In Re Pure Resources, Inc., Shareholders Litigation

808 A.2d 421 (Del. Ch. 2002)

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Nature of the Case

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Facts

Unocal Corporation spun off its Permian Basin unit and combined it with Titan Exploration, Inc. Titan was an oil and gas company operating in the Permian Basin, south-central Texas, and the central Gulf Coast region of Texas. It also owned mineral interests in the southern Gulf Coast. Following the creation of Pure, Unocal owned 65.4% of Pure's issued and outstanding common stock. The remaining 34.6% of Pure was held by Titan's former stockholders, including its managers who stayed on to run Pure. Several important agreements were entered into when Pure was formed. The first is a Stockholders Voting Agreement. That Agreement requires Unocal and Hightower to vote their shares to elect to the Pure board five persons designated by Unocal (so long as Unocal owns greater than 50% of Pure's common stock), two persons designated by Hightower, and one person to be jointly agreed upon by Unocal and Hightower. Unocal extracted a 'Business Opportunities Agreement' ('BOA') from Titan. So long as Unocal owns at least 35% of Pure, the BOA limits Pure to the oil and gas exploration and production business in certain designated areas, which were essentially co-extensive with the territories covered by Titan and the Permian Basin operations of Unocal as of the time of the combination. The BOA includes an acknowledgment by Pure that it has no business expectancy in opportunities outside the limits set by the contract. This limitation is not reciprocal, however. The BOA expressly states that Unocal may compete with Pure in its areas of operation. Indeed, it implies that Pure board members affiliated with Unocal may bring a corporate opportunity in Pure's area of operation to Unocal for exploitation, but may not pursue the opportunity personally. Unocal also has a preemptive right to maintain its proportionate ownership in the event that Pure issues new shares or undertakes certain other transactions. A Put Agreements require Unocal to pay the managers the 'per share net asset value' or 'NAV' of Pure, in the event the managers exercise their Put rights within a certain period after a triggering event. One triggering event is a transaction in which Unocal obtains 85% of Pure's shares, which could include the Offer if it results in Unocal obtaining that level of ownership. Senior members of Pure's management team have severance agreements that will (if they choose) be triggered in the event the Offer succeeds. In his case, Hightower will be eligible for a severance payment of three times his annual salary and bonus, or nearly four million dollars, an amount that while quite large is not substantial in comparison to the economic consequences of the treatment of his equity interest in Pure. During the summer of 2001, Unocal explored the feasibility of acquiring the rest of Pure. On August 20, 2002, Unocal sent the Pure board a letter that stated in pertinent part that: It has become clear to us that the best interests of our respective stockholders will be served by Unocal's acquisition of the shares of Pure Resources that we do not already... It offered to make an exchange offer pursuant to which the stockholders of Pure (other than Union Oil) will be offered 0.6527 shares of common stock of Unocal for each outstanding share of Pure common stock they own in a transaction designed to be tax-free. Based on the $34.09 closing price of Unocal's shares on August 20, 2002, the offer was for $22.25 per share of Pure common stock and a 27% premium to the closing price of Pure common stock on that date. Unocal's offer was made directly to Pure's stockholders and conditioned on the tender of a sufficient number of shares of Pure common stock such that, after the offer is completed, it would own 90% of the outstanding shares of Pure common stock and other customary conditions. The Pure board voted to establish a Special Committee. Maxwell and Laughbaum were omitted from the Committee because of their substantial employment histories with Unocal. Hightower and Staley were excluded from the Committee because there were circumstances in which the Put Agreements could provide them with incentive to support the procession of the Offer, not because the Offer was at the most favorable price, but because it would trigger their right to receive a higher price under the NAV formula in the Put Agreements. The Special Committee hired Credit Suisse First Boston ('First Boston'), the investment bank assisting Pure with its consideration of the Royalty Trust, and Petrie Parkman & Co., Inc., a smaller firm very experienced in the energy field. This suit was then filed, and a preliminary injunction hearing was soon scheduled. Among the issues raised was the adequacy of the Special Committee's scope of authority. The record supports the inference that the Special Committee believed some of the broader options technically open to them under their preferred resolution (e.g., finding another buyer) were not practicable. As to their failure to insist on the power to deploy a poison pill - the by-now de rigeur tool of a board responding to a third-party tender offer - the record is obscure. The Special Committee also argues that the pill was unnecessary because the Committee's ability to make a negative recommendation - coupled with Hightower's and Staley's by-then apparent opposition to the Offer - were leverage and protection enough. On a few occasions, the Special Committee met with Unocal and tried to persuade it to increase its offer. Unocal remained unmoved and made no counteroffer. Therefore, on September 17, 2002, the Special Committee voted not to recommend the Offer, based on its analysis and the advice of its financial advisors. The Special Committee prepared the 14D-9 on behalf of Pure, which contained the board's recommendation not to tender into the Offer. Hightower and Staley also announced their personal present intentions not to tender, intentions that if adhered to would make it nearly impossible for Unocal to obtain 90% of Pure's shares in the Offer.