Journal of Civil Rights and Economic DevelopmentVolume 5Issue 1 Volume 5, 1989, Issue 1Article 95-7-2012Te Business Judgment Rule and Unocal: TwinBarriers to Shareholder WelfareFrank CaraPeter F. LaneFollow this and additional works at: htp://scholarship.law.stjohns.edu/jcredTis Note is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion inJournal of Civil Rights and Economic Development by an authorized administrator of St. John's Law Scholarship Repository. For more information,please contact cerjanm@stjohns.edu.Recommended CitationCara, Frank and Lane, Peter F. (1989) "Te Business Judgment Rule and Unocal: Twin Barriers to Shareholder Welfare," Journal ofCivil Rights and Economic Development: Vol. 5: Iss. 1, Article 9.Available at: htp://scholarship.law.stjohns.edu/jcred/vol5/iss1/9THEBUSINESSJUDGMENTRULEANDUNOCAL:TWINBARRIERSTOSHAREHOLDERWELFARE"Anevilsoul, producing holywitness,Islikeavillain witha smiling cheek,Agoodlyapple rotten at theheart.0,whata goodlyoutside falsehood hath."Antonio,inShakespeare'sTheMerchantof Venice,Act1:3,11.99-102.Antonio,amodernmerchantofVenice,isashareholderinaDelawarecorporation.Theboardhasrecentlyimplementedade-fensivemeasureinresponseto ahostiletakeoverattempt.'Adis-appointedAntoniosues,confidentthattheDelawarecourtswillupholdhisclaim.Afterall,thesemagistrateshavesmiledgra-ciouslyuponshareholdersbyaddingtherequirementthatdirec-torssatisfytheUnocal test'beforebusinessjudgmentruleprotec-SeeHogg, Hostile Takeovers AndOther War Games in THEPREDATORANDTHEPREDATEE1n.1(1988).When"acquisitionsaresoughtovertheobligationofthetarget'smanage-ment...theacquisitionis'hostile'.. . . Theacquisition,whichmaybeof control(fre-quently51%of theoutstandingcommonstock),ormorethancontrol,ortotal,iscom-monlyreferredtoasa'takeover'-thetargetbeing'taken'andnot'givenbyconsent.'"Id. See,e.g.,IvanhoePartners v.NewmontMining Corp.,535A.2d1334,1339(Del.1987)(predatorowning9.95percentof targets stockcommencedhostileofferfor42percentoftarget'soutstandingshares);Revlon,Inc.v.MacAndrews&ForbesHoldings,506A.2d173,178(Del.1986)(hostileoffermadetotargetfor$56.25conditionedonnullificationof rightsplan,waiverofnotescovenantsand"electionof threePantryPridedirectorstotheRevlon board.");AC Acquisitions v.Anderson,Clayton&Co.,519A.2d103,109(Del.1986)(predatorcorporationmadetenderofferfor any andall sharesof targetfor$56persharecash);UnocalCorp.v.MesaPetroleumCo.,493A.2d946,949 (Del.1985)(owning13percentof target'sstock,shareholdermadehostiletenderofferfor37percentof tar-get'soutstandingstock);RobertM.BassGroup,Inc.v.Evans,552A.2d1227,1237(Del.Ch.1988)(hostileacquirormade$73persharecash offerforany andall sharesof target).SeealsoI M.LIProN&E.STEINBERGER,TAKEOVERS&FREEZEOIJTs6.1- 6.3.3(1987)(discuss-ingvariousdefensivetacticsavailabletodirectorswhenfacedwithtakeoverthreat).'Unocal, 493A.2dat 955.Directorsarenotaffordedbusiness judgmentprotectionuntiltheyprovea"goodfaithandreasonableinvestigation"of thethreat,andthatthesere-sponseswere"reasonableinrelationtothethreatposed."Id.See infra notes10,25-32 andaccompanyingtext.1951Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentaryVol.5:195,1989tion'isafforded.Antonioisgladheisnot ashareholderinaNewYorkcorporation.NewYorkcourtswouldnotrequiredirectorstobeartheinitialburdenof provingbusinessjudgmentrulepro-tectionunderastandardlikeUnocal. IsAntoniocorrectinhisas-sumptionthatDelawarecourtswillusethe"goodly"Unocal testtocarefullyscrutinizeboarddecision-making,beforeinvokingbusi-nessjudgmentruleprotection?Delawarecourts,likemost jurisdictions,havetraditionallyheldthatdirectorsowefiduciarydutiesofcareandloyaltytoshare-holders.4 However,withtheincreaseinmergersandacquisitions8 SeeAronsonv.Lewis,473A.2d805,812(Del.1984).Thebusiness judgmentruleisapresumptionthat"inmakingabusinessdecisiondirectorshaveactedonaninformedbasis,ingoodfaithandinthehonestbelief thattheactiontakenwasinthebestinterestsof thecompany."Id.Seeinfranotes7,18-24andaccompanyingtext(additionalapplicationofbusiness judgmentrule).SeeLoftlandv.Cahill,118A.1,3(Del.1922)("directorsof acorporationaretrusteesfor thestockholders,and their actsare governedbytherulesapplicableto sucharelation,whichexactof themtheutmostgood faithandfairdealing,especiallywheretheirindivid-ualinterestsareconcerned");Loft,Inc.v.Guth,2A.2d225,238-39(Del.Ch.1938)(itisacceptedthatfiduciarydutiesandobligationsof anofficeranddirectorof corporationaresuchthat"ifabusinessopportunitycomestohimwhichisinthelineof hiscorporation'sactivitiesandofadvantagetoit,andespeciallyifreallyintendedforit,thelawwillnotallowhimtodiverttheopportunityfromthecorporationandembraceitashisown."),affd,5A.2d503(Del.1939).SeealsoNorlinCorp.v.RooneyPace,Inc.,744F.2d255,264(2dCir.1984)(directorsowedutiesof careandloyaltytocorporationandsharehold-ers);Revlon,506A.2dat182(directorsbreachedtheirfiduciarydutyof loyaltytoshare-holderswhenactionstakenbyRevlonwereself-servingandatexpenseofshareholders);Unocal, 493A.2dat 955(reviewingcorporationsattemptattakeoverbid,courtstartsanal-ysiswith"basicprinciplethatcorporatedirectorshaveafiduciarydutytoactinthebestinterestsof thecorporation'sstockholders");Smithv.VanGorkom,488A.2d858,872(Del.1985)("directormustexecutedutieswithrecognitionthatheactsonbehalfofothers");GrandMetro.,558A.2dat1055(corporatedirectorshavefiduciarydutytoactinbestinterests of corporateshareholders);Harrington,IfIt Ain't Broke, Don't Fix It: TheLegalPropriety of Defenses Against HostileTakeover Bids,34SYRACUSEL.REV.977,987-90(1983)(discussionof duty of careanddutyof loyalty owedto company bymanagement).See gener-allyHENN&ALEXANDER,LAWSOFCORPORATIONS,621-25(1983)(discussingdirectors'dutyof care).Manystateshaveadoptedastatutorydutyof carebasedontheRevisedModelBusinessCorporationAct,whichstatesinpertinentpart:Adirectorshalldischargehisduties asa director,includinghisduties asa memberofacommittee:(1)ingoodfaith;(2)withthecareanordinaryprudentpersoninalike positionwould exerciseundersimilarcircumstances;and(3)inamannerhereasonablybelievestobeinthebestinterestsof thecorporation.REVISEDMODELBUSINESSCORP.ACT8.30(a)(1984).See,e.g.,N.Y.Bus.CORP.LAW717(McKinney1987)(basedonREVISEDMODELBUSINESSCORP.ACT).SeealsoHarrington,supra,at987n.47("[s]evenstateshavestatutorilyadoptedtheModelActwording,anadditionalninehavejudiciallyadopteditsordinarynegligencestandard. . .").2Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9BusinessJudgmentRuleinrecentyears,'Delawarecourtshavegrappledwithdefiningthelegaldutiesdirectorsowetoshareholdersinthehostiletakeoversetting.'IntheirstruggletheDelawarecourtshavelookedtothebusiness judgmentrule'andtothetestarticulatedinUnocal Corp.Bartlett&Andrews,TheStandstill Agreement:Legal and Business ConsiderationsUnderly-ing Corporate Peace Treaty,62B.U.L. REV.143,143(1982)(competitionhasincreasednum-berof mergersandacquisitions);N.Y.L.J.,Sept.14,1989at5(greatincreaseinmergersandacquisitionsoverpasttwentyfiveyears).SeeSommer,HostileTender Offers:Time foraReviewofFundamentals, inTENDEROFFERS256(M.Steinberged.1985)("disquiethasmountedasthe sizeof takeovershassteadilymounted...");Note,TheBusiness JudgmentRuleina HostileTender Offer:Tearing at theSeams of aConfusing Doctrine - Norlin v.RooneyPace, Inc.,17RUTGERSL.J. 321,321(1986)(discussingsubstantialgrowth,bothinnumberandferocity,ofstrugglesforcorporatecontrolinrecentyears).SeealsoA.KRAMER&J.MCCORD,MERGERSANDAcquiSITIONS 1-24(1969)(providingearlysurveysexplainingin-creasednumberof mergersandacquisitions).'See,e.g.,Moranv.HouseholdInt'l,Inc.,500A.2d1346,1354(Del.1985)(courtde-cidedthatintakeoverattemptwhentenderofferismadedirectorsowefiduciarydutytostockholders);Revlon,Inc.v.MacAndrews&ForbesHolding,Inc.,506A.2d173,179(Del.1985);(courtmustdeterminewhether,intakeoversetting,concessionsmadebydi-rectors"outof concernfortheirliability tonoteholdersratherthanmaximizingthesalepriceof thecompanyfor thestockholders'benefitbreached afiduciaryduty directors havetostockholders");GrandMetro.PublicLtd. v.PillsburyCo.,558A.2d1049,1055(Del.Ch.1988)(courtdecidedthat"indischargingtheir managerialfunction,thedirectorsowefiduciaryduties of careandloyaltytothe corporationanditsshareholders andthose princi-plesapplywithequalforcetoacorporatemergerandtocorporatetakeoverissues.")(cit-ing Revlon,506A.2d at179).Seealso supra note4(discussing directors'dutiesof careandloyalty).Seeinfra notes19-25andaccompanyingtext(descriptionof businessjudgmentrule).Seealso Revlon,506A.2dat180(citingAronsonv.Lewis,473A.2d805,812(Del.1984))(business judgmentrule appliesto director actionsiffiduciary duties of careandloyaltyaresatisfied);Aronson,473A.2dat812."[B]usinessjudgmentruleisanacknowledgementofthemanagerialperogatives"of directors. Id. Thereisapresumptionthatdirectors'actionwasinbestinterestof corporation.Id.(citing Kaplanv.CentexCorp.,284A.2d119,124(Del.Ch.1971));Kaplan, 284A.2dat124(business judgmentrule determinesifdirectorshavebreachedtheirfiduciaryduties).Becausedirectorsof acorporationarechargedwithstrongfiduciarydutiestoboththecorporationanditsshareholders,thebusiness judgmentrule"existstoprotectandpro-motethefullandfreeexerciseof themanagerialpowergrantedtoDelawaredirectors."Smith,488A.2dat 872(citing ZapataCorp. v.Maldonado,430 A.2d779,782(Del.1981))."Theruleitselfisa'presumptionthatinmakingabusinessdecision,thedirectorsofacorporationactedonaninformedbasis,in goodfaith andin thehonestbelief' that"itwasinthecompany'sbestinterest. Smith,488A.2d at872(quoting Aronson,473A.2dat811).Consequently,Delawaredirectorsactinginconformancewiththeirpowertomanagethebusinessaffairsof the corporationundertitle 8,141(a)of theDelawareCode,aregener-ally entitledtobusiness judgmentprotection. See Smith,488A.2d at872(Del.1985)(bene-fitof business judgmentrulegiventocorporatedirectors);C.SMITH&C.FURLOW,GUIDETOTHETAKEOVERLAWOFDELAWARE21(1988).Thestatuteprovidesinpertinentpart:"(a)Thebusinessandaffairsof everycorporationorganizedunderthischaptershallbemanagedbyorunderthedirectionofa boardofdirectors, exceptasmaybeotherwiseprovidedinthischapterorinitscertificateof incorporation."DEL.CODEANN.tit.8,141(a)(Supp.1988).1973Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentary Vol.5:195,1989v.Mesa Petroleum' for guidance."Becauseof Delaware'sprominentroleinthisareaof thelaw,thisNotewillfocusontheDelawarecourts.10Inthehostiletakeovercontext,thebusinessjudgmentruleisgenerallyacceptedasthestandardof judicialreviewforgaugingthedefensivemeasuresofdirectors."Thisruleplacestheinitialburdenofproofontheshareholderstoovercomethepresump-tionthatboarddecisionsareproper.2 However,Delawarecourts8 493A.2d946(Del.1985).'Unocal,493A.2dat955.Thecourtusedfivecriteriaasguidancetodeterminethepermissibilityof defensiveactsbeforeitaffordedthedirectorsprotectionunderthebusi-ness judgmentrule.Id.First,theboardmustshowthatithadreasonablegroundstotaketheaction.Id.(citingCheffv.Mathes,199A.2d548,554-55(Del.1964)).Second,theboardmustactingoodfaith.Id.Third,proofofreasonablegroundsandgoodfaithisenhancediftheboardiscomposedofdisinteresteddirectors.Id.Fourth,theboardmustmakeareasonableinvestigationof thetenderoffer.Id. Fifth,thedefensivetacticmustbereasonableinrelationtothethreatposed.Id. See,e.g.,GrandMetro.PublicLtd.v.Pills-buryCo.,558A.2d1049,1056(Del.1988)(explainingcriterialistedinUnocal; businessjudgmentprotectionnotgrantedwhenboarddecisiontokeeppoisonpillinplacefailedUnocal); IvanhoePartnersv.NewmontMiningCorp.,535A.2d1334,1343-44(Del.1987)(court upheldstreetsweepunderUnocal andbusinessjudgmentrule);Moranv.HouseholdInt'l,Inc.,500A.2d1346,1356 (Del.1985)(courtusedbusinessjudgmentruleandUnocalstandardtoupholdpurchaserightsplan);CityCapitalAssocs.Ltd.v.IntercoInc.,551A.2d787,801(Del.Ch.1988)(proposedsaleof corporatedivisionwasacceptabledefen-sivemaneuverunderUnocal test),appeal dismissed, 556A.2d1070(Del.1988).Cf. Revlon,Inc.v.MacAndrews&ForbesHoldings,506A.2d173,182(Del.1986).Delawarecourtshavealsochargeddirectorswiththefiduciarydutyof "gettingthebestpriceforthestock-holdersatasaleof thecompany"wheretheboardhasrecognized"thecompanywasupforsale."Id.Generally,thecompanyis"upforsale"whentheboardentertainsvariousoffersforthecompany'ssale,or"thedissolutionof thecompanybecomesinevitable."Id.at184.Butsee,e.g.,ParamountCommunicationsInc.v.Time,Inc.,Fed.Sec.L.Rep.94514,Nos.10866,10670,10935at69-73(Del.Ch.July17,1989)(LEXIS,Stateslibrary,Delfile)(whenboardnegotiatesfriendlymergertransactionandhostileacquirorinter-venes,companyisnot"upforsale"withinmeaningofRevlon),affd,565A.2d280(Del.1989)."0See Johnson&Millon,MisreadingtheWilliams Act,87MICH.L.REV.1862,1862(1989)(Delawarelawgovernsonehalfof allNewYorkStockExchangelistedcorporations);Ro-mano,TheStateCompetition Debate inCorporation Law,8CARDozoL.REV.709,714(1987)("slightlymorethanone-halfofthelargestU.S.firmsareincorporatedinDelaware");N.Y.Times,Feb.1,1988,atDI,col.l("Delawareisthestateofincorporationforabout180,000corporationsandisthelegalhometomanyofthenationsbest-knowncorpora-tions.");Black,Legal Times,Nov.25,1985,at 6,col.1 (nationallaw of takeoversevolvesinDelaware);WallStreet Journal,May10,1984,2,at33(w)(DelawareChanceryCourtismajorcorporatebattleground)."SeeGreene,Recent Tender Offer Developments: Onthe Edge or DeepIn?, 45OHIoST.L. J.721,729(1984)(duetoreluctancetogetinvolvedandcomplicatednatureofactions,courtschosebusiness judgmentruleaseasysolution);infra notes18-24andaccompanyingtext.13Seeinfra notes20-25andaccompanyingtext(discussingshareholderburdenof proof4Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9BusinessJudgmentRulehaverecognizedthatdirectors,throughtheirdefensivemeasures,sometimesactfortheprimarypurposeofretainingcontrol."'Therefore,firstinBennett v.Propp'4 andthenwithinthecontextoftheformaltestinUnocal,15 theDelawarecourtshaveshiftedtheinitialburdenof proof todirectors.UndertheUnocal test,di-rectorsmustfirstjustifytheirdefensiveactionbeforereceivingthebenefitofbusinessjudgementruleprotection."ThisNotewillexaminetherelationshipbetweenthebusinessjudgmentruleandtheUnocal testinthehostiletakeoversetting.Inaddition,itwilldiscussthecomplicationsarisingfromthebroaddeferenceDelawarecourtshavegrantedtodirectordeci-sionsunderthesestandards.ThisNotewillproposethatthebusi-ness judgmentruleandtheUnocal testaresubstantivelyequalasaresultoftheexcessive judicialdeferencegiventodirectorration-aleunderthe directors'burdenof proof. Byrequiringdirectorstoproveonlythatwhichispresumedunderthebusinessjudgmentrule,Delawarecourtshaveslowlyreducedprominentjudicialstandardstovacuousprinciplesthatareinsufficienttoprotectshareholderinterests."7 ItissuggestedthatunlessDelawarecourtsarewillingtoadoptamorecriticalanalysisof reviewingdirectordecisions,shareholderinterestswillnotbesufficientlyprotected.Finally,thisNotewillproposethatatrulyenhancedburdenwillunderbusiness judgmentrule)."UnocalCorp.v.MesaPetroleumCo.,493A.2d946,954-55(Del.1985)."41Del.Ch.14,187A.2d405(1962).493A.2d946(Del.1985).10SeeUnocal, 493A.2dat955(incontrolsituationinitialburdenof proof automaticallyshiftstodirectors);Bennettv.Propp,187A.2d405,409(Del.1962)(directorhasinitialburdentoshowactionisincorporateinterest).Seealso Easterbrook&Fischel,TheProperRoleof a Target's Management inResponding toa Tender Offer,94HARV.L.REV.1161,1198(1981).Giventheseriousandunavoidableconflictof interestthatinheresinany decisiononone'sownouster,courts- oughtnottomakeavailabletoamanagerresistingatenderoffer- andineffect,fightingagainsthisownreplacement- thesamedefer-enceaccordedtothedecisionsofamanageringoodstanding.Id.7See Johnson&Siegel,Corporate Mergers: Redefining the Roleof Target Directors,136U.PA.L.REV.315,375-76(1987)(althoughitwassurmisedthatcourts'reluctancetosecondguessdirectors'decisionsmayleadtoinconsistentstandards,itwasconcludedthatcourtsaregenerallynotqualifiedtoundertakemorethoroughreview);Buxbaum,TheInternalDivision of Powers in Corporate Governance, 73CALIF.L.REV.1671,1683(1985)(courtshavelimitedoreliminatedshareholderauthorityoverstructuraldecisionsthroughexpansionofbusiness judgmentrule).1995Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentaryVol.5:195,1989resultifshareholderplaintiffsweretobeartheinitialburdenofproofwithouthavingtoovercomethepresumptionof thebusi-nessjudgmentrule.Oncetheburdenhasshifted,thedirectorswould bepermittedtodemonstratethedegreetowhichtheir bus-iness judgmentshould beprotectedbyprovingtheUnocal factors.I.THERELATIONSHIPBETWEENTHEBUSINESSJUDGMENTRULEANDUNOCALThebusinessjudgmentrulefunctionstoprotectdirectorsfromshareholderactionsbroughtinresponsetotheimplementationoftakeoverdefensetactics." The ruleisageneralpresumptionthatboarddecisionshavebeenmadeonaninformedbasis,ingoodfaithandinthehonestbeliefthatboardactionwastakeninthebestinterestsofthecorporation." Ifdirectorssatisfytherule'spresumptiveelementsthen,absentanyabuseofdiscretion0 or1" SeeJewelCos.v.PayLessDrugStoresN.W.,Inc.,741F.2d1555,1564(9thCir.1984)(directorsprotectedunderbusinessjudgmentrulewhencourtapprovedno-shopprovision whichforeclosed competing offers);IvanhoePartners v.NewmontMiningCorp.,535A.2d1334,1342(Del.1987)(court recognizedthat business judgmentruleprotecteddirectorsincorporation'sself-tenderofferthat excludedminorityshareholderfrommak-ing bid forcorporation);Moranv.HouseholdInt'l, Inc.,500A.2d1346,1357(Del.1985)(flip-over rights planheldvalid underbusiness judgmentruletherefore directorsobtainedjudicialprotection).But seeNote,Dual Class Recapitalization and Shareholder VotingRights,87COLUM.L. REV.106,108(1987)(fiduciaryobligations prohibitdirectorsfromresistingtakeoverthatoffersfairpriceandwillnotharmcorporation)."8 SeeRevlon,Inc.v.MacAndrews&ForbesHoldings,Inc.,506A.2d173,180(Del.1986)(quoting Aronsonv.Lewis,473A.2d805,812(Del.1984));Unocal, 493A.2d at954(quoting Aronson,473A.2dat812);Aronson,473A.2dat812;Kaplanv.CentexCorp.,284A.2d119,124(Del.Ch.1971);Bodellv.GeneralGas&Elec.Corp.,15Del.Ch.420,140A.264,268(1927).See Johnson&Siegel,supranote17,at323n.27.Thebusinessjudgmentruleservesatwofoldpurpose:first,directorsshouldnotbeexposedtoliabilityfor decisionsthey madeingoodfaith andin whatthey perceivedtobethe bestinterests ofthe corporation. Id.Second, sinceshareholdersentrusteddirectorstomakedecisions,theymustalso givethem"latitudetotakerisks"withoutbeing held liable forfailure. Id.Pogos-tinv.Rice,480A.2d619,627(Del.1980)(businessjudgmentruleappliestotakeovercontexts).Seegenerally E.FOLK.THEDELAWAREGENERALCORPORATIONLAW:ACOMMEN-TARYANDANALYSIS75-81(1972)(discussingprinciplesandapplicabilityof businessjudg-mentrule).Thebusiness judgmentrule shouldbe appliedin accordancewithstatecorporatelaw. SeeBurksv.Lasker,441U.S.471,478(1979)(applicationof businessjudgmentruleisstatecorporatelawquestion);Note,Corporate Auctionand Directors' Fiduciary Duties: AThrid-Generation Business JudgmentRule,87MICH.L.REV.276,280(1988)(directors'businessjudgmentwillbeevaluatedby"standardsof conductrequiredbystatelaw").20 Cottlev.StorerCommunications,Inc.,849 F.2d570,575(1 1thCir.1988)(defendantdirectorsentitledtobusinessjudgmentprotectionunlessplaintiff showsabuseofdiscre-tion);Aronson, 473A.2dat812(absentabuseof discretion,directors decisionrespectedby2006Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9BusinessJudgmentRulegrossnegligence,1 thedirectors'decisionswillnotbequestionedbymostcourts.2 Thisrulehasonlyplaced"therudimentsof lim-its"2"onthediscretionofdirectorsinpursuingplansofactiontheyfeelarenecessaryforthefutureof thecorporation.2'courts)."Smithv.VanGorkom,488A.2d 858,874(Del.1985).The courtfoundthatdirectorsweregrosslynegligentinfailingtoactwith"informedreasonabledeliberation."Id. at 881.Thedirectorsapprovedthe"sale"byrelyingonatwohouroralpresentationwithoutpriorknowledgeof thematter,andthepremiumwasacceptedwithoutpriorappraisalofthesubsidiary.Id.at 876.Thecourt heldthatintheaggregatethisconstitutedgrossnegli-gence.Id.at881.SeeMoran, 500A.2dat1356-57(sincedirectorshadreasonablebeliefthatcompanywasvulnerabletothreatposedbypotentialacquiror,their judgmentdidnotamountto"grossnegligence.").SeealsoPennMartRealtyCo.v.Becker,298A.2d349,351(Del.Ch.1972)(grossnegligenceisbreachof fiduciaryduty).Cf. SinclairOilCorp.v.Levien,280A.2d717,722(Del.1971)(absentgross overreaching,businessjudgmentruleapplicable).SeegenerallyKreider,Corporate TakeoversandtheBusiness JudgmentRule:AnUpdate,11J.CORP.L.633(1986)(development of grossnegligenceasstandardforreview-ingboards'businessjudgment),reprinted in30CORP.PRAC.COMMENTATOR117,123-125(1989)."SeeAronson,473A.2dat812.Ifthedecisionwasmadeoninformedbasis,ingoodfaithandinthehonestbelief thatitwasinbestinterestsof company,it willbe respectedbythecourt.Id. See alsoUnocalCorp.v.MesaPetroleumCo.,493A.2d946,954(Del.1985)("Court willnotsubstituteits judgmentforthatof theboardif thelatter'sdecisioncanbe,attributedtoanyrationalbusinesspurpose.'")(quotingSinclair, 280A.2dat720).Seegenerally Buxbaum,supra note17,at1677("courtpaysexaggeratedrespecttotheblackboxof managerialfunction");S.Lorne,Acquisitions and Mergers: Negotiated and ContestedTransactions 4.05(3)(a),at4-101(1985)(courtsacquiescetodirectordecisionsbecausetheyareunqualifiedtosecondguessthesedecisions).But seeConocoInc.v.SeagramCo.,517F.Supp.1299,1303-4(S.D.N.Y.1981)(stockholdersshouldnotbe denied opportunitytotendersharesinrelianceonequityprinciples);Schnellv.Chris-CraftIndus.Inc.,285A.2d437,439(Del.1971)("[IInequitableactiondoesnotbecomepermissiblesimplybe-causeitislegallypossible.")."Note, Panter v. Marshall Field &Co.:Unbridled Discretion of Management to Resist HostileTender Offers,33MERCERL.REV.647,650(1982)."Note,supra note23,at650.Butcf. Note,False Halo:TheBusiness Judgment RuleinCorporate Control Contests, 66TEx.L. REV.843,844(1988)(ruleremains presumption,not astandardofconduct;"insteadofapplyingthebusinessjudgmentrulemechanically,[intakeovercases]courtshavebeguntoanalyzecarefullythedirectors'faithfulnesstotheirfiduciarydutiestothecorporation").SeeSmith,488A.2d at872.The elementsmakingupthebusiness judgmentrule, suchasmakinganinformeddecision,actingingoodfaithandwiththehonestbeliefthatitisinthe bestinterestsof thecorporation,focus ontheindividualdirector'sknowledgeof mate-rialinformationatthetimejustpriortothedecision.Id.Thecourtsmustrelyonthedirectors'interpretationsofthesurroundingcircumstancesinorderto determineiftheyhavemetthecriteriaofthebusiness judgmentrule. Id. SeealsoHarrington,supra note4,at1001.Referringto the court'sunwillingnesstoanalyzesuchimportantissuesasthe fair-nessof atransactionoranobviousconflict of interest,Harringtonnotesthat"[t]henaturalinstinctofthecourts[is]toavoidsuchthornythicketsof review...." Id."[Tihereluc-tanceofthecourtstofacetheseissueshasalltoooftenresultedinatotaldistortionof thebusiness judgmentruleandamisapplicationof theruletocasesinwhichitshouldneverhavebeenapplied."Id.7Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentary Vol.5:195,1989However,becauseof theincreasedliklihoodthatdirectorswillforsaketheinterestsofshareholdersinthehostiletakeoverset-ting,Delawarecourtsrequiredirectorstosatisfythe"enhanced"burdenof theUnocal testbeforetheyareaffordedbusinessjudg-mentruleprotection."'InUnocal, aminorityshareholdermadeatwo-tierfrontloadedtenderoffer6 for37percentof thecorpora-tion'soutstandingstockatapriceof $54pershare.2 7 Afterdeter-miningthattheofferwascoerciveandthatthepricewasinade-quate,theUnocalboardofdirectorsimplementedaselectiveexchangeagreement28 asadefenseagainstthetenderoffer.29 Rec-ognizingthe riskof self-interestedmotives,theDelawareSupremeCourtplacedadualburdenofproofonthedirectors:first,theywererequiredtoprovethattherewerereasonablegroundsforbelievingthatcorporatepolicyandeffectivenesswasindanger;Seesupranote17;infra notes35-47andaccompanyingtext(discussinginadequacyofbusiness judgmentruleinprotectingshareholderinterests).$5 Unocal,493A.2dat954.Inthehostiletakeovercontext,directorshavetheinitialburdenof proof. Id.at955.Thisburdenissatisfieduponashowingof "goodfaithandreasonableinvestigation,"and areasonableresponse.Id.SeeParamountCommunications,Inc.v.Time,Inc.,Fed.Sec.L.Rep.T 94514,Nos.10866,10670,10935at79(Del.Ch.July17,1989)(LEXIS,Stateslibrary,Delfile)(inhostiletakeoversettingdirectorsmustovercomeUnocal standardbeforeobtainingbusiness judgmentprotection),af'd, 565A.2d280(Del.1989);IvanhoePartnersv.NewmontMiningCorp.,535A.2d1334,1341(Del.1987)(same);Revlon,Inc.v.MacAndrews&ForbesHoldings,Inc.,506A.2d173,180(Del.1986)."Thispotentialforconflictplacesuponthedirectorstheburdenofprovingthattheyhadreasonablegroundsforbelievingtherewasadangertocorporatepolicyandeffectiveness,aburdensatisfiedbyashowingofgoodfaithandreasonableinvestigation."Id."SeeSteinberg,SomeThoughtsonRegulation of Trade Offers,inTENDEROFFERS273(M.Steinberged.1985).Atwo-tierfrontloadedtenderofferis:[a]twostepacquisitiontechniqueinwhichthefirststep(frontend)isacashtenderofferandthesecondstep (backend) isamergerinwhichremainingshareholdersofthesubjectcompanytypicallyreceivesecuritiesof thebiddervaluedbelowthecashconsiderationofferedinthefirststeptenderoffer.Id.at274n.l."UnocalCorp.v.MesaPetroleumCo.,493A.2d946,949(Del.1985)."8 Id.at951.Aselectiveexchangeagreementoccurswhenacompanyimplementsa"self-tenderforitsownshareswhichexcludesfromparticipationastockholdermakingahostiletenderofferforthecompany'sstock."Id.at949."Id.at956.Thecourtstated:[T]heUnocaldirectorshadconcludedthatthevalueofUnocalwassubstantiallyabovethe$54pershareoffered....[T]heboardstatedthatitsobjectivewaseithertodefeattheinadequateMesaofferor,shouldtheofferstillsucceed,providethe49%of itsstockholders,whowouldotherwisebeforcedtoaccept"junkbonds,"with$72worthofseniordebt.Id.2028Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9Business JudgmentRuleandsecond,theyhadtoshowthatthedefensivemeasurestakenwerereasonableinresponsetothethreat posed."If thedirectorssustainedthisburden,itbecametheplaintiff'stasktoestablishdi-rectorfraud,badfaithorself dealingbyapreponderanceof theevidence.8"TheUnocal courtheldthatthedefensivemeasureinquestionwasreasonableunderthecircumstances,andthusin-vokedbusiness judgmentprotection.3II.THEBUSINESSJUDGMENTRULEINTHETAKEOVERCONTEXT:COMPLETEPROTECTIONFORDIRECTORSThebusiness judgmentruleismostfrequentlyappliedwhende-cisionsofdirectorsarechallengedinthetakeovercontext.33Whendirectorsrejectabidder'stenderoffertheyoftenbasetheirdecisionon"theinadequacyof thebid,thenatureandtimingoftheoffer,questionsofillegality,theimpactonconstituenciesotherthanshareholders,theriskofnonconsummation,andthebasicstockholderinterestsatstake,includingthepastactionsof"SeeId.at955,958.SeeIvanhoePartnersv.NewmontMiningCorp.,533A.2d585,606(Del.Ch.)(twoprongUnocaltestappliedwhenboardresiststakeoverbid),affd,535A.2d1334,1341(Del.1987);Revlon,Inc.v.MacAndrews&ForbesHoldings,Inc.,506A.2d173,180(Del.1986)(same).SeeJohnson&Siegel,supranote17,at329(generaldiscussionandexpansionofUnocal requirements)."'SeeUnocal, 493A.2dat 958.Oncethe burdenshiftsto the plaintiff, "unlessit isshownbyapreponderanceof theevidencethatthe directors'decisionswereprimarilybased...onsome.. .breachoffiduciarydutysuchasfraud,overreaching,lackof goodfaith,orbeinguninformed,a[c]ourtwillnotsubstituteits judgmentforthatof theboard."Id.SeealsoMoranv.HouseholdInt'l,Inc.,500A.2d1346,1356(Del.1985)(burdenof goingforwardwithevidenceshiftsbackto plaintiff after directorssatisfyUnocal standard).But seeCottlev.StorerCommunication,Inc.,849F.2d570,575(1 1thCir.1988)(defendantenti-tledtosummary judgmentunlessplaintifffirstshowsgenuineissueof fraud,badfaithorabuseofdiscretion);Wolfv.Fried,473Pa.26,373A.2d734,735(1977)(evenabsentproofof fraudorselfdealing,"directorsofacorporationmaybeheldpersonallyliablewheretheyhavebeenimprudent,wasteful,carelessandnegligentandsuchactionshaveresultedincorporatelosses.")(statingholdinginSelheimerv.ManganeseCorp.,423Pa.563,224A.2d634(1966)).s UnocalCorp.v.MesaPetroleumCo.,493A.2d946,949,959(Del.1985).SeePogostinv.Rice,480A.2d619,627(Del.1984).Seealso Johnsonv.Trueblood,629F.2d287,292-93(3dCir.1980)(business judgmentruleapplicableintakeovercon-text);Unocal,493A.2d954(same);Aronsonv.Lewis,473A.2d805,812(Del.1984)("The functionof thebusiness judgmentruleisof paramountsignificanceinthe contextofaderivativeaction.");Kaplanv.CentexCorp.284A.2d119,124(Del.1971).Businessjudgmentruleappliestotakeovers.Id.Seegenerally Kreider,supra note21,at636-37(ex-plainscircumstancesinwhichbusiness judgmentruleapplies).2039Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentaryVol.5:195,1989thebidderanditsaffiliatesinothertakeovercontexts."' 4 TheDelawarecourtshavegranteddeferenceto boarddecision-makingbecauseof theextensivenumberof factorsit involvesandtherec-ognitionthattheboard hasmoreexperienceincorporatemattersandisprivilegedtopertinentinformationconcerningitsownaf-fairs .3Theshareholders,bycontrast,areviewedasunabletomakeinformeddecisions."DirectorsinDelawarecorporationsenjoyawidelatitudeof dis-cretionbecausethecourtsconsiderthemselvesunqualifiedtosec-ond-guessdirectordecisions.7 Ifdirectorscandemonstrateanyrationalbusinesspurpose,inspiteof otherconcerns,theirdeci-sionswillprevail."Consequently,directorshavealmostabsoluteIvanhoe,535A.2dat1341-42;Unocal,493A.2dat955-56(boardmustbalance vari-ousfactorswhendecidingreasonablecourseof action);ParamountCommunications,Inc.v.Time,Inc.,Fed.Sec.L.Rep.94514,Nos.10866,10670,10935(Del.Ch. July17,1989)(LEXIS,Stateslibrary,Delfile),affd,565A.2d280(Del.1989).Seegenerally Lipton&Brownstein,TakeoverResponsesand Directors' Responsibilities: AnUpdate, ABANATIONALINSTITUTEONTHEDYNAMICSOFCORPORATECONTROL7(December8,1983).But seeEaster-brook &Fischel, Takeover Bids, Defense Tactics, and Shareholders' Welfare,36 Bus.LAW.1733,1746-50(1981)(authorsarguefor"managerialpassivity"whichwouldrequiredirectorstoacquiescewhenconfrontedwitha tenderoffer). Butcf.Herzel,Schmidt&Davis,WhyCor-porate Directors Have a Rightto ResistTender Offers,3CORP.L. REV.107,110(1980)(requir-ing"passivity"would,"ineffect,putthecompanyupforsaletothehighestbidder atalltimes")."Smithv.VanGorkom,488A.2d858,876(Del.1985)(boardinbetterpositiontogatherrelevantinformation,thereforecourtdeferstotheir"informed"decision).SeeBlock&Prussin,TheBusiness Judgment Rule&Shareholder Derivative Actions:VivaZapata?,37Bus.LAW.27,32-33(1981)(court'srefusaltosecondguessdirectordecisionsismajorrationaleunderbusiness judgmentrule);supra notes17and22.Cf.HansonTrustPLCv.MLSCMAcquisition, Inc.,781F.2d264,286(2dCir.1986) (Kearse,J., dissenting) (courtsareill-equippedtoevaluatebusiness judgment)."SeeEasterbrook&Fischel,supranote16,at1196(plaintiff/shareholders,justlikecourts,lack experienceandinformationnecessarytointelligently challengemanagerialde-cisions);Herzel,Schmidt&Davis,supra note34,at111(shareholdersunabletomakedeci-sionsthatwillbestservetheircollectiveself-interest);supra notes17&22.'7Seesupra notes17,22&36(discussingDelawarecourts'unwillingness tosecondguessdirectordecisions)."UnocalCorp.v.MesaPetroleumCo.,493A.2d946,954(Del.1985)(court willnotsubstituteitsjudgmentforboard'sif"latter'sdecisioncanbe'attributedtoanyrationalbusiness purpose'")(quoting SinclairOilCorp.v.Levien,280A.2d717,720(Del.1971))(emphasisadded).SeeIvanhoePartnersv.NewmontMiningCorp.,535A.2d1334,1341(Del.1987)("directors'decisionsarepresumed tohavebeen madeonaninformedbasis,ingoodfaithandinthehonestbeliefthattheactiontakenwasinthebestinterestof thecompany")(emphasisadded);Cheffv.Mathes,199A.2d548,555(Del.1964)(directorsnot"penalized"ifdecisionseemedreasonableattimemade).Seegenerally Easterbrook&Fischel,supranote34at1748-49(debatingwhetherrationalbusinesspurposecanbeformedwhenboardactionforeclosesshareholderpremiumanddepletescorporatetrea-surywithlitigationexpenses).20410Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9BusinessJudgmentRulediscretionindecidingwhatisinthebestinterestof boththecor-porationandits shareholders.3 9 Unfortunatelyforshareholdersinthehostiletakeovercontext,theexerciseofdirectordiscretionoftenprecludesshareholdersfromobtainingaguaranteedcapitalgainontheirinvestment,usuallyintheformof apremiumoverthecurrentmarketpriceof thestock.'SeeGrandMetro.Pub.Ltd. v.Pillsbury Co.,558A.2d1049,1055(Del.Ch.1988) ("Del-awarecourt willnot substitute its judgmentforthat of board,providedthat the answertheBoardgavecanbeattributedtoanyrationalbusinesspurposeand... thatthestandardsrequiredbyUnocalhavebeenmet.")(quoting SinclairOilCorp.v.Levien,280A.2d717,726(Del.1971)).SeealsoUnocalCorp.v.MesaPetroleumCo.,493A.2d946,954(Del.1985)(courtwill-not secondguessboarddecision); Sinclair Oil Corp.,280A.2d at720(Del.1971)(court"willnotsubstituteitsnotion of whatisorisnotsoundbusiness judgment").Severalpolicyreasonshavebeenput forthto justify defensivemeasuresassoundbusi-nessjudgment.Forinstance,theboardmayclaimthattheyareable"toobtaingreatervaluefortheshareholders."Gilson,Delaware's Intermediate Standardfor DefensiveTactics: IsThere Substance toProportionality,44Bus.LAw.247,260(1989).Theboardcanalso justifyitsdefensivemeasuresbyclaimingitcouldachieveabetterprice"bypreservingthetar-get'sindependenceandgeneratingvalueinternally."Id. at262.See,e.g.,IvanhoePartnersv.NewmontMining Corp.,535A.2d1334,1340(Del.1987)(standstillagreementlimitedhostile offeror'scontrol of target,"therebyassuring the latter'scontinuedindependence");ParamountCommunications,Inc.v.Time,Inc.,Fed.Sec.L.Rep.94514,Nos.10866,10670,10935(Del.Ch.July17,1989)(LEXIS,Stateslibrary,Delfile)(Timeboarden-teredmergeragreementthatprecludedhostileoffertopreserve"TimeCulture,"andtopromote policydecisionto managefor"longterm"valueof company),aff'd, 565A.2d280(Del.1989).However,EasterbrookandFischelhave arguedthatboardpoliciesof resistingtenderoffersormaintainingcompanyindependenceoperatetotheshareholdersdetri-ment,andshouldthereforebe restricted. SeeEasterbrook&Fischel,supra note34, at1737(stockholdersworseoffwhendefensivetacticspreserveindependence);Easterbrook&Fishel,supra note16,at1174-75("If thecompanyadoptsapolicyof intransigentresis-tenceandsucceedsinmaintainingitsindependence,theshareholderslosewhateverpre-miumovermarketvalue thebidderofferedorwouldhave offeredbutfortheresistance.. ."1).Incasesof self-perpetuation,thecourtshaveinvalidated aboard's decisiononlywhenitwasthesoleorprimarymotivefortheiractions,notmerelyanunderlyingmotive.Cheff,199A.2dat554.SeeFrantzMfg.Co.v.EACIndus.,Inc.,501A.2d401,408(Del.1985)(impropermotiveofself-perpetuationoverridesprotectionofbusinessjudgmentrule);Schnellv.Chris-CraftIndus.,Inc.,285A.2d437(Del.1971)(courtenjoinedmanage-ment'sactswhichattemptedtoperpetuatethemselvesinofficebyobstructinglegitimateeffortsof dissentingstockholderstoundertakeproxycontest)."See,e.g.,Panterv.MarshallField&Co.,646F.2d271,297(7thCir.)(courtupheld"defensive"acquisitionsusedto thwarttakeoverdueto antitrustlaw),cert. denied, 454U.S.1092(1981);Moranv.HouseholdInt'l,Inc.,500A.2d1346,1357(Del.1985)(courtdeemedpurchaseof rightsplanthatdilutedacquirer'sholdingintargetcorporationtobereasonableinrelationtothreatposed);Unocal, 493A.2dat955(court upheldself-tenderofferexcluding certainshareholderparticipationwheredirectorsreasonablybelievedcer-tainshareholderspresenteddangertocorporatepolicyandeffectiveness);Harrington,supra note4,at1005("boardcantake,withimpunity,virtuallyanyactionitwishestofrustrate"atenderoffer);supra notes17&35.40 SeeBradley,InterfirmTenderOffersand theMarket forCorporate Control, inMERGERS20511Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentary Vol.5:195,1989Bystrainingtoinsulatedirectorsfromliabilityat theexpenseofshareholders,Delawarecourtshavereducedthebusinessjudg-mentule toameretokenstandard,enablingacourttosanctionvirtuallyanybusinessdecision.41 Thiseffectivelyclothesdirectorswithan"almostirrebuttablepresumptionof soundbusiness judg-ment,prevailingovereverythingbuttheelusivehobgoblinsoffraud,badfaithorabuseof discretion.142 TheapproachtakenbytheDelawarecourtseffectivelyinsulatesdirectorsfromliabilitybecausethedirectorsareobligedtomerelypresentposthocrea-tionalesto justifytheirdefensivepolicies.43 Thisposthocprotec-tionunderminestheverypurposeof thebusiness judgmentrule"ANDAcQuIsIIoNs267(M.Keenaned.1982)("[Biddingfirmspaidtargetstockholdersanaveragepremiumof 49percentforthesharestheypurchased.").See,e.g.,Panter, 646F.2dat280(shareholderslostpremiumwhendefensivemeasureswereupheld);WhittakerCorp. v.Edgar,535F.Supp.933,951(N.D.III.1982)(directors of targetcorporationsold"crownjewel"assettherebyloweringvalueof companytodetrimentofshareholders),af'd,Nos.82-1305,82-1307(7thCir.Mar.5,1982);ParamountCommunications,Inc.v.Time,Inc.,Fed.Sec.L. Rep.1 94514,Nos.10866,10670,10935at73(Del.Ch.July17,1989)(LEXIS,Stateslibrary,Delfile) (TimeshareholdersprecludedfromrealizingPara-mount's$200pershareofferinreturnforhigherspeculatedreturnsinfuture), affd,565A.2d280(Del.1989);Note, Tender Offer DefensiveTactics and the BusinessJudgment Rule,58N.Y.U. L. REV.621,655(1983)("stringent application of the business judgmentrule createsanalmostinsurmountablebarrier torelief forshareholderswhohave beendeniedthe op-portunitytoselltheirsharesata substantialpremium").Cf. JewelCos.v.PayLessDrugStoresN.W.,Inc.,741F.2d1555,1564(9thCir.1984)(mergeragreementwithno-shopclauseprovisionprecludingacceptanceof competingofferscouldbevalid beforeapprovalbyshareholderswhichmightprecludethemfrompossiblecapitalgain)."SeeHansonTrustPLCv.MLSCMAcquisition,Inc.,781F.2d264,286(2dCir.1986)(Kearse,J.,dissenting) (policyunderlyingbusiness judgmentruleistwofold:courtsareill-equippedto evaluate business judgments,andthereisnoavailable objectivestandardto judge correctnessof boarddecisions);Panter, 646F.2dat299.(Chudahy, J.,dissenting)(courts'useof business judgmentruleismovingcloser"toshreddingwhateverconstraintsstillremainuponthe.. .corporatedirectors....");Buxbaum,supra note18,at1683.Thecourtshavelimitedoreliminated shareholders'ultimateauthorityoverstructuralde-cisionsvia anexpanded definitionof "businessjudgment,"thereforetherearefewchecksuponthedirectors.Id.SeealsoHarrington,supranote4,at1001(courts'reluctancetoreview substanceormotivation of boardactionhas"oftenresultedin total distortion of thebusiness judgmentrule").See generally Johnsonv.Trueblood,629F.2d287,300(3dCir.1980) (court upheld"scorchedearth"and"lockupoption"defense wherefriendly bidderwasgivenoptionontarget'ssecurities),cert.denied,450U.S.999(1981)."'Panterv.Marshall&Co.,646F.2d271,299(7thCir.)(Cudahy,J.,dissenting),cert.denied,454U.S.1092(1981)."Panter, 646F.2dat299(Cudahy, J.,dissenting). Seesupra note38.44 SeeSteinberg,SomeThoughts onRegulation of Tender Offers,inTENDEROFFERs273,285n.44 (M.Steinberg ed.1985)."First,ifmanagementwereliableformeregood faitherrorsin judgment,fewcapableindividualswouldbe willingtoincurthe financialandemotionalrisks of servingin suchroles. Second,courts aregenerallyill-equippedtoevaluatebusinessjudgments.Finally,managementhas theexpertiseto . . .makje]such determinations."Id.20612Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9BusinessJudgmentRulebecauseitallowsprotectionnotgranteduponthetruerationaleofadecision,butratheruponsomeconvenientjustification."Criticizingthis"handsoff"approachtothe conflict,thedissentinPanterv.Marshall Field &Co. accuratelywarnedof directorschan-nelingtheir expertisetotheir personaladvantageandtothe detri-mentof the corporationanditsshareholders.'Theminimalstan-dardsusedtoevaluatedefensivedirectoractiontakenwithoutshareholderapproval,andtheDelawarecourts'implicittrustofthoseactions,arenolonger justifiableinlightof thecertaincon-flictofinterestbetweendirectorsandshareholdersinthehostiletakeover situation.47III.Unocal:LIMITEDPROTECTIONFORSHAREHOLDERSINHOSTILETAKEOVERSTheDelawarecourtshaveappliedtheUnocaltesttodefensivemeasuresinahostiletakeoversetting,48 recognizingthat directorsNote,supra note40,at651(policyofbusinessjudgmentruleisto"allowdirectorsthediscretiontoformulateeffectivecompanypolicy[J...encourage[]competentpeopletobecomedirectorswithoutfearof personalliability[and]...relieve[]thecourtsof thebur-denofsecondguessingcomplexcorporatedecisions")."Seesupranotes17,22,38,43andaccompanyingtext.SeegenerallyEasterbrook&Fischel,supra note34,at1745-47(business judgmentruleshouldnotbeappliedto direc-torswhoareresistingtenderofferdueto inherentconflictsof interestsbetweensharehold-ersandmanagersandcourts'unwillingnesstosecond-guessbusinessdecisions)."Panterv.MarshallField& Co.,646F.2d271,300(7thCir.)(Cudahy, J.,dissenting),cert.denied, 454U.S.1092(1981).SeeGelfond&Sebastian,Reevaluating the Duties of TargetManagement inaHostileTenderOffer,60B.U.L.REV.403,435-37(1980).Hostiletenderofferscreateunavoidableconflictof interest.Id.at436.Thedirectorsareinterestedinprotectingtheirpositionandholdings;therefore,theirdecisionsmightnottrulyreflectwhatisinthebestinterestofthecorporationoritsshareholders.Id."SeeBlock&Miller,TheResponsibilities and Obligations of Corporate Directors inTakeoverContests,11SEc.REG.L.J. 44,69-70(1983)(discussingdangerof businessjudgmentrulewhenboardactionsarenotinbestinterestof shareholders);Buxbaum,supra note17,at1727-32(recognizinginabilityof Delawarecourtstoproperlyaddressmanagementdefen-sivestrategies,andconcurrentneedfor checksonboardauthority);Easterbrook&Fischel,supra note16,at1198(courtsshouldnot grantdeferencetomanagerialdecisionsresistingtenderofferbecauseof"unavoidableconflictof interestthatinheresinanydecisiononone'sownouster");Kreider,supra note21,at 648-50(discussingtrendof courtstosecond-guess"businessjudgmentof thedirectorsbyimposingtheir ownjudgmentintheinterestoffairnesstoshareholders");Note,DiscriminationAgainst Shareholders in Opposing a HostileTakeover, 59S.CALL. REV.1319,1322(1986)(discussing argumentsinfavorof prohibitingdefensivemeasuresbyboard).But seeHerzel,Schmidt &Davis,supra note34,at109(man-agerialresistancetotenderofferscreatesbargainingprocesswhichultimatelybenefitsshareholders).48 E.g.,ParamountCommunications,Inc.,v.Time,Inc.,Fed.Sec.L.Rep.194514,Nos.20713Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentary"[do]nothaveunbridleddiscretiontodefeatanyperceivedthreatbyanyDraconianmeansavailable."' Thecourtslooktotheaddi-tionalburdenof satisfyingthe Unocal criteriaasameansof guard-ingagainst"theomnipresentspecterthataboardmaybeactingprimarilyinitsowninterestsratherthanthoseof thecorporationanditsshareholders."5 Althoughitmayappearthatarequire-mentof reasonablenessisanadditionalburdenupondirectors,itissubmittedthattheUnocalrequirementshaveinfactprovidedshareholderswithinsufficientprotection.TheUnocalstandardissubstantivelyequaltothe business judgmentrule asaresultof theexpansivejudicialdeference1 giventoboardrationaleundertheboard'sburdenof proof. UnlesstheDelawarecourts arewillingtocriticallyexaminetheserationales,thepurposeofUnocalisun-derminedandtherequirmentof proofserveslittlepurpose.ThefirstprongoftheUnocaltestrequiresdirectorstoprovethattheyconducteda"goodfaithandreasonableinvestigation"ofboththeperceivedthreatandthecorporation'spossiblede-fenses.53 Thedirectorscansatisfythisburdenbydemonstrating10866,10670,10935(Del.Ch. July17,1989)(LEXIS,Stateslibrary,Delfile)(court re-viewsdefensivemeasurestohostiletakeoversunderUnocal test),affid,565A.2d280(Del.1989).SeeIvanhoePartnersv.NewmontMiningCorp.,535A.2d1334,1341-44(Del.1987)(probabilityofsuccessof claimmustbeanalyzedunderwell-establishedstandardofUnocaO; Moranv.HouseholdInt'lInc.,500A.2d1346,1350(Del.1985)(same);CityCapi-talAssocs.Ltd. v.IntercoInc.,551A.2d787,790(Del.Ch.)(court appliedUnocal testtodefensivemeasuresimplementedto thwarttakeover),appeal dismissed, 556A.2d1070(Del.1988);GrandMetro.Pub.Ltd.v.PillsburyCo.,558A.2d1049,1055(Del.Ch.1988)(same);ACAcquisitionsCorp.v.Anderson,Clayton&Co.,519A.2d103,111(Del.Ch.1986)(same).Seesupra note1(definitionof hostiletakeover).4, UnocalCorp.v.MesaPetroleumCo.,493A.2d946,955(Del.1985).Unocal,493A.2dat954.SeeIvanhoe,535A.2dat1341(explainingUnocal policy);Johnson&Siegel,supranote17,at329(explainsapplicationofenhancedburdenofUnocal)."See supra notes17,38andaccompanyingtext (discussingDelawarecourts'unwilling-nesstosubstituteits judgmentforthatof board)."Seesupra notes11-16andaccompanyingtext(discussing purposeof Unocaltest).88Unocal, 493A.2d at955.SeeGrand Metro. Pub.,558A.2d at1055(first element satis-fied bygoodfaithandreasonableinvestigation);IvanhoePartnersv.NewmontMiningCorp.,535A.2d1334,1341(Del.1987)(same).In asimilarcase,atender offerwasmadethatwasnoncoerciveandcontainednothreatof injuryto theshareholdersorthecorporation.ACAquisitionsCorp. v.Anderson,Clay-ton&Co.,519A.2d103,112(Del.1986).Asadefense,theboardimplementedaself-tender of ahigheramountfor"65percentof its outstandingstockat $60persharecash."Id. at104.Thecourt heldthat this competitive"alternative,"basedoneconomicconsider-ations,satisfiesthefirstprongof Unocal becauseitservesavalid corporatepurpose. Id. at112.Ithasbeenrecognizedthattheeaseof meetingthisthresholdrequirementisthat208Vol.5:195,198914Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9BusinessJudgmentRulethattheywerenotgrosslynegligentinreachingan"informedde-cision.""TheDelawarecourtshavegranteddeferencetoboardrationalesfor"informeddecisions"inallbutextremecircum-stances;so,realistically,theburdenunderUnocal's firstprongcanbeeasilysatified.55Informeddecision-making,forexample,hasbeenshownsimplybyproofofanextendeddiscussionofapro-poseddefensivemeasurewithlegalconsultants56 oraboard'srec-ognitionof the tenderofferor'spastactionsinothertakeovercon-texts.5 " OneDelawarecourthasgoneasfaraspresumingthataninformeddecisionexistedwhere aboardof directorssimplydeter-minedthecompanyvalue.58 Thus,the"informeddecision"prongdirectorsdonothavetoprove"adangerexistedtocorporatepolicyandeffectiveness...[and]directorscanalmostalwaysciteaconflictinpolicybetweenthe corporationandthebidder."Johnson&Siegel,supranote17,at330.SeealsoNote,Corporate AuctionsandDirectors' FiduciaryDuties: AThird-Generation Business Judgment Rule, 87MICH.L.REv.276,286(1988)."Areasonablycautiousboardthatisawareof itsobligationsunderthe dutyofcarewillhavelittledifficultysatisfyingthisthreshold,proceduralinquiry."Id.Thefirstprongissimplymeanttoidentifysomerationalbusinesspurposebehindtheboard'sac-tions .."Id.But seeRobertM.BassGroup,Inc.v.Evans,Fed.Sec.L.Rep.(CCH)193,924at90,197-98(Del.Ch.1989)(singlemeetingwithofferor'srepresentativeswasre-jectedasreasonableinvestigationbecauseitwas"littlemorethanacharade")."SeeMoranv.HouseholdInt'lInc.,500A.2d1346,1356(Del.1985)(boardsatisfiedfirst prongof Unocal bypresentingproof thatdecisionwasinformedandnotgrosslynegli-gent);Smithv.VanGorkom,488A.2d858,873(Del.1985).Directorsmustactinaninformedanddeliberatemanner.Id. Dutyof careinDelawareprescribesthat"informed"decision-makingbeevaluatedonagrossnegligencestandard.Id. Johnson&Seigel,supranote17,at332(dutyofcarerequiresinformeddecision);DEL.CODEANN.tit.8,251(b)(1974)(Delaware'sstatuterequiresinformeddecisionmakingbydirectors)."Seeinfra note73andaccompanyingtext(onlythreecasesexistinwhichdirectorsdidnotmeetUnocal standard)."See,e.g.,Moran,500A.2dat1356.Thecourtstated:TheDirectorsweregivenbeforehandanotebookwhichincludedathree-pagesum-maryof thePlanalongwitharticlesonthecurrenttakeoverenvironment.Theex-tendeddiscussionbetweentheboardandrepresentativesofWachtell,LiptonandGoldman,Sachs,beforeapprovalof thePlanreflectedafullandcandidevaluationof thePlan.Id. Thecourtconcludedthattheboardmadeaninformeddecisionsinceitwasnotgrosslynegligentinitsreviewunderthesecircumstances.Id.57See,e.g.,Ivanhoe, 535A.2dat1342.Thecourtstated:"[t]heseriesof Ivanhoemaneu-vers,includingthesecretacquisitionof shares,the'bearhug'letter,thecoercivepartialtenderofferandinadequatebidwereallviewedbythedefendantsasclassicelementsofMr.Pickens'typicalmodusoperandi."Id.Furthermore,hehadareputationof acquiringandbreakingupcorporations.Id. Fromthesefactstheboardcouldconcludetheofferwasnotinthebestinterestof theshareholders.Id. SeeUnocalCorp.v.MesaPetroleumCo.,493A.2d946,955-56(Del.1985).Boardcanproperlyconsiderthepastactionsof thebidderanditsaffiliates,inothertakeovercontexts,whendeterminingwhatisbestforthecorporation.Id.See,e.g.,CityCapitalAssocs.Ltd.v.IntercoInc.,551A.2d787,795,798(Del.Ch.)20915Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentary Vol.5:195,1989oftheUnocaltestplacesnosignificantburdenondirectorsbe-causeitrequiresthemtosatisfyonlythatwhichispresumedunderthebusinessjudgmentrule:thatadecisionwasmadeon"aninformed basis,ingoodfaithandinthe honestbelief thattheactiontakenwasinthebestinterestsof thecompany.""ThesecondprongoftheUnocaltestrequiresthatdirectorre-sponsebereasonableinrelationtothethreatposed.60 Indeter-miningthereasonablenessoftheresponse,thefocusison"thenatureof thetakeoverbidanditseffectonthecorporateenter-prise.""1 AnappropriateresponseisillustratedbyDelaware'spol-icyof upholdingboarddecisionswhenthe boarddemonstratestheexistenceof eitheraconflictbetweenthehostileofferandtheircorporatepolicy,oravalidbusinesspurposeunderlyingtheboard'sdecisions.62 Inanexampleoftheformersituation,thecourthasfoundboardactivityreasonablewhentheboardeffec-tivelyrejectedahostileofferbyrevisingamergeragreementinordertocarryoutlongtermcorporatepolicy."Inaninstanceofthelattersituation,theDelawarecourthasrecognizedasarea-(boardmadeinformeddecisionbasedongoodfaithbeliefthatcorporaterestructuringwouldproducehighersharevaluethanthat of offertendered),appeal dismissed, 556A.2d1070(Del.1988).ButseeSmithv.VanGorkom,488A.2d858,874(Del.1985)(Unocalanalysisis not appliedwheredecisionbasedontwentyminuteoralpresentationof proposalandunsupportedvaluationof company'sworthwasnotconsideredinformed.)6Aronsonv.Lewis,473A.2d805,812(Del.1984).ManycourtshavereaffirmedAron-son'sdefinition of thebusiness judgment rule.See,e.g.,IvanhoePartnersv.NewmontMin-ingCorp.,535A.2d1334,1341(Del.1987)(quoting Aronsondefinitionof business judg-mentrule);Revlon,Inc.v.MacAndrews&ForbesHoldings, 506A.2d173,180 (Del.1986)(same);UnocalCorp.v.MesaPetroleumCo.,493A.2d946,954(Del.1985)(same)."Unocal,493A.2dat955.Seegenerally Johnson&Siegel,supranote17,at330-39(1987)(discussingsimplicityof overcomingrelativelyreasonableresponsestandardestab-lishedunderUnocal).eIvanhoe,535A.2dat1341-42.SeeUnocal, 493A.2dat955." SeeUnocal,493A.2dat957(selective exchange offermotivatedbyvalid businesspur-poseheld reasonable);Paramount Communications,Inc.v.Time,Inc.,Fed.Sec.L.Rep.94514,Nos.10866,10670,10935(Del.Ch. July17,1989)(LEXIS,Stateslibrary,Delfile)(board'srestructuringmergertransactionmotivatedbyvalidstrategicbusinessconcernsheldreasonable),affd,565A.2d280(Del.1989).But cf. ACAcquisitionsCorp.v.Ander-son,Clayton&Co.,519A.2d103,112-13(Del.Ch.1986)(board'screationof alternativesto outsidecompany'soffermotivatedby valid businessconcern,but options heldunreason-ablydefensive).63ParamountCommunications,Inc.v.Time,Inc.,Fed.Sec.L.Rep.94514,Nos.10866,10670,10935(Del.Ch.July17,1989)(LEXIS,Stateslibrary,Delfile) (corporatepolicyof preservingTime's"culture"justifiedboard'sdefensiveactions),aff'd,565A.2d280(Del.1989).21016Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9Business JudgmentRulesonableresponsea"comprehensivedefensivestrategy""' em-ployedto"maintainthe company'sindependence.' 65 InCityCapi-tal Assocs.v.Interco, Inc.,6theDelawareChanceryCourtstretchedtheconceptof"reasonableresponse"toincludeprophylacticboarddecisionsmadepriortotheactualizationof anythreat.67Indeterminingreasonableness,Delawarecourtshaverecog-nizedthattheymust"employ[]theUnocalprecedentcau-tiously,""becauseif "inartfullyapplied,theUnocal formof analy-siscouldpermitanunravelingofthewell-madefabricofthebusiness judgmentrule... .""Itisproposedthatsuchanunrav-elinghasinfactoccurred.Delaware'sunjustifiablycautiousanddeferentialapplicationof the secondprongof theUnocal testster-ilizesthetestandrendersitsubstantivelyequivalenttothebusi-nessjudgmentrule.Giventhecomparativestandardsof theUnocal testandthebusi-nessjudgmentrule,0 theonlydifferencebetweenthetwoisthatUnocalplacestheburdenofproofuponthedirectorswhilethebusiness judgmentrulepresumesthisburdenintheirfavor.1 Itissubmittedthatthisdifferenceisnotadistinguishablefactorinlvanhoe, 535A.2dat1345.Acomprehensive,defensivestrategyincludedastandstillagreement,adeclarations of dividends,andastreetsweep. Id. at1336-37.Thecourt statedthat,"Newmont'sactions... aresoinextricablyrelated,theprinciplesof Unocalrequirethattheybescrutinizedcollectivelyasaunitaryresponsetotheperceivedthreats."Id.at1343." Id. at1345."Newmont'sdirectorshadboththeduty andresponsibilitytoopposethethreatspresentedbyIvanhoeandGoldFields."Id.Theboarddeterminedthattheofferwasinadequateandcoercive.Id.at1342.SeeUnocalCorp.v.MesaPetroleumCo.,493A.2d946,954(Del.1985)(directorshave dutytoprotect corporation"fromharmreason-ablyperceived,irrespective of itssource").551A.2d787(Del.Ch.1988).e SeeJohnson &Siegel,supra note17,at330-31(1987)(Unocal applied wherenothreatto corporatepolicyexisted)." CityCapitalAssocs.Ltdv.IntercoInc.,551A.2d787,796(Del.Ch.),appeal dis-missed,556A.2d1070 (Del.1988).This cautionisevidencedbythefact that only twocaseshaveruledthatboardsuseddisproportionatedefensemeasuresrelativetothetakeoverthreat.Id.at796n.9.SeeParamountCommunicationsv.Time,Inc.,Fed.Sec.L.Rep.94514,Nos.10866,10670,10935,at85-86(Del.Ch.July17,1989)(LEXIS,Statesli-brary,Delfile)("it isprudenttokeepinmindthat theinnovativeandconstructiveruleofUnocal mustbecautiouslyapplied"),aff d,565A.2d280(Del.1989).66 CityCapital Assocs.,551A.2dat796."Seesupranote59,69andaccompanyingtext(discussingrelationshipbetweenandcomparisonof business judgmentruleandUnocal)."'Seesupra notes12,16,25andaccompanyingtext (discussingplacementof burdenofproof underUnocal andbusinessjudgmentrule).17Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentary Vol.5:195,1989lightof the judicialdeferencegivento boarddecisions.2 The bur-denofproofdistinctionserveslittlepurposebecausethecourtswillinglydefertovirtuallyanyshowingputforthbydirectors.Thisdeferenceisevidencedbytheinfrequencyinwhichtheboardhasfailedtosustainitsburdenof proofinattainingbusi-nessjudgmentprotectionunderUnocal."3Moststateshaverecognizedthatamoreeffectivereviewofboardactivityisachievedwhentheshareholderplaintiffisre-quiredtosustaintheinitialburdenof presentingevidenceofdi-rectorfraud,badfaithorself-dealinginthehostiletakeoverset-ting."4 Followingtheleadoftheseotherstates,theDelawarecourtsshouldrequireshareholderstosustaintheinitialburdenofproofandshouldnotgrantdirectorsthebusinessjudgmzntrulepresumption.TheDelawarecourtscouldthenincorporatethe"2SeeNote,supra note53,at288(inapplyingsecondprongof Unocal Delawarecourts"showgreatdeferencetowardatargetboard'sreasonabledeterminationthatanofferposesathreattothecorporateenterprise."); Johnson&Siegel,supra note17,at338-39(discussing superficialityof Unocal inrelationtodirectorsduty of loyalty andcourts defer-entialtreatmenttoboarddecisions)."SeeGrandMetro.Pub.Ltd. v.Pillsbury Co.,588A.2d1049,1060(Del.1988)(defen-sivethreatinsufficienttowarrantboard'sresponsive action);RobertM.BassGroup,&Co.v.Evans,Fed.Sec.L.Rep.(CCH)V 93,924(Del.Ch.July14,1989)(same);ACAcquisi-tionsCorp.v.Anderson,Clayton&Co.,519A.2d103,112-15(Del.Ch.1986)(minimal"threat"morelikeprobablenon-preferenceforremedyof coerciveshareholders).SinceUnocal,onlythreecasesexistinwhichthedefensivestepswerefounddisproportionatetothethreat posed. SeeCityCapitalAssocs.Ltd. v.IntercoInc.,551A.2d787,796n.9(Del.1988)."'SeePriddy v.Edelman,883F.2d438,443 (6thCir.1989) (burdenof proof on plaintiffunderMichigan law);HansonTrustPLCv.MLSCMAcquisition,Inc.,781F.2d264,273(2dCir.1986)(plaintiff inNewYorkbearsinitial burdenof provingdirectorsbreachoffiduciarydutyresultingfromdefensivetacticstotakeovers);TreadwayCos.,Inc.v.CareCorp.,638F.2d357,382(2ndCir.1980)(burdenofproofonplaintiff;applyingNewJersey rule);Treco,Inc. v.Landof LincolnSay.&Loan, 749F.2d374,378(7th Cir.1984)(underIllinoislawburdenof proof onplaintiff);Keyser v.CommonwealthNat'l Fin.Corp.,675F.Supp.238,256(M.D.Pa.1987)(plaintiff inPennsylvaniabearsinitialburdenofproof).Seegenerally Note,supranote40,at656."[P]laintiffshouldberequiredtoshowthatthereisasubstantiallikelihoodthatthedirectorswillbereplaceduponsuccessfulcompletionof thetender offer...theburdenshould[then] shiftto the directorstoshowthattheirconductwasfairandreasonable."Id.SeealioNote,Target Directors' FiduciaryDuties: AnInitial Reasonableness Burden,61NoTREDAMEL. REV.722,726(1986).Themajorityof courtsaccordinglydonotplaceaninitialburdenona boardofdirectorsbeforetheycanenjoythepresumptionofthebusinessjudgmentrule.Thesecourtsrequiretheplaintiff tofirstpresentevidencethatthedirectorsactedonanuninformedbasis,inbadfaith,orprimarilyorsolelyforthepurposeofpreventingachangeincontroltokeepthemselvesinoffice.Id.21218Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9BusinessJudgmentRuleUnocal factorsasguidelinesfordeterminingif directorshavemettheirburdenofproof.75 Thus,ratherthanbeingdispositiveonthequestionof thelegitimacyofboardaction,theUnocalfactorswouldbeavailabletodirectorsasanaidtowardestablishingtheproperdegreeofprotectiondueunderthebusinessjudgmentrule.Asitnowstands,Delaware'spracticeof placingtheinitialburdenof proof onthedirectors76 undertheUnocal standardcrit-icallyhamperstheproperscrutinyof boardactionbecausedirec-torshavemerelybeenrequiredtosustain-therelativelyeasybur-denofestablishingtheelementsofthebusinessjudgmentrule."Thisrequirement,inconjunctionwiththeDelawarecourts'un-willingnesstosecond-guessboardaction,"8 leavesDelawareunabletoadequatelyprotectitsshareholdersinthehostiletakeoversetting.CONCLUSIONTheDelawarecourtshavefailedtoadequatelyprotectshare-holderintereststhroughtheapplicationof thebusiness judgmentruleandtheUnocaltest.Underthebusinessjudgmentrule,theDelawarecourtshavestrainedtograntdeferencetotheexpertiseof directorsandhavebeenunwillingtosecond-guesstheirdeci-sions.Asaresult,virtuallyanybusinessdecisioncanbeshowntohavebeenmadeingoodfaithandinthehonestbeliefthatitwasinthecorporation'sbestinterests."Seesupranotes9,34andaccompanyingtext(factorsconsideredbyboardinimple-mentingdefensivemeasureandfactorsreviewedbycourtindeterminingpermissibilityofboardaction).76SeeIvanhoePartnersv.NewmontMiningCorp.,535A.2d1334,1341(Del.1987)(citingUnocal, 493A.2dat954)."[T]hedirectors[have]theburdenof provingthattheyhavenotactedsolelyorprimarilyoutof adesiretoperpetuatethemselvesinoffice,thatthethreatenedtakeoverposed adangertocorporatepolicyandeffectiveness,andthatthedefensivemeasuresadoptedarereasonableinrelationtothethreatposed."Id.SeealsoUnocalCorp.v.MesaPetroleumCo.,493A.2d946,954-55(Del.1985)(explainingpolicyreasonsfor requiringboardtobearinitialburdenof proof);Moranv.HouseholdInt'l, Inc.500A.2d1346,1350(Del.1985)(recognizingneedforplacinginitialburdenof proof ondirectorsbecause judiciaryhasincreasedconcernoverdrasticactionstakenbydirectorstoremoveunwarrantedtakeoverthreats).SeegenerallyKreider,supranote21,at636-38(1989)(describes burdenof proofintakeoveroffers);Note,supra note74,at727-28(dis-cussingwhyinitialburdenisondirectors)."Seesupra notes59,68-71andaccompanyingtext(rationaldecisionsupheld).18See supra notes17,22,35,38 andaccompanyingtext(discussingcourts'unwillingnesstosecond-guessboard).21319Cara and Lane: The Business Judgment Rule and Unocal: Twin Barriers to ShareholdPublished by St. John's Law Scholarship Repository, 1989JournalofLegalCommentaryInordertoeffectivelyprotectshareholderinterests,Delawareshouldadoptamorecriticalanalysisof therationalesunderlyingboarddecisions.Thishadbeenattemptedinthehostiletakeoversetting,inwhichtheUnocal testhasbeenpurportedlyerectedasabarriertobusinessjudgmentprotection.TheUnocaltest,how-ever,islimitedasameansof reviewingboarddecisionsandisin-sufficienttoprotectshareholdersfromimproperboardactivity.Boarddecisionscouldbemoreeffectivelyreviewedbyrequiringthe shareholderto sustaintheinitialburdenof proof withouthav-ingtoovercomethepresumptionof thebusinessjudgmentrule.If theburdenwereshiftedto theshareholders,directorswould bepermittedtoestablishthenecessarydegreeof protectionaccordedtheirbusinessjudgmentusingtheUnocalfactors,insteadofini-tiallybenefitingfromtherule.Thisformof analysiswouldbetterallowboardactivitytobe viewedwithacriticaleye,andthereforediminishtheinitialdeferencetheDelawarecourtshavebeenwill-ingtograntdirectors.Frank Cara &Peter F.Lane214Vol.5:195,198920Journal of Civil Rights and Economic Development, Vol. 5, Iss. 1 [1989], Art. 9http://scholarship.law.stjohns.edu/jcred/vol5/iss1/9