Unocal Corp. v. Mesa Petroleum Co.

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

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

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

While Unocal involves the deployment of the intermediate standard to evaluate board actions to defend the corporation against an unsolicited acquisition offer, the intermediate standard will also be used by courts in other contexts as well. For example, courts use the intermediate standard to evaluate board actions in the context of a sale of control (Revlon); board actions to thwart a stockholder vote (Blasius); the use of a special litigation committee to reassert control over derivative litigation (Zapata); and also, in evaluating voting by controlling stockholders (Sears).    

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