken under the guise of law. Schnell v. Chris-Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971). The standard of proof established in Cheff v. Mathes and discussed supra at page 16, is designed to ensure that a defensive measure to thwart or impede a takeover is indeed motivated by a good faith concern for the welfare of the corporation and its stockholders, which in all circumstances must be free of any fraud or other misconduct. Cheff v. Mathes, 199 A.2d at 554-55. However, this does not end the inquiry.

B.

A further aspect is the element of balance. If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed. This entails an analysis by the directors of the nature of the takeover bid and its effect on the corporate enterprise. Examples of such concerns may include: inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on "constituencies" other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange. See Lipton and Brownstein, Takeover Responses and Directors' Responsibilities: An Update, p. 7, ABA National Institute on the Dynamics of Corporate Control (December 8, 1983). While not a controlling factor, it also seems to us that a board may reasonably consider the basic stockholder [956] interests at stake, including those of short term speculators, whose actions may have fueled the coercive aspect of the offer at the expense of the long term investor.^[11] Here, the threat posed was viewed by the Unocal board as a grossly inadequate two-tier coercive tender offer coupled with the threat of greenmail.

Specifically, the Unocal directors had concluded that the value of Unocal was substantially above the $54 per share offered in cash at the front end. Furthermore, they determined that the subordinated securities to be exchanged in Mesa's announced squeeze out of the remaining shareholders in the "back-end" merger were "junk bonds" worth far less than $54. It is now well recognized that such offers are a classic coercive measure designed to stampede shareholders into tendering at the first tier, even if the price is inadequate, out of fear of what they will receive at the back end of the transaction.^[12] Wholly beyond the coercive aspect of an inadequate two-tier tender offer, the threat was posed by a corporate raider with a national reputation as a "greenmailer".^[13]

In adopting the selective exchange offer, the board stated that its objective was either to defeat the inadequate Mesa offer or, should the offer still succeed, provide the 49% of its stockholders, who would otherwise be forced to accept "junk bonds", with $72 worth of senior debt. We find that both purposes are valid.

However, such efforts would have been thwarted by Mesa's participation in the exchange offer. First, if Mesa could tender its shares, Unocal would effectively be subsidizing the former's continuing effort to buy Unocal stock at $54 per share. Second, Mesa could not, by definition, fit within the class of shareholders being protected from its own coercive and inadequate tender offer.

Thus, we are satisfied that the selective exchange offer is reasonably related to the threats posed. It is consistent with the principle that "the minority stockholder shall receive the substantial equivalent in value of what he had before." Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 114 (1952). See also Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 940 (1985). This concept of fairness, while stated in the merger context, is also relevant [957] in the area of tender offer law. Thus, the board's decision to offer what it determined to be the fair value of the corporation to the 49% of its shareholders, who would otherwise be forced to accept highly subordinated "junk bonds", is reasonable and consistent with the directors' duty to ensure that the minority stockholders receive equal value for their shares.

V.

Mesa contends that it is unlawful, and the trial court agreed, for a corporation to discriminate in this fashion against one shareholder. It argues correctly that no case has ever sanctioned a device that precludes a raider from sharing in a benefit available to all other stockholders. However, as we have noted earlier, the principle of selective stock repurchases by a Delaware corporation is neither unknown nor unauthorized. Cheff v. Mathes, 199 A.2d at 554; Bennett v. Propp, 187 A.2d at 408; Martin v. American Potash & Chemical Corporation, 92 A.2d at 302; Kaplan v. Goldsamt, 380 A.2d at 568-569; Kors v. Carey, 158 A.2d at 140-141; 8 Del. C. § 160. The only difference is that heretofore the approved transaction was the payment of "greenmail" to a raider or dissident posing a threat to the corporate enterprise. All other stockholders were denied such favored treatment, and given Mesa's past history of greenmail, its claims here are rather ironic.

However, our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs. Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited. See Providence and Worcester Co. v. Baker, Del.Supr., 378 A.2d 121, 123-124 (1977). In the days when Cheff, Bennett, Martin and Kors were decided, the tender offer, while not an unknown device, was virtually unused, and little was known of such methods as two-tier "front-end" loaded offers with their coercive effects. Then, the favored attack of a raider was stock acquisition followed by a proxy contest. Various defensive tactics, which provided no benefit whatever to the raider, evolved. Thus, the use of corporate funds by management to counter a proxy battle was approved. Hall v. Trans-Lux Daylight Picture Screen Corp., Del.Supr., 171 A. 226 (1934); Hibbert v. Hollywood Park, Inc., Del.Supr., 457 A.2d 339 (1983). Litigation, supported by corporate funds, aimed at the raider has long been a popular device.

More recently, as the sophistication of both raiders and targets has developed, a host of other defensive measures to counter such ever mounting threats has evolved and received judicial sanction. These include defensive charter amendments and other devices bearing some rather exotic, but apt, names: Crown Jewel, White Knight, Pac Man, and Golden Parachute. Each has highly selective features, the object of which is to deter or defeat the raider.

Thus, while the exchange offer is a form of selective treatment, given the nature of the threat posed here the response is neither unlawful nor unreasonable. If the board of directors is disinterested, has acted in good faith and with due care, its decision in the absence of an abuse of discretion will be upheld as a proper exercise of business judgment.

To this Mesa responds that the board is not disinterested, because the directors are receiving a benefit from the tender of their own shares, which because of the Mesa exclusion, does not devolve upon all stockholders equally. See Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984). However, Mesa concedes that if the exclusion is valid, then the directors and all other stockholders share the same benefit. The answer of course is that the exclusion is valid, and the directors' participation in the exchange offer does not rise to the level of a disqualifying interest. The excellent discussion in Johnson v. Trueblood, 629 F.2d at 292-293, of the use of the business judgment rule in takeover contests also seems pertinent here.

[958] Nor does this become an "interested" director transaction merely because certain board members are large stockholders. As this Court has previously noted, that fact alone does not create a disqualifying "personal pecuniary interest" to defeat the operation of the business judgment rule. Cheff v. Mathes, 199 A.2d at 554.

Mesa also argues that the exclusion permits the directors to abdicate the fiduciary duties they owe it. However, that is not so. The board continues to owe Mesa the duties of due care and loyalty. But in the face of the destructive threat Mesa's tender offer was perceived to pose, the board had a supervening duty to protect the corporate enterprise, which includes the other shareholders, from threatened harm.

Mesa contends that the basis of this action is punitive, and solely in response to the exercise of its rights of corporate democracy.^[14] Nothing precludes Mesa, as a stockholder, from acting in its own self-interest. See e.g., DuPont v. DuPont, 251 Fed. 937 (D.Del.1918), aff'd 256 Fed. 129 (3d Cir.1918); Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, Del.Supr., 53 A.2d 441, 447 (1947); Heil v. Standard Gas & Electric Co., Del.Ch., 151 A. 303, 304 (1930). But see, Allied Chemical & Dye Corp. v. Steel & Tube Co. of America, Del.Ch., 120 A. 486, 491 (1923) (majority shareholder owes a fiduciary duty to the minority shareholders). However, Mesa, while pursuing its own interests, has acted in a manner which a board consisting of a majority of independent directors has reasonably determined to be contrary to the best interests of Unocal and its other shareholders. In this situation, there is no support in Delaware law for the proposition that, when responding to a perceived harm, a corporation must guarantee a benefit to a stockholder who is deliberately provoking the danger being addressed. There is no obligation of self-sacrifice by a corporation and its shareholders in the face of such a challenge.

Here, the Court of Chancery specifically found that the "directors' decision [to oppose the Mesa tender offer] was made in the good faith belief that the Mesa tender offer is inadequate." Given our standard of review under Levitt v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972), and Application of Delaware Racing Association, Del.Supr., 213 A.2d 203, 207 (1965), we are satisfied that Unocal's board has met its burden of proof. Cheff v. Mathes, 199 A.2d at 555.

VI.

In conclusion, there was directorial power to oppose the Mesa tender offer, and to undertake a selective stock exchange made in good faith and upon a reasonable investigation pursuant to a clear duty to protect the corporate enterprise. Further, the selective stock repurchase plan chosen by Unocal is reasonable in relation to the threat that the board rationally and reasonably believed was posed by Mesa's inadequate and coercive two-tier tender offer. Under those circumstances the board's action is entitled to be measured by the standards of the business judgment rule. Thus, unless it is shown by a preponderance of the evidence that the directors' decisions were primarily based on perpetuating themselves in office, or some other breach of fiduciary duty such as fraud, overreaching, lack of good faith, or being uninformed, a Court will not substitute its judgment for that of the board.

In this case that protection is not lost merely because Unocal's directors have [959] tendered their shares in the exchange offer. Given the validity of the Mesa exclusion, they are receiving a benefit shared generally by all other stockholders except Mesa. In this circumstance the test of Aronson v. Lewis, 473 A.2d at 812, is satisfied. See also Cheff v. Mathes, 199 A.2d at 554. If the stockholders are displeased with the action of their elected representatives, the powers of corporate democracy are at their disposal to turn the board out. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). See also 8 Del.C. §§ 141(k) and 211(b).

With the Court of Chancery's findings that the exchange offer was based on the board's good faith belief that the Mesa offer was inadequate, that the board's action was informed and taken with due care, that Mesa's prior activities justify a reasonable inference that its principle objective was greenmail, and implicitly, that the substance of the offer itself was reasonable and fair to the corporation and its stockholders if Mesa were included, we cannot say that the Unocal directors have acted in such a manner as to have passed an "unintelligent and unadvised judgment". Mitchell v. Highland-Western Glass Co., Del. Ch., 167 A. 831, 833 (1933). The decision of the Court of Chancery is therefore REVERSED, and the preliminary injunction is VACATED.

[1] T. Boone Pickens, Jr., is President and Chairman of the Board of Mesa Petroleum and President of Mesa Asset and controls the related Mesa entities.

[2] This appeal was heard on an expedited basis in light of the pending Mesa tender offer and Unocal exchange offer. We announced our decision to reverse in an oral ruling in open court on May 17, 1985 with the further statement that this opinion would follow shortly thereafter. See infra n. 5.

[3] Mesa's May 3, 1985 supplement to its proxy statement states:

(i) following the Offer, the Purchasers would seek to effect a merger of Unocal and Mesa Eastern or an affiliate of Mesa Eastern (the "Merger") in which the remaining Shares would be acquired for a combination of subordinated debt securities and preferred stock; (ii) the securities to be received by Unocal shareholders in the Merger would be subordinated to $2,400 million of debt securities of Mesa Eastern, indebtedness incurred to refinance up to $1,000 million of bank debt which was incurred by affiliates of Mesa Partners II to purchase Shares and to pay related interest and expenses and all then-existing debt of Unocal; (iii) the corporation surviving the Merger would be responsible for the payment of all securities of Mesa Eastern (including any such securities issued pursuant to the Merger) and the indebtedness referred to in item (ii) above, and such securities and indebtedness would be repaid out of funds generated by the operations of Unocal; (iv) the indebtedness incurred in the Offer and the Merger would result in Unocal being much more highly leveraged, and the capitalization of the corporation surviving the Merger would differ significantly from that of Unocal at present; and (v) in their analyses of cash flows provided by operations of Unocal which would be available to service and repay securities and other obligations of the corporation surviving the Merger, the Purchasers assumed that the capital expenditures and expenditures for exploration of such corporation would be significantly reduced.

[4] Under Delaware law directors may participate in a board meeting by telephone. Thus, 8 Del.C. § 141(i) provides:

Unless otherwise restricted by the certificate of incorporation or by-laws, members of the board of directors of any corporation, or any committee designated by the board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at such meeting.

[5] Such expedition was required by the fact that if Unocal's exchange offer was permitted to proceed, the proration date for the shares entitled to be exchanged was May 17, 1985, while Mesa's tender offer expired on May 23. After acceptance of this appeal on May 14, we received excellent briefs from the parties, heard argument on May 16 and announced our oral ruling in open court at 9:00 a.m. on May 17. See supra n. 2.

[6] The general grant of power to a board of directors is conferred by 8 Del.C. § 141(a), which provides:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation. (Emphasis added)

[7] This power under 8 Del.C. § 160(a), with certain exceptions not pertinent here, is as follows:

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; ...

[8] Even in the traditional areas of fundamental corporate change, i.e., charter, amendments [8 Del.C. § 242(b)], mergers [8 Del.C. §§ 251(b), 252(c), 253(a), and 254(d)], sale of assets [8 Del.C. § 271(a)], and dissolution [8 Del.C. § 275(a)], director action is a prerequisite to the ultimate disposition of such matters. See also, Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 888 (1985).

[9] This is a subject of intense debate among practicing members of the bar and legal scholars. Excellent examples of these contending views are: Block & Miller, The Responsibilities and Obligations of Corporate Directors in Takeover Contests, 11 Sec.Reg. L.J. 44 (1983); Easterbrook & Fischel, Takeover Bids, Defensive Tactics, and Shareholders' Welfare, 36 Bus.Law. 1733 (1981); Easterbrook & Fischel, The Proper Role of a Target's Management In Responding to a Tender Offer, 94 Harv.L.Rev. 1161 (1981). Herzel, Schmidt & Davis, Why Corporate Directors Have a Right To Resist Tender Offers, 3 Corp.L.Rev. 107 (1980); Lipton, Takeover Bids in the Target's Boardroom, 35 Bus.Law. 101 (1979).

[10] It has been suggested that a board's response to a takeover threat should be a passive one. Easterbrook & Fischel, supra, 36 Bus.Law. at 1750. However, that clearly is not the law of Delaware, and as the proponents of this rule of passivity readily concede, it has not been adopted either by courts or state legislatures. Easterbrook & Fischel, supra, 94 Harv.L.Rev. at 1194.

[11] There has been much debate respecting such stockholder interests. One rather impressive study indicates that the stock of over 50 percent of target companies, who resisted hostile takeovers, later traded at higher market prices than the rejected offer price, or were acquired after the tender offer was defeated by another company at a price higher than the offer price. See Lipton, supra 35 Bus.Law. at 106-109, 132-133. Moreover, an update by Kidder Peabody & Company of this study, involving the stock prices of target companies that have defeated hostile tender offers during the period from 1973 to 1982 demonstrates that in a majority of cases the target's shareholders benefited from the defeat. The stock of 81% of the targets studied has, since the tender offer, sold at prices higher than the tender offer price. When adjusted for the time value of money, the figure is 64%. See Lipton & Brownstein, supra ABA Institute at 10. The thesis being that this strongly supports application of the business judgment rule in response to takeover threats. There is, however, a rather vehement contrary view. See Easterbrook & Fischel, supra 36 Bus.Law. at 1739-1745.

[12] For a discussion of the coercive nature of a two-tier tender offer see e.g., Brudney & Chirelstein, Fair Shares in Corporate Mergers and Takeovers, 88 Harv.L.Rev. 297, 337 (1974); Finkelstein, Antitakeover Protection Against Two-Tier and Partial Tender Offers: The Validity of Fair Price, Mandatory Bid, and Flip-Over Provisions Under Delaware Law, 11 Sec.Reg. L.J. 291, 293 (1984); Lipton, supra, 35 Bus.Law at 113-14; Note, Protecting Shareholders Against Partial and Two-Tiered Takeovers: The Poison Pill Preferred, 97 Harv.L.Rev. 1964, 1966 (1984).

[13] The term "greenmail" refers to the practice of buying out a takeover bidder's stock at a premium that is not available to other shareholders in order to prevent the takeover. The Chancery Court noted that "Mesa has made tremendous profits from its takeover activities although in the past few years it has not been successful in acquiring any of the target companies on an unfriendly basis." Moreover, the trial court specifically found that the actions of the Unocal board were taken in good faith to eliminate both the inadequacies of the tender offer and to forestall the payment of "greenmail".

[14] This seems to be the underlying basis of the trial court's principal reliance on the unreported Chancery decision of Fisher v. Moltz, Del.Ch. No. 6068 (1979), published in 5 Del.J.Corp.L. 530 (1980). However, the facts in Fisher are thoroughly distinguishable. There, a corporation offered to repurchase the shares of its former employees, except those of the plaintiffs, merely because the latter were then engaged in lawful competition with the company. No threat to the enterprise was posed, and at best it can be said that the exclusion was motivated by pique instead of a rational corporate purpose.

A. Gilchrist Sparks, III (argued), Lawrence A. Hamermesh, and Kenneth Nachbar, of Morris, Nichols, Arsht & Tunnell, Wilmington, and Herbert M. Wachtell, Douglas S. Liebhafsky, Kenneth B. Forrest, and Theodore N. Mirvis, of Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for appellant Revlon.

Michael D. Goldman, James F. Burnett, Donald J. Wolfe, Jr., Richard L. Horwitz, of Potter, Anderson & Corroon, Wilmington, and Leon Silverman (argued), and Marc P. Cherno, of Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel, for appellant Forstmann Little.

Bruce M. Stargatt (argued), Edward B. Maxwell, 2nd, David C. McBride, Josy W. Ingersoll, of Young, Conaway, Stargatt & Taylor, Wilmington, and Stuart L. Shapiro (argued), Stephen P. Lamb, Andrew J. Turezyn, and Thomas P. White, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, and Michael W. Mitchell (New York City) and Marc B. Tucker, Washington, D.C., of Skadden, Arps, Slate, Meagher & Flom, for appellee.

Before McNEILLY and MOORE, JJ., and BALICK, Judge (Sitting by designation pursuant to Del. Const., Art. IV, § 12.).

[175] MOORE, Justice:

In this battle for corporate control of Revlon, Inc. (Revlon), the Court of Chancery enjoined certain transactions designed to thwart the efforts of Pantry Pride, Inc. (Pantry Pride) to acquire Revlon.^[1] The defendants are Revlon, its board of directors, and Forstmann Little & Co. and the latter's affiliated limited partnership (collectively, Forstmann). The injunction barred consummation of an option granted Forstmann to purchase certain Revlon assets (the lockup option), a promise by Revlon to deal exclusively with Forstmann in the face of a takeover (the no-shop provision), and the payment of a $25 million cancellation fee to Forstmann if the transaction was aborted. The Court of Chancery found that the Revlon directors had breached their duty of care by entering into the foregoing transactions [176] and effectively ending an active auction for the company. The trial court ruled that such arrangements are not illegal per se under Delaware law, but that their use under the circumstances here was impermissible. We agree. See MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., Del. Ch., 501 A.2d 1239 (1985). Thus, we granted this expedited interlocutory appeal to consider for the first time the validity of such defensive measures in the face of an active bidding contest for corporate control.^[2] Additionally, we address for the first time the extent to which a corporation may consider the impact of a takeover threat on constituencies other than shareholders. See Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 955 (1985).

In our view, lock-ups and related agreements are permitted under Delaware law where their adoption is untainted by director interest or other breaches of fiduciary duty. The actions taken by the Revlon directors, however, did not meet this standard. Moreover, while concern for various corporate constituencies is proper when addressing a takeover threat, that principle is limited by the requirement that there be some rationally related benefit accruing to the stockholders. We find no such benefit here.

Thus, under all the circumstances we must agree with the Court of Chancery that the enjoined Revlon defensive measures were inconsistent with the directors' duties to the stockholders. Accordingly, we affirm.

I.

The somewhat complex maneuvers of the parties necessitate a rather detailed examination of the facts. The prelude to this controversy began in June 1985, when Ronald O. Perelman, chairman of the board and chief executive officer of Pantry Pride, met with his counterpart at Revlon, Michel C. Bergerac, to discuss a friendly acquisition of Revlon by Pantry Pride. Perelman suggested a price in the range of $40-50 per share, but the meeting ended with Bergerac dismissing those figures as considerably below Revlon's intrinsic value. All subsequent Pantry Pride overtures were rebuffed, perhaps in part based on Mr. Bergerac's strong personal antipathy to Mr. Perelman.

Thus, on August 14, Pantry Pride's board authorized Perelman to acquire Revlon, either through negotiation in the $42-$43 per share range, or by making a hostile tender offer at $45. Perelman then met with Bergerac and outlined Pantry Pride's alternate approaches. Bergerac remained adamantly opposed to such schemes and conditioned any further discussions of the matter on Pantry Pride executing a standstill agreement prohibiting it from acquiring Revlon without the latter's prior approval.

On August 19, the Revlon board met specially to consider the impending threat of a hostile bid by Pantry Pride.^[3] At the meeting, Lazard Freres, Revlon's investment [177] banker, advised the directors that $45 per share was a grossly inadequate price for the company. Felix Rohatyn and William Loomis of Lazard Freres explained to the board that Pantry Pride's financial strategy for acquiring Revlon would be through "junk bond" financing followed by a break-up of Revlon and the disposition of its assets. With proper timing, according to the experts, such transactions could produce a return to Pantry Pride of $60 to $70 per share, while a sale of the company as a whole would be in the "mid 50" dollar range. Martin Lipton, special counsel for Revlon, recommended two defensive measures: first, that the company repurchase up to 5 million of its nearly 30 million outstanding shares; and second, that it adopt a Note Purchase Rights Plan. Under this plan, each Revlon shareholder would receive as a dividend one Note Purchase Right (the Rights) for each share of common stock, with the Rights entitling the holder to exchange one common share for a $65 principal Revlon note at 12% interest with a one-year maturity. The Rights would become effective whenever anyone acquired beneficial ownership of 20% or more of Revlon's shares, unless the purchaser acquired all the company's stock for cash at $65 or more per share. In addition, the Rights would not be available to the acquiror, and prior to the 20% triggering event the Revlon board could redeem the rights for 10 cents each. Both proposals were unanimously adopted.

Pantry Pride made its first hostile move on August 23 with a cash tender offer for any and all shares of Revlon at $47.50 per common share and $26.67 per preferred share, subject to (1) Pantry Pride's obtaining financing for the purchase, and (2) the Rights being redeemed, rescinded or voided.

The Revlon board met again on August 26. The directors advised the stockholders to reject the offer. Further defensive measures also were planned. On August 29, Revlon commenced its own offer for up to 10 million shares, exchanging for each share of common stock tendered one Senior Subordinated Note (the Notes) of $47.50 principal at 11.75% interest, due 1995, and one-tenth of a share of $9.00 Cumulative Convertible Exchangeable Preferred Stock valued at $100 per share. Lazard Freres opined that the notes would trade at their face value on a fully distributed basis.^[4] Revlon stockholders tendered 87 percent of the outstanding shares (approximately 33 million), and the company accepted the full 10 million shares on a pro rata basis. The new Notes contained covenants which limited Revlon's ability to incur additional debt, sell assets, or pay dividends unless otherwise approved by the "independent" (nonmanagement) members of the board.

At this point, both the Rights and the Note covenants stymied Pantry Pride's attempted takeover. The next move came on September 16, when Pantry Pride announced a new tender offer at $42 per share, conditioned upon receiving at least 90% of the outstanding stock. Pantry Pride also indicated that it would consider buying less than 90%, and at an increased price, if Revlon removed the impeding Rights. While this offer was lower on its face than the earlier $47.50 proposal, Revlon's investment banker, Lazard Freres, described the two bids as essentially equal in view of the completed exchange offer.

The Revlon board held a regularly scheduled meeting on September 24. The directors rejected the latest Pantry Pride offer and authorized management to negotiate with other parties interested in acquiring Revlon. Pantry Pride remained determined in its efforts and continued to make cash bids for the company, offering $50 per share on September 27, and raising its bid to $53 on October 1, and then to $56.25 on October 7.

[178] In the meantime, Revlon's negotiations with Forstmann and the investment group Adler & Shaykin had produced results. The Revlon directors met on October 3 to consider Pantry Pride's $53 bid and to examine possible alternatives to the offer. Both Forstmann and Adler & Shaykin made certain proposals to the board. As a result, the directors unanimously agreed to a leveraged buyout by Forstmann. The terms of this accord were as follows: each stockholder would get $56 cash per share; management would purchase stock in the new company by the exercise of their Revlon "golden parachutes";^[5] Forstmann would assume Revlon's $475 million debt incurred by the issuance of the Notes; and Revlon would redeem the Rights and waive the Notes covenants for Forstmann or in connection with any other offer superior to Forstmann's. The board did not actually remove the covenants at the October 3 meeting, because Forstmann then lacked a firm commitment on its financing, but accepted the Forstmann capital structure, and indicated that the outside directors would waive the covenants in due course. Part of Forstmann's plan was to sell Revlon's Norcliff Thayer and Reheis divisions to American Home Products for $335 million. Before the merger, Revlon was to sell its cosmetics and fragrance division to Adler & Shaykin for $905 million. These transactions would facilitate the purchase by Forstmann or any other acquiror of Revlon.

When the merger, and thus the waiver of the Notes covenants, was announced, the market value of these securities began to fall. The Notes, which originally traded near par, around 100, dropped to 87.50 by October 8. One director later reported (at the October 12 meeting) a "deluge" of telephone calls from irate noteholders, and on October 10 the Wall Street Journal reported threats of litigation by these creditors.

Pantry Pride countered with a new proposal on October 7, raising its $53 offer to $56.25, subject to nullification of the Rights, a waiver of the Notes covenants, and the election of three Pantry Pride directors to the Revlon board. On October 9, representatives of Pantry Pride, Forstmann and Revlon conferred in an attempt to negotiate the fate of Revlon, but could not reach agreement. At this meeting Pantry Pride announced that it would engage in fractional bidding and top any Forstmann offer by a slightly higher one. It is also significant that Forstmann, to Pantry Pride's exclusion, had been made privy to certain Revlon financial data. Thus, the parties were not negotiating on equal terms.

Again privately armed with Revlon data, Forstmann met on October 11 with Revlon's special counsel and investment banker. On October 12, Forstmann made a new $57.25 per share offer, based on several conditions.^[6] The principal demand was a lock-up option to purchase Revlon's Vision Care and National Health Laboratories divisions for $525 million, some $100-$175 million below the value ascribed to them by Lazard Freres, if another acquiror got 40% of Revlon's shares. Revlon also was required to accept a no-shop provision. The Rights and Notes covenants had to be removed as in the October 3 agreement. There would be a $25 million cancellation fee to be placed in escrow, and released to Forstmann if the new agreement terminated or if another acquiror got more than 19.9% of Revlon's stock. Finally, there would be no participation by Revlon management in the merger. In return, Forstmann agreed to support the par value [179] of the Notes, which had faltered in the market, by an exchange of new notes. Forstmann also demanded immediate acceptance of its offer, or it would be withdrawn. The board unanimously approved Forstmann's proposal because: (1) it was for a higher price than the Pantry Pride bid, (2) it protected the noteholders, and (3) Forstmann's financing was firmly in place.^[7] The board further agreed to redeem the rights and waive the covenants on the preferred stock in response to any offer above $57 cash per share. The covenants were waived, contingent upon receipt of an investment banking opinion that the Notes would trade near par value once the offer was consummated.

Pantry Pride, which had initially sought injunctive relief from the Rights plan on August 22, filed an amended complaint on October 14 challenging the lock-up, the cancellation fee, and the exercise of the Rights and the Notes covenants. Pantry Pride also sought a temporary restraining order to prevent Revlon from placing any assets in escrow or transferring them to Forstmann. Moreover, on October 22, Pantry Pride again raised its bid, with a cash offer of $58 per share conditioned upon nullification of the Rights, waiver of the covenants, and an injunction of the Forstmann lock-up.

On October 15, the Court of Chancery prohibited the further transfer of assets, and eight days later enjoined the lock-up, no-shop, and cancellation fee provisions of the agreement. The trial court concluded that the Revlon directors had breached their duty of loyalty by making concessions to Forstmann, out of concern for their liability to the noteholders, rather than maximizing the sale price of the company for the stockholders' benefit. MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., 501 A.2d at 1249-50.

II.

To obtain a preliminary injunction, a plaintiff must demonstrate both a reasonable probability of success on the merits and some irreparable harm which will occur absent the injunction. Gimbel v. Signal Companies, Del.Ch., 316 A.2d 599, 602 (1974), aff'd, Del.Supr., 316 A.2d 619 (1974). Additionally, the Court shall balance the conveniences of and possible injuries to the parties. Id.

A.

We turn first to Pantry Pride's probability of success on the merits. The ultimate responsibility for managing the business and affairs of a corporation falls on its board of directors. 8 Del.C. § 141(a).^[8] In discharging this function the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. Guth v. Loft, Inc., 23 Del.Supr. 255, 5 A.2d 503, 510 (1939); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). These principles apply with equal force when a board approves a corporate merger pursuant to 8 Del.C. § 251(b);^[9]Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873 (1985); and of course they are the bedrock of our law regarding corporate takeover issues. Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Unocal Corp. v. Mesa [180] Petroleum Co., Del.Supr., 493 A.2d 946, 953, 955 (1985); Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346, 1350 (1985). While the business judgment rule may be applicable to the actions of corporate directors responding to takeover threats, the principles upon which it is founded — care, loyalty and independence — must first be satisfied.^[10]Aronson v. Lewis, 473 A.2d at 812.

If the business judgment rule applies, there is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, 473 A.2d at 812. However, when a board implements anti-takeover measures there arises "the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders ..." Unocal Corp. v. Mesa Petroleum Co., 493 A.2d at 954. This potential for conflict places upon the directors the burden of proving that they had reasonable grounds for believing there was a danger to corporate policy and effectiveness, a burden satisfied by a showing of good faith and reasonable investigation. Id. at 955. In addition, the directors must analyze the nature of the takeover and its effect on the corporation in order to ensure balance — that the responsive action taken is reasonable in relation to the threat posed. Id.

B.

The first relevant defensive measure adopted by the Revlon board was the Rights Plan, which would be considered a "poison pill" in the current language of corporate takeovers — a plan by which shareholders receive the right to be bought out by the corporation at a substantial premium on the occurrence of a stated triggering event. See generally Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346 (1985). By 8 Del.C. §§ 141 and 122(13),^[11] the board clearly had the power to adopt the measure. See Moran v. Household International, Inc., 500 A.2d at 1351. Thus, the focus becomes one of reasonableness and purpose.

The Revlon board approved the Rights Plan in the face of an impending hostile takeover bid by Pantry Pride at $45 per share, a price which Revlon reasonably concluded was grossly inadequate. Lazard Freres had so advised the directors, and had also informed them that Pantry Pride was a small, highly leveraged company bent on a "bust-up" takeover by using "junk bond" financing to buy Revlon cheaply, sell the acquired assets to pay the [181] debts incurred, and retain the profit for itself.^[12] In adopting the Plan, the board protected the shareholders from a hostile takeover at a price below the company's intrinsic value, while retaining sufficient flexibility to address any proposal deemed to be in the stockholders' best interests.

To that extent the board acted in good faith and upon reasonable investigation. Under the circumstances it cannot be said that the Rights Plan as employed was unreasonable, considering the threat posed. Indeed, the Plan was a factor in causing Pantry Pride to raise its bids from a low of $42 to an eventual high of $58. At the time of its adoption the Rights Plan afforded a measure of protection consistent with the directors' fiduciary duty in facing a takeover threat perceived as detrimental to corporate interests. Unocal, 493 A.2d at 954-55. Far from being a "show-stopper," as the plaintiffs had contended in Moran, the measure spurred the bidding to new heights, a proper result of its implementation. See Moran, 500 A.2d at 1354, 1356-67.

Although we consider adoption of the Plan to have been valid under the circumstances, its continued usefulness was rendered moot by the directors' actions on October 3 and October 12. At the October 3 meeting the board redeemed the Rights conditioned upon consummation of a merger with Forstmann, but further acknowledged that they would also be redeemed to facilitate any more favorable offer. On October 12, the board unanimously passed a resolution redeeming the Rights in connection with any cash proposal of $57.25 or more per share. Because all the pertinent offers eventually equalled or surpassed that amount, the Rights clearly were no longer any impediment in the contest for Revlon. This mooted any question of their propriety under Moran or Unocal.

C.

The second defensive measure adopted by Revlon to thwart a Pantry Pride takeover was the company's own exchange offer for 10 million of its shares. The directors' general broad powers to manage the business and affairs of the corporation are augmented by the specific authority conferred under 8 Del.C. § 160(a), permitting the company to deal in its own stock.^[13]Unocal, 493 A.2d at 953-54; Cheff v. Mathes, 41 Del.Supr. 494, 199 A.2d 548, 554 (1964); Kors v. Carey, 39 Del.Ch. 47, 158 A.2d 136, 140 (1960). However, when exercising that power in an effort to forestall a hostile takeover, the board's actions are strictly held to the fiduciary standards outlined in Unocal. These standards require the directors to determine the best interests of the corporation and its stockholders, and impose an enhanced duty to abjure any action that is motivated by considerations other than a good faith concern for such interests. Unocal, 493 A.2d at 954-55; see Bennett v. Propp, 41 Del.Supr. 14, 187 A.2d 405, 409 (1962).

The Revlon directors concluded that Pantry Pride's $47.50 offer was grossly inadequate. In that regard the board acted in good faith, and on an informed basis, with reasonable grounds to believe that there existed a harmful threat to the corporate enterprise. The adoption of a defensive measure, reasonable in relation to the threat posed, was proper and fully accorded with the powers, duties, and responsibilities conferred upon directors under our law. Unocal, 493 A.2d at 954; Pogostin v. Rice, 480 A.2d at 627.

[182] D.

However, when Pantry Pride increased its offer to $50 per share, and then to $53, it became apparent to all that the break-up of the company was inevitable. The Revlon board's authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. This significantly altered the board's responsibilities under the Unocal standards. It no longer faced threats to corporate policy and effectiveness, or to the stockholders' interests, from a grossly inadequate bid. The whole question of defensive measures became moot. The directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.

III.

This brings us to the lock-up with Forstmann and its emphasis on shoring up the sagging market value of the Notes in the face of threatened litigation by their holders. Such a focus was inconsistent with the changed concept of the directors' responsibilities at this stage of the developments. The impending waiver of the Notes covenants had caused the value of the Notes to fall, and the board was aware of the noteholders' ire as well as their subsequent threats of suit. The directors thus made support of the Notes an integral part of the company's dealings with Forstmann, even though their primary responsibility at this stage was to the equity owners.

The original threat posed by Pantry Pride — the break-up of the company — had become a reality which even the directors embraced. Selective dealing to fend off a hostile but determined bidder was no longer a proper objective. Instead, obtaining the highest price for the benefit of the stockholders should have been the central theme guiding director action. Thus, the Revlon board could not make the requisite showing of good faith by preferring the noteholders and ignoring its duty of loyalty to the shareholders. The rights of the former already were fixed by contract. Wolfensohn v. Madison Fund, Inc., Del.Supr., 253 A.2d 72, 75 (1969); Harff v. Kerkorian, Del.Ch., 324 A.2d 215 (1974). The noteholders required no further protection, and when the Revlon board entered into an auction-ending lock-up agreement with Forstmann on the basis of impermissible considerations at the expense of the shareholders, the directors breached their primary duty of loyalty.

The Revlon board argued that it acted in good faith in protecting the noteholders because Unocal permits consideration of other corporate constituencies. Although such considerations may be permissible, there are fundamental limitations upon that prerogative. A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders. Unocal, 493 A.2d at 955. However, such concern for non-stockholder interests is inappropriate when an auction among active bidders is in progress, and the object no longer is to protect or maintain the corporate enterprise but to sell it to the highest bidder.

Revlon also contended that by Gilbert v. El Paso Co., Del. Ch., 490 A.2d 1050, 1054-55 (1984), it had contractual and good faith obligations to consider the noteholders. However, any such duties are limited to the principle that one may not interfere with contractual relationships by improper actions. Here, the rights of the noteholders were fixed by agreement, and there is nothing of substance to suggest that any of those terms were violated. The Notes covenants specifically contemplated a waiver to permit sale of the company at a fair price. The Notes were accepted by the holders on that basis, including the risk of an adverse market effect stemming from a waiver. Thus, nothing remained for Revlon [183] to legitimately protect, and no rationally related benefit thereby accrued to the stockholders. Under such circumstances we must conclude that the merger agreement with Forstmann was unreasonable in relation to the threat posed.

A lock-up is not per se illegal under Delaware law. Its use has been approved in an earlier case. Thompson v. Enstar Corp., Del. Ch., ___ A.2d ___ (1984). Such options can entice other bidders to enter a contest for control of the corporation, creating an auction for the company and maximizing shareholder profit. Current economic conditions in the takeover market are such that a "white knight" like Forstmann might only enter the bidding for the target company if it receives some form of compensation to cover the risks and costs involved. Note, Corporations-Mergers — "Lock-up" Enjoined Under Section 14(e) of Securities Exchange Act — Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981), 12 Seton Hall L.Rev. 881, 892 (1982). However, while those lock-ups which draw bidders into the battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders' detriment. Note, Lock-up Options: Toward a State Law Standard, 96 Harv. L. Rev. 1068, 1081 (1983).^[14]

Recently, the United States Court of Appeals for the Second Circuit invalidated a lock-up on fiduciary duty grounds similar to those here.^[15]Hanson Trust PLC, et al. v. ML SCM Acquisition Inc., et al., 781 F.2d 264 (2nd Cir.1986). Citing Thompson v. Enstar Corp., supra, with approval, the court stated:

In this regard, we are especially mindful that some lock-up options may be beneficial to the shareholders, such as those that induce a bidder to compete for control of a corporation, while others may be harmful, such as those that effectively preclude bidders from competing with the optionee bidder. 781 F.2d at 274.

In Hanson Trust, the bidder, Hanson, sought control of SCM by a hostile cash tender offer. SCM management joined with Merrill Lynch to propose a leveraged buy-out of the company at a higher price, and Hanson in turn increased its offer. Then, despite very little improvement in its subsequent bid, the management group sought a lock-up option to purchase SCM's two main assets at a substantial discount. The SCM directors granted the lock-up without adequate information as to the size of the discount or the effect the transaction would have on the company. Their action effectively ended a competitive bidding situation. The Hanson Court invalidated the lock-up because the directors failed to fully inform themselves about the value of a transaction in which management had a strong self-interest. "In short, the Board appears to have failed to ensure that negotiations for alternative bids were conducted by those whose only loyalty was to the shareholders." Id. at 277.

The Forstmann option had a similar destructive effect on the auction process. Forstmann had already been drawn into the contest on a preferred basis, so the result of the lock-up was not to foster bidding, but to destroy it. The board's stated reasons for approving the transactions were: (1) better financing, (2) noteholder [184] protection, and (3) higher price. As the Court of Chancery found, and we agree, any distinctions between the rival bidders' methods of financing the proposal were nominal at best, and such a consideration has little or no significance in a cash offer for any and all shares. The principal object, contrary to the board's duty of care, appears to have been protection of the noteholders over the shareholders' interests.

While Forstmann's $57.25 offer was objectively higher than Pantry Pride's $56.25 bid, the margin of superiority is less when the Forstmann price is adjusted for the time value of money. In reality, the Revlon board ended the auction in return for very little actual improvement in the final bid. The principal benefit went to the directors, who avoided personal liability to a class of creditors to whom the board owed no further duty under the circumstances. Thus, when a board ends an intense bidding contest on an insubstantial basis, and where a significant by-product of that action is to protect the directors against a perceived threat of personal liability for consequences stemming from the adoption of previous defensive measures, the action cannot withstand the enhanced scrutiny which Unocal requires of director conduct. See Unocal, 493 A.2d at 954-55.

In addition to the lock-up option, the Court of Chancery enjoined the no-shop provision as part of the attempt to foreclose further bidding by Pantry Pride. MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., 501 A.2d at 1251. The no-shop provision, like the lock-up option, while not per se illegal, is impermissible under the Unocal standards when a board's primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder. The agreement to negotiate only with Forstmann ended rather than intensified the board's involvement in the bidding contest.

It is ironic that the parties even considered a no-shop agreement when Revlon had dealt preferentially, and almost exclusively, with Forstmann throughout the contest. After the directors authorized management to negotiate with other parties, Forstmann was given every negotiating advantage that Pantry Pride had been denied: cooperation from management, access to financial data, and the exclusive opportunity to present merger proposals directly to the board of directors. Favoritism for a white knight to the total exclusion of a hostile bidder might be justifiable when the latter's offer adversely affects shareholder interests, but when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions. Market forces must be allowed to operate freely to bring the target's shareholders the best price available for their equity.^[16] Thus, as the trial court ruled, the shareholders' interests necessitated that the board remain free to negotiate in the fulfillment of that duty.

The court below similarly enjoined the payment of the cancellation fee, pending a resolution of the merits, because the fee was part of the overall plan to thwart Pantry Pride's efforts. We find no abuse of discretion in that ruling.

IV.

Having concluded that Pantry Pride has shown a reasonable probability of success on the merits, we address the issue of irreparable harm. The Court of Chancery ruled that unless the lock-up and other aspects of the agreement were enjoined, Pantry Pride's opportunity to bid for Revlon was lost. The court also held that the need for both bidders to compete [185] in the marketplace outweighed any injury to Forstmann. Given the complexity of the proposed transaction between Revlon and Forstmann, the obstacles to Pantry Pride obtaining a meaningful legal remedy are immense. We are satisfied that the plaintiff has shown the need for an injunction to protect it from irreparable harm, which need outweighs any harm to the defendants.

V.

In conclusion, the Revlon board was confronted with a situation not uncommon in the current wave of corporate takeovers. A hostile and determined bidder sought the company at a price the board was convinced was inadequate. The initial defensive tactics worked to the benefit of the shareholders, and thus the board was able to sustain its Unocal burdens in justifying those measures. However, in granting an asset option lock-up to Forstmann, we must conclude that under all the circumstances the directors allowed considerations other than the maximization of shareholder profit to affect their judgment, and followed a course that ended the auction for Revlon, absent court intervention, to the ultimate detriment of its shareholders. No such defensive measure can be sustained when it represents a breach of the directors' fundamental duty of care. See Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 874 (1985). In that context the board's action is not entitled to the deference accorded it by the business judgment rule. The measures were properly enjoined. The decision of the Court of Chancery, therefore, is

AFFIRMED.

[1] The nominal plaintiff, MacAndrews & Forbes Holdings, Inc., is the controlling stockholder of Pantry Pride. For all practical purposes their interests in this litigation are virtually identical, and we hereafter will refer to Pantry Pride as the plaintiff.

[2] This appeal was heard on an expedited basis in light of the pending Pantry Pride offer and the Revlon-Forstmann transactions. We accepted the appeal on Friday, October 25, 1985, received the parties' opening briefs on October 28, their reply briefs on October 29, and heard argument on Thursday, October 31. We announced our decision to affirm in an oral ruling in open court at 9:00 a.m. on Friday, November 1, with the proviso that this more detailed written opinion would follow in due course.

[3] There were 14 directors on the Revlon board. Six of them held senior management positions with the company, and two others held significant blocks of its stock. Four of the remaining six directors were associated at some point with entities that had various business relationships with Revlon. On the basis of this limited record, however, we cannot conclude that this board is entitled to certain presumptions that generally attach to the decisions of a board whose majority consists of truly outside independent directors. See Polk v. Good & Texaco, Del.Supr., ___ A.2d ___, ___ (1986); Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346, 1356 (1985); Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 955 (1985); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812, 815 (1984); Puma v. Marriott, Del. Ch., 283 A.2d 693, 695 (1971).

[4] Like bonds, the Notes actually were issued in denominations of $1,000 and integral multiples thereof. A separate certificate was issued in a total principal amount equal to the remaining sum to which a stockholder was entitled. Likewise, in the esoteric parlance of bond dealers, a Note trading at par ($1,000) would be quoted on the market at 100.

[5] In the takeover context "golden parachutes" generally are understood to be termination agreements providing substantial bonuses and other benefits for managers and certain directors upon a change in control of a company.

[6] Forstmann's $57.25 offer ostensibly is worth $1 more than Pantry Pride's $56.25 bid. However, the Pantry Pride offer was immediate, while the Forstmann proposal must be discounted for the time value of money because of the delay in approving the merger and consummating the transaction. The exact difference between the two bids was an unsettled point of contention even at oral argument.

[7] Actually, at this time about $400 million of Forstmann's funding was still subject to two investment banks using their "best efforts" to organize a syndicate to provide the balance. Pantry Pride's entire financing was not firmly committed at this point either, although Pantry Pride represented in an October 11 letter to Lazard Freres that its investment banker, Drexel Burnham Lambert, was highly confident of its ability to raise the balance of $350 million. Drexel Burnham had a firm commitment for this sum by October 18.

[8] The pertinent provision of the statute is:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. 8 Del.C. § 141(a).

[9] The statute provides in pertinent part:

(b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation. 8 Del.C. § 251(b).

[10] One eminent corporate commentator has drawn a distinction between the business judgment rule, which insulates directors and management from personal liability for their business decisions, and the business judgment doctrine, which protects the decision itself from attack. The principles upon which the rule and doctrine operate are identical, while the objects of their protection are different. See Hinsey, Business Judgment and the American Law Institute's Corporate Governance Project: The Rule, the Doctrine and the Reality, 52 Geo. Wash. L.Rev. 609, 611-13 (1984). In the transactional justification cases, where the doctrine is said to apply, our decisions have not observed the distinction in such terminology. See Polk v. Good & Texaco, Del.Supr., ___ A.2d ___, ___ (1986); Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346, 1356 (1985); Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 953-55 (1985); Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 943 (1985). Under the circumstances we do not alter our earlier practice of referring only to the business judgment rule, although in transactional justification matters such reference may be understood to embrace the concept of the doctrine.

[11] The relevant provision of Section 122 is:

Every corporation created under this chapter shall have power to:

(13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income, ...". 8 Del.C. § 122(13).

See Section 141(a) in n. 8, supra. See also Section 160(a), n. 13, infra.

[12] As we noted in Moran, a "bust-up" takeover generally refers to a situation in which one seeks to finance an acquisition by selling off pieces of the acquired company, presumably at a substantial profit. See Moran, 500 A.2d at 1349, n. 4.

[13] The pertinent provision of this statute is:

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares. 8 Del.C. § 160(a).

[14] For further discussion of the benefits and detriments of lock-up options, also see: Nelson, Mobil Corp. v. Marathon Oil Co. — The Decision and Its Implications for Future Tender Offers, 7 Corp. L.Rev. 233, 265-68 (1984); Note, Swallowing the Key to Lock-up Options: Mobil Corp. v. Marathon Oil Co., 14 U.Tol.L.Rev. 1055, 1081-83 (1983).

[15] The federal courts generally have declined to enjoin lock-up options despite arguments that lock-ups constitute impermissible "manipulative" conduct forbidden by Section 14(e) of the Williams Act [15 U.S.C. § 78n(e)]. See Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757 (2nd Cir.1983), cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983); Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1 (2nd Cir.1983); cert. denied 465 U.S. 1052, 104 S.Ct. 1326, 79 L.Ed.2d 722 (1984); but see Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981). The cases are all federal in nature and were not decided on state law grounds.

[16] By this we do not embrace the "passivity" thesis rejected in Unocal. See 493 A.2d at 954-55, nn. 8-10. The directors' role remains an active one, changed only in the respect that they are charged with the duty of selling the company at the highest price attainable for the stockholders' benefit.

Melvyn L. Cantor (argued) of Simpson Thacher & Bartlett, New York City, Bruce M. Stargatt, David C. McBride, Josy W. Ingersoll, and Jan R. Jurden of Young, Conaway, Stargatt & Taylor, Wilmington, for Paramount Communications, Inc. and KDS Acquisition Corp., appellants.

Michael R. Klein (argued), Richard W. Cass, Thomas W. Jeffrey, and Eric R. Markus of Wilmer, Cutler & Pickering, Washington, D.C., P. Clarkson Collins, Jr., Lewis H. Lazarus, and Barbara M. MacDonald of Morris, James, Hitchens & Williams, Wilmington, for Literary Partners, L.P., Cablevision Media Partners, L.P., and A. Jerrold Perenchio, appellants.

Robert D. Joffe (argued) of Cravath, Swaine & Moore, New York City, Martin P. Tully, Thomas R. Hunt, Jr., Lawrence A. Hamermesh, and Palmer L. Whisenant of Morris, Nichols, Arsht & Tunnell, Wilmington, for Time Inc., TW Sub Inc. and the Individual Director defendants, appellees.

Herbert M. Wachtell (argued), William C. Sterling, Jr., Peter C. Hein, Kenneth B. Forrest, Barbara Robbins, Andrew C. Houston, Benjamin E. Rosenberg, and George T. Conway III of Wachtell, Lipton, Rosen & Katz, New York City, Charles F. Richards, Jr., William J. Wade, Thomas A. Beck, Gregory V. Varallo, Daniel A. Dreisbach, Michael J. Feinstein, and William P. Bowden of Richards, Layton & Finger, Wilmington, for Warner Communications Inc., appellee.

Stuart H. Savett (argued) of Kohn Savett Klein & Graff, P.C., Philadelphia; Henry A. Heiman and Gary W. Aber of Heiman, Aber & Goldlust, Wilmington, Berger & Montague, P.C., of counsel, Philadelphia, for Shareholder plaintiffs.

Before HORSEY, MOORE and HOLLAND, JJ.

[1141] HORSEY, Justice:

Paramount Communications, Inc. ("Paramount") and two other groups of plaintiffs^[1] [1142] ("Shareholder Plaintiffs"), shareholders of Time Incorporated ("Time"), a Delaware corporation, separately filed suits in the Delaware Court of Chancery seeking a preliminary injunction to halt Time's tender offer for 51% of Warner Communication, Inc.'s ("Warner") outstanding shares at $70 cash per share. The court below consolidated the cases and, following the development of an extensive record, after discovery and an evidentiary hearing, denied plaintiffs' motion. In a 50-page unreported opinion and order entered July 14, 1989, the Chancellor refused to enjoin Time's consummation of its tender offer, concluding that the plaintiffs were unlikely to prevail on the merits. In re Time Incorporated Shareholder Litigation, Del.Ch., C.A. No. 10670, Allen, C., 1989 WL 79880 (July 14, 1989).

On the same day, plaintiffs filed in this Court an interlocutory appeal, which we accepted on an expedited basis. Pending the appeal, a stay of execution of Time's tender offer was entered for ten days, or until July 24, 1989, at 5:00 p.m. Following briefing and oral argument, on July 24 we concluded that the decision below should be affirmed. We so held in a brief ruling from the bench and a separate Order entered on that date. The effect of our decision was to permit Time to proceed with its tender offer for Warner's outstanding shares. This is the written opinion articulating the reasons for our July 24 bench ruling. 565 A.2d 280, 281.

The principal ground for reversal, asserted by all plaintiffs, is that Paramount's June 7, 1989 uninvited all-cash, all-shares, "fully negotiable" (though conditional) tender offer for Time triggered duties under Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and that Time's board of directors, in responding to Paramount's offer, breached those duties. As a consequence, plaintiffs argue that in our review of the Time board's decision of June 16, 1989 to enter into a revised merger agreement with Warner, Time is not entitled to the benefit and protection of the business judgment rule.

Shareholder Plaintiffs also assert a claim based on Revlon v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986). They argue that the original Time-Warner merger agreement of March 4, 1989 resulted in a change of control which effectively put Time up for sale, thereby triggering Revlon duties. Those plaintiffs argue that Time's board breached its Revlon duties by failing, in the face of the change of control, to maximize shareholder value in the immediate term.

Applying our standard of review, we affirm the Chancellor's ultimate finding and conclusion under Unocal. We find that Paramount's tender offer was reasonably perceived by Time's board to pose a threat to Time and that the Time board's "response" to that threat was, under the circumstances, reasonable and proportionate. Applying Unocal, we reject the argument that the only corporate threat posed by an all-shares, all-cash tender offer is the possibility of inadequate value.

We also find that Time's board did not by entering into its initial merger agreement with Warner come under a Revlon duty either to auction the company or to maximize short-term shareholder value, notwithstanding the unequal share exchange. Therefore, the Time board's original plan of merger with Warner was subject only to a business judgment rule analysis. See Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873-74 (1985).^[2]

[1143] I

Time is a Delaware corporation with its principal offices in New York City. Time's traditional business is publication of magazines and books; however, Time also provides pay television programming through its Home Box Office, Inc. and Cinemax subsidiaries. In addition, Time owns and operates cable television franchises through its subsidiary, American Television and Communication Corporation. During the relevant time period, Time's board consisted of sixteen directors. Twelve of the directors were "outside," nonemployee directors. Four of the directors were also officers of the company. The outside directors included: James F. Bere, chairman of the board and CEO of Borg-Warner Corporation (Time director since 1979); Clifford J. Grum, president and CEO of Temple-Inland, Inc. (Time director since 1980); Henry C. Goodrich, former chairman of Sonat, Inc. (Time director since 1978); Matina S. Horner, then president of Radcliffe College (Time director since 1975); David T. Kearns, chairman and CEO of Xerox Corporation (Time director since 1978); Donald S. Perkins, former chairman of Jewel Companies, Inc. (Time director since 1979); Michael D. Dingman, chairman and CEO of The Henley Group, Inc. (Time director since 1978); Edward S. Finkelstein, chairman and CEO of R.H. Macy & Co. (Time director since 1984); John R. Opel, former chairman and CEO of IBM Corporation (Time director since 1984); Arthur Temple, chairman of Temple-Inland, Inc. (Time director since 1983); Clifton R. Wharton, Jr., chairman and CEO of Teachers Insurance and Annuity Association — College Retirement Equities Fund (Time director since 1982); and Henry R. Luce III, president of The Henry Luce Foundation, Inc. (Time director since 1967). Mr. Luce, the son of the founder of Time, individually and in a representative capacity controlled 4.2% of the outstanding Time stock. The inside officer directors were: J. Richard Munro, Time's chairman and CEO since 1980: N.J. Nicholas, Jr., president and chief operating officer of the company since 1986; Gerald M. Levin, vice chairman of the board; and Jason D. McManus, editor-in-chief of Time magazine and a board member since 1988.^[3]

As early as 1983 and 1984, Time's executive board began considering expanding Time's operations into the entertainment industry. In 1987, Time established a special committee of executives to consider and propose corporate strategies for the 1990s. The consensus of the committee was that Time should move ahead in the area of ownership and creation of video programming. This expansion, as the Chancellor noted, was predicated upon two considerations: first, Time's desire to have greater control, in terms of quality and price, over the film products delivered by way of its cable network and franchises; and second, Time's concern over the increasing globalization of the world economy. Some of Time's outside directors, especially Luce and Temple, had opposed this move as a threat to the editorial integrity and journalistic focus of Time.^[4] Despite this concern, the board recognized that a [1144] vertically integrated video enterprise to complement Time's existing HBO and cable networks would better enable it to compete on a global basis.

In late spring of 1987, a meeting took place between Steve Ross, CEO of Warner Brothers, and Nicholas of Time. Ross and Nicholas discussed the possibility of a joint venture between the two companies through the creation of a jointly-owned cable company. Time would contribute its cable system and HBO. Warner would contribute its cable system and provide access to Warner Brothers Studio. The resulting venture would be a larger, more efficient cable network, able to produce and distribute its own movies on a worldwide basis. Ultimately the parties abandoned this plan, determining that it was impractical for several reasons, chief among them being tax considerations.

On August 11, 1987, Gerald M. Levin, Time's vice chairman and chief strategist, wrote J. Richard Munro a confidential memorandum in which he strongly recommended a strategic consolidation with Warner. In June 1988, Nicholas and Munro sent to each outside director a copy of the "comprehensive long-term planning document" prepared by the committee of Time executives that had been examining strategies for the 1990s. The memo included reference to and a description of Warner as a potential acquisition candidate.

Thereafter, Munro and Nicholas held meetings with Time's outside directors to discuss, generally, long-term strategies for Time and, specifically, a combination with Warner. Nearly a year later, Time's board reached the point of serious discussion of the "nuts and bolts" of a consolidation with an entertainment company. On July 21, 1988, Time's board met, with all outside directors present. The meeting's purpose was to consider Time's expansion into the entertainment industry on a global scale. Management presented the board with a profile of various entertainment companies in addition to Warner, including Disney, 20th Century Fox, Universal, and Paramount.

Without any definitive decision on choice of a company, the board approved in principle a strategic plan for Time's expansion. The board gave management the "go-ahead" to continue discussions with Warner concerning the possibility of a merger. With the exception of Temple and Luce, most of the outside directors agreed that a merger involving expansion into the entertainment field promised great growth opportunity for Time. Temple and Luce remained unenthusiastic about Time's entry into the entertainment field. See supra note 2.

The board's consensus was that a merger of Time and Warner was feasible, but only if Time controlled the board of the resulting corporation and thereby preserved a management committed to Time's journalistic integrity. To accomplish this goal, the board stressed the importance of carefully defining in advance the corporate governance provisions that would control the resulting entity. Some board members expressed concern over whether such a business combination would place Time "in play." The board discussed the wisdom of adopting further defensive measures to lessen such a possibility.^[5]

Of a wide range of companies considered by Time's board as possible merger candidates, Warner Brothers, Paramount, Columbia, M.C.A., Fox, MGM, Disney, and Orion, the board, in July 1988, concluded that Warner was the superior candidate for a consolidation. Warner stood out on a number of counts. Warner had just acquired Lorimar and its film studios. Time-Warner could make movies and television shows for use on HBO. Warner had an international distribution system, which Time could use to sell films, videos, books and magazines. Warner was a giant in the music and recording business, an area into which Time wanted to expand. None of [1145] the other companies considered had the musical clout of Warner. Time and Warner's cable systems were compatible and could be easily integrated; none of the other companies considered presented such a compatible cable partner. Together, Time and Warner would control half of New York City's cable system; Warner had cable systems in Brooklyn and Queens; and Time controlled cable systems in Manhattan and Queens. Warner's publishing company would integrate well with Time's established publishing company. Time sells hardcover books and magazines, and Warner sells softcover books and comics.^[6] Time-Warner could sell all of these publications and Warner's videos by using Time's direct mailing network and Warner's international distribution system. Time's network could be used to promote and merchandise Warner's movies.

In August 1988, Levin, Nicholas, and Munro, acting on instructions from Time's board, continued to explore a business combination with Warner. By letter dated August 4, 1988, management informed the outside directors of proposed corporate governance provisions to be discussed with Warner. The provisions incorporated the recommendations of several of Time's outside directors.

From the outset, Time's board favored an all-cash or cash and securities acquisition of Warner as the basis for consolidation. Bruce Wasserstein, Time's financial advisor, also favored an outright purchase of Warner. However, Steve Ross, Warner's CEO, was adamant that a business combination was only practicable on a stock-for-stock basis. Warner insisted on a stock swap in order to preserve its shareholders' equity in the resulting corporation. Time's officers, on the other hand, made it abundantly clear that Time would be the acquiring corporation and that Time would control the resulting board. Time refused to permit itself to be cast as the "acquired" company.

Eventually Time acquiesced in Warner's insistence on a stock-for-stock deal, but talks broke down over corporate governance issues. Time wanted Ross' position as a co-CEO to be temporary and wanted Ross to retire in five years. Ross, however, refused to set a time for his retirement and viewed Time's proposal as indicating a lack of confidence in his leadership. Warner considered it vital that their executives and creative staff not perceive Warner as selling out to Time. Time's request of a guarantee that Time would dominate the CEO succession was objected to as inconsistent with the concept of a Time-Warner merger "of equals." Negotiations ended when the parties reached an impasse. Time's board refused to compromise on its position on corporate governance. Time, and particularly its outside directors, viewed the corporate governance provisions as critical for preserving the "Time Culture" through a pro-Time management at the top. See supra note 4.

Throughout the fall of 1988 Time pursued its plan of expansion into the entertainment field; Time held informal discussions with several companies, including Paramount. Capital Cities/ABC approached Time to propose a merger. Talks terminated, however, when Capital Cities/ABC suggested that it was interested in purchasing Time or in controlling the resulting board. Time steadfastly maintained it was not placing itself up for sale.

Warner and Time resumed negotiations in January 1989. The catalyst for the resumption of talks was a private dinner between Steve Ross and Time outside director, Michael Dingman. Dingman was able to convince Ross that the transitional nature of the proposed co-CEO arrangement did not reflect a lack of confidence in Ross. Ross agreed that this course was best for the company and a meeting between Ross and Munro resulted. Ross agreed to retire in five years and let Nicholas succeed him. Negotiations resumed and many of the details of the original stock-for-stock exchange agreement remained [1146] intact. In addition, Time's senior management agreed to long-term contracts.

Time insider directors Levin and Nicholas met with Warner's financial advisors to decide upon a stock exchange ratio. Time's board had recognized the potential need to pay a premium in the stock ratio in exchange for dictating the governing arrangement of the new Time-Warner. Levin and outside director Finkelstein were the primary proponents of paying a premium to protect the "Time Culture." The board discussed premium rates of 10%, 15% and 20%. Wasserstein also suggested paying a premium for Warner due to Warner's rapid growth rate. The market exchange ratio of Time stock for Warner stock was .38 in favor of Warner. Warner's financial advisors informed its board that any exchange rate over .400 was a fair deal and any exchange rate over .450 was "one hell of a deal." The parties ultimately agreed upon an exchange rate favoring Warner of .465. On that basis, Warner stockholders would have owned approximately 62%^[7] of the common stock of Time-Warner.

On March 3, 1989, Time's board, with all but one director in attendance, met and unanimously approved the stock-for-stock merger with Warner. Warner's board likewise approved the merger. The agreement called for Warner to be merged into a wholly-owned Time subsidiary with Warner becoming the surviving corporation. The common stock of Warner would then be converted into common stock of Time at the agreed upon ratio. Thereafter, the name of Time would be changed to Time-Warner, Inc.

The rules of the New York Stock Exchange required that Time's issuance of shares to effectuate the merger be approved by a vote of Time's stockholders. The Delaware General Corporation Law required approval of the merger by a majority of the Warner stockholders. Delaware law did not require any vote by Time stockholders. The Chancellor concluded that the agreement was the product of "an arms-length negotiation between two parties seeking individual advantage through mutual action."

The resulting company would have a 24-member board, with 12 members representing each corporation. The company would have co-CEO's, at first Ross and Munro, then Ross and Nicholas, and finally, after Ross' retirement, by Nicholas alone. The board would create an editorial committee with a majority of members representing Time. A similar entertainment committee would be controlled by Warner board members. A two-thirds supermajority vote was required to alter CEO successions but an earlier proposal to have supermajority protection for the editorial committee was abandoned. Warner's board suggested raising the compensation levels for Time's senior management under the new corporation. Warner's management, as with most entertainment executives, received higher salaries than comparable executives in news journalism. Time's board, however, rejected Warner's proposal to equalize the salaries of the two management teams.

At its March 3, 1989 meeting, Time's board adopted several defensive tactics. Time entered an automatic share exchange agreement with Warner. Time would receive 17,292,747 shares of Warner's outstanding common stock (9.4%) and Warner would receive 7,080,016 shares of Time's outstanding common stock (11.1%). Either party could trigger the exchange. Time sought out and paid for "confidence" letters from various banks with which it did business. In these letters, the banks promised not to finance any third-party attempt to acquire Time. Time argues these agreements served only to preserve the confidential relationship between itself and the banks. The Chancellor found these agreements to be inconsequential and futile attempts to "dry up" money for a hostile takeover. Time also agreed to a "no-shop" clause, preventing Time from considering any other consolidation proposal, thus relinquishing [1147] its power to consider other proposals, regardless of their merits. Time did so at Warner's insistence. Warner did not want to be left "on the auction block" for an unfriendly suitor, if Time were to withdraw from the deal.

Time's board simultaneously established a special committee of outside directors, Finkelstein, Kearns, and Opel, to oversee the merger. The committee's assignment was to resolve any impediments that might arise in the course of working out the details of the merger and its consummation.

Time representatives lauded the lack of debt to the United States Senate and to the President of the United States. Public reaction to the announcement of the merger was positive. Time-Warner would be a media colossus with international scope. The board scheduled the stockholder vote for June 23; and a May 1 record date was set. On May 24, 1989, Time sent out extensive proxy statements to the stockholders regarding the approval vote on the merger. In the meantime, with the merger proceeding without impediment, the special committee had concluded, shortly after its creation, that it was not necessary either to retain independent consultants, legal or financial, or even to meet. Time's board was unanimously in favor of the proposed merger with Warner; and, by the end of May, the Time-Warner merger appeared to be an accomplished fact.

On June 7, 1989, these wishful assumptions were shattered by Paramount's surprising announcement of its all-cash offer to purchase all outstanding shares of Time for $175 per share. The following day, June 8, the trading price of Time's stock rose from $126 to $170 per share. Paramount's offer was said to be "fully negotiable."^[8]

Time found Paramount's "fully negotiable" offer to be in fact subject to at least three conditions. First, Time had to terminate its merger agreement and stock exchange agreement with Warner, and remove certain other of its defensive devices, including the redemption of Time's shareholder rights. Second, Paramount had to obtain the required cable franchise transfers from Time in a fashion acceptable to Paramount in its sole discretion. Finally, the offer depended upon a judicial determination that section 203 of the General Corporate Law of Delaware (The Delaware Anti-Takeover Statute) was inapplicable to any Time-Paramount merger. While Paramount's board had been privately advised that it could take months, perhaps over a year, to forge and consummate the deal, Paramount's board publicly proclaimed its ability to close the offer by July 5, 1989. Paramount executives later conceded that none of its directors believed that July 5th was a realistic date to close the transaction.

On June 8, 1989, Time formally responded to Paramount's offer. Time's chairman and CEO, J. Richard Munro, sent an aggressively worded letter to Paramount's CEO, Martin Davis. Munro's letter attacked Davis' personal integrity and called Paramount's offer "smoke and mirrors." Time's nonmanagement directors were not shown the letter before it was sent. However, at a board meeting that same day, all members endorsed management's response as well as the letter's content.

Over the following eight days, Time's board met three times to discuss Paramount's $175 offer. The board viewed Paramount's offer as inadequate and concluded that its proposed merger with Warner was the better course of action. Therefore, the board declined to open any negotiations with Paramount and held steady its course toward a merger with Warner.

In June, Time's board of directors met several times. During the course of their June meetings, Time's outside directors met frequently without management, officers or directors being present. At the request of the outside directors, corporate counsel was present during the board meetings [1148] and, from time to time, the management directors were asked to leave the board sessions. During the course of these meetings, Time's financial advisors informed the board that, on an auction basis, Time's per share value was materially higher than Warner's $175 per share offer.^[9] After this advice, the board concluded that Paramount's $175 offer was inadequate.

At these June meetings, certain Time directors expressed their concern that Time stockholders would not comprehend the long-term benefits of the Warner merger. Large quantities of Time shares were held by institutional investors. The board feared that even though there appeared to be wide support for the Warner transaction, Paramount's cash premium would be a tempting prospect to these investors. In mid-June, Time sought permission from the New York Stock Exchange to alter its rules and allow the Time-Warner merger to proceed without stockholder approval. Time did so at Warner's insistence. The New York Stock Exchange rejected Time's request on June 15; and on that day, the value of Time stock reached $182 per share.

The following day, June 16, Time's board met to take up Paramount's offer. The board's prevailing belief was that Paramount's bid posed a threat to Time's control of its own destiny and retention of the "Time Culture." Even after Time's financial advisors made another presentation of Paramount and its business attributes, Time's board maintained its position that a combination with Warner offered greater potential for Time. Warner provided Time a much desired production capability and an established international marketing chain. Time's advisors suggested various options, including defensive measures. The board considered and rejected the idea of purchasing Paramount in a "Pac Man" defense.^[10] The board considered other defenses, including a recapitalization, the acquisition of another company, and a material change in the present capitalization structure or dividend policy. The board determined to retain its same advisors even in light of the changed circumstances. The board rescinded its agreement to pay its advisors a bonus based on the consummation of the Time-Warner merger and agreed to pay a flat fee for any advice rendered. Finally, Time's board formally rejected Paramount's offer.^[11]

At the same meeting, Time's board decided to recast its consolidation with Warner into an outright cash and securities acquisition of Warner by Time; and Time so informed Warner. Time accordingly restructured its proposal to acquire Warner as follows: Time would make an immediate all-cash offer for 51% of Warner's outstanding stock at $70 per share. The remaining 49% would be purchased at some later date for a mixture of cash and securities worth $70 per share. To provide the funds required for its outright acquisition of Warner, Time would assume 7-10 billion dollars worth of debt, thus eliminating one of the principal transaction-related benefits of the original merger agreement. Nine billion dollars of the total purchase price would be allocated to the purchase of Warner's goodwill.

Warner agreed but insisted on certain terms. Warner sought a control premium and guarantees that the governance provisions found in the original merger agreement would remain intact. Warner further sought agreements that Time would not employ its poison pill against Warner and that, unless enjoined, Time would be legally bound to complete the transaction. Time's board agreed to these last measures only at the insistence of Warner. For its part, Time was assured of its ability to extend its [1149] efforts into production areas and international markets, all the while maintaining the Time identity and culture. The Chancellor found the initial Time-Warner transaction to have been negotiated at arms length and the restructured Time-Warner transaction to have resulted from Paramount's offer and its expected effect on a Time shareholder vote.

On June 23, 1989, Paramount raised its all-cash offer to buy Time's outstanding stock to $200 per share. Paramount still professed that all aspects of the offer were negotiable. Time's board met on June 26, 1989 and formally rejected Paramount's $200 per share second offer. The board reiterated its belief that, despite the $25 increase, the offer was still inadequate. The Time board maintained that the Warner transaction offered a greater long-term value for the stockholders and, unlike Paramount's offer, did not pose a threat to Time's survival and its "culture." Paramount then filed this action in the Court of Chancery.

II

The Shareholder Plaintiffs first assert a Revlon claim. They contend that the March 4 Time-Warner agreement effectively put Time up for sale, triggering Revlon duties, requiring Time's board to enhance short-term shareholder value and to treat all other interested acquirors on an equal basis. The Shareholder Plaintiffs base this argument on two facts: (i) the ultimate Time-Warner exchange ratio of .465 favoring Warner, resulting in Warner shareholders' receipt of 62% of the combined company; and (ii) the subjective intent of Time's directors as evidenced in their statements that the market might perceive the Time-Warner merger as putting Time up "for sale" and their adoption of various defensive measures.

The Shareholder Plaintiffs further contend that Time's directors, in structuring the original merger transaction to be "take-over-proof," triggered Revlon duties by foreclosing their shareholders from any prospect of obtaining a control premium. In short, plaintiffs argue that Time's board's decision to merge with Warner imposed a fiduciary duty to maximize immediate share value and not erect unreasonable barriers to further bids. Therefore, they argue, the Chancellor erred in finding: that Paramount's bid for Time did not place Time "for sale"; that Time's transaction with Warner did not result in any transfer of control; and that the combined Time-Warner was not so large as to preclude the possibility of the stockholders of Time-Warner receiving a future control premium.

Paramount asserts only a Unocal claim in which the shareholder plaintiffs join. Paramount contends that the Chancellor, in applying the first part of the Unocal test, erred in finding that Time's board had reasonable grounds to believe that Paramount posed both a legally cognizable threat to Time shareholders and a danger to Time's corporate policy and effectiveness. Paramount also contests the court's finding that Time's board made a reasonable and objective investigation of Paramount's offer so as to be informed before rejecting it. Paramount further claims that the court erred in applying Unocal's second part in finding Time's response to be "reasonable." Paramount points primarily to the preclusive effect of the revised agreement which denied Time shareholders the opportunity both to vote on the agreement and to respond to Paramount's tender offer. Paramount argues that the underlying motivation of Time's board in adopting these defensive measures was management's desire to perpetuate itself in office.

The Court of Chancery posed the pivotal question presented by this case to be: Under what circumstances must a board of directors abandon an in-place plan of corporate development in order to provide its shareholders with the option to elect and realize an immediate control premium? As applied to this case, the question becomes: Did Time's board, having developed a strategic plan of global expansion to be launched through a business combination with Warner, come under a fiduciary duty to jettison its plan and put the corporation's [1150] future in the hands of its shareholders?

While we affirm the result reached by the Chancellor, we think it unwise to place undue emphasis upon long-term versus short-term corporate strategy. Two key predicates underpin our analysis. First, Delaware law imposes on a board of directors the duty to manage the business and affairs of the corporation. 8 Del.C. § 141(a). This broad mandate includes a conferred authority to set a corporate course of action, including time frame, designed to enhance corporate profitability. Thus, the question of "long-term" versus "short-term" values is largely irrelevant because directors, generally, are obliged to chart a course for a corporation which is in its best interests without regard to a fixed investment horizon. Second, absent a limited set of circumstances as defined under Revlon, a board of directors, while always required to act in an informed manner, is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover.^[12] In our view, the pivotal question presented by this case is: "Did Time, by entering into the proposed merger with Warner, put itself up for sale?" A resolution of that issue through application of Revlon has a significant bearing upon the resolution of the derivative Unocal issue.

A.

We first take up plaintiffs' principal Revlon argument, summarized above. In rejecting this argument, the Chancellor found the original Time-Warner merger agreement not to constitute a "change of control" and concluded that the transaction did not trigger Revlon duties. The Chancellor's conclusion is premised on a finding that "[b]efore the merger agreement was signed, control of the corporation existed in a fluid aggregation of unaffiliated shareholders representing a voting majority — in other words, in the market." The Chancellor's findings of fact are supported by the record and his conclusion is correct as a matter of law. However, we premise our rejection of plaintiffs' Revlon claim on different grounds, namely, the absence of any substantial evidence to conclude that Time's board, in negotiating with Warner, made the dissolution or break-up of the corporate entity inevitable, as was the case in Revlon.

Under Delaware law there are, generally speaking and without excluding other possibilities, two circumstances which may implicate Revlon duties. The first, and clearer one, is when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company. See, e.g., Mills Acquisition Co. v. Macmillan, Inc, Del.Supr., 559 A.2d 1261 (1988). However, Revlon duties may also be triggered where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company.^[13] Thus, in Revlon, when the board responded to Pantry Pride's offer by contemplating a "bust-up" sale of assets in a leveraged acquisition, we imposed upon the board a duty to maximize immediate shareholder value and an obligation to auction the company fairly. If, however, the board's reaction to a hostile tender offer is found to constitute only a defensive response and not an abandonment of the corporation's continued existence, Revlon duties are not triggered, though Unocal [1151] duties attach.^[14]See, e.g., Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1345 (1987).

The plaintiffs insist that even though the original Time-Warner agreement may not have worked "an objective change of control," the transaction made a "sale" of Time inevitable. Plaintiffs rely on the subjective intent of Time's board of directors and principally upon certain board members' expressions of concern that the Warner transaction might be viewed as effectively putting Time up for sale. Plaintiffs argue that the use of a lock-up agreement, a no-shop clause, and so-called "dry-up" agreements prevented shareholders from obtaining a control premium in the immediate future and thus violated Revlon.

We agree with the Chancellor that such evidence is entirely insufficient to invoke Revlon duties; and we decline to extend Revlon's application to corporate transactions simply because they might be construed as putting a corporation either "in play" or "up for sale." See Citron v. Fairchild Camera, Del.Supr., 569 A.2d 53, (1989); Macmillan, 559 A.2d at 1285 n. 35. The adoption of structural safety devices alone does not trigger Revlon.^[15] Rather, as the Chancellor stated, such devices are properly subject to a Unocal analysis.

Finally, we do not find in Time's recasting of its merger agreement with Warner from a share exchange to a share purchase a basis to conclude that Time had either abandoned its strategic plan or made a sale of Time inevitable.^[16] The Chancellor found that although the merged Time-Warner company would be large (with a value approaching approximately $30 billion), recent takeover cases have proven that acquisition of the combined company might nonetheless be possible. In re Time Incorporated Shareholder Litigation, Del.Ch., C.A. No. 10670, Allen, C. (July 14, 1989), slip op. at 56. The legal consequence is that Unocal alone applies to determine whether the business judgment rule attaches to the revised agreement. Plaintiffs' analogy to Macmillan thus collapses and plaintiffs' reliance on Macmillan is misplaced.

B.

We turn now to plaintiffs' Unocal claim. We begin by noting, as did the Chancellor, that our decision does not require us to pass on the wisdom of the board's decision to enter into the original Time-Warner agreement. That is not a court's task. Our task is simply to review the record to determine whether there is sufficient evidence to support the Chancellor's conclusion that the initial Time-Warner agreement was the product of a proper exercise of business judgment. Macmillan, 559 A.2d at 1288.

We have purposely detailed the evidence of the Time board's deliberative approach, beginning in 1983-84, to expand itself. Time's decision in 1988 to combine with Warner was made only after what could be fairly characterized as an exhaustive appraisal [1152] of Time's future as a corporation. After concluding in 1983-84 that the corporation must expand to survive, and beyond journalism into entertainment, the board combed the field of available entertainment companies. By 1987 Time had focused upon Warner; by late July 1988 Time's board was convinced that Warner would provide the best "fit" for Time to achieve its strategic objectives. The record attests to the zealousness of Time's executives, fully supported by their directors, in seeing to the preservation of Time's "culture," i.e., its perceived editorial integrity in journalism. We find ample evidence in the record to support the Chancellor's conclusion that the Time board's decision to expand the business of the company through its March 3 merger with Warner was entitled to the protection of the business judgment rule. See Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984).

The Chancellor reached a different conclusion in addressing the Time-Warner transaction as revised three months later. He found that the revised agreement was defense-motivated and designed to avoid the potentially disruptive effect that Paramount's offer would have had on consummation of the proposed merger were it put to a shareholder vote. Thus, the court declined to apply the traditional business judgment rule to the revised transaction and instead analyzed the Time board's June 16 decision under Unocal. The court ruled that Unocal applied to all director actions taken, following receipt of Paramount's hostile tender offer, that were reasonably determined to be defensive. Clearly that was a correct ruling and no party disputes that ruling.

In Unocal, we held that before the business judgment rule is applied to a board's adoption of a defensive measure, the burden will lie with the board to prove (a) reasonable grounds for believing that a danger to corporate policy and effectiveness existed; and (b) that the defensive measure adopted was reasonable in relation to the threat posed. Unocal, 493 A.2d 946. Directors satisfy the first part of the Unocal test by demonstrating good faith and reasonable investigation. We have repeatedly stated that the refusal to entertain an offer may comport with a valid exercise of a board's business judgment. See, e.g., Macmillan, 559 A.2d at 1285 n. 35; Van Gorkom, 488 A.2d at 881; Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984).

Unocal involved a two-tier, highly coercive tender offer. In such a case, the threat is obvious: shareholders may be compelled to tender to avoid being treated adversely in the second stage of the transaction. Accord Ivanhoe, 535 at 1344. In subsequent cases, the Court of Chancery has suggested that an all-cash, all-shares offer, falling within a range of values that a shareholder might reasonably prefer, cannot constitute a legally recognized "threat" to shareholder interests sufficient to withstand a Unocal analysis. AC Acquisitions Corp. v. Anderson, Clayton & Co., Del.Ch., 519 A.2d 103 (1986); see Grand Metropolitan, PLC v. Pillsbury Co., Del.Ch., 558 A.2d 1049 (1988); City Capital Associates v. Interco, Inc., Del. Ch., 551 A.2d 787 (1988). In those cases, the Court of Chancery determined that whatever threat existed related only to the shareholders and only to price and not to the corporation.

From those decisions by our Court of Chancery, Paramount and the individual plaintiffs extrapolate a rule of law that an all-cash, all-shares offer with values reasonably in the range of acceptable price cannot pose any objective threat to a corporation or its shareholders. Thus, Paramount would have us hold that only if the value of Paramount's offer were determined to be clearly inferior to the value created by management's plan to merge with Warner could the offer be viewed — objectively — as a threat.

Implicit in the plaintiffs' argument is the view that a hostile tender offer can pose only two types of threats: the threat of coercion that results from a two-tier offer promising unequal treatment for nontendering shareholders; and the threat of inadequate value from an all-shares, all-cash offer at a price below what a target board [1153] in good faith deems to be the present value of its shares. See, e.g., Interco, 551 A.2d at 797; see also BNS, Inc. v. Koppers, D.Del., 683 F.Supp. 458 (1988). Since Paramount's offer was all-cash, the only conceivable "threat," plaintiffs argue, was inadequate value.^[17] We disapprove of such a narrow and rigid construction of Unocal, for the reasons which follow.

Plaintiffs' position represents a fundamental misconception of our standard of review under Unocal principally because it would involve the court in substituting its judgment as to what is a "better" deal for that of a corporation's board of directors. To the extent that the Court of Chancery has recently done so in certain of its opinions, we hereby reject such approach as not in keeping with a proper Unocal analysis. See, e.g., Interco, 551 A.2d 787, and its progeny; but see TW Services, Inc. v. SWT Acquisition Corp., Del.Ch., C.A. No. 1047, Allen, C. 1989 WL 20290 (March 2, 1989).

The usefulness of Unocal as an analytical tool is precisely its flexibility in the face of a variety of fact scenarios. Unocal is not intended as an abstract standard; neither is it a structured and mechanistic procedure of appraisal. Thus, we have said that directors may consider, when evaluating the threat posed by a takeover bid, the "inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on `constituencies' other than shareholders ... the risk of nonconsummation, and the quality of securities being offered in the exchange." 493 A.2d at 955. The open-ended analysis mandated by Unocal is not intended to lead to a simple mathematical exercise: that is, of comparing the discounted value of Time-Warner's expected trading price at some future date with Paramount's offer and determining which is the higher. Indeed, in our view, precepts underlying the business judgment rule militate against a court's engaging in the process of attempting to appraise and evaluate the relative merits of a long-term versus a short-term investment goal for shareholders. To engage in such an exercise is a distortion of the Unocal process and, in particular, the application of the second part of Unocal's test, discussed below.

In this case, the Time board reasonably determined that inadequate value was not the only legally cognizable threat that Paramount's all-cash, all-shares offer could present. Time's board concluded that Paramount's eleventh hour offer posed other threats. One concern was that Time shareholders might elect to tender into Paramount's cash offer in ignorance or a mistaken belief of the strategic benefit which a business combination with Warner might produce. Moreover, Time viewed the conditions attached to Paramount's offer as introducing a degree of uncertainty that skewed a comparative analysis. Further, the timing of Paramount's offer to follow issuance of Time's proxy notice was viewed as arguably designed to upset, if not confuse, the Time stockholders' vote. Given this record evidence, we cannot conclude that the Time board's decision of June 6 that Paramount's offer posed a threat to corporate policy and effectiveness was lacking in good faith or dominated by motives of either entrenchment or self-interest.

Paramount also contends that the Time board had not duly investigated Paramount's offer. Therefore, Paramount argues, Time was unable to make an informed decision that the offer posed a threat to Time's corporate policy. Although [1154] the Chancellor did not address this issue directly, his findings of fact do detail Time's exploration of the available entertainment companies, including Paramount, before determining that Warner provided the best strategic "fit." In addition, the court found that Time's board rejected Paramount's offer because Paramount did not serve Time's objectives or meet Time's needs. Thus, the record does, in our judgment, demonstrate that Time's board was adequately informed of the potential benefits of a transaction with Paramount. We agree with the Chancellor that the Time board's lengthy pre-June investigation of potential merger candidates, including Paramount, mooted any obligation on Time's part to halt its merger process with Warner to reconsider Paramount. Time's board was under no obligation to negotiate with Paramount. Unocal, 493 A.2d at 954-55; see also Macmillan, 559 A.2d at 1285 n. 35. Time's failure to negotiate cannot be fairly found to have been uninformed. The evidence supporting this finding is materially enhanced by the fact that twelve of Time's sixteen board members were outside independent directors. Unocal, 493 A.2d at 955; Moran v. Household Intern., Inc., Del.Supr., 500 A.2d 1346, 1356 (1985).

We turn to the second part of the Unocal analysis. The obvious requisite to determining the reasonableness of a defensive action is a clear identification of the nature of the threat. As the Chancellor correctly noted, this "requires an evaluation of the importance of the corporate objective threatened; alternative methods of protecting that objective; impacts of the `defensive' action, and other relevant factors." In Re: Time Incorporated Shareholder Litigation, Del.Ch., 1989 WL 79880 (July 14, 1989). It is not until both parts of the Unocal inquiry have been satisfied that the business judgment rule attaches to defensive actions of a board of directors. Unocal, 493 A.2d at 954.^[18] As applied to the facts of this case, the question is whether the record evidence supports the Court of Chancery's conclusion that the restructuring of the Time-Warner transaction, including the adoption of several preclusive defensive measures, was a reasonable response in relation to a perceived threat.

Paramount argues that, assuming its tender offer posed a threat, Time's response was unreasonable in precluding Time's shareholders from accepting the tender offer or receiving a control premium in the immediately foreseeable future. Once again, the contention stems, we believe, from a fundamental misunderstanding of where the power of corporate governance lies. Delaware law confers the management of the corporate enterprise to the stockholders' duly elected board representatives. 8 Del.C. § 141(a). The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. That duty may not be delegated to the stockholders. Van Gorkom, 488 A.2d at 873. Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy. See, e.g., Revlon, 506 A.2d 173.

Although the Chancellor blurred somewhat the discrete analyses required under Unocal, he did conclude that Time's board reasonably perceived Paramount's offer to be a significant threat to the planned Time-Warner merger and that Time's response was not "overly broad." We have found that even in light of a valid threat, management actions that are coercive in nature or force upon shareholders a management-sponsored alternative to a hostile offer may be struck down as unreasonable and non-proportionate responses. Macmillan, 559 A.2d 1261; AC Acquisitions Corp., 519 A.2d 103.

Here, on the record facts, the Chancellor found that Time's responsive action to Paramount's tender offer was not aimed at [1155] "cramming down" on its shareholders a management-sponsored alternative, but rather had as its goal the carrying forward of a pre-existing transaction in an altered form.^[19] Thus, the response was reasonably related to the threat. The Chancellor noted that the revised agreement and its accompanying safety devices did not preclude Paramount from making an offer for the combined Time-Warner company or from changing the conditions of its offer so as not to make the offer dependent upon the nullification of the Time-Warner agreement. Thus, the response was proportionate. We affirm the Chancellor's rulings as clearly supported by the record. Finally, we note that although Time was required, as a result of Paramount's hostile offer, to incur a heavy debt to finance its acquisition of Warner, that fact alone does not render the board's decision unreasonable so long as the directors could reasonably perceive the debt load not to be so injurious to the corporation as to jeopardize its well being.

C.

Conclusion

Applying the test for grant or denial of preliminary injunctive relief, we find plaintiffs failed to establish a reasonable likelihood of ultimate success on the merits. Therefore, we affirm.

[1] Plaintiffs in these three consolidated appeals are: (i) Paramount Communications, Inc. and KDS Acquisition Corp. (collectively "Paramount"); (ii) Literary Partners L.P., Cablevision Media Partners, L.P., and A. Jerrold Perenchio (collectively "Literary Partners"), suing individually; and (iii) certain other shareholder plaintiffs, suing individually and as an uncertified class.

[2] In the specific context of a proposed merger of domestic corporations, a director has a duty under 8 Del.C. § 251(b), along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. See Beard v. Elster, Del.Supr., 160 A.2d 731, 737 (1960). Only an agreement of merger satisfying the requirements of 8 Del.C. § 251(b) may be submitted to the shareholders under § 251(c). See generally Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811-13 (1984); see also Pogostin v. Rice, Del.Supr., 480 A.2d 619 (1984).

Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873 (footnote omitted).

[3] Four directors, Arthur Temple, Henry C. Goodrich, Clifton R. Wharton, and Clifford J. Grum, have since resigned from Time's board. The Chancellor found, with the exception of Temple, their resignations to reflect more a willingness to step down than disagreement or dissension over the Time-Warner merger. Temple did not choose to continue to be associated with a corporation that was expanding into the entertainment field. Under the board of the combined Time-Warner corporation, the number of Time directors, as well as Warner directors, was limited to twelve each.

[4] The primary concern of Time's outside directors was the preservation of the "Time Culture." They believed that Time had become recognized in this country as an institution built upon a foundation of journalistic integrity. Time's management made a studious effort to refrain from involvement in Time's editorial policy. Several of Time's outside directors feared that a merger with an entertainment company would divert Time's focus from news journalism and threaten the Time Culture.

[5] Time had in place a panoply of defensive devices, including a staggered board, a "poison pill" preferred stock rights plan triggered by an acquisition of 15% of the company, a fifty-day notice period for shareholder motions, and restrictions on shareholders' ability to call a meeting or act by consent.

[6] In contrast, Paramount's publishing endeavors were in the areas of professional volumes and text books. Time's board did not find Paramount's publishing as compatible as Warner's publishing efforts.

[7] As was noted in the briefs and at oral argument, this figure is somewhat misleading because it does not take into consideration the number of individuals who owned stock in both companies.

[8] Subsequently, it was established that Paramount's board had decided as early as March 1989 to move to acquire Time. However, Paramount management intentionally delayed publicizing its proposal until Time had mailed to its stockholders its Time-Warner merger proposal along with the required proxy statements.

[9] Time's advisors estimated the value of Time in a control premium situation to be significantly higher than the value of Time in other than a sale situation.

[10] In a "Pac Man" defense, Time would launch a tender offer for the stock of Paramount, thus consuming its rival. Moran v. Household Intern., Inc., Del.Supr., 500 A.2d 1346, 1350 n. 6 (1985).

[11] Meanwhile, Time had already begun erecting impediments to Paramount's offer. Time encouraged local cable franchises to sue Paramount to prevent it from easily obtaining the franchises.

[12] Thus, we endorse the Chancellor's conclusion that it is not a breach of faith for directors to determine that the present stock market price of shares is not representative of true value or that there may indeed be several market values for any corporation's stock. We have so held in another context. See Van Gorkom, 488 A.2d at 876.

[13] As we stated in Revlon, in both such cases, "[t]he duty of the board [has] changed from the preservation of ... [the] corporate entity to the maximization of the company's value at a sale for the stockholder's benefit.... [The board] no longer face[s] threats to corporate policy and effectiveness, or to the stockholders' interests, from a grossly inadequate bid." Revlon v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173, 182 (1986).

[14] Within the auction process, any action taken by the board must be reasonably related to the threat posed or reasonable in relation to the advantage sought, see Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261, 1288 (1988). Thus, a Unocal analysis may be appropriate when a corporation is in a Revlon situation and Revlon duties may be triggered by a defensive action taken in response to a hostile offer. Since Revlon, we have stated that differing treatment of various bidders is not actionable when such action reasonably relates to achieving the best price available for the stockholders. Macmillan, 559 A.2d at 1286-87.

[15] Although the legality of the various safety devices adopted to protect the original agreement is not a central issue, there is substantial evidence to support each of the trial court's related conclusions. Thus, the court found that the concept of the Share Exchange Agreement predated any takeover threat by Paramount and had been adopted for a rational business purpose: to deter Time and Warner from being "put in play" by their March 4 Agreement. The court further found that Time had adopted the "no-shop" clause at Warner's insistence and for Warner's protection. Finally, although certain aspects of the "dry-up" agreements were suspect on their face, we concur in the Chancellor's view that in this case they were inconsequential.

[16] We note that, although Time's advisors presented the board with such alternatives as an auction or sale to a third party bidder, the board rejected those responses, preferring to go forward with its pre-existing plan rather than adopt an alternative to Paramount's proposal.

[17] Some commentators have suggested that the threats posed by hostile offers be categorized into not two but three types: "(i) opportunity loss . . . [where] a hostile offer might deprive target shareholders of the opportunity to select a superior alternative offered by target management [or, we would add, offered by another bidder]; (ii) structural coercion, ... the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender decisions; and ... (iii) substantive coercion, ... the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management's representations of intrinsic value." The recognition of substantive coercion, the authors suggest, would help guarantee that the Unocal standard becomes an effective intermediate standard of review. Gilson & Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 The Business Lawyer, 247, 267 (1989).

[18] Some commentators have criticized Unocal by arguing that once the board's deliberative process has been analyzed and found not to be wanting in objectivity, good faith or deliberateness, the so-called "enhanced" business judgment rule has been satisfied and no further inquiry is undertaken. See generally Johnson & Siegel, Corporate Mergers: Redefining the Role of Target Directors, 136 U.Pa.L.Rev. 315 (1987). We reject such views.

[19] The Chancellor cited Shamrock Holdings, Inc. v. Polaroid Corp., Del.Ch., 559 A.2d 257 (1989), as a closely analogous case. In that case, the Court of Chancery upheld, in the face of a takeover bid, the establishment of an employee stock ownership plan that had a significant anti-takeover effect. The Court of Chancery upheld the board's action largely because the ESOP had been adopted prior to any contest for control and was reasonably determined to increase productivity and enhance profits. The ESOP did not appear to be primarily a device to affect or secure corporate control.

Charles F. Richards, Jr., Thomas A. Beck and Anne C. Foster of Richards, Layton & Finger, Wilmington, Barry R. Ostrager (argued), Michael J. Chepiga, Robert F. Cusumano, Mary Kay Vyskocil and Peter C. Thomas of Simpson Thacher & Bartlett, New York City, for appellants Paramount Communications Inc. and the individual defendants.

A. Gilchrist Sparks, III and William M. Lafferty of Morris, Nichols, Arsht & Tunnell, Wilmington, Stuart J. Baskin (argued), Jeremy [36] G. Epstein, Alan S. Goudiss and Seth J. Lapidow of Shearman & Sterling, New York City, for appellant Viacom Inc.

Bruce M. Stargatt, David C. McBride, Josy W. Ingersoll, William D. Johnston, Bruce L. Silverstein and James P. Hughes, Jr. of Young, Conaway, Stargatt & Taylor, Wilmington, Herbert M. Wachtell (argued), Michael W. Schwartz, Theodore N. Mirvis, Paul K. Rowe and George T. Conway, III of Wachtell, Lipton, Rosen & Katz, New York City, for appellee QVC Network Inc.

Irving Morris, Karen L. Morris and Abraham Rappaport of Morris & Morris, Pamela S. Tikellis, Carolyn D. Mack and Cynthia A. Calder of Chimicles, Burt & Jacobsen, Joseph A. Rosenthal and Norman M. Monhait of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Daniel W. Krasner and Jeffrey G. Smith of Wolf, Haldenstein, Adler, Freeman & Herz, Arthur N. Abbey (argued), and Mark C. Gardy of Abbey & Ellis, New York City, for the shareholder appellees.

Before VEASEY, C.J., MOORE and HOLLAND. JJ.

[35] VEASEY, Chief Justice.

In this appeal we review an order of the Court of Chancery dated November 24, 1993 (the "November 24 Order"), preliminarily enjoining certain defensive measures designed to facilitate a so-called strategic alliance between Viacom Inc. ("Viacom") and Paramount Communications Inc. ("Paramount") approved by the board of directors of Paramount (the "Paramount Board" or the "Paramount directors") and to thwart an unsolicited, more valuable, tender offer by QVC Network Inc. ("QVC"). In affirming, we hold that the sale of control in this case, which is at the heart of the proposed strategic alliance, implicates enhanced judicial scrutiny of the conduct of the Paramount Board under Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946 (1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986). We further hold that the conduct of the Paramount Board was not reasonable as to process or result.

QVC and certain stockholders of Paramount commenced separate actions (later consolidated) in the Court of Chancery seeking preliminary and permanent injunctive relief against Paramount, certain members of the Paramount Board, and Viacom. This action arises out of a proposed acquisition of Paramount by Viacom through a tender offer followed by a second-step merger (the "Paramount-Viacom transaction"), and a competing unsolicited tender offer by QVC. The Court of Chancery granted a preliminary injunction. QVC Network, Inc. v. Paramount Communications Inc., Del.Ch., 635 A.2d 1245, Jacobs, V.C. (1993), (the "Court of Chancery Opinion"). We affirmed by order dated December 9, 1993. Paramount Communications Inc. v. QVC Network Inc., Del. Supr., Nos. 427 and 428, 1993, 637 A.2d 828, Veasey, C.J. (Dec. 9, 1993) (the "December 9 Order").^[1]

The Court of Chancery found that the Paramount directors violated their fiduciary duties by favoring the Paramount-Viacom transaction over the more valuable unsolicited offer of QVC. The Court of Chancery preliminarily enjoined Paramount and the individual defendants (the "Paramount defendants") from amending or modifying Paramount's stockholder rights agreement (the "Rights Agreement"), including the redemption of the Rights, or taking other action to facilitate the consummation of the pending tender offer by Viacom or any proposed second-step merger, including the Merger Agreement between Paramount and Viacom dated September 12, 1993 (the "Original Merger Agreement"), as amended on October 24, 1993 (the "Amended Merger Agreement"). Viacom and the Paramount defendants were enjoined from taking any action [37] to exercise any provision of the Stock Option Agreement between Paramount and Viacom dated September 12, 1993 (the "Stock Option Agreement"), as amended on October 24, 1993. The Court of Chancery did not grant preliminary injunctive relief as to the termination fee provided for the benefit of Viacom in Section 8.05 of the Original Merger Agreement and the Amended Merger Agreement (the "Termination Fee").

Under the circumstances of this case, the pending sale of control implicated in the Paramount-Viacom transaction required the Paramount Board to act on an informed basis to secure the best value reasonably available to the stockholders. Since we agree with the Court of Chancery that the Paramount directors violated their fiduciary duties, we have AFFIRMED the entry of the order of the Vice Chancellor granting the preliminary injunction and have REMANDED these proceedings to the Court of Chancery for proceedings consistent herewith.

We also have attached an Addendum to this opinion addressing serious deposition misconduct by counsel who appeared on behalf of a Paramount director at the time that director's deposition was taken by a lawyer representing QVC.^[2]

I. FACTS

The Court of Chancery Opinion contains a detailed recitation of its factual findings in this matter. Court of Chancery Opinion, 635 A.2d 1245, 1246-1259. Only a brief summary of the facts is necessary for purposes of this opinion. The following summary is drawn from the findings of fact set forth in the Court of Chancery Opinion and our independent review of the record.^[3]

Paramount is a Delaware corporation with its principal offices in New York City. Approximately 118 million shares of Paramount's common stock are outstanding and traded on the New York Stock Exchange. The majority of Paramount's stock is publicly held by numerous unaffiliated investors. Paramount owns and operates a diverse group of entertainment businesses, including motion picture and television studios, book publishers, professional sports teams, and amusement parks.

There are 15 persons serving on the Paramount Board. Four directors are officer-employees of Paramount: Martin S. Davis ("Davis"), Paramount's Chairman and Chief Executive Officer since 1983; Donald Oresman ("Oresman"), Executive Vice-President, Chief Administrative Officer, and General Counsel; Stanley R. Jaffe, President and Chief Operating Officer; and Ronald L. Nelson, Executive Vice President and Chief Financial Officer. Paramount's 11 outside directors are distinguished and experienced business persons who are present or former senior executives of public corporations or financial institutions.^[4]

[38] Viacom is a Delaware corporation with its headquarters in Massachusetts. Viacom is controlled by Sumner M. Redstone ("Red-stone"), its Chairman and Chief Executive Officer, who owns indirectly approximately 85.2 percent of Viacom's voting Class A stock and approximately 69.2 percent of Viacom's nonvoting Class B stock through National Amusements, Inc. ("NAI"), an entity 91.7 percent owned by Redstone. Viacom has a wide range of entertainment operations, including a number of well-known cable television channels such as MTV, Nickelodeon, Showtime, and The Movie Channel. Viacom's equity co-investors in the Paramount-Viacom transaction include NYNEX Corporation and Blockbuster Entertainment Corporation.

QVC is a Delaware corporation with its headquarters in West Chester, Pennsylvania. QVC has several large stockholders, including Liberty Media Corporation, Comcast Corporation, Advance Publications, Inc., and Cox Enterprises Inc. Barry Diller ("Diller"), the Chairman and Chief Executive Officer of QVC, is also a substantial stockholder. QVC sells a variety of merchandise through a televised shopping channel. QVC has several equity co-investors in its proposed combination with Paramount including BellSouth Corporation and Comcast Corporation.

Beginning in the late 1980s, Paramount investigated the possibility of acquiring or merging with other companies in the entertainment, media, or communications industry. Paramount considered such transactions to be desirable, and perhaps necessary, in order to keep pace with competitors in the rapidly evolving field of entertainment and communications. Consistent with its goal of strategic expansion, Paramount made a tender offer for Time Inc. in 1989, but was ultimately unsuccessful. See Paramount Communications, Inc. v. Time Inc., Del. Supr., 571 A.2d 1140 (1990) ("Time-Warner").

Although Paramount had considered a possible combination of Paramount and Viacom as early as 1990, recent efforts to explore such a transaction began at a dinner meeting between Redstone and Davis on April 20, 1993. Robert Greenhill ("Greenhill"), Chairman of Smith Barney Shearson Inc. ("Smith Barney"), attended and helped facilitate this meeting. After several more meetings between Redstone and Davis, serious negotiations began taking place in early July.

It was tentatively agreed that Davis would be the chief executive officer and Redstone would be the controlling stockholder of the combined company, but the parties could not reach agreement on the merger price and the terms of a stock option to be granted to Viacom. With respect to price, Viacom offered a package of cash and stock (primarily Viacom Class B nonvoting stock) with a market value of approximately $61 per share, but Paramount wanted at least $70 per share.

Shortly after negotiations broke down in July 1993, two notable events occurred. First, Davis apparently learned of QVC's potential interest in Paramount, and told Diller over lunch on July 21, 1993, that Paramount was not for sale. Second, the market value of Viacom's Class B nonvoting stock increased from $46.875 on July 6 to $57.25 on August 20. QVC claims (and Viacom disputes) that this price increase was caused by open market purchases of such stock by Redstone or entities controlled by him.

[39] On August 20, 1993, discussions between Paramount and Viacom resumed when Greenhill arranged another meeting between Davis and Redstone. After a short hiatus, the parties negotiated in earnest in early September, and performed due diligence with the assistance of their financial advisors, Lazard Freres & Co. ("Lazard") for Paramount and Smith Barney for Viacom. On September 9, 1993, the Paramount Board was informed about the status of the negotiations and was provided information by Lazard, including an analysis of the proposed transaction.

On September 12, 1993, the Paramount Board met again and unanimously approved the Original Merger Agreement whereby Paramount would merge with and into Viacom. The terms of the merger provided that each share of Paramount common stock would be converted into 0.10 shares of Viacom Class A voting stock, 0.90 shares of Viacom Class B nonvoting stock, and $9.10 in cash. In addition, the Paramount Board agreed to amend its "poison pill" Rights Agreement to exempt the proposed merger with Viacom. The Original Merger Agreement also contained several provisions designed to make it more difficult for a potential competing bid to succeed. We focus, as did the Court of Chancery, on three of these defensive provisions: a "no-shop" provision (the "No-Shop Provision"), the Termination Fee, and the Stock Option Agreement.

First, under the No-Shop Provision, the Paramount Board agreed that Paramount would not solicit, encourage, discuss, negotiate, or endorse any competing transaction unless: (a) a third party "makes an unsolicited written, bona fide proposal, which is not subject to any material contingencies relating to financing"; and (b) the Paramount Board determines that discussions or negotiations with the third party are necessary for the Paramount Board to comply with its fiduciary duties.

Second, under the Termination Fee provision, Viacom would receive a $100 million termination fee if: (a) Paramount terminated the Original Merger Agreement because of a competing transaction; (b) Paramount's stockholders did not approve the merger; or (c) the Paramount Board recommended a competing transaction.

The third and most significant deterrent device was the Stock Option Agreement, which granted to Viacom an option to purchase approximately 19.9 percent (23,699,000 shares) of Paramount's outstanding common stock at $69.14 per share if any of the triggering events for the Termination Fee occurred. In addition to the customary terms that are normally associated with a stock option, the Stock Option Agreement contained two provisions that were both unusual and highly beneficial to Viacom: (a) Viacom was permitted to pay for the shares with a senior subordinated note of questionable marketability instead of cash, thereby avoiding the need to raise the $1.6 billion purchase price (the "Note Feature"); and (b) Viacom could elect to require Paramount to pay Viacom in cash a sum equal to the difference between the purchase price and the market price of Paramount's stock (the "Put Feature"). Because the Stock Option Agreement was not "capped" to limit its maximum dollar value, it had the potential to reach (and in this case did reach) unreasonable levels.

After the execution of the Original Merger Agreement and the Stock Option Agreement on September 12, 1993, Paramount and Viacom announced their proposed merger. In a number of public statements, the parties indicated that the pending transaction was a virtual certainty. Redstone described it as a "marriage" that would "never be torn asunder" and stated that only a "nuclear attack" could break the deal. Redstone also called Diller and John Malone of Tele-Communications Inc., a major stockholder of QVC, to dissuade them from making a competing bid.

Despite these attempts to discourage a competing bid, Diller sent a letter to Davis on September 20, 1993, proposing a merger in which QVC would acquire Paramount for approximately $80 per share, consisting of 0.893 shares of QVC common stock and $30 in cash. QVC also expressed its eagerness to meet with Paramount to negotiate the details of a transaction. When the Paramount Board met on September 27, it was advised by Davis that the Original Merger [40] Agreement prohibited Paramount from having discussions with QVC (or anyone else) unless certain conditions were satisfied. In particular, QVC had to supply evidence that its proposal was not subject to financing contingencies. The Paramount Board was also provided information from Lazard describing QVC and its proposal.

On October 5, 1993, QVC provided Paramount with evidence of QVC's financing. The Paramount Board then held another meeting on October 11, and decided to authorize management to meet with QVC. Davis also informed the Paramount Board that Booz-Allen & Hamilton ("Booz-Allen"), a management consulting firm, had been retained to assess, inter alia, the incremental earnings potential from a Paramount-Viacom merger and a Paramount-QVC merger. Discussions proceeded slowly, however, due to a delay in Paramount signing a confidentiality agreement. In response to Paramount's request for information, QVC provided two binders of documents to Paramount on October 20.

On October 21, 1993, QVC filed this action and publicly announced an $80 cash tender offer for 51 percent of Paramount's outstanding shares (the "QVC tender offer"). Each remaining share of Paramount common stock would be converted into 1.42857 shares of QVC common stock in a second-step merger. The tender offer was conditioned on, among other things, the invalidation of the Stock Option Agreement, which was worth over $200 million by that point.^[5] QVC contends that it had to commence a tender offer because of the slow pace of the merger discussions and the need to begin seeking clearance under federal antitrust laws.

Confronted by QVC's hostile bid, which on its face offered over $10 per share more than the consideration provided by the Original Merger Agreement, Viacom realized that it would need to raise its bid in order to remain competitive. Within hours after QVC's tender offer was announced, Viacom entered into discussions with Paramount concerning a revised transaction. These discussions led to serious negotiations concerning a comprehensive amendment to the original Paramount-Viacom transaction. In effect, the opportunity for a "new deal" with Viacom was at hand for the Paramount Board. With the QVC hostile bid offering greater value to the Paramount stockholders, the Paramount Board had considerable leverage with Viacom.

At a special meeting on October 24, 1993, the Paramount Board approved the Amended Merger Agreement and an amendment to the Stock Option Agreement. The Amended Merger Agreement was, however, essentially the same as the Original Merger Agreement, except that it included a few new provisions. One provision related to an $80 per share cash tender offer by Viacom for 51 percent of Paramount's stock, and another changed the merger consideration so that each share of Paramount would be converted into 0.20408 shares of Viacom Class A voting stock, 1.08317 shares of Viacom Class B nonvoting stock, and 0.20408 shares of a new series of Viacom convertible preferred stock. The Amended Merger Agreement also added a provision giving Paramount the right not to amend its Rights Agreement to exempt Viacom if the Paramount Board determined that such an amendment would be inconsistent with its fiduciary duties because another offer constituted a "better alternative."^[6] Finally, the Paramount Board was given the power to terminate the Amended Merger Agreement if it withdrew its recommendation of the Viacom transaction or recommended a competing transaction.

Although the Amended Merger Agreement offered more consideration to the Paramount stockholders and somewhat more flexibility to the Paramount Board than did the Original Merger Agreement, the defensive measures designed to make a competing bid more difficult were not removed or modified. [41] In particular, there is no evidence in the record that Paramount sought to use its newly-acquired leverage to eliminate or modify the No-Shop Provision, the Termination Fee, or the Stock Option Agreement when the subject of amending the Original Merger Agreement was on the table.

Viacom's tender offer commenced on October 25, 1993, and QVC's tender offer was formally launched on October 27, 1993. Diller sent a letter to the Paramount Board on October 28 requesting an opportunity to negotiate with Paramount, and Oresman responded the following day by agreeing to meet. The meeting, held on November 1, was not very fruitful, however, after QVC's proposed guidelines for a "fair bidding process" were rejected by Paramount on the ground that "auction procedures" were inappropriate and contrary to Paramount's contractual obligations to Viacom.

On November 6, 1993, Viacom unilaterally raised its tender offer price to $85 per share in cash and offered a comparable increase in the value of the securities being proposed in the second-step merger. At a telephonic meeting held later that day, the Paramount Board agreed to recommend Viacom's higher bid to Paramount's stockholders.

QVC responded to Viacom's higher bid on November 12 by increasing its tender offer to $90 per share and by increasing the securities for its second-step merger by a similar amount. In response to QVC's latest offer, the Paramount Board scheduled a meeting for November 15, 1993. Prior to the meeting, Oresman sent the members of the Paramount Board a document summarizing the "conditions and uncertainties" of QVC's offer. One director testified that this document gave him a very negative impression of the QVC bid.

At its meeting on November 15, 1993, the Paramount Board determined that the new QVC offer was not in the best interests of the stockholders. The purported basis for this conclusion was that QVC's bid was excessively conditional. The Paramount Board did not communicate with QVC regarding the status of the conditions because it believed that the No-Shop Provision prevented such communication in the absence of firm financing. Several Paramount directors also testified that they believed the Viacom transaction would be more advantageous to Paramount's future business prospects than a QVC transaction.^[7] Although a number of materials were distributed to the Paramount Board describing the Viacom and QVC transactions, the only quantitative analysis of the consideration to be received by the stockholders under each proposal was based on then-current market prices of the securities involved, not on the anticipated value of such securities at the time when the stockholders would receive them.^[8]

The preliminary injunction hearing in this case took place on November 16, 1993. On November 19, Diller wrote to the Paramount Board to inform it that QVC had obtained financing commitments for its tender offer and that there was no antitrust obstacle to the offer. On November 24, 1993, the Court of Chancery issued its decision granting a preliminary injunction in favor of QVC and the plaintiff stockholders. This appeal followed.

II. APPLICABLE PRINCIPLES OF ESTABLISHED DELAWARE LAW

The General Corporation Law of the State of Delaware (the "General Corporation Law") and the decisions of this Court have repeatedly recognized the fundamental principle that the management of the business and affairs of a Delaware corporation is entrusted to its directors, who are the duly elected and authorized representatives of the [42] stockholders. 8 Del.C. § 141(a); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811-12 (1984); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984). Under normal circumstances, neither the courts nor the stockholders should interfere with the managerial decisions of the directors. The business judgment rule embodies the deference to which such decisions are entitled. Aronson, 473 A.2d at 812.

Nevertheless, there are rare situations which mandate that a court take a more direct and active role in overseeing the decisions made and actions taken by directors. In these situations, a court subjects the directors' conduct to enhanced scrutiny to ensure that it is reasonable.^[9] The decisions of this Court have clearly established the circumstances where such enhanced scrutiny will be applied. E.g., Unocal, 493 A.2d 946; Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346 (1985); Revlon, 506 A.2d 173; Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1989); Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131 (1990). The case at bar implicates two such circumstances: (1) the approval of a transaction resulting in a sale of control, and (2) the adoption of defensive measures in response to a threat to corporate control.

A. The Significance of a Sale or Change^[10] of Control

When a majority of a corporation's voting shares are acquired by a single person or entity, or by a cohesive group acting together, there is a significant diminution in the voting power of those who thereby become minority stockholders. Under the statutory framework of the General Corporation Law, many of the most fundamental corporate changes can be implemented only if they are approved by a majority vote of the stockholders. Such actions include elections of directors, amendments to the certificate of incorporation, mergers, consolidations, sales of all or substantially all of the assets of the corporation, and dissolution. 8 Del.C. §§ 211, 242, 251-258, 263, 271, 275. Because of the overriding importance of voting rights, this Court and the Court of Chancery have consistently acted to protect stockholders from unwarranted interference with such rights.^[11]

In the absence of devices protecting the minority stockholders,^[12] stockholder votes are likely to become mere formalities where there is a majority stockholder. For example, minority stockholders can be deprived of a continuing equity interest in their corporation by means of a cash-out merger. Weinberger, [43] 457 A.2d at 703. Absent effective protective provisions, minority stockholders must rely for protection solely on the fiduciary duties owed to them by the directors and the majority stockholder, since the minority stockholders have lost the power to influence corporate direction through the ballot. The acquisition of majority status and the consequent privilege of exerting the powers of majority ownership come at a price. That price is usually a control premium which recognizes not only the value of a control block of shares, but also compensates the minority stockholders for their resulting loss of voting power.

In the case before us, the public stockholders (in the aggregate) currently own a majority of Paramount's voting stock. Control of the corporation is not vested in a single person, entity, or group, but vested in the fluid aggregation of unaffiliated stockholders. In the event the Paramount-Viacom transaction is consummated, the public stockholders will receive cash and a minority equity voting position in the surviving corporation. Following such consummation, there will be a controlling stockholder who will have the voting power to: (a) elect directors; (b) cause a break-up of the corporation; (c) merge it with another company; (d) cash-out the public stockholders; (e) amend the certificate of incorporation; (f) sell all or substantially all of the corporate assets; or (g) otherwise alter materially the nature of the corporation and the public stockholders' interests. Irrespective of the present Paramount Board's vision of a long-term strategic alliance with Viacom, the proposed sale of control would provide the new controlling stockholder with the power to alter that vision.

Because of the intended sale of control, the Paramount-Viacom transaction has economic consequences of considerable significance to the Paramount stockholders. Once control has shifted, the current Paramount stockholders will have no leverage in the future to demand another control premium. As a result, the Paramount stockholders are entitled to receive, and should receive, a control premium and/or protective devices of significant value. There being no such protective provisions in the Viacom-Paramount transaction, the Paramount directors had an obligation to take the maximum advantage of the current opportunity to realize for the stockholders the best value reasonably available.

B. The Obligations of Directors in a Sale or Change of Control Transaction

The consequences of a sale of control impose special obligations on the directors of a corporation.^[13] In particular, they have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders. The courts will apply enhanced scrutiny to ensure that the directors have acted reasonably. The obligations of the directors and the enhanced scrutiny of the courts are well-established by the decisions of this Court. The directors' fiduciary duties in a sale of control context are those which generally attach. In short, "the directors must act in accordance with their fundamental duties of care and loyalty." Barkan v. Amsted Indus., Inc., Del.Supr., 567 A.2d 1279, 1286 (1989). As we held in Macmillan:

It is basic to our law that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. In discharging this function, the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. This unremitting obligation extends equally to board conduct in a sale of corporate control. [44] 559 A.2d at 1280 (emphasis supplied) (citations omitted).

In the sale of control context, the directors must focus on one primary objective — to secure the transaction offering the best value reasonably available for the stockholders — and they must exercise their fiduciary duties to further that end. The decisions of this Court have consistently emphasized this goal. Revlon, 506 A.2d at 182 ("The duty of the board ... [is] the maximization of the company's value at a sale for the stockholders' benefit."); Macmillan, 559 A.2d at 1288 ("[I]n a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders."); Barkan, 567 A.2d at 1286 ("[T]he board must act in a neutral manner to encourage the highest possible price for shareholders."). See also Wilmington Trust Co. v. Coulter, Del.Supr., 200 A.2d 441, 448 (1964) (in the context of the duty of a trustee, "[w]hen all is equal ... it is plain that the Trustee is bound to obtain the best price obtainable").

In pursuing this objective, the directors must be especially diligent. See Citron v. Fairchild Camera and Instrument Corp., Del.Supr., 569 A.2d 53, 66 (1989) (discussing "a board's active and direct role in the sale process"). In particular, this Court has stressed the importance of the board being adequately informed in negotiating a sale of control: "The need for adequate information is central to the enlightened evaluation of a transaction that a board must make." Barkan, 567 A.2d at 1287. This requirement is consistent with the general principle that "directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them." Aronson, 473 A.2d at 812. See also Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 367 (1993); Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 872 (1985). Moreover, the role of outside, independent directors becomes particularly important because of the magnitude of a sale of control transaction and the possibility, in certain cases, that management may not necessarily be impartial. See Macmillan, 559 A.2d at 1285 (requiring "the intense scrutiny and participation of the independent directors").

Barkan teaches some of the methods by which a board can fulfill its obligation to seek the best value reasonably available to the stockholders. 567 A.2d at 1286-87. These methods are designed to determine the existence and viability of possible alternatives. They include conducting an auction, canvassing the market, etc. Delaware law recognizes that there is "no single blueprint" that directors must follow. Id. at 1286-87; Citron 569 A.2d at 68; Macmillan, 559 A.2d at 1287.

In determining which alternative provides the best value for the stockholders, a board of directors is not limited to considering only the amount of cash involved, and is not required to ignore totally its view of the future value of a strategic alliance. See Macmillan, 559 A.2d at 1282 n. 29. Instead, the directors should analyze the entire situation and evaluate in a disciplined manner the consideration being offered. Where stock or other non-cash consideration is involved, the board should try to quantify its value, if feasible, to achieve an objective comparison of the alternatives.^[14] In addition, the board may assess a variety of practical considerations relating to each alternative, including:

[an offer's] fairness and feasibility; the proposed or actual financing for the offer, and the consequences of that financing; questions of illegality; ... the risk of nonconsum[m]ation;... the bidder's identity, prior background and other business venture experiences; and the bidder's business plans for the corporation and their effects on stockholder interests.

Macmillan, 559 A.2d at 1282 n. 29. These considerations are important because the selection of one alternative may permanently foreclose other opportunities. While the assessment of these factors may be complex, [45] the board's goal is straightforward: Having informed themselves of all material information reasonably available, the directors must decide which alternative is most likely to offer the best value reasonably available to the stockholders.

C. Enhanced Judicial Scrutiny of a Sale or Change of Control Transaction

Board action in the circumstances presented here is subject to enhanced scrutiny. Such scrutiny is mandated by: (a) the threatened diminution of the current stockholders' voting power; (b) the fact that an asset belonging to public stockholders (a control premium) is being sold and may never be available again; and (c) the traditional concern of Delaware courts for actions which impair or impede stockholder voting rights (see supra note 11). In Macmillan, this Court held:

When Revlon duties devolve upon directors, this Court will continue to exact an enhanced judicial scrutiny at the threshold, as in Unocal, before the normal presumptions of the business judgment rule will apply.^[15]

559 A.2d at 1288. The Macmillan decision articulates a specific two-part test for analyzing board action where competing bidders are not treated equally:^[16]

In the face of disparate treatment, the trial court must first examine whether the directors properly perceived that shareholder interests were enhanced. In any event the board's action must be reasonable in relation to the advantage sought to be achieved, or conversely, to the threat which a particular bid allegedly poses to stockholder interests.

Id. See also Roberts v. General Instrument Corp., Del.Ch., C.A. No. 11639, 1990 WL 118356, Allen, C. (Aug. 13, 1990), reprinted at 16 Del.J.Corp.L. 1540, 1554 ("This enhanced test requires a judicial judgment of reasonableness in the circumstances.").

The key features of an enhanced scrutiny test are: (a) a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors' action in light of the circumstances then existing. The directors have the burden of proving that they were adequately informed and acted reasonably.

Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board's actions,^[17] a court should not ignore the complexity of the directors' task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness. [46] See Unocal, 493 A.2d at 955-56; Macmillan, 559 A.2d at 1288; Nixon, 626 A.2d at 1378.

D. Revlon and Time-Warner Distinguished

The Paramount defendants and Viacom assert that the fiduciary obligations and the enhanced judicial scrutiny discussed above are not implicated in this case in the absence of a "break-up" of the corporation, and that the order granting the preliminary injunction should be reversed. This argument is based on their erroneous interpretation of our decisions in Revlon and Time-Warner.

In Revlon, we reviewed the actions of the board of directors of Revlon, Inc. ("Revlon"), which had rebuffed the overtures of Pantry Pride, Inc. and had instead entered into an agreement with Forstmann Little & Co. ("Forstmann") providing for the acquisition of 100 percent of Revlon's outstanding stock by Forstmann and the subsequent break-up of Revlon. Based on the facts and circumstances present in Revlon, we held that "[t]he directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company." 506 A.2d at 182. We further held that "when a board ends an intense bidding contest on an insubstantial basis, ... [that] action cannot withstand the enhanced scrutiny which Unocal requires of director conduct." Id. at 184.

It is true that one of the circumstances bearing on these holdings was the fact that "the break-up of the company . . . had become a reality which even the directors embraced." Id. at 182. It does not follow, however, that a "break-up" must be present and "inevitable" before directors are subject to enhanced judicial scrutiny and are required to pursue a transaction that is calculated to produce the best value reasonably available to the stockholders. In fact, we stated in Revlon that "when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions." Id. at 184 (emphasis added). Revlon thus does not hold that an inevitable dissolution or "break-up" is necessary.

The decisions of this Court following Revlon reinforced the applicability of enhanced scrutiny and the directors' obligation to seek the best value reasonably available for the stockholders where there is a pending sale of control, regardless of whether or not there is to be a break-up of the corporation. In Macmillan, this Court held:

We stated in Revlon, and again here, that in a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders.

559 A.2d at 1288 (emphasis added). In Barkan, we observed further:

We believe that the general principles announced in Revlon, in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and in Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346 (1985) govern this case and every case in which a fundamental change of corporate control occurs or is contemplated.

567 A.2d at 1286 (emphasis added).

Although Macmillan and Barkan are clear in holding that a change of control imposes on directors the obligation to obtain the best value reasonably available to the stockholders, the Paramount defendants have interpreted our decision in Time-Warner as requiring a corporate break-up in order for that obligation to apply. The facts in Time-Warner, however, were quite different from the facts of this case, and refute Paramount's position here. In Time-Warner, the Chancellor held that there was no change of control in the original stock-for-stock merger between Time and Warner because Time would be owned by a fluid aggregation of unaffiliated stockholders both before and after the merger:

If the appropriate inquiry is whether a change in control is contemplated, the answer must be sought in the specific circumstances surrounding the transaction. Surely under some circumstances a stock for stock merger could reflect a transfer of corporate control. That would, for example, plainly be the case here if Warner were a private company. But where, as [47] here, the shares of both constituent corporations are widely held, corporate control can be expected to remain unaffected by a stock for stock merger. This in my judgment was the situation with respect to the original merger agreement. When the specifics of that situation are reviewed, it is seen that, aside from legal technicalities and aside from arrangements thought to enhance the prospect for the ultimate succession of [Nicholas J. Nicholas, Jr., president of Time], neither corporation could be said to be acquiring the other. Control of both remained in a large, fluid, changeable and changing market.

The existence of a control block of stock in the hands of a single shareholder or a group with loyalty to each other does have real consequences to the financial value of "minority" stock. The law offers some protection to such shares through the imposition of a fiduciary duty upon controlling shareholders. But here, effectuation of the merger would not have subjected Time shareholders to the risks and consequences of holders of minority shares. This is a reflection of the fact that no control passed to anyone in the transaction contemplated. The shareholders of Time would have "suffered" dilution, of course, but they would suffer the same type of dilution upon the public distribution of new stock.

Paramount Communications Inc. v. Time Inc., Del.Ch., No. 10866, 1989 WL 79880, Allen, C. (July 17, 1989), reprinted at 15 Del.J.Corp.L. 700, 739 (emphasis added). Moreover, the transaction actually consummated in Time-Warner was not a merger, as originally planned, but a sale of Warner's stock to Time.

In our affirmance of the Court of Chancery's well-reasoned decision, this Court held that "The Chancellor's findings of fact are supported by the record and his conclusion is correct as a matter of law." 571 A.2d at 1150 (emphasis added). Nevertheless, the Paramount defendants here have argued that a break-up is a requirement and have focused on the following language in our Time-Warner decision:

However, we premise our rejection of plaintiffs' Revlon claim on different grounds, namely, the absence of any substantial evidence to conclude that Time's board, in negotiating with Warner, made the dissolution or break-up of the corporate entity inevitable, as was the case in Revlon.

Under Delaware law there are, generally speaking and without excluding other possibilities, two circumstances which may implicate Revlon duties. The first, and clearer one, is when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company. However, Revlon duties may also be triggered where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company.

Id. at 1150 (emphasis added) (citation and footnote omitted).

The Paramount defendants have misread the holding of Time-Warner. Contrary to their argument, our decision in Time-Warner expressly states that the two general scenarios discussed in the above-quoted paragraph are not the only instances where "Revlon duties" may be implicated. The Paramount defendants' argument totally ignores the phrase "without excluding other possibilities." Moreover, the instant case is clearly within the first general scenario set forth in Time-Warner. The Paramount Board, albeit unintentionally, had "initiate[d] an active bidding process seeking to sell itself" by agreeing to sell control of the corporation to Viacom in circumstances where another potential acquiror (QVC) was equally interested in being a bidder.

The Paramount defendants' position that both a change of control and a break-up are required must be rejected. Such a holding would unduly restrict the application of Revlon, is inconsistent with this Court's decisions in Barkan and Macmillan, and has no basis in policy. There are few events that have a more significant impact on the stockholders than a sale of control or a corporate breakup. Each event represents a fundamental [48] (and perhaps irrevocable) change in the nature of the corporate enterprise from a practical standpoint. It is the significance of each of these events that justifies: (a) focusing on the directors' obligation to seek the best value reasonably available to the stockholders; and (b) requiring a close scrutiny of board action which could be contrary to the stockholders' interests.

Accordingly, when a corporation undertakes a transaction which will cause: (a) a change in corporate control; or (b) a breakup of the corporate entity, the directors' obligation is to seek the best value reasonably available to the stockholders. This obligation arises because the effect of the Viacom-Paramount transaction, if consummated, is to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom. Neither Time-Warner nor any other decision of this Court holds that a "break-up" of the company is essential to give rise to this obligation where there is a sale of control.

III. BREACH OF FIDUCIARY DUTIES BY PARAMOUNT BOARD

We now turn to duties of the Paramount Board under the facts of this case and our conclusions as to the breaches of those duties which warrant injunctive relief.

A. The Specific Obligations of the Paramount Board

Under the facts of this case, the Paramount directors had the obligation: (a) to be diligent and vigilant in examining critically the Paramount-Viacom transaction and the QVC tender offers; (b) to act in good faith; (c) to obtain, and act with due care on, all material information reasonably available, including information necessary to compare the two offers to determine which of these transactions, or an alternative course of action, would provide the best value reasonably available to the stockholders; and (d) to negotiate actively and in good faith with both Viacom and QVC to that end.

Having decided to sell control of the corporation, the Paramount directors were required to evaluate critically whether or not all material aspects of the Paramount-Viacom transaction (separately and in the aggregate) were reasonable and in the best interests of the Paramount stockholders in light of current circumstances, including: the change of control premium, the Stock Option Agreement, the Termination Fee, the coercive nature of both the Viacom and QVC tender offers,^[18] the No-Shop Provision, and the proposed disparate use of the Rights Agreement as to the Viacom and QVC tender offers, respectively.

These obligations necessarily implicated various issues, including the questions of whether or not those provisions and other aspects of the Paramount-Viacom transaction (separately and in the aggregate): (a) adversely affected the value provided to the Paramount stockholders; (b) inhibited or encouraged alternative bids; (c) were enforceable contractual obligations in light of the directors' fiduciary duties; and (d) in the end would advance or retard the Paramount directors' obligation to secure for the Paramount stockholders the best value reasonably available under the circumstances.

The Paramount defendants contend that they were precluded by certain contractual provisions, including the No-Shop Provision, from negotiating with QVC or seeking alternatives. Such provisions, whether or not they are presumptively valid in the abstract, may not validly define or limit the directors' fiduciary duties under Delaware law or prevent the Paramount directors from carrying out their fiduciary duties under Delaware law. To the extent such provisions are inconsistent with those duties, they are invalid and unenforceable. See Revlon, 506 A.2d at 184-85.

Since the Paramount directors had already decided to sell control, they had an obligation [49] to continue their search for the best value reasonably available to the stockholders. This continuing obligation included the responsibility, at the October 24 board meeting and thereafter, to evaluate critically both the QVC tender offers and the Paramount-Viacom transaction to determine if: (a) the QVC tender offer was, or would continue to be, conditional; (b) the QVC tender offer could be improved; (c) the Viacom tender offer or other aspects of the Paramount-Viacom transaction could be improved; (d) each of the respective offers would be reasonably likely to come to closure, and under what circumstances; (e) other material information was reasonably available for consideration by the Paramount directors; (f) there were viable and realistic alternative courses of action; and (g) the timing constraints could be managed so the directors could consider these matters carefully and deliberately.

B. The Breaches of Fiduciary Duty by the Paramount Board

The Paramount directors made the decision on September 12, 1993, that, in their judgment, a strategic merger with Viacom on the economic terms of the Original Merger Agreement was in the best interests of Paramount and its stockholders. Those terms provided a modest change of control premium to the stockholders. The directors also decided at that time that it was appropriate to agree to certain defensive measures (the Stock Option Agreement, the Termination Fee, and the No-Shop Provision) insisted upon by Viacom as part of that economic transaction. Those defensive measures, coupled with the sale of control and subsequent disparate treatment of competing bidders, implicated the judicial scrutiny of Unocal, Revlon, Macmillan, and their progeny. We conclude that the Paramount directors' process was not reasonable, and the result achieved for the stockholders was not reasonable under the circumstances.

When entering into the Original Merger Agreement, and thereafter, the Paramount Board clearly gave insufficient attention to the potential consequences of the defensive measures demanded by Viacom. The Stock Option Agreement had a number of unusual and potentially "draconian"^[19] provisions, including the Note Feature and the Put Feature. Furthermore, the Termination Fee, whether or not unreasonable by itself, clearly made Paramount less attractive to other bidders, when coupled with the Stock Option Agreement. Finally, the No-Shop Provision inhibited the Paramount Board's ability to negotiate with other potential bidders, particularly QVC which had already expressed an interest in Paramount.^[20]

Throughout the applicable time period, and especially from the first QVC merger proposal on September 20 through the Paramount Board meeting on November 15, QVC's interest in Paramount provided the opportunity for the Paramount Board to seek significantly higher value for the Paramount stockholders than that being offered by Viacom. QVC persistently demonstrated its intention to meet and exceed the Viacom offers, and [50] frequently expressed its willingness to negotiate possible further increases.

The Paramount directors had the opportunity in the October 23-24 time frame, when the Original Merger Agreement was renegotiated, to take appropriate action to modify the improper defensive measures as well as to improve the economic terms of the Paramount-Viacom transaction. Under the circumstances existing at that time, it should have been clear to the Paramount Board that the Stock Option Agreement, coupled with the Termination Fee and the No-Shop Clause, were impeding the realization of the best value reasonably available to the Paramount stockholders. Nevertheless, the Paramount Board made no effort to eliminate or modify these counterproductive devices, and instead continued to cling to its vision of a strategic alliance with Viacom. Moreover, based on advice from the Paramount management, the Paramount directors considered the QVC offer to be "conditional" and asserted that they were precluded by the No-Shop Provision from seeking more information from, or negotiating with, QVC.

By November 12, 1993, the value of the revised QVC offer on its face exceeded that of the Viacom offer by over $1 billion at then current values. This significant disparity of value cannot be justified on the basis of the directors' vision of future strategy, primarily because the change of control would supplant the authority of the current Paramount Board to continue to hold and implement their strategic vision in any meaningful way. Moreover, their uninformed process had deprived their strategic vision of much of its credibility. See Van Gorkom, 488 A.2d at 872; Cede v. Technicolor, 634 A.2d at 367; Hanson Trust PLC v. ML SCM Acquisition Inc., 2d Cir., 781 F.2d 264, 274 (1986).

When the Paramount directors met on November 15 to consider QVC's increased tender offer, they remained prisoners of their own misconceptions and missed opportunities to eliminate the restrictions they had imposed on themselves. Yet, it was not "too late" to reconsider negotiating with QVC. The circumstances existing on November 15 made it clear that the defensive measures, taken as a whole, were problematic: (a) the No-Shop Provision could not define or limit their fiduciary duties; (b) the Stock Option Agreement had become "draconian"; and (c) the Termination Fee, in context with all the circumstances, was similarly deterring the realization of possibly higher bids. Nevertheless, the Paramount directors remained paralyzed by their uninformed belief that the QVC offer was "illusory." This final opportunity to negotiate on the stockholders' behalf and to fulfill their obligation to seek the best value reasonably available was thereby squandered.^[21]

IV. VIACOM'S CLAIM OF VESTED CONTRACT RIGHTS

Viacom argues that it had certain "vested" contract rights with respect to the No-Shop Provision and the Stock Option Agreement.^[22] In effect, Viacom's argument is that the Paramount directors could enter into an agreement in violation of their fiduciary duties and then render Paramount, and ultimately its stockholders, liable for failing to carry out an agreement in violation of those duties. Viacom's protestations about vested rights are without merit. This Court has found that those defensive measures were improperly designed to deter potential bidders, and that [51] such measures do not meet the reasonableness test to which they must be subjected. They are consequently invalid and unenforceable under the facts of this case.

The No-Shop Provision could not validly define or limit the fiduciary duties of the Paramount directors. To the extent that a contract, or a provision thereof, purports to require a board to act or not act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable. Cf. Wilmington Trust v. Coulter, 200 A.2d at 452-54. Despite the arguments of Paramount and Viacom to the contrary, the Paramount directors could not contract away their fiduciary obligations. Since the No-Shop Provision was invalid, Viacom never had any vested contract rights in the provision.

As discussed previously, the Stock Option Agreement contained several "draconian" aspects, including the Note Feature and the Put Feature. While we have held that lock-up options are not per se illegal, see Revlon, 506 A.2d at 183, no options with similar features have ever been upheld by this Court. Under the circumstances of this case, the Stock Option Agreement clearly is invalid. Accordingly, Viacom never had any vested contract rights in that Agreement.

Viacom, a sophisticated party with experienced legal and financial advisors, knew of (and in fact demanded) the unreasonable features of the Stock Option Agreement. It cannot be now heard to argue that it obtained vested contract rights by negotiating and obtaining contractual provisions from a board acting in violation of its fiduciary duties. As the Nebraska Supreme Court said in rejecting a similar argument in ConAgra, Inc. v. Cargill, Inc., 222 Neb. 136, 382 N.W.2d 576, 587-88 (1986), "To so hold, it would seem, would be to get the shareholders coming and going." Likewise, we reject Viacom's arguments and hold that its fate must rise or fall, and in this instance fall, with the determination that the actions of the Paramount Board were invalid.

V. CONCLUSION

The realization of the best value reasonably available to the stockholders became the Paramount directors' primary obligation under these facts in light of the change of control. That obligation was not satisfied, and the Paramount Board's process was deficient. The directors' initial hope and expectation for a strategic alliance with Viacom was allowed to dominate their decisionmaking process to the point where the arsenal of defensive measures established at the outset was perpetuated (not modified or eliminated) when the situation was dramatically altered. QVC's unsolicited bid presented the opportunity for significantly greater value for the stockholders and enhanced negotiating leverage for the directors. Rather than seizing those opportunities, the Paramount directors chose to wall themselves off from material information which was reasonably available and to hide behind the defensive measures as a rationalization for refusing to negotiate with QVC or seeking other alternatives. Their view of the strategic alliance likewise became an empty rationalization as the opportunities for higher value for the stockholders continued to develop.

It is the nature of the judicial process that we decide only the case before us — a case which, on its facts, is clearly controlled by established Delaware law. Here, the proposed change of control and the implications thereof were crystal clear. In other cases they may be less clear. The holding of this case on its facts, coupled with the holdings of the principal cases discussed herein where the issue of sale of control is implicated, should provide a workable precedent against which to measure future cases.

For the reasons set forth herein, the November 24, 1993, Order of the Court of Chancery has been AFFIRMED, and this matter has been REMANDED for proceedings consistent herewith, as set forth in the December 9, 1993, Order of this Court.

ADDENDUM

The record in this case is extensive. The appendix filed in this Court comprises 15 volumes, totalling some 7251 pages. It includes [52] substantial deposition testimony which forms part of the factual record before the Court of Chancery and before this Court. The members of this Court have read and considered the appendix, including the deposition testimony, in reaching its decision, preparing the Order of December 9, 1993, and this opinion. Likewise, the Vice Chancellor's opinion revealed that he was thoroughly familiar with the entire record, including the deposition testimony. As noted, supra p. 37 note 2, the Court has commended the parties for their professionalism in conducting expedited discovery, assembling and organizing the record, and preparing and presenting very helpful briefs, a joint appendix, and oral argument.

The Court is constrained, however, to add this Addendum. Although this Addendum has no bearing on the outcome of the case, it relates to a serious issue of professionalism involving deposition practice in proceedings in Delaware trial courts.^[23]

The issue of discovery abuse, including lack of civility and professional misconduct during depositions, is a matter of considerable concern to Delaware courts and courts around the nation.^[24] One particular instance of misconduct during a deposition in this case demonstrates such an astonishing lack of professionalism and civility that it is worthy of special note here as a lesson for the future — a lesson of conduct not to be tolerated or repeated.

On November 10, 1993, an expedited deposition of Paramount, through one of its directors, J. Hugh Liedtke,^[25] was taken in the state of Texas. The deposition was taken by Delaware counsel for QVC. Mr. Liedtke was individually represented at this deposition by Joseph D. Jamail, Esquire, of the Texas Bar. Peter C. Thomas, Esquire, of the New York Bar appeared and defended on behalf of the Paramount defendants. It does not appear that any member of the Delaware bar was present at the deposition representing any of the defendants or the stockholder plaintiffs.

Mr. Jamail did not otherwise appear in this Delaware proceeding representing any party, and he was not admitted pro hac vice.^[26] [53] Under the rules of the Court of Chancery and this Court,^[27] lawyers who are admitted pro hac vice to represent a party in Delaware proceedings are subject to Delaware Disciplinary Rules,^[28] and are required to review the Delaware State Bar Association Statement of Principles of Lawyer Conduct (the "Statement of Principles").^[29] During the Liedtke deposition, Mr. Jamail abused the privilege of representing a witness in a Delaware proceeding, in that he: (a) improperly directed the witness not to answer certain questions; (b) was extraordinarily rude, uncivil, and vulgar; and (c) obstructed the ability of the questioner to elicit testimony to assist the Court in this matter.

To illustrate, a few excerpts from the latter stages of the Liedtke deposition follow:

A. [Mr. Liedtke] I vaguely recall [Mr. Oresman's letter] .... I think I did read it, probably.

. . . .

Q. (By Mr. Johnston [Delaware counsel for QVC]) Okay. Do you have any idea why Mr. Oresman was calling that material to your attention?

MR. JAMAIL: Don't answer that.

How would he know what was going on in Mr. Oresman's mind?

Don't answer it.

Go on to your next question.

MR. JOHNSTON: No, Joe —

MR. JAMAIL: He's not going to answer that. Certify it. I'm going to shut it down if you don't go to your next question.

[54] MR. JOHNSTON: No. Joe, Joe —

MR. JAMAIL: Don't "Joe" me, asshole. You can ask some questions, but get off of that. I'm tired of you. You could gag a maggot off a meat wagon. Now, we've helped you every way we can.

MR. JOHNSTON: Let's just take it easy.

MR. JAMAIL: No, we're not going to take it easy. Get done with this.

MR. JOHNSTON: We will go on to the next question.

MR. JAMAIL: Do it now.

MR. JOHNSTON: We will go on to the next question. We're not trying to excite anyone.

MR. JAMAIL: Come on. Quit talking. Ask the question. Nobody wants to socialize with you.

MR. JOHNSTON: I'm not trying to socialize. We'll go on to another question. We're continuing the deposition.

MR. JAMAIL: Well, go on and shut up.

MR. JOHNSTON: Are you finished?

MR. JAMAIL: Yeah, you —

MR. JOHNSTON: Are you finished?

MR. JAMAIL: I may be and you may be. Now, you want to sit here and talk to me, fine. This deposition is going to be over with. You don't know what you're doing. Obviously someone wrote out a long outline of stuff for you to ask. You have no concept of what you're doing.

Now, I've tolerated you for three hours. If you've got another question, get on with it. This is going to stop one hour from now, period. Go.

MR. JOHNSTON: Are you finished?

MR. THOMAS: Come on, Mr. Johnston, move it.

MR. JOHNSTON: I don't need this kind of abuse.

MR. THOMAS: Then just ask the next question.

Q. (By Mr. Johnston) All right. To try to move forward, Mr. Liedtke, ... I'll show you what's been marked as Liedtke 14 and it is a covering letter dated October 29 from Steven Cohen of Wachtell, Lipton, Rosen & Katz including QVC's Amendment Number 1 to its Schedule 14D-1, and my question —

A. No.

Q. — to you, sir, is whether you've seen that?

A. No. Look, I don't know what your intent in asking all these questions is, but, my God, I am not going to play boy lawyer.

Q. Mr. Liedtke —

A. Okay. Go ahead and ask your question.

Q. — I'm trying to move forward in this deposition that we are entitled to take. I'm trying to streamline it.

MR. JAMAIL: Come on with your next question. Don't even talk with this witness.

MR. JOHNSTON: I'm trying to move forward with it.

MR. JAMAIL: You understand me? Don't talk to this witness except by question. Did you hear me?

MR. JOHNSTON: I heard you fine.

MR. JAMAIL: You fee makers think you can come here and sit in somebody's office, get your meter running, get your full day's fee by asking stupid questions. Let's go with it.

(JA 6002-06).^[30]

Staunch advocacy on behalf of a client is proper and fully consistent with the finest effectuation of skill and professionalism. Indeed, it is a mark of professionalism, not weakness, for a lawyer zealously and firmly to protect and pursue a client's legitimate interests by a professional, courteous, and civil attitude toward all persons involved in the litigation process. A lawyer who engages in the type of behavior exemplified by Mr. Jamail on the record of the Liedtke deposition is not properly representing his client, and the client's cause is not advanced by a lawyer who engages in unprofessional conduct of this nature. It happens that in this case there was no application to the Court, and the parties and the witness do not [55] appear to have been prejudiced by this misconduct.^[31]

Nevertheless, the Court finds this unprofessional behavior to be outrageous and unacceptable. If a Delaware lawyer had engaged in the kind of misconduct committed by Mr. Jamail on this record, that lawyer would have been subject to censure or more serious sanctions.^[32] While the specter of disciplinary proceedings should not be used by the parties as a litigation tactic,^[33] conduct such as that involved here goes to the heart of the trial court proceedings themselves. As such, it cries out for relief under the trial court's rules, including Ch. Ct. R. 37. Under some circumstances, the use of the trial court's inherent summary contempt powers may be appropriate. See In re Butler, Del.Supr., 609 A.2d 1080, 1082 (1992).

Although busy and overburdened, Delaware trial courts are "but a phone call away" and would be responsive to the plight of a party and its counsel bearing the brunt of such misconduct.^[34] It is not appropriate for this Court to prescribe in the abstract any particular remedy or to provide an exclusive list of remedies under such circumstances. We assume that the trial courts of this State would consider protective orders and the sanctions permitted by the discovery rules. Sanctions could include exclusion of obstreperous counsel from attending the deposition (whether or not he or she has been admitted pro hac vice), ordering the deposition recessed and reconvened promptly in Delaware, or the appointment of a master to preside at the deposition. Costs and counsel fees should follow.

As noted, this was a deposition of Paramount through one of its directors. Mr. Liedtke was a Paramount witness in every respect. He was not there either as an individual defendant or as a third party witness. Pursuant to Ch. Ct. R. 170(d), the Paramount defendants should have been represented at the deposition by a Delaware lawyer or a lawyer admitted pro hac vice. A Delaware lawyer who moves the admission pro hac vice of an out-of-state lawyer is not relieved of responsibility, is required to appear at all court proceedings (except depositions when a lawyer admitted pro hac vice is present), shall certify that the lawyer appearing [56] pro hac vice is reputable and competent, and that the Delaware lawyer is in a position to recommend the out-of-state lawyer.^[35] Thus, one of the principal purposes of the pro hac vice rules is to assure that, if a Delaware lawyer is not to be present at a deposition, the lawyer admitted pro hac vice will be there. As such, he is an officer of the Delaware Court, subject to control of the Court to ensure the integrity of the proceeding.

Counsel attending the Liedtke deposition on behalf of the Paramount defendants had an obligation to ensure the integrity of that proceeding. The record of the deposition as a whole (JA 5916-6054) demonstrates that, not only Mr. Jamail, but also Mr. Thomas (representing the Paramount defendants), continually interrupted the questioning, engaged in colloquies and objections which sometimes suggested answers to questions,^[36] and constantly pressed the questioner for time throughout the deposition.^[37] As to Mr. Jamail's tactics quoted above, Mr. Thomas passively let matters proceed as they did, and at times even added his own voice to support the behavior of Mr. Jamail. A Delaware lawyer or a lawyer admitted pro hac vice would have been expected to put an end to the misconduct in the Liedtke deposition.

This kind of misconduct is not to be tolerated in any Delaware court proceeding, including depositions taken in other states in which witnesses appear represented by their own counsel other than counsel for a party in the proceeding. Yet, there is no clear mechanism for this Court to deal with this matter in terms of sanctions or disciplinary remedies at this time in the context of this case. Nevertheless, consideration will be given to the following issues for the future: (a) whether or not it is appropriate and fair to take into account the behavior of Mr. Jamail in this case in the event application is made by him in the future to appear pro hac vice in any Delaware proceeding;^[38] and (b) what rules or standards should be adopted to deal effectively with misconduct by out-of-state lawyers in depositions in proceedings pending in Delaware courts.

As to (a), this Court will welcome a voluntary appearance by Mr. Jamail if a request is received from him by the Clerk of this Court within thirty days of the date of this Opinion and Addendum. The purpose of such voluntary appearance will be to explain the questioned conduct and to show cause why such conduct should not be considered as a bar to any future appearance by Mr. Jamail in a Delaware proceeding. As to (b), this Court and the trial courts of this State will undertake to strengthen the existing mechanisms for dealing with the type of misconduct referred [57] to in this Addendum and the practices relating to admissions pro hac vice.

[1] We accepted this expedited interlocutory appeal on November 29, 1993. After briefing and oral argument in this Court held on December 9, 1993, we issued our December 9 Order affirming the November 24 Order of the Court of Chancery. In our December 9 Order, we stated, "It is not feasible, because of the exigencies of time, for this Court to complete an opinion setting forth more comprehensively the rationale of the Court's decision. Unless otherwise ordered by the Court, such an opinion will follow in due course." December 9 Order at 3. This is the opinion referred to therein.

[2] It is important to put the Addendum in perspective. This Court notes and has noted its appreciation of the outstanding judicial workmanship of the Vice Chancellor and the professionalism of counsel in this matter in handling this expedited litigation with the expertise and skill which characterize Delaware proceedings of this nature. The misconduct noted in the Addendum is an aberration which is not to be tolerated in any Delaware proceeding.

[3] This Court's standard and scope of review as to facts on appeal from a preliminary injunction is whether, after independently reviewing the entire record, we can conclude that the findings of the Court of Chancery are sufficiently supported by the record and are the product of an orderly and logical deductive process. Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1342-41 (1987).

[4] Grace J. Fippinger, a former Vice President, Secretary and Treasurer of NYNEX Corporation, and director of Pfizer, Inc., Connecticut Mutual Life Insurance Company, and The Bear Stearns Companies, Inc.

Irving R. Fischer, Chairman and Chief Executive Officer of HRH Construction Corporation, Vice Chairman of the New York City Chapter of the National Multiple Sclerosis Society, a member of the New York City Holocaust Memorial Commission, and an Adjunct Professor of Urban Planning at Columbia University

Benjamin L. Hooks, Senior Vice President of the Chapman Company and director of Maxima Corporation

J. Hugh Liedtke, Chairman of Pennzoil Company Franz J. Lutolf, former General Manager and a member of the Executive Board of Swiss Bank Corporation, and director of Grapha Holding AG, Hergiswil (Switzerland), Banco Santander (Suisse) S.A., Geneva, Diawa Securities Bank (Switzerland), Zurich, Cheak Coast Helarb European Acquisitions S.A., Luxembourg Internationale Nederlanden Bank (Switzerland), Zurich James A. Pattison, Chairman and Chief Executive Officer of the Jim Pattison Group, and director of the Toronto-Dominion Bank, Canadian Pacific Ltd., and Toyota's Canadian subsidiary

Lester Pollack, General Partner of Lazard Freres & Co., Chief Executive Officer of Center Partners, and Senior Managing Director of Corporate Partners, investment affiliates of Lazard Freres, director of Loews Corp., CNA Financial Corp., Sunamerica Corp., Kaufman & Broad Home Corp., Parlex Corp., Transco Energy Company, Polaroid Corp., Continental Cablevision, Inc., and Tidewater Inc., and Trustee of New York University

Irwin Schloss, Senior Advisor, Marcus Schloss & Company, Inc.

Samuel J. Silberman, Retired Chairman of Consolidated Cigar Corporation

Lawrence M. Small, President and Chief Operating Officer of the Federal National Mortgage Association, director of Fannie Mae and the Chubb Corporation, and trustee of Morehouse College and New York University Medical Center George Weissman, retired Chairman and Consultant of Philip Morris Companies, Inc., director of Avnet, Incorporated, and Chairman of Lincoln Center for the Performing Arts, Inc.

[5] By November 15, 1993, the value of the Stock Option Agreement had increased to nearly $500 million based on the S90 QVC bid. See Court of Chancery Opinion, 635 A.2d 1245, 1271.

[6] Under the Amended Merger Agreement and the Paramount Board's resolutions approving it, no further action of the Paramount Board would be required in order for Paramount's Rights Agreement to be amended. As a result, the proper officers of the company were authorized to implement the amendment unless they were instructed otherwise by the Paramount Board.

[7] This belief may have been based on a report prepared by Booz-Allen and distributed to the Paramount Board at its October 24 meeting. The report, which relied on public information regarding QVC, concluded that the synergies of a Paramount-Viacom merger were significantly superior to those of a Paramount-QVC merger. QVC has labelled the Booz-Allen report as a "joke."

[8] The market prices of Viacom's and QVC's stock were poor measures of their actual values because such prices constantly fluctuated depending upon which company was perceived to be the more likely to acquire Paramount.

[9] Where actual self-interest is present and affects a majority of the directors approving a transaction, a court will apply even more exacting scrutiny to determine whether the transaction is entirely fair to the stockholders. E.g., Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710-11 (1983); Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1376 (1993).

[10] For purposes of our December 9 Order and this Opinion, we have used the terms "sale of control" and "change of control" interchangeably without intending any doctrinal distinction.

[11] See Schnell v. Chris-Craft Indus., Inc., Del. Supr., 285 A.2d 437, 439 (1971) (holding that actions taken by management to manipulate corporate machinery "for the purpose of obstructing the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management" were "contrary to established principles of corporate democracy" and therefore invalid); Giuricich v. Emtrol Corp., Del.Supr., 449 A.2d 232, 239 (1982) (holding that "careful judicial scrutiny will be given a situation in which the right to vote for the election of successor directors has been effectively frustrated"); Centaur Partners, IV v. Nat'l Intergroup, Del.Supr., 582 A.2d 923 (1990) (holding that supermajority voting provisions must be clear and unambiguous because they have the effect of disenfranchising the majority); Stroud v. Grace, Del.Supr., 606 A.2d 75, 84 (1992) (directors' duty of disclosure is premised on the importance of stockholders being fully informed when voting on a specific matter); Blasius Indus., Inc. v. Atlas Corp., Del.Ch., 564 A.2d 651, 659 n. 2 (1988) ("Delaware courts have long exercised a most sensitive and protective regard for the free and effective exercise of voting rights.").

[12] Examples of such protective provisions are supermajority voting provisions, majority of the minority requirements, etc. Although we express no opinion on what effect the inclusion of any such stockholder protective devices would have had in this case, we note that this Court has upheld, under different circumstances, the reasonableness of a standstill agreement which limited a 49.9 percent stockholder to 40 percent board representation. Ivanhoe, 535 A.2d at 1343.

[13] We express no opinion on any scenario except the actual facts before the Court, and our precise holding herein. Unsolicited tender offers in other contexts may be governed by different precedent. For example, where a potential sale of control by a corporation is not the consequence of a board's action, this Court has recognized the prerogative of a board of directors to resist a third party's unsolicited acquisition proposal or offer. See Pogostin, 480 A.2d at 627; Time-Warner, 571 A.2d at 1152; Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840, 845 (1987); Macmillan, 559 A.2d at 1285 n. 35. The decision of a board to resist such an acquisition, like all decisions of a properly-functioning board, must be informed, Unocal, 493 A.2d at 954-55, and the circumstances of each particular case will determine the steps that a board must take to inform itself, and what other action, if any, is required as a matter of fiduciary duty.

[14] When assessing the value of non-cash consideration, a board should focus on its value as of the date it will be received by the stockholders. Normally, such value will be determined with the assistance of experts using generally accepted methods of valuation. See In re RJR Nabisco, Inc. Shareholders Litig., Del.Ch., C.A. No. 10389, 1989 WL 7036, Allen, C. (Jan. 31, 1989), reprinted at 14 Del.J.Corp.L. 1132, 1161.

[15] Because the Paramount Board acted unreasonably as to process and result in this sale of control situation, the business judgment rule did not become operative.

[16] Before this test is invoked, "the plaintiff must show, and the trial court must find, that the directors of the target company treated one or more of the respective bidders on unequal terms." Macmillan, 559 A.2d at 1288.

[17] It is to be remembered that, in cases where the traditional business judgment rule is applicable and the board acted with due care, in good faith, and in the honest belief that they are acting in the best interests of the stockholders (which is not this case), the Court gives great deference to the substance of the directors' decision and will not invalidate the decision, will not examine its reasonableness, and "will not substitute our views for those of the board if the latter's decision can be `attributed to any rational business purpose.'" Unocal, 493 A.2d at 949 (quoting Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971)). See Aronson, 473 A.2d at 812.

[18] Both the Viacom and the QVC tender offers were for 51 percent cash and a "back-end" of various securities, the value of each of which depended on the fluctuating value of Viacom and QVC stock at any given time. Thus, both tender offers were two-tiered, front-end loaded, and coercive. Such coercive offers are inherently problematic and should be expected to receive particularly careful analysis by a target board. See Unocal, 493 A.2d at 956.

[19] The Vice Chancellor so characterized the Stock Option Agreement. Court of Chancery Opinion, 635 A.2d 1245, 1272. We express no opinion whether a stock option agreement of essentially this magnitude, but with a reasonable "cap" and without the Note and Put Features, would be valid or invalid under other circumstances. See Hecco Ventures v. Sea-Land Corp., Del.Ch., C.A. No. 8486, 1986 WL 5840, Jacobs, V.C. (May 19, 1986) (21.7 percent stock option); In re Vitalink Communications Corp. Shareholders Litig., Del.Ch., C.A. No. 12085, Chandler, V.C. (May 16, 1990) (19.9 percent stock option).

[20] We express no opinion whether certain aspects of the No-Shop Provision here could be valid in another context. Whether or not it could validly have operated here at an early stage solely to prevent Paramount from actively "shopping" the company, it could not prevent the Paramount directors from carrying out their fiduciary duties in considering unsolicited bids or in negotiating for the best value reasonably available to the stockholders. Macmillan, 559 A.2d at 1287. As we said in Barkan: "Where a board has no reasonable basis upon which to judge the adequacy of a contemplated transaction, a no-shop restriction gives rise to the inference that the board seeks to forestall competing bids." 567 A.2d at 1288. See also Revlon, 506 A.2d at 184 (holding that "[t]he no-shop provision, like the lock-up option, while not per se illegal, is impermissible under the Unocal standards when a board's primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder").

[21] The Paramount defendants argue that the Court of Chancery erred by assuming that the Rights Agreement was "pulled" at the November 15 meeting of the Paramount Board. The problem with this argument is that, under the Amended Merger Agreement and the resolutions of the Paramount Board related thereto, Viacom would be exempted from the Rights Agreement in the absence of further action of the Paramount Board and no further meeting had been scheduled or even contemplated prior to the closing of the Viacom tender offer. This failure to schedule and hold a meeting shortly before the closing date in order to make a final decision, based on all of the information and circumstances then existing, whether to exempt Viacom from the Rights Agreement was inconsistent with the Paramount Board's responsibilities and does not provide a basis to challenge the Court of Chancery's decision.

[22] Presumably this argument would have included the Termination Fee had the Vice Chancellor invalidated that provision or if appellees had cross-appealed from the Vice Chancellor's refusal to invalidate that provision.

[23] We raise this matter sua sponte as part of our exclusive supervisory responsibility to regulate and enforce appropriate conduct of lawyers appearing in Delaware proceedings. See In re Infotechnology, Inc. Shareholder Litig., Del.Supr., 582 A.2d 215 (1990); In re Nenno, Del.Supr., 472 A.2d 815, 819 (1983); In re Green, Del.Supr., 464 A.2d 881, 885 (1983); Delaware Optometric Corp. v. Sherwood, 36 Del.Ch. 223, 128 A.2d 812 (1957); Darling Apartment Co. v. Springer, 25 Del.Ch. 420, 22 A.2d 397 (1941). Normally our supervision relates to the conduct of members of the Delaware Bar and those admitted pro hac vice. Our responsibility for supervision is not confined to lawyers who are members of the Delaware Bar and those admitted pro hac vice, however. See In re Metviner, Del.Supr., Misc. No. 256, 1989 WL 226135, Christie, C.J. (July 7, 1989 and Aug. 22, 1989) (ORDERS). Our concern, and our duty to insist on appropriate conduct in any Delaware proceeding, including out-of-state depositions taken in Delaware litigation, extends to all lawyers, litigants, witnesses, and others.

[24] Justice Sandra Day O'Connor recently highlighted the national concern about the deterioration in civility in a speech delivered on December 14, 1993, to an American Bar Association group on "Civil Justice Improvements."

I believe that the justice system cannot function effectively when the professionals charged with administering it cannot even be polite to one another. Stress and frustration drive down productivity and make the process more time-consuming and expensive. Many of the best people get driven away from the field. The profession and the system itself lose esteem in the public's eyes.

. . . .

... In my view, incivility disserves the client because it wastes time and energy — time that is billed to the client at hundreds of dollars an hour, and energy that is better spent working on the case than working over the opponent.

The Honorable Sandra Day O'Connor, "Civil Justice System Improvements," ABA at 5 (Dec. 14, 1993) (footnotes omitted).

[25] The docket entries in the Court of Chancery show a November 2, 1993, "Notice of Deposition of Paramount Board" (Dkt 65). Presumably, this included Mr. Liedtke, a director of Paramount. Under Ch. Ct. R. 32(a)(2), a deposition is admissible against a party if the deposition is of an officer, director, or managing agent. From the docket entries, it appears that depositions of third party witnesses (persons who were not directors or officers) were taken pursuant to the issuance of commissions.

[26] It does not appear from the docket entries that Mr. Thomas was admitted pro hac vice in the Court of Chancery. In fact, no member of his firm appears from the docket entries to have been so admitted until Barry R. Ostrager, Esquire, who presented the oral argument on behalf of the Paramount defendants, was admitted on the day of the argument before the Vice Chancellor, November 16, 1993.

[27] Ch.Ct.R. 170; Supr.Ct.R. 71. There was no Delaware lawyer and no lawyer admitted pro hac vice present at the deposition representing any party, except that Mr. Johnston, a Delaware lawyer, took the deposition on behalf of QVC. The Court is aware that the general practice has not been to view as a requirement that a Delaware lawyer or a lawyer already admitted pro hac vice must be present at all depositions. Although it is not as explicit as perhaps it should be, we believe that Ch.Ct.R. 170(d), fairly read, requires such presence:

(d) Delaware counsel for any party shall appear in the action in which the motion for admission pro hac vice is filed and shall sign or receive service of all notices, orders, pleadings or other papers filed in the action, and shall attend all proceedings before the Court, Clerk of the Court, or other officers of the Court, unless excused by the Court. Attendance of Delaware Counsel at depositions shall not be required unless ordered by the Court.

See also Hoechst Celanese Corp. v. National Union Fire Ins. Co., Del.Super., 623 A.2d 1099, 1114 (1991). (Super.Ct.Civ.R. 90.1, which corresponds to Ch.Ct.R. 170, "merely excuses attendance of local counsel at depositions, but does not excuse non-Delaware counsel from compliance with the pro hac vice requirement.... A deposition conducted pursuant to Court rules is a proceeding."). We believe that these shortcomings in the enforcement of proper lawyer conduct can and should be remedied consistent with the nature of expedited proceedings.

[28] It appears that at least Rule 3.5(c) of the Delaware Lawyer's Rules of Professional Conduct is implicated here. It provides: "A lawyer shall not ... (c) engage in conduct intended to disrupt a tribunal or engage in undignified or discourteous conduct which is degrading to a tribunal."

[29] The following are a few pertinent excerpts from the Statement of Principles:

The Delaware State Bar Association, for the Guidance of Delaware lawyers, and those lawyers from other jurisdictions who may be associated with them, adopted the following Statement of Principles of Lawyer Conduct on [November 15, 1991].... The purpose of adopting these Principles is to promote and foster the ideals of professional courtesy, conduct and cooperation.... A lawyer should develop and maintain the qualities of integrity, compassion, learning, civility, diligence and public service that mark the most admired members of our profession.... [A] lawyer ... should treat all persons, including adverse lawyers and parties, fairly and equitably.... Professional civility is conduct that shows respect not only for the courts and colleagues, but also for all people encountered in practice.... Respect for the court requires ... emotional self-control; [and] the absence of scorn and superiority in words of demeanor.... A lawyer should use pre-trial procedures, including discovery, solely to develop a case for settlement or trial. No pre-trial procedure should be used to harass an opponent or delay a case.... Questions and objections at deposition should be restricted to conduct appropriate in the presence of a judge.... Before moving the admission of a lawyer from another jurisdiction, a Delaware lawyer should make such investigation as is required to form an informed conviction that the lawyer to be admitted is ethical and competent, and should furnish the candidate for admission with a copy of this Statement.

(Emphasis supplied.)

[30] Joint Appendix of the parties on appeal.

[31] We recognize the practicalities of litigation practice in our trial courts, particularly in expedited proceedings such as this preliminary injunction motion, where simultaneous depositions are often taken in far-flung locations, and counsel have only a few hours to question each witness. Understandably, counsel may be reluctant to take the time to stop a deposition and call the trial judge for relief. Trial courts are extremely busy and overburdened. Avoidance of this kind of misconduct is essential. If such misconduct should occur, the aggrieved party should recess the deposition and engage in a dialogue with the offending lawyer to obviate the need to call the trial judge. If all else fails and it is necessary to call the trial judge, sanctions may be appropriate against the offending lawyer or party, or against the complaining lawyer or party if the request for court relief is unjustified. See Ch.Ct.R. 37. It should also be noted that discovery abuse sometimes is the fault of the questioner, not the lawyer defending the deposition. These admonitions should be read as applying to both sides.

[32] See In re Ramunno, Del.Supr., 625 A.2d 248, 250 (1993) (Delaware lawyer held to have violated Rule 3.5 of the Rules of Professional Conduct, and therefore subject to public reprimand and warning for use of profanity similar to that involved here and "insulting conduct toward opposing counsel [found] ... unacceptable by any standard").

[33] See Infotechnology, 582 A.2d at 220 ("In Delaware there is the fundamental constitutional principle that [the Supreme] Court, alone, has the sole and exclusive responsibility over all matters affecting governance of the Bar.... The Rules are to be enforced by a disciplinary agency, and are not to be subverted as procedural weapons.").

[34] See Hall v. Clifton Precision, E.D.Pa., 150 F.R.D. 525 (1993) (ruling on "coaching," conferences between deposed witnesses and their lawyers, and obstructive tactics):

Depositions are the factual battleground where the vast majority of litigation actually takes place.... Thus, it is particularly important that this discovery device not be abused. Counsel should never forget that even though the deposition may be taking place far from a real courtroom, with no black-robed overseer peering down upon them, as long as the deposition is conducted under the caption of this court and proceeding under the authority of the rules of this court, counsel are operating as officers of this court. They should comport themselves accordingly; should they be tempted to stray, they should remember that this judge is but a phone call away.

150 F.R.D. at 531.

[35] See, e.g., Ch.Ct.R. 170(b), (d), and (h).

[36] Rule 30(d)(1) of the revised Federal Rules of Civil Procedure, which became effective on December 1, 1993, requires objections during depositions to be "stated concisely and in a non-argumentative and non-suggestive manner." See Hall, 150 F.R.D. at 530. See also Rose Hall, Ltd. v. Chase Manhattan Overseas Banking Corp., D.Del., C.A. No. 79-182, Steel, J. (Dec. 12, 1980); Cascella v. GDV, Inc., Del.Ch., C.A. No. 5899, 1981 WL 15129, Brown, V.C. (Jan. 15, 1981); In re Asbestos Litig., Del.Super., 492 A.2d 256 (1985); Deutschman v. Beneficial Corp., D.Del., C.A. No. 86-595 MMS, Schwartz, J. (Feb. 20, 1990). The Delaware trial courts and this Court are evaluating the desirability of adopting certain of the new Federal Rules, or modifications thereof, and other possible rule changes.

[37] While we do not necessarily endorse everything set forth in the Hall case, we share Judge Gawthrop's view not only of the impropriety of coaching witnesses on and off the record of the deposition (see supra note 34), but also the impropriety of objections and colloquy which "tend to disrupt the question-and-answer rhythm of a deposition and obstruct the witness's testimony." See 150 F.R.D. at 530. To be sure, there are also occasions when the questioner is abusive or otherwise acts improperly and should be sanctioned. See supra note 31. Although the questioning in the Liedtke deposition could have proceeded more crisply, this was not a case where it was the questioner who abused the process.

[38] The Court does not condone the conduct of Mr. Thomas in this deposition. Although the Court does not view his conduct with the gravity and revulsion with which it views Mr. Jamail's conduct, in the future the Court expects that counsel in Mr. Thomas's position will have been admitted pro hac vice before participating in a deposition. As an officer of the Delaware Court, counsel admitted pro hac vice are now clearly on notice that they are expected to put an end to conduct such as that perpetrated by Mr. Jamail on this record.