Before he became a public advocate for alternative energy, T. Boone Pickens, the Texas oil billionaire and prolific corporate takeover artist, played an important role in the development of Delaware corporate law with counsel from Richards, Layton & Finger. In Unocal Corp. v. Mesa Petroleum, the Supreme Court of Delaware faced difficult questions about how much freedom boards of directors should have in responding to the takeover tactics of Pickens and others like him.
The early 1980s were a perfect climate for corporate takeovers. In 1982, the United States Supreme Court declared state anti-takeover statutes to be unconstitutional violations of the Commerce Clause. Since the validity of the poison pill had not yet been tested in court, this left corporations with little protection in battles for corporate control. At the same time, investment bankers were inventing new methods to finance takeover attempts that were perfectly suited to the needs of corporate raiders. By early 1985, when the Court of Chancery first considered Unocal, T. Boone Pickens had already established a national reputation as an adept "corporate raider." In the midst of the Unocal fight he relied so heavily on the advice of Richards Layton counsel that there was a firm fax machine dedicated solely to sending and receiving communications to and from Pickens.
In April 1985, Pickens launched a tender offer for a majority of the stock in Unocal Corporation. The tender offer was structured in two steps. In the first step, stockholders who accepted the offer and tendered their stock would be given $54 in cash per share. In the second step, those stockholders who had not tendered their stock would have their stock exchanged for securities worth $54. The Unocal board of directors believed the price to be inadequate and the structure to be coercive because the value of the securities exchanged in the second step were highly subordinated "junk bonds." The Unocal board argued that the risk of being stuck with the junk bonds if they did not tender in the first step could stampede stockholders into tendering in the first step even though $54 was inadequate. In response, the board initiated a protective exchange offer at a higher price, but excluded Pickens, who held 13% of Unocal's stock.
Richards Layton attorneys argued that it was improper for the board to discriminate against a stockholder in this way. In formulating their response to this difficult question, the Supreme Court created a novel intermediate standard of review to apply to boards of directors when responding to takeover threats. The board must have reasonable grounds to believe that a threat to corporate policy and effectiveness exists, and they must respond to that threat proportionally. This rule, known simply as the Unocal standard, has become one of the central tenets of Delaware corporate law.