Unitrin, Inc. v. American General Corp.

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Unitrin, Inc. v. American General Corp., Del. Supr., 651 A.2d 1361 (1995) is the leading case on a board of directors' ability to use defensive measures, such as poison pills or buy backs, to prevent a hostile takeover. The case demontrates an approach to corporate governance that favours the primacy of the board of directors over the will of the shareholders.

[edit] Background

American General Corp tendered an offer for a controlling block of shares of Unitrin. The Board of Directors of Unitrin, who held 23% of the shares, did not think the price offered was adequate and so initiated a poison pill and offered a buyback to increase their holdings to 28% of the total shares.

The trial court found that the offer represented a threat of "substantial coercion", and based on the Unocal v. Mesa Petroleum test, the poison pill was reasonable but the repurchase was not. The issue before the Supreme Court of Delaware was whether the repurchasing was a reasonable reaction to American General's threat.

[edit] Opinion of the Court

The Supreme Court found that the lower court erred in applying the Unocal standard. Only "draconian" defensive measures that have the effect of precluding or coercing shareholders choice will be considered unreasonable conduct of the board.