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CALIFORNIA CORPORATE & SECURITIES LAW

Nevada Legislature Ponders Rejection Of Unocal And Revlon Standards

Thirty years ago, the Delaware Supreme Court issued two seminal opinions concerning how courts ought to review director decisionmaking in merger and acquisition transactions.  In the first case, Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), the Supreme Court imposed a heightened standard to board responses to hostile takeover attempts.  In the second case, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Supreme Court imposed enhanced scrutiny on director decisions in a sale of control situations.  In the ensuing three decades, these two opinions have spawned a prodigious number of cases interpreting when and how these standards are applied.

The Nevada legislature may soon reject both of these cases in no uncertain terms.  As introduced, SB 203 includes the following statements of legislative intent:

Except in the limited circumstances set forth in NRS 78.139, an exercise of the respective powers of directors or officers of a domestic corporation, including, without limitation, in circumstances involving a change or potential change in control of a corporation, is not subject to a heightened standard of review.

The standards promulgated by the Supreme Court of Delaware in Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), and their progeny have been, and are hereby, rejected by the Legislature.

It doesn’t get more clear than that.  The “limited circumstances” set forth in NRS 78.139 most likely refers to current subsection 2 of that statute which provides:

If directors or officers take action to resist a change or potential change in control of a corporation, which action impedes the exercise of the right of stockholders to vote for or remove directors:

(a) The directors must have reasonable grounds to believe that a threat to corporate policy and effectiveness exists; and

(b) The action taken which impedes the exercise of the stockholders’ rights must be reasonable in relation to that threat.

If those facts are found, the directors and officers have the benefit of the presumption established by subsection 3 of NRS 78.138.

Even this heightened standard does not apply under the current statute if either (a) the actions that only affect the time of the exercise of stockholders’ voting rights; or (b) the adoption or signing of plans, arrangements or instruments that deny rights, privileges, power or authority to a holder of a specified number or fraction of shares or fraction of voting power.  NRS 78.139(3).  The Nevada legislature enacted these provisions after (and probably in reaction to) Judge Philip Pro’s decision in Hilton Hotels Corp. v. ITT Corp., 9718 F. Supp. 1342 (D. Nev. 1997) to follow Delaware precedents regarding a board’s fiduciary duties in a takeover battle.

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