In the recent decision of In re Ebix, Inc. S’holder Litig., Consol. C.A. No. 8526-VCN (Del. Ch. Jan. 15, 2016), the Court of Chancery examined certain board actions claimed to be entrenching and subject to Unocal review.  This decision provides a good analysis as to what conduct by company management would be subject to enhanced scrutiny under Unocal.

Under Unocal, in order for a board to be allotted the protection of the business judgment rule, it must demonstrate that it was responding to a legitimate threat to corporate policy and effectiveness, and that its actions were “reasonable in relation to the threat posed.”  See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985).  In the present action, the Court explained the Unocal analysis as follows:

Enhanced scrutiny under Unocal applies “whenever the record reflects that a board of directors took defensive measures in response to a perceived threat to corporate policy and effectiveness which touches on issues of control.” As this court noted in Stroud v. Grace, Unocal may also apply in contexts aside from a board’s adoption of a defensive measure in response to a hostile takeover attempt; Unocal has also “applied to a preemptive measure where the corporation was not under immediate ‘attack’” but nonetheless enacted a measure “in contemplation of an ephemeral threat that could somehow materialize in the future.”

Vice Chancellor Noble found that an agreement with an activist shareholder that resulted in a shareholder standing down temporarily and nominating two new directors was not subject to Unocal review at the motion to dismiss stage.  As provided by the Court:

A corporate action with collateral effects including a tendency to preserve incumbent control is not per se subject to Unocal scrutiny and applying Unocal under the specific facts of this case would sponsor the enigmatic idea that the Board’s decision to dilute its own control of the corporation by surrendering board seats to insurgents is best viewed as a defensive action. Simply put, because Ebix opened its doors to Barrington, approving the Director Nomination Agreement does not qualify as the sort of entrenchment device viewed as categorically suspect under Unocal.

However, the Vice Chancellor found that bylaw amendments dealing with special shareholder meetings and notice requirements allegedly targeted at staving off future threats from the same shareholder were held to be subject to Unocal review.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.