492 17 Duties of the Board in the Context of Takeovers
final offer for Yahoo! was about $47.5 billion and some 70% more than Yahoo!’s market
valuation at the time of the opening bid. The board of Yahoo! nevertheless rejected the bid.
This reduced the market valuation of Yahoo! to $34 billion.
No board neutrality in the US. According to Delaware law, the board of the target
has no legal duty to be neutral or accept the bid. The target’s board may say no. So
long as the board acts on a fully informed basis, the board is be protected by the
business judgment rule.^2
Judicial review of directors’ actions may be enhanced in certain circumstances including
defending against a change of control or engaging in a sale of control. The adoption of de-
fensive mechanisms (other than the just-say-no defence) must satisfy the Unocal standard
(see Volume I).^3 If the Unocal standard is satisfied, the directors again benefit from the
business judgment rule. The Unocal standard can be called a qualified business judgment
rule.^4
If the directors indeed have decided to sell control of the company, their actions will be
constrained by the Revlon test.^5 The Revlon test means that “[t]he directors’ role change[s]
from defenders of the corporate bastion to auctioneers charged with getting the best price
for the stockholders at a sale of the company”.^6
When Revlon duties apply, a board’s conduct will be evaluated by review of both its
process and its result. As a consequence, a board engaging in a change-of-control transac-
tion must establish basic procedures to preserve the integrity of its evaluation of the options
that may arise. One critical element is to ensure that only disinterested directors evaluate
and vote on the proposed transaction. Typically, a special committee might be formed. The
function of a special committee is to protect shareholder interests in cases where the inter-
ests of management directors or other interested directors differ significantly from those of
the shareholders. In several cases, Delaware courts have been skeptical of processes that did
not involve the active participation of special committees.^7
Finally, the most exacting standard is the “entire fairness” review. It may apply in trans-
actions involving a conflict of interest.^8 This means that going-private transactions (such as
LBOs, MBOs, and private-equity deals) that will go through are evaluated by the strictest
“entire fairness” standard. The board of directors has a duty to prove that both the going-
private process it followed and the price it obtained were entirely fair under the circum-
stances.
No board neutrality under Community law. Similar rules apply in Europe. The
board of the target company does not have any general legal obligation to be “neu-
(^2) See Cole J Jr, Kirman I, Takeover Law and Practice. In: PLI, Doing Deals 2008: Under-
standing the Nuts & Bolts of Transactional Practice. New York City (2008) p 43, citing,
for example: Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1341 (Del.
1987); and Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360–61 (Del. 1993) (“Tech-
nicolor”).
(^3) Unocal Corp. v. Mesa Petroleum Co., 493 A.2d at 946 (Del. 1985).
(^4) See, for example, Merkt H, Verhaltenspflichten des Vorstands der Zielgesellschaft bei
feindlichen Übernahmen, ZHR 165 (2001) p 235.
(^5) Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d at 173 (Del. 1986).
(^6) Paramount Communications Inc. v. QVC Network, Inc., 637 A.2d at 46.
(^7) Cole J Jr, Kirman I, op cit, pp 76–79.
(^8) Ibid, pp 43–50.