Corporate Auctions And Directors’ Fiduciary Duties: A Third-Generation Business Judgment Rule
This Note proposes a rationale and a methodology for applying the business judgment rule when directors resist a hostile bid during the auction phase of a control contest. Part I examines the changes that occur in the responsibilities of target directors when a corporate auction is initiated. This Part describes the Unocal business judgment rule test and discusses its usefulness in the auction phase of a takeover. While the test requires modification if it is to complement effectively the auction-phase duties announced in Revlon, this Part suggests that the business judgment rule continues to be relevant and important during a corporate auction. Finally, this Part discusses target resistance in the auction phase, and closely examines the standard of review employed in CTS II to determine whether this case represents an undue departure from the use of the business judgment rule developed in Unocal and Revlon. Part II defines those situations in which the duty of loyalty analysis should supersede the business judgment rule. This Part distinguishes suspected conflicts of interest from manifest conflicts of interest, and argues that business judgment rule protection should be available in cases involving no more than a suspected conflict of interest. Finally, Part III formulates a standard of review for applying the business judgment rule in the auction phase. This Part suggests that the reasonableness of target resistance be measured using Delaware’s policy of facilitating corporate auctions for the maximization of shareholder gain.