Exorcizing the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis

Business Lawyer

Volumn 55, Issue 1, 1999, Pages 109-134

  Travis Laster, J ^a  

^a NONE

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EID: 0345982284     PISSN: 00076899     EISSN: None     Source Type: Journal    
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References (142)

1. 493 A.2d 946 (Del. 1985).
2. Id. at 954.
3. 651 A.2d 1361 (Del. 1995).
4. Keycite, a leading citation reference service maintained by WestLaw, identifies 199 cases and more than 1000 secondary sources addressing the Unocal opinion. The same service identifies 38 cases and 122 secondary sources addressing the Unitrin opinion.
5. Unitrin, 651 A.2d at 1380-81.
6. Substantial equity ownership also has potentially dramatic implications for analyzing directors' compliance with the fiduciary duty of care. See R. Franklin Balotti et al., Equity Ownership and the Duty of Care: Convergence, Revolution or Evolution? (Sept. 1, 1999) (unpublished manuscript) (on file with The Business Lawyer, University of Maryland School of Law).
7. Unocal, 493 A.2d at 946.
8. Id. at 956.
9. See Mesa Petroleum Co. v. Unocal Corp., Civ. A. No. 7997 (Del. Ch. May 13, 1985) (granting preliminary injunction); Mesa Petroleum Co. v. Unocal Corp., Civ. A. No. 7997 (Del. Ch. Apr. 29, 1985) (granting temporary restraining order).
10. Unocal, 493 A.2d at 953-54.
11. Id. at 955.
12. Id. at 954.
13. Id.
14. Id. (emphasis added).
15. Id. at 955.
16. Id.
17. Id.
18. Id.
19. Id. at 956.
20. Id. at 956-57.
21. Id. at 958-59.
22. See text accompanying supra notes 14-15.
23. Unocal, 493 A.2d at 955.
24. 535 A.2d 1334 (Del. 1987).
25. Id. at 1341 (emphasis added); see also Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1287 (Del. 1989) (explaining that the omnipresent specter influences all decisions by directors "where issues of corporate control are at stake"); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 180 (Del. 1986) (grounding Unocal analysis on the "potential for conflict" created by the omnipresent specter).
26. See AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 111 (Del. Ch. 1986).
27. See Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1373 (Del. 1995).
28. Michael P. Dooley, Two Models of Corporate Governance, 47 BUS. LAW. 461, 518 (1992).
29. Paul L. Regan, The Unimportance of Being Earnest: Paramount Rewrites the Rules for Enhanced Scrutiny in Corporate Takeovers, 46 HASTINGS L.J. 125, 147-48 (1994).
30. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).
31. 187 A.2d 405 (Del. 1962).
32. Id. at 411.
33. Id. at 409.
34. Note, Recent Developments: Board of Directors May Not Ratify Chairman's Purchase of Corporate Shares to Prevent Assumption of Control by Another Without Adequate Study of Threat to Corporation, 62 COLUM. L. REV. 1096, 1100 (1962).
35. Unocal, 493 A.2d at 955; see id. at 950 (stating that "Unocal's board consists of eight independent outside directors and six insiders"); id. (noting that "[t]he eight outside directors, comprising a clear majority of the thirteen members present, then met separately with Unocal's financial advisors and attorneys").
36. See DEL. CODE ANN. tit. 8, § 144 (Supp. 1998).
37. Unocal, 493 A.2d at 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." (quoting Cheff v. Mathes, 199 A.2d 548, 554 (Del. 1964)).
38. Id. at 950, 955.
39. Id. at 954-55; see also AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 115 (Del. Ch. 1986) (explaining that Unocal recognizes "a species of director interest even on the part of outside directors"); Marcel Kahan, Paramount or Paradox: The Delaware Supreme Court's Takeover Jurisprudence, 19 J. CORP. L. 583, 589 (1994) (explaining that the omnipresent specter "relates as well to independent directors, though to a lesser degree than to the inside directors"); Regan, supra note 28, at 174 (noting that under Unocal, "even outside directors arc thought to face" the omnipresent specter of self-interest).
40. This interpretation finds support in the Delaware Supreme Court's explanation in Unocal that the purpose of the first prong of enhanced scrutiny was to ensure that the directors did not act "solely or primarily out of a desire to perpetuate themselves in office." Unocal, 493 A.2d at 955. The Unocal court's focus on this threat as the risk to be addressed by enhanced scrutiny suggests that a "desire to perpetuate themselves in office" was the motivation at the heart of the omnipresent specter. Id.
41. See, e.g., Regan, supra note 29, at 148 (describing "omnipresent specter" as "the suspicion that directors who try to block a takeover might be acting primarily out of an improper desire to perpetuate their control"). See also Thomas J. Bamonte, The Dynamics of State Protectionism: A Short Critique of the CTSDecision, 8 N. ILL. U. L. REV. 259, 261 n. 10 (1988) (asserting that "[i]ncumbent management understandably resists changes in corporate control because they will lose control over 'their' company and all the accompanying perquisites"); Alex Devience, Jr., A Hindsight Review of the Business Judgment Rule in a Takeover Environment: The State of the Business Judgment Rule After the Fall, 5 DEPAUL BUS. L.J. 113, 114 (1993) (describing "omnipresent specter" as concern "that board directors act in their own self-interests for preservation of their office and control"); Portia Policastro, When Delaware Corporate Managers Turn Auctioneers: Triggering the Revlon Duty after the Paramount Decision, 16 DEL. J. CORP. L. 187, 194 (1991) (identifying "omnipresent specter" as risk that "board directors will act out of a desire to perpetuate themselves in office").
42. See, e.g., Regan, supra note 29, at 148 (describing "omnipresent specter" as "the suspicion that directors who try to block a takeover might be acting primarily out of an improper desire to perpetuate their control"). See also Thomas J. Bamonte, The Dynamics of State Protectionism: A Short Critique of the CTSDecision, 8 N. ILL. U. L. REV. 259, 261 n. 10 (1988) (asserting that "[i]ncumbent management understandably resists changes in corporate control because they will lose control over 'their' company and all the accompanying perquisites"); Alex Devience, Jr., A Hindsight Review of the Business Judgment Rule in a Takeover Environment: The State of the Business Judgment Rule After the Fall, 5 DEPAUL BUS. L.J. 113, 114 (1993) (describing "omnipresent specter" as concern "that board directors act in their own self-interests for preservation of their office and control"); Portia Policastro, When Delaware Corporate Managers Turn Auctioneers: Triggering the Revlon Duty after the Paramount Decision, 16 DEL. J. CORP. L. 187, 194 (1991) (identifying "omnipresent specter" as risk that "board directors will act out of a desire to perpetuate themselves in office").
43. See, e.g., Regan, supra note 29, at 148 (describing "omnipresent specter" as "the suspicion that directors who try to block a takeover might be acting primarily out of an improper desire to perpetuate their control"). See also Thomas J. Bamonte, The Dynamics of State Protectionism: A Short Critique of the CTSDecision, 8 N. ILL. U. L. REV. 259, 261 n. 10 (1988) (asserting that "[i]ncumbent management understandably resists changes in corporate control because they will lose control over 'their' company and all the accompanying perquisites"); Alex Devience, Jr., A Hindsight Review of the Business Judgment Rule in a Takeover Environment: The State of the Business Judgment Rule After the Fall, 5 DEPAUL BUS. L.J. 113, 114 (1993) (describing "omnipresent specter" as concern "that board directors act in their own self-interests for preservation of their office and control"); Portia Policastro, When Delaware Corporate Managers Turn Auctioneers: Triggering the Revlon Duty after the Paramount Decision, 16 DEL. J. CORP. L. 187, 194 (1991) (identifying "omnipresent specter" as risk that "board directors will act out of a desire to perpetuate themselves in office").
44. See, e.g., Regan, supra note 29, at 148 (describing "omnipresent specter" as "the suspicion that directors who try to block a takeover might be acting primarily out of an improper desire to perpetuate their control"). See also Thomas J. Bamonte, The Dynamics of State Protectionism: A Short Critique of the CTSDecision, 8 N. ILL. U. L. REV. 259, 261 n. 10 (1988) (asserting that "[i]ncumbent management understandably resists changes in corporate control because they will lose control over 'their' company and all the accompanying perquisites"); Alex Devience, Jr., A Hindsight Review of the Business Judgment Rule in a Takeover Environment: The State of the Business Judgment Rule After the Fall, 5 DEPAUL BUS. L.J. 113, 114 (1993) (describing "omnipresent specter" as concern "that board directors act in their own self-interests for preservation of their office and control"); Portia Policastro, When Delaware Corporate Managers Turn Auctioneers: Triggering the Revlon Duty after the Paramount Decision, 16 DEL. J. CORP. L. 187, 194 (1991) (identifying "omnipresent specter" as risk that "board directors will act out of a desire to perpetuate themselves in office").
45. E. Norman Veasey, Duty of Loyalty: The Criticality of the Counselor's Role, 45 BUS. LAW. 2065, 2075 (1990).
46. R. Franklin Balotti & James J. Hanks, Jr., Rejudging the Business Judgment Rule, 48 BUS. LAW. 1337, 1351 (1993) (footnote omitted).
47. 679 A.2d 460 (Del. 1996).
48. Id. at 465 (emphasis added).
49. 651 A.2d 1361 (Del. 1995).
50. Id. at 1384. The Delaware Supreme Court previously had recognized the validity of substantive coercion as a threat to which a target board could respond, but had not discussed the doctrine at length. See Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1153 n. 17 (Del. 1989) (recognizing substantive coercion).
51. Unitrin, 651 A.2d at 1388-90.
52. Id. at 1380-81.
53. In re Unitrin, Inc. Shareholders Litig., Civ. A. Nos. 13,656, 13,699, slip op. at 22 (Del. Ch. Oct. 13, 1994) (citing Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)), rev'd, 651 A.2d 1362 (Del. 1995).
54. Id., slip op. at 6.
55. A fourth director, Unitrin's chairman of the board, owned shares representing 0.3% of Unitrin's stock. Both the Delaware Court of Chancery and the Delaware Supreme Court treated this director as an insider. See id., slip op. at 7; see also Unitrin, 651 A.2d at 1367-68.
56. Unitrin, Civ. A. Nos. 13,656, 13,699, slip op. at 13.
57. Id., slip op. at 20.
58. Id., slip op. at 20-21.
59. Id., slip op. at 22.
60. Id.
61. See id. ("I have no doubt that a hostile acquirer can make an offer high enough to entice at least some of the directors that own stock to break ranks and sell their shares.").
62. Id., slip op. at 22-23 (citing Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)).
63. Id., slip op. at 22.
64. Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1367 (Del. 1995).
65. Id. at 1380.
66. In criticizing the trial court's analysis of the motivations of stockholder directors as being "subjective," the Delaware Supreme Court presumably meant that the Vice Chancellor's conclusion represented his own personal opinion, rather than a rule of Delaware law. See, e.g., AMERICAN HERITAGE COLLEGE DICTIONARY 1352 (3d ed. 1993) (defining "subjective" as "[p]roceeding from or taking place within a person's mind such as to be unaffected by the external world"; "[p]articular to a given person; personal"). This criticism seems particularly strained because in concluding that even the stockholding directors would "undoubtedly place a value, probably a substantial one, on their management of Unitrin," Unitrin, 651 A.2d at 1377, the Delaware Court of Chancery cited to and quoted from the Delaware Supreme Court's holding in Unocal that enhanced scrutiny rested on "the omni-present specter that a board may be acting primarily in its own interests." Unitrin, Civ. A. Nos. 13,656, 13,699, slip op. at 22 (citations omitted). The trial court thus had some basis for its conclusion beyond the Vice Chancellor's personal, subjective opinion.
67. Unitrin, 651 A.2d at 1380. Although not central to the Delaware Supreme Court's ultimate holding, the criticism of the Delaware Court of Chancery's analysis of the motivations of stockholder directors as being "without record support" appears mistaken. A careful reading of the trial court's opinion reveals that the court cited specific evidence in the record on which it relied in concluding that the stockholder directors would act together as a block, including "handwritten notes of Morgan Stanley and the draft materials created by [the board's counsel]," both of which indicated that the Unitrin board expected its stockholding members "to hold firm against an offer rejected by the board." Unitrin, Civ. A. Nos. 13,656, 13,699, slip op. at 13. The Delaware Court of Chancery included these references to the record in discussing its conclusion that the repurchase plan was adopted as a "defensive measure [ ] in response to th[e] threat" posed by American General's offer and therefore merited review under Unocal. Unitrin, 651 A.2d at 1372. Interestingly, the Delaware Supreme Court affirmed this aspect of the Delaware Court of Chancery's opinion, although without discussing the trial court's reasons or factual citations. See id. at 1391. Although the Delaware Court of Chancery did not repeat its factual references when it reiterated its finding regarding the behavior of stockholding directors as part of its analysis of Unocal's second prong, the trial court's decision had record support.
68. Unitrin, 651 A.2d at 1380.
69. Id. at 1380-81.
70. Id.
71. See Kahn v. Roberts, 679 A.2d 460, 465 (Del. 1996).
72. Unitrin, 651 A.2d at 1380.
73. Id. at 1367-68.
74. Id.
75. Id. at 1375.
76. Id. at 1371-72.
77. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 949-50, 955 (Del. 1985).
78. Unitrin, 651 A.2d at 1367-68.
79. Two Delaware Court of Chancery decisions in a related context support this conclusion. In In re General Motors Class H Shareholders Litig., Civ. A. No. 15,517 (Del. Ch. Mar. 22, 1999), a class of holders of a tracking stock designed to derive its value from the performance of Hughes Electronic Corporation, a wholly-owned subsidiary of General Motors Corporation (GM), alleged that the GM board of directors was self-interested in the sale of Hughes because all of the directors owned substantially more GM $1 2/3 shares than Hughes tracking stock shares. The Delaware Court of Chancery held that [t]o show that a GM director's independence was compromised by her ownership of greater amount of GM $1 2/3 stock, the plaintiffs must plead that the amounts of such holdings and the predominance of such holdings over GMH holdings was of a sufficiently material importance, in the context of the director's economic circumstances, as to have made it improbable that the director could perform her fiduciary duties to the GMH shareholders without being influenced by her overriding personal interest in the performance of the GM $1 2/3 shares. Id., slip op. at 14. The Delaware Court of Chancery reached the same conclusion in Solomon v. Armstrong, Consol. Civ. A. No. 13,515 (Del. Ch. Mar. 25, 1999), in which holders of a different series of GM tracking stock argued that the GM board of directors was self-interested in a split-off transaction because "the outside directors held a disproportionate number of shares of GM 1-2/3 common stock." Id., slip op. at 30. The Delaware Court of Chancery agreed with the GM directors that "when a party challenges a director's action based on a claim of the director's debilitating pecuniary self-interest, that party must allege that the director's interest is material to that director." Id., slip op. at 31. These cases suggest that if a director conversely wishes to show that his or her substantial stock ownership is sufficient to eliminate an otherwise "debilitating self-interest," then the director must show that the amount of his or her stockholdings are material "in the context of the director's economic circumstances." General Motors, Civ. A. No. 15,517, slip op. at 14.
80. Unitrin, 651 A.2d at 1381.
81. Id. at 1380.
82. See id.
83. See DEL. CODE ANN. tit. 8, § 251(b) (Supp. 1998) (stating that "the board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation and declaring its advisability").
84. See TW Servs., Inc. v. SWT Acquisition Corp., Civ. A. Nos. 10,427, 10,298, slip op. at 34 (Del. Ch. Mar. 2, 1989). The Delaware Court of Chancery stated that [t]he exercise of the board's power under [Section 251] is, where there is no interested merger involved, subject to traditional business judgment review, not the proportionality review of Unocal. Since SWT has chosen to proceed in a way that does require exercise of the TW board's Section 251 power, it cannot complain if the board's decision with respect to it is reviewed under the traditional business judgment approach. Id., slip op. at 34; accord Kahn v. MSB Bancorp, Inc., Civ. A. No. 14,712-NC, slip op. at 6-7 (Del. Ch. July 16, 1998) (applying "the business judgment presumption" rather than Unocal to a board's decision not to accept a premium merger proposal from one of two third-party bidders), aff'd, No. 364, 1998, 1999 WL 507085 (Del. June 14, 1999).
85. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993); accord Quickturn Design Sys., Inc., v. Shapiro, 721 A.2d 1281, 1291 (Del. 1998) ("One of the most basic tenets of Delaware corporate law is that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation."); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 179 (Del. 1995) ("The ultimate responsibility for managing the business and affairs of a corporation falls on its board of directors."); Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989) ("It is basic to our law that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation.").
86. Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).
87. DEL. CODE ANN. tit. 8, § 141(a) (1991).
88. Regan, supra note 29, at 130.
89. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).
90. Id.
91. Id.
92. See id. at 954 n.9 (noting scholarly debate over whether a target board should be a passive instrumentality).
93. A business decision reached by a board of directors of a Delaware corporation ordinarily is entitled to the substantial protections of the business judgment rule when challenged by a litigant and reviewed by a Delaware court. 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, 473 A.2d 805, 812 (Del. 1984). Under the business judgment standard, a Delaware court will not substitute its judgment for that of a board of directors but instead will sustain the board's decision if it can "be attributed to any rational business purpose." Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).
94. The entire fairness standard subjects a board of directors' decision to the highest level of judicial scrutiny available under Delaware law. Under this standard, the directors bear the burden of demonstrating that their actions were entirely fair to the corporation and its stockholders. See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). The entire fairness standard applies where one of the requirements of the business judgment rule has been rebutted, see id., to transactions in which a controlling stockholder stands on both sides of the negotiation, such as in a cash-out merger, see, e.g., Kahn v. Lynch Communication Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994), or where a target board fails to carry its burden of proof under Unocal, see Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 271 (Del. Ch. 1989). The resulting inquiry examines the process by which the transaction was approved and "embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and shareholders were obtained." In re MAXXAM, Inc./Federated Dev. Shareholders Litig., Civ. A. No. 12,353, slip op. at 28 (Del. Ch. Apr. 4, 1997) (citation omitted). The court also will examine the substantive terms of the transaction. Id.
95. 114 A.2d 231 (Del. Ch. 1955).
96. Id. at 234-35 (citation omitted); accord Finch v. Warrior Cement Corp., 141 A. 54, 61 (Del. Ch. 1928) (noting in declining to enjoin sale of assets transaction that if the directors who also were stockholders "made a bad bargain, they injured themselves as well as others").
97. Gropper, 114 A.2d at 235 (citation omitted). The Delaware Court of Chancery reached a similar conclusion in Baron v. Pressed Metals of America, Inc., 117 A.2d 357 (Del. Ch. 1955), aff'd, 123 A.2d 848 (Del. 1956). The plaintiff in Baron alleged that the defendant corporation failed to disclose in connection with a stockholder vote on a sale of assets that "certain New York stockbrokers [and] their customers bought heavily into [the defendant corporation's stock]" prior to the sale and "could expect to profit" from the transaction. Id. at 364. One of the brokers was a director of the defendant corporation, had received the sale of assets proposal from the potential acquirer, and voted in favor of the transaction. The Delaware Court of Chancery found that "neither these new stockholders nor the old stockholders, including [the director], who held a substantial number of shares, had any motive other than that of following a course of business expediency in authorizing a sale which in their opinion was in the best interests of all stockholders." Id. As in Gropper, the court recognized the incentives created by substantial stock ownership, but found no conflict requiring disclosure.
98. 537 A.2d 1051 (Del. Ch. 1987).
99. Id. at 1060.
100. Id. at 1061.
101. Civ. A. No. 13,845 (Del. Ch. Nov. 15, 1994).
102. Id., slip op. at 7.
103. Id., slip op. at 8.
104. Id., slip op. at 5-6.
105. Civ. A. No. 12,343 (Del. Ch. June 15, 1995).
106. Id., slip op. at 14 (emphasis added).
107. Id., slip op. at 27.
108. Civ. A. No. 5278 (Del. Ch. Sept. 19, 1983), aff'd, 493 A.2d 929 (Del. 1985).
109. Id., slip op. at 60. The Delaware Court of Chancery also has expressed its concern about whether a transaction was entirely fair where the party negotiating on behalf of the challenging stockholders did not possess a substantial equity stake. In Ryan v. Tad's Enterprises, Inc., the court examined the propriety of a merger transaction by which the majority stockholders cashed-out the minority. 709 A.2d 682 (Del. Ch. 1996), aff'd, 693 A.2d 1082 (Del. 1997). In reviewing the course of the negotiations, the court observed that the negotiator, who supposedly was representing the minority's interests, "owned no significant stock interest in his own right" and therefore "could hardly have been counted on to vigorously advocate the interests of the minority shareholders." Id. at 692.
110. The Delaware Court of Chancery has stressed, however, that while the views of directors who are substantial stockholders are "entitled to great weight" in evaluating whether a transaction is entirely fair, the approval of such directors is "not conclusive." David J. Greene & Co. v. Dunhill Int'l, Inc., 249 A.2d 427, 432 (Del. Ch. 1968) (reviewing challenge by stockholder to merger with majority stockholder).
111. Civ. A. No. 14,712-NC (Del. Ch. July 16, 1998), aff'd, No. 364, 1998, 1999 WL 507085 (Del. June 14, 1999).
112. Id., slip op. at 7-8.
113. Id., slip op. at 9; accord In re Rexene Corp. Shareholders Litig., Consol. Civ. A. Nos. 10,897, 11,300, slip op. at 7 (Del. Ch. May 8, 1991) ("The fact that defendants own a substantial number of shares does not make them interested."), aff'd sub nom. Eichorn v. Rexene Corp., No. 197, 1991, 1991 WL 210962 (Del. Oct. 10, 1991).
114. 674 A.2d 483 (Del. Ch.), aff'd, 670 A.2d 1338 (Del. 1995).
115. Id. at 494.
116. Id.
117. Id. at 496-97.
118. 592 A.2d 445 (Del. 1991).
119. Id. at 468.
120. Id.; see also HMG/Courtland Properties, Inc. v. Gray, Civ. A. No. 15,789, slip op. at 46-47 (Del. Ch. July 12, 1999) (holding in determining that transaction would be reviewed for entire fairness that director who had invested $355,000 of his own and his sister's money in the transaction had a "keen interest in maximizing distributions" from his investment).
121. Gropper v. North Cent. Tex. Oil Co., 114 A.2d 231, 234-35 (Del. Ch. 1955).
122. Id. at 232; Katell v. Morgan Stanley Group, Inc., Civ. A. No. 12343, slip op. at 1 (Del. Ch. June 15, 1995).
123. It bears noting, however, that although Delaware law appears settled on the nature of the incentives created by substantial equity ownership, the conclusion that Delaware courts have reached may well be incorrect. A strong argument can be made that although substantial equity ownership should create beneficial incentives for directors to monitor management and fulfill their duty of care, substantial equity ownership should not create any beneficial incentives for directors to fulfill their duty of loyalty and in fact should complicate a duty of loyalty analysis. See generally Balotti et al., supra note 6. This argument suggests that Unitrin's holding may need to be re-examined and that its implications for Unocal review may be far less clear. Such an analysis, however, lies outside the scope of this Article, which accepts Unitrin's view of the incentives created by substantial equity ownership and merely seeks to assess its implications for Unocal review as currently framed under Delaware law.
124. See supra notes 108-10 and accompanying text.
125. See supra notes 111-14 and accompanying text.
126. See supra notes 115-17 and accompanying text.
127. See, e.g., Dennis J. Block et al., The Duty of Loyalty and the Evolution of the Scope of Judicial Review, 59 BROOK. L. REV. 65, 98 (1993) ("As courts and legislatures have recognized the benefits of having outside directors serving on boards, commentators have likewise emphasized the significance that such directors play in the corporate governance structure.") (footnote omitted). See generally Laura Lin, The Effectiveness of Outside Directors as a Corporate Governance Mechanism: Theories and Evidence, 90 NW. U. L. REV. 898 (1996) (describing trend toward use of outside directors, their role in various corporate decision making contexts, and evidence for and against their effectiveness); Donald E. Pease, Outside Directors: Their Importance to the Corporation and Protection from Liability, 12 DEL. J. CORP. L. 25 (1987) (discussing practical and legal advantages of outside directors).
128. See, e.g., Dennis J. Block et al., The Duty of Loyalty and the Evolution of the Scope of Judicial Review, 59 BROOK. L. REV. 65, 98 (1993) ("As courts and legislatures have recognized the benefits of having outside directors serving on boards, commentators have likewise emphasized the significance that such directors play in the corporate governance structure.") (footnote omitted). See generally Laura Lin, The Effectiveness of Outside Directors as a Corporate Governance Mechanism: Theories and Evidence, 90 NW. U. L. REV. 898 (1996) (describing trend toward use of outside directors, their role in various corporate decision making contexts, and evidence for and against their effectiveness); Donald E. Pease, Outside Directors: Their Importance to the Corporation and Protection from Liability, 12 DEL. J. CORP. L. 25 (1987) (discussing practical and legal advantages of outside directors).
129. See, e.g., Dennis J. Block et al., The Duty of Loyalty and the Evolution of the Scope of Judicial Review, 59 BROOK. L. REV. 65, 98 (1993) ("As courts and legislatures have recognized the benefits of having outside directors serving on boards, commentators have likewise emphasized the significance that such directors play in the corporate governance structure.") (footnote omitted). See generally Laura Lin, The Effectiveness of Outside Directors as a Corporate Governance Mechanism: Theories and Evidence, 90 NW. U. L. REV. 898 (1996) (describing trend toward use of outside directors, their role in various corporate decision making contexts, and evidence for and against their effectiveness); Donald E. Pease, Outside Directors: Their Importance to the Corporation and Protection from Liability, 12 DEL. J. CORP. L. 25 (1987) (discussing practical and legal advantages of outside directors).
130. See, e.g., Sanjai Bhagat & Bernard Black, Board Composition and Firm Performance: The Uneasy Case for Majority-Independent Boards, in CORPORATE GOVERNANCE INSTITUTE: BLUEPRINT FOR GOOD GOVERNANCE IN THE 1990s, at 98 (PLI Corp. Law & Practice Course Handbook Series No. B-1053, 1997) ("Over the last 25 years, the boards of directors of large American public companies have come increasingly to contain a majority of independent directors."); Block et al., supra note 124, at 99-100 (noting "evolution towards an outside director-dominated board"); Statement of the Business Roundtable, The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation, 33 BUS. LAW. 2083, 2108 (1978) ("We note the strong tendency of U.S. business corporations to move toward a board structure based on a majority of outside directors - and we endorse it.").
131. See, e.g., Sanjai Bhagat & Bernard Black, Board Composition and Firm Performance: The Uneasy Case for Majority-Independent Boards, in CORPORATE GOVERNANCE INSTITUTE: BLUEPRINT FOR GOOD GOVERNANCE IN THE 1990s, at 98 (PLI Corp. Law & Practice Course Handbook Series No. B-1053, 1997) ("Over the last 25 years, the boards of directors of large American public companies have come increasingly to contain a majority of independent directors."); Block et al., supra note 124, at 99-100 (noting "evolution towards an outside director-dominated board"); Statement of the Business Roundtable, The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation, 33 BUS. LAW. 2083, 2108 (1978) ("We note the strong tendency of U.S. business corporations to move toward a board structure based on a majority of outside directors - and we endorse it.").
132. See, e.g., Charles M. Elson, Director Compensation and the Management-Captured Board: The History of a Symptom and a Cure, 50 SMU L. REV. 127, 164-73 (1996) (describing benefits of substantial equity ownership by board members). See also MILES L. MACE, DIRECTORS: MYTH AND REALITY 61-65 (1986) (discussing oversight by outside directors with substantial stock ownership); Dennis C. Carey et al., How Should Corporate Directors Be Compensated?, DIRECTORS & BOARDS, Special Report, No. 1, 1996, at 1 (same). The chief executive officer of Tyco Corporation concurs in the importance of stock ownership by directors. John F. Olson & D. Jarrett Arp, The Year of the Proactive Director: Recent Developments in the Performance and Compensation of Outside Directors, in 27TH ANNUAL INSTITUTE ON SECURITIES REGULATION, at 577 (PLI Corp. Law & Practice Course Handbook Series No. B-907, 1995) (noting recommendations of a Blue Ribbon Commission of the National Association of Corporate Directors that companies should seek director ownership of company stock); see Dennis L. Kozlowski, The Vitals of Accountability, DIRECTORS & BOARDS, Fall 1995, at 9 (describing benefits of substantial equity ownership by board members).
133. See, e.g., Charles M. Elson, Director Compensation and the Management-Captured Board: The History of a Symptom and a Cure, 50 SMU L. REV. 127, 164-73 (1996) (describing benefits of substantial equity ownership by board members). See also MILES L. MACE, DIRECTORS: MYTH AND REALITY 61-65 (1986) (discussing oversight by outside directors with substantial stock ownership); Dennis C. Carey et al., How Should Corporate Directors Be Compensated?, DIRECTORS & BOARDS, Special Report, No. 1, 1996, at 1 (same). The chief executive officer of Tyco Corporation concurs in the importance of stock ownership by directors. John F. Olson & D. Jarrett Arp, The Year of the Proactive Director: Recent Developments in the Performance and Compensation of Outside Directors, in 27TH ANNUAL INSTITUTE ON SECURITIES REGULATION, at 577 (PLI Corp. Law & Practice Course Handbook Series No. B-907, 1995) (noting recommendations of a Blue Ribbon Commission of the National Association of Corporate Directors that companies should seek director ownership of company stock); see Dennis L. Kozlowski, The Vitals of Accountability, DIRECTORS & BOARDS, Fall 1995, at 9 (describing benefits of substantial equity ownership by board members).
134. See, e.g., Charles M. Elson, Director Compensation and the Management-Captured Board: The History of a Symptom and a Cure, 50 SMU L. REV. 127, 164-73 (1996) (describing benefits of substantial equity ownership by board members). See also MILES L. MACE, DIRECTORS: MYTH AND REALITY 61-65 (1986) (discussing oversight by outside directors with substantial stock ownership); Dennis C. Carey et al., How Should Corporate Directors Be Compensated?, DIRECTORS & BOARDS, Special Report, No. 1, 1996, at 1 (same). The chief executive officer of Tyco Corporation concurs in the importance of stock ownership by directors. John F. Olson & D. Jarrett Arp, The Year of the Proactive Director: Recent Developments in the Performance and Compensation of Outside Directors, in 27TH ANNUAL INSTITUTE ON SECURITIES REGULATION, at 577 (PLI Corp. Law & Practice Course Handbook Series No. B-907, 1995) (noting recommendations of a Blue Ribbon Commission of the National Association of Corporate Directors that companies should seek director ownership of company stock); see Dennis L. Kozlowski, The Vitals of Accountability, DIRECTORS & BOARDS, Fall 1995, at 9 (describing benefits of substantial equity ownership by board members).
135. See, e.g., Charles M. Elson, Director Compensation and the Management-Captured Board: The History of a Symptom and a Cure, 50 SMU L. REV. 127, 164-73 (1996) (describing benefits of substantial equity ownership by board members). See also MILES L. MACE, DIRECTORS: MYTH AND REALITY 61-65 (1986) (discussing oversight by outside directors with substantial stock ownership); Dennis C. Carey et al., How Should Corporate Directors Be Compensated?, DIRECTORS & BOARDS, Special Report, No. 1, 1996, at 1 (same). The chief executive officer of Tyco Corporation concurs in the importance of stock ownership by directors. John F. Olson & D. Jarrett Arp, The Year of the Proactive Director: Recent Developments in the Performance and Compensation of Outside Directors, in 27TH ANNUAL INSTITUTE ON SECURITIES REGULATION, at 577 (PLI Corp. Law & Practice Course Handbook Series No. B-907, 1995) (noting recommendations of a Blue Ribbon Commission of the National Association of Corporate Directors that companies should seek director ownership of company stock); see Dennis L. Kozlowski, The Vitals of Accountability, DIRECTORS & BOARDS, Fall 1995, at 9 (describing benefits of substantial equity ownership by board members).
136. See, e.g., Charles M. Elson, Director Compensation and the Management-Captured Board: The History of a Symptom and a Cure, 50 SMU L. REV. 127, 164-73 (1996) (describing benefits of substantial equity ownership by board members). See also MILES L. MACE, DIRECTORS: MYTH AND REALITY 61-65 (1986) (discussing oversight by outside directors with substantial stock ownership); Dennis C. Carey et al., How Should Corporate Directors Be Compensated?, DIRECTORS & BOARDS, Special Report, No. 1, 1996, at 1 (same). The chief executive officer of Tyco Corporation concurs in the importance of stock ownership by directors. John F. Olson & D. Jarrett Arp, The Year of the Proactive Director: Recent Developments in the Performance and Compensation of Outside Directors, in 27TH ANNUAL INSTITUTE ON SECURITIES REGULATION, at 577 (PLI Corp. Law & Practice Course Handbook Series No. B-907, 1995) (noting recommendations of a Blue Ribbon Commission of the National Association of Corporate Directors that companies should seek director ownership of company stock); see Dennis L. Kozlowski, The Vitals of Accountability, DIRECTORS & BOARDS, Fall 1995, at 9 (describing benefits of substantial equity ownership by board members).
137. See Charles M. Elson, The Duty of Care, Compensation and Stock Ownership, 63 U. CIN. L. REV. 649, 700-06 (1995); Charles M. Elson, Executive Overcompensation: A Board-Based Solution, 34 B.C. L. REV. 937, 990-95 (1993); David J. McLaughlin, The Director's Stake in the Enterprise, DIRECTORS & BOARDS, Winter 1994, at 53; Robert Stobaugh, Director Compensation: A Lever to Improve Corporate Governance, DIRECTOR'S MONTHLY, Aug. 1993, at 14.
138. See Charles M. Elson, The Duty of Care, Compensation and Stock Ownership, 63 U. CIN. L. REV. 649, 700-06 (1995); Charles M. Elson, Executive Overcompensation: A Board-Based Solution, 34 B.C. L. REV. 937, 990-95 (1993); David J. McLaughlin, The Director's Stake in the Enterprise, DIRECTORS & BOARDS, Winter 1994, at 53; Robert Stobaugh, Director Compensation: A Lever to Improve Corporate Governance, DIRECTOR'S MONTHLY, Aug. 1993, at 14.
139. See Charles M. Elson, The Duty of Care, Compensation and Stock Ownership, 63 U. CIN. L. REV. 649, 700-06 (1995); Charles M. Elson, Executive Overcompensation: A Board-Based Solution, 34 B.C. L. REV. 937, 990-95 (1993); David J. McLaughlin, The Director's Stake in the Enterprise, DIRECTORS & BOARDS, Winter 1994, at 53; Robert Stobaugh, Director Compensation: A Lever to Improve Corporate Governance, DIRECTOR'S MONTHLY, Aug. 1993, at 14.
140. See Charles M. Elson, The Duty of Care, Compensation and Stock Ownership, 63 U. CIN. L. REV. 649, 700-06 (1995); Charles M. Elson, Executive Overcompensation: A Board-Based Solution, 34 B.C. L. REV. 937, 990-95 (1993); David J. McLaughlin, The Director's Stake in the Enterprise, DIRECTORS & BOARDS, Winter 1994, at 53; Robert Stobaugh, Director Compensation: A Lever to Improve Corporate Governance, DIRECTOR'S MONTHLY, Aug. 1993, at 14.
141. See Sanjai Bhagat et al., Director Ownership, Corporate Performance, and Management Turnover, 54 BUS. LAW. 885 (1999).
142. Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1381 (Del. 1995).