text:
Unitrin, Inc. v. American General Corp./Opinion of the Court

[p1366] HOLLAND, Justice:

This is an appeal from the Court of Chancery's entry of a preliminary injunction on October 13, 1994, upon plaintiffs' motions in two actions: American General Corporation's ("American General") suit against Unitrin, Inc. ("Unitrin") and its directors; and a parallel class action brought by Unitrin stockholders. An interlocutory appeal was certified by the Court of Chancery on October 24, 1994. This Court accepted the appeal on October 27, 1994.

American General, which had publicly announced a proposal to merge with Unitrin for $ 2.6 billion at $ 50-3/8 per share, and certain Unitrin shareholder plaintiffs, filed suit in the Court of Chancery, inter alia, to enjoin Unitrin from repurchasing up to 10 million shares of its own stock (the "Repurchase [p1367]  Program"). On August 26, 1994, the Court of Chancery temporarily restrained Unitrin from making any further repurchases. After expedited discovery, briefing and argument, the Court of Chancery preliminarily enjoined Unitrin from making further repurchases on the ground that the Repurchase Program was a disproportionate response to the threat posed by American General's inadequate all cash for all shares offer, under the standard of this Court's holding in Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946 (1985) ("Unocal").

Unitrin's Contentions
Unitrin has raised several issues in this appeal. First, it contends that the Court of Chancery erred in assuming that the outside directors would subconsciously act contrary to their substantial financial interests as stockholders and, instead, vote in favor of a subjective desire to protect the "prestige and perquisites" of membership on Unitrin's Board of Directors. Second, it contends that the Court of Chancery erred in holding that the adoption of the Repurchase Program would materially affect the ability of an insurgent stockholder to win a proxy contest. According to Unitrin, that holding is unsupported by the evidence, is based upon a faulty mathematical analysis, and disregards the holding of Moran v. Household Int'l, Inc., Del. Supr., 500 A.2d 1346, 1355 (1985). Furthermore, Unitrin argues that the Court of Chancery erroneously substituted its own judgment for that of Unitrin's Board, contrary to this Court's subsequent interpretations of Unocal in Paramount Communications, Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 45-46 (1994), and Paramount Communications, Inc. v. Time, Inc., Del. Supr., 571 A.2d 1140 (1990). Third, Unitrin submits that the Court of Chancery erred in finding that the plaintiffs would be irreparably harmed absent an injunction (a) because the Court of Chancery disregarded Unitrin's proffered alternative remedy of sterilizing the increased voting power of the stockholder directors and (b) because there was no basis for finding that stockholders who sold into the market during the pendency of the Repurchase Program would be irreparably harmed.

Ultimate Disposition
This Court has concluded that the Court of Chancery erred in applying the proportionality review Unocal requires by focusing upon whether the Repurchase Program was an "unnecessary" defensive response. See Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d at 45-46. The Court of Chancery should have directed its enhanced scrutiny: first, upon whether the Repurchase Program the Unitrin Board implemented was draconian, by being either preclusive or coercive and; second, if it was not draconian, upon whether it was within a range of reasonable responses to the threat American General's Offer posed. Consequently, the interlocutory preliminary injunctive judgment of the Court of Chancery is reversed. This matter is remanded for further proceedings in accordance with this opinion.

The Parties
American General is the largest provider of home service insurance. On July 12, 1994, it made a merger proposal to acquire Unitrin for $ 2.6 billion at $ 50-3/8 per share. Following a public announcement of this proposal, Unitrin shareholders filed suit seeking to compel a sale of the company. American General filed suit to enjoin Unitrin's Repurchase Program.

Unitrin is also in the insurance business. It is the third largest provider of home service insurance. The other defendants-appellants are the members of Unitrin's seven person Board of Directors (the "Unitrin Board" or "Board"). Two directors are employees, [p1368]  Richard C. Vie ("Vie"), the Chief Executive Officer, and Jerrold V. Jerome ("Jerome"), Chairman of the Board. The five remaining directors are not and have never been employed by Unitrin. These directors are:

"(1) Dr. Henry E. Singleton ('Singleton'), who co-founded Teledyne, Inc. (from which Unitrin is a spin-off) in 1961, and served as its Chairman and Chief Executive Officer until 1988. He is Unitrin's largest shareholder, owning 7,242,260 shares, in excess of 14% of the outstanding stock;"

"(2) Fayez S. Sarofim ('Sarofim'), the Chief Executive Officer and 70% owner of Fayez Sarofim & Co., which manages over $ 23 billion in investments for its clients. Sarofim personally owns 1,062,335 shares of Unitrin common stock, 2.26% of the outstanding stock;"

"(3) Dr. George A. Roberts ('Roberts'), retired Chairman and former President of Teledyne, Inc. He owns more than 400,000 shares of Unitrin stock. Dr. Roberts managed Teledyne's operations for more than 25 years and was apparently responsible for acquiring the companies that make up Unitrin's core businesses;"

"(4) James E. Annable ('Annable'), Chief Economist for First National Bank of Chicago and a former professor of economics at the Massachusetts Institute of Technology; and"

"(5) Reuben L. Hedlund ('Hedlund'), a trial lawyer in Chicago, with experience in antitrust law."

The record reflects that the non-employee directors each receive a fixed annual fee of $ 30,000. They receive no other significant financial benefit from serving as directors. At the offering price proposed by American General, the value of Unitrin's non-employee directors' stock exceeded $ 450 million.

American General's Offer
In January 1994, James Tuerff ("Tuerff"), the President of American General, met with Richard Vie, Unitrin's Chief Executive Officer. Tuerff advised Vie that American General was considering acquiring other companies. Unitrin was apparently at or near the top of its list. Tuerff did not mention any terms for a potential acquisition of Unitrin. Vie replied that Unitrin had excellent prospects as an independent company and had never considered a merger. Vie indicated to Tuerff that Unitrin was not for sale.

According to Vie, he reported his conversation with Tuerff at the next meeting of the Unitrin Board in February 1994. The minutes of the full Board meeting do not reflect a discussion of Tuerff's proposition. Nevertheless, the parties agree that the Board's position in February was that Unitrin was not for sale. It was unnecessary to respond to American General because no offer had been made.

On July 12, 1994, American General sent a letter to Vie proposing a consensual merger transaction in which it would "purchase all of Unitrin's 51.8 million outstanding shares of common stock for $ 50-3/8 per share, in cash" (the "Offer"). The Offer was conditioned on the development of a merger agreement and regulatory approval. The Offer price represented a 30% premium over the market price of Unitrin's shares. In the Offer, American General stated that it "would consider offering a higher price" if "Unitrin could demonstrate additional value." American General also offered to consider tax-free "alternatives to an all cash transaction."

Unitrin's Rejection
Upon receiving the American General Offer, the Unitrin Board's Executive Committee (Singleton, Vie, and Jerome) engaged legal counsel and scheduled a telephonic Board meeting for July 18. At the July 18 special meeting, the Board reviewed the terms of the Offer. The Board was advised that the existing charter and bylaw provisions might not effectively deter all types of takeover strategies. It was suggested that the Board consider adopting a shareholder rights plan and an advance notice provision for shareholder proposals.

[p1369] The Unitrin Board met next on July 25, 1994 in Los Angeles for seven hours. All directors attended the meeting. The principal purpose of the meeting was to discuss American General's Offer.

Vie reviewed Unitrin's financial condition and its ongoing business strategies. The Board also received a presentation from its investment advisor, Morgan Stanley & Co. ("Morgan Stanley"), regarding the financial adequacy of American General's proposal. Morgan Stanley expressed its opinion that the Offer was financially inadequate. Legal counsel expressed concern that the combination of Unitrin and American General would raise antitrust complications due to the resultant decrease in competition in the home service insurance markets.

The Unitrin Board unanimously concluded that the American General merger proposal was not in the best interests of Unitrin's shareholders and voted to reject the Offer. The Board then received advice from its legal and financial advisors about a number of possible defensive measures it might adopt, including a shareholder rights plan ("poison pill") and an advance notice bylaw provision for shareholder proposals. Because the Board apparently thought that American General intended to keep its Offer private, the Board did not implement any defensive measures at that time.

On July 26, 1994, Vie faxed a letter to Tuerff, rejecting American General's Offer. That correspondence stated:

"As I told you back in January, when you first proposed acquiring our company, we are not for sale. The Board believed then, and believes even more strongly today, that the company's future as an independent enterprise is excellent and will provide greater long-term benefits to the company, our stockholders and our other constituencies than pursuing a sale transaction."

"Accordingly, we don't view a combination with you as part of our future and our Board is unanimous and unequivocal that we should not pursue it."

"The Board has specifically directed me to say that we assume you do not want to create an adversarial situation and that you agree with us it would be counterproductive to do so. But our Board is very firm in its conclusion about your offer and if our assumption about your intentions proves to be incorrect, Unitrin has, as you know, the financial capacity to pursue all avenues the Board considers appropriate."

Vie acknowledged during discovery that the latter portion of his letter referred, in part, to the Repurchase Program.

[p1370]

Unitrin's Initial Responses
On August 2, 1994, American General issued a press release announcing its Offer to Unitrin's Board to purchase all of Unitrin's stock for $ 50-3/8 per share. The press release also noted that the Board had rejected American General's Offer. After that public announcement, the trading volume and market price of Unitrin's stock increased.

At its regularly scheduled meeting on August 3, the Unitrin Board discussed the effects of American General's press release. The Board noted that the market reaction to the announcement suggested that speculative traders or arbitrageurs were acquiring Unitrin stock. The Board determined that American General's public announcement constituted a hostile act designed to coerce the sale of Unitrin at an inadequate price. The Board unanimously approved the poison pill and the proposed advance notice bylaw that it had considered previously.

Beginning on August 2 and continuing through August 12, 1994, Unitrin issued a series of press releases to inform its shareholders and the public market: first, that the Unitrin Board believed Unitrin's stock was worth more than the $ 50-3/8 American General offered; second, that the Board felt that the price of American General's Offer did not reflect Unitrin's long term business prospects as an independent company; third, that "the true value of Unitrin [was] not reflected in the [then] current market price of its common stock," and that because of its strong financial position, Unitrin was well positioned "to pursue strategic and financial opportunities;" fourth, that the Board believed a merger with American General would have anticompetitive effects and might violate antitrust laws and various state regulatory statutes; and fifth, that the Board had adopted a shareholder rights plan (poison pill) to guard against undesirable takeover efforts.

Unitrin's Repurchase Program
The Unitrin Board met again on August 11, 1994. The minutes of that meeting indicate that its principal purpose was to consider the Repurchase Program. At the Board's request, Morgan Stanley had prepared written materials to distribute to each of the directors. Morgan Stanley gave a presentation in which alternative means of implementing the Repurchase Program were explained. Morgan Stanley recommended that the Board implement an open market stock repurchase. The Board voted to authorize the Repurchase Program for up to ten million shares of its outstanding stock.

On August 12, Unitrin publicly announced the Repurchase Program. The Unitrin Board expressed its belief that "Unitrin's stock is undervalued in the market and that the expanded program will tend to increase the value of the shares that remain outstanding." The announcement also stated that the director stockholders were not participating in the Repurchase Program, and that the repurchases "will increase the percentage ownership of those stockholders who choose not to sell."

Unitrin's August 12 press release also stated that the directors owned 23% of Unitrin's stock, that the Repurchase Program would cause that percentage to increase, and that Unitrin's certificate of incorporation included a supermajority voting provision. The following language from a July 22 draft press release revealing the antitakeover effects of the Repurchase Program was omitted from the final press release.

"Under the [supermajority provision], the consummation of the expanded repurchase program would enhance the ability of nonselling stockholders, including the directors, to prevent a merger with a greater-than-15% stockholder if they did not favor the transaction."

Unitrin sent a letter to its stockholders on August 17 regarding the Repurchase Program which stated:

"Your Board of Directors has authorized the Company to repurchase, in the open market or in private transactions, up to 10 million of Unitrin's 51.8 million outstanding [p1371] common shares. This authorization is intended to provide an additional measure of liquidity to the Company's shareholders in light of the unsettled market conditions resulting from American General's unsolicited acquisition proposal. The Board believes that the Company's stock is undervalued and that this program will tend to increase the value of the shares that remain outstanding."

Between August 12 and noon on August 24, Morgan Stanley purchased nearly 5 million of Unitrin's shares on Unitrin's behalf. The average price paid was slightly above American General's Offer price.

Procedural Posture
It is important to begin our review by recognizing and emphasizing the procedural posture of this case in the Court of Chancery as well as in this Court. The Court of Chancery granted the plaintiffs' request for a preliminary injunction. After the Court of Chancery entered the preliminary injunction, it certified an appeal from that interlocutory ruling. Supr. Ct. R. 42. This Court accepted the interlocutory appeal and has expedited its review.

The legal paradigm which guides the Court of Chancery before entering a preliminary injunction is well established. First, the plaintiff must demonstrate a reasonable probability of success on the merits at trial. Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261, 1278 (1989). Second, the plaintiff must prove a reasonable probability of irreparable harm in the absence of such preliminary injunctive relief. Id. Finally, the plaintiff must convince the Court of Chancery that, after balancing the relative hardships to the parties involved, the harm to the plaintiff if injunctive relief is denied outweighs the harm to the defendant if the relief is granted. Id. at 1278-79; Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del. Supr., 506 A.2d 173, 179 (1986).

Determines Judicial Review
In this case, before the Court of Chancery could evaluate the reasonable probability of the plaintiffs' success on the merits, it had to determine the nature of the proceeding. When shareholders challenge directors' actions, usually one of three levels of judicial review is applied: the traditional business judgment rule, the Unocal standard of enhanced judicial scrutiny, or the entire fairness analysis. "Because the effect of the proper invocation of the business judgment rule is so powerful and the standard of entire fairness so exacting, the determination of the appropriate standard of judicial review frequently is determinative of the outcome of [the] litigation." Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d at 1279 (citing AC Acquisitions Corp. v. Anderson, Clayton & Co., Del. Ch., 519 A.2d 103, 111 (1986)).

The plaintiffs initially argued that Unitrin's Board put the corporation up for sale by implementing the Repurchase Program. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d at 182. The Court of Chancery ruled, however, that the plaintiffs had not established with reasonable probability that the Repurchase Program constituted a change of control from Unitrin's public stockholders to the stockholder directors. See Paramount Communications, Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34 (1994). The ruling is not at issue in this interlocutory appeal.

[p1372] The plaintiffs alternatively argued that the conduct of the Unitrin Board should be examined under the entire fairness standard. The Court of Chancery concluded that the Board's implementation of the poison pill and the Repurchase Program, in response to American General's Offer, did not constitute self-dealing that would require the Unitrin Board to demonstrate entire fairness. See Nixon v. Blackwell, Del. Supr., 626 A.2d 1366, 1376 (1993); Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701, 710 (1983). Consequently, the Court of Chancery addressed the plaintiffs' third alternative argument, that the Unitrin Board's actions should be examined under the standard of enhanced judicial scrutiny this Court set forth in Unocal.

Unocal is Proper Review Standard
Before a board of directors' action is subject to the Unocal standard of enhanced judicial scrutiny, the court must determine whether the particular conduct was defensive. The stockholder-plaintiffs asked the Court of Chancery to review both the poison pill and the Repurchase Program pursuant to the Unocal standard. American General requested the Court of Chancery to apply Unocal and enjoin the Repurchase Program only. Unitrin acknowledged that the poison pill was subject to the enhanced scrutiny Unocal requires but argued that the Court of Chancery should evaluate the Repurchase Program under the business judgment rule.

According to the Unitrin Board, the Repurchase Program was enacted for a valid business purpose and, therefore, should not be evaluated as a defensive measure under Unocal. The Court of Chancery agreed that, had the Board enacted the Repurchase Program independent of a takeover proposal, its decision would be reviewed under the traditional business judgment rule. The Court of Chancery concluded, however, that the Unitrin Board perceived American General's Offer as a threat and, from the timing of the consideration and implementation of the Repurchase Program, adopted the Repurchase Program as one of several defensive measures in response to that threat. Unitrin does not dispute that conclusion for the purpose of this interlocutory appeal.

The Court of Chancery held that all of the Unitrin Board's defensive actions merited judicial scrutiny according to Unocal. The record supports the Court of Chancery's determination that the Board perceived American General's Offer as a threat and adopted the Repurchase Program, along with the poison pill and advance notice bylaw, as defensive measures in response to that threat. Therefore, the Court of Chancery properly concluded the facts before it required an application of Unocal and its progeny. See Stroud v. Grace, Del. Supr., 606 A.2d 75, 82 (1992). The evolution of that jurisprudence is didactic.

Enhanced Judicial Scrutiny
The business judgment rule applies to the conduct of directors in the context of a takeover. ''See Pogostin v. Rice, Del. Supr.,'' 480 A.2d 619 (1984); [p1373] Aronson v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984). Accord Paramount Communications, Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 41-42 (1994). The business judgment rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, 473 A.2d at 812. An application of the traditional business judgment rule places the burden on the "party challenging the [board's] decision to establish facts rebutting the presumption." Id. If the business judgment rule is not rebutted, a "court will not substitute its judgment for that of the board if the [board's] decision can be 'attributed to any rational business purpose.'" Unocal, 493 A.2d at 954(citation omitted).

In Unocal, this Court reaffirmed "the application of the business judgment rule in the context of a hostile battle for control of a Delaware corporation where board action is taken to the exclusion of, or in limitation upon, a valid stockholder vote." Stroud v. Grace, 606 A.2d at 82. This Court has recognized that directors are often confronted with an "'inherent conflict of interest' during contests for corporate control 'because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders.'" Id. (quoting Unocal, 493 A.2d at 954). Consequently, in such situations, before the board is accorded the protection of the business judgment rule, and that rule's concomitant placement of the burden to rebut its presumption on the plaintiff, the board must carry its own initial two-part burden:

"First, a reasonableness test, which is satisfied by a demonstration that the board of directors had reasonable grounds for believing that a danger to corporate policy and effectiveness existed, and" "Second, a proportionality test, which is satisfied by a demonstration that the board of directors' defensive response was reasonable in relation to the threat posed."

Unocal, 493 A.2d at 955. See also Moran v. Household Int'l, Inc., Del. Supr., 500 A.2d 1346, 1356 (1985). The common law pronouncement in Unocal of enhanced judicial scrutiny, as a threshold or condition precedent to an application of the traditional business judgment rule, is now well known.

The enhanced judicial scrutiny mandated by Unocal is not intended to lead to a structured, mechanistic, mathematical exercise. [p1374] Paramount Communications, Inc. v. Time, Inc., Del. Supr., 571 A.2d 1140, 1153 (1990). Conversely, it is not intended to be an abstract theory. Id. The Unocal standard is a flexible paradigm that jurists can apply to the myriad of "fact scenarios" that confront corporate boards. Id.

Business Judgment Rule and Unocal
The correct analytical framework is essential to a proper review of challenges to the decision-making process of a corporate Board. Nixon v. Blackwell, Del. Supr., 626 A.2d 1366, 1375 (1993). The ultimate question in applying the Unocal standard is: what deference should the reviewing court give "to the decisions of directors in defending against a takeover?" E. Norman Veasey, The New Incarnation of the Business Judgment Rule in Takeover Defenses, 11 Del. J. Corp. L. 503, 504-05 (1986). The question is usually presented to the Court of Chancery, as in the present case, in an injunction proceeding, a posture which is known as "transactional justification." Id. To answer the question, the enhanced judicial scrutiny Unocal requires implicates both the substantive and procedural nature of the business judgment rule.

The business judgment rule has traditionally operated to shield directors from personal liability arising out of completed actions involving operational issues. Id. When the business judgment rule is applied to defend directors against personal liability, as in a derivative suit, the plaintiff has the initial burden of proof and the ultimate burden of persuasion. See Spiegel v. Buntrock, Del. Supr., 571 A.2d 767, 774 (1990). In such cases, the business judgment rule shields directors from personal liability if, upon review, the court concludes the directors' decision can be attributed to any rational business purpose. See Sinclair Oil Corp. v. Levien, Del. Supr., 280 A.2d 717, 720 (1971).

Conversely, in transactional justification cases involving the adoption of defenses to takeovers, the director's actions invariably implicate issues affecting stockholder rights. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del. Supr., 506 A.2d 173, 180 n.10 (1986). In transactional justification cases, the directors' decision is reviewed judicially and the burden of going forward is placed on the directors. See Joseph Hinsey, IV, Business Judgment and the American Law Institute's Corporate Governance Project: the Rule, the Doctrine and the Reality, 52 Geo. Wash. L. Rev., 609, 611-13 (1984). If the directors' actions withstand Unocal's reasonableness and proportionality review, the traditional business judgment rule is applied to shield the directors' defensive decision rather than the directors themselves. Id.

The litigation between Unitrin, American General, and the Unitrin shareholders in the Court of Chancery is a classic example of a transactional justification case. The Court of Chancery's determination that the conduct of Unitrin's Board was subject to Unocal's enhanced judicial scrutiny required it to evaluate each party's ability to sustain its unique burden in the procedural context of a preliminary injunction proceeding. The plaintiff's burden in such a proceeding is to demonstrate a reasonable probability of success after trial.

[p1375] In general, to effectively defeat the plaintiff's ability to discharge that burden, a board must sustain its burden of demonstrating that, even under Unocal's standard of enhanced judicial scrutiny, its actions deserved the protection of the traditional business judgment rule. Thus, the plaintiff's likelihood of success in obtaining a preliminary injunction was initially dependent upon the inability of the Unitrin Board to discharge the burden placed upon it first by Unocal. Accordingly, having concluded that the Board's actions were defensive, the Court of Chancery logically began with an evaluation of the Unitrin Board's evidence.

Reasonableness Burden Sustained
The first aspect of the Unocal burden, the reasonableness test, required the Unitrin Board to demonstrate that, after a reasonable investigation, it determined in good faith, that American General's Offer presented a threat to Unitrin that warranted a defensive response. This Court has held that the presence of a majority of outside independent directors will materially enhance such evidence. Unocal, 493 A.2d at 955. Accord Paramount Communications, Inc. v. Time, Inc., Del. Supr., 571 A.2d 1140, 1154 (1990); Polk v. Good, Del. Supr., 507 A.2d 531, 537 (1986); Moran v. Household Int'l, Inc., Del. Supr., 500 A.2d 1346, 1356 (1985). An "outside" director has been defined as a non-employee and non-management director, (e.g., Unitrin argues, five members of its seven-person Board). See Grobow v. Perot, Del. Supr., 539 A.2d 180, 184 n.1 (1988). Independence "means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Aronson v. Lewis, Del. Supr., 473 A.2d 805, 816 (1984).

The Unitrin Board identified two dangers it perceived the American General Offer posed: inadequate price and antitrust complications. The Court of Chancery characterized the Board's concern that American General's proposed transaction could never be consummated because it may violate antitrust laws and state insurance regulations as a "makeweight excuse" for the defensive measure. It determined, however, that the Board reasonably believed that the American General Offer was inadequate and also reasonably concluded that the Offer was a threat to Unitrin's uninformed stockholders.

The Court of Chancery held that the Board's evidence satisfied the first aspect or reasonableness test under Unocal. The Court of Chancery then noted, however, that the threat to the Unitrin stockholders from American General's inadequate opening bid was "mild," because the Offer was negotiable both in price and structure. The court then properly turned its attention to Unocal's second aspect, the proportionality test because "it is not until both parts of the Unocal inquiry have been satisfied that the business judgment rule attaches to defensive actions of a board of directors." Paramount Communications, [p1376]  Inc. v. Time, Inc., 571 A.2d at 1154. See Unocal, 493 A.2d at 955.

Chancery Approves Poison Pill
The second aspect or proportionality test of the initial Unocal burden required the Unitrin Board to demonstrate the proportionality of its response to the threat American General's Offer posed. The record reflects that the Unitrin Board considered three options as defensive measures: the poison pill, the advance notice bylaw, and the Repurchase Program. The Unitrin Board did not act on any of these options on July 25.

On August 2, American General made a public announcement of its offer to buy all the shares of Unitrin for $ 2.6 billion at $ 50-3/8 per share. The Unitrin Board had already concluded that the American General offer was inadequate. It also apparently feared that its stockholders did not realize that the long term value of Unitrin was not reflected in the market price of its stock.

On August 3, the Board met to decide whether any defensive action was necessary. The Unitrin Board decided to adopt defensive measures to protect Unitrin's stockholders from the inadequate American General Offer in two stages: first, it passed the poison pill and the advance notice bylaw; and, a week later, it implemented the Repurchase Program.

With regard to the second aspect or proportionality test of the initial Unocal burden, the Court of Chancery analyzed each stage of the Unitrin Board's defensive responses separately. Although the Court of Chancery characterized Unitrin's antitrust concerns as "makeweight," it acknowledged that the directors of a Delaware corporation have the prerogative to determine that the market undervalues its stock and to protect its stockholders from offers that do not reflect the long term value of the corporation under its present management plan. Paramount Communications, Inc. v. Time, Inc., 571 A.2d at 1153. The Court of Chancery concluded that Unitrin's Board believed in good faith that the American General Offer was inadequate and properly employed a poison pill as a proportionate defensive response to protect its stockholders from a "low ball" bid.

No cross-appeal was filed in this expedited interlocutory proceeding. Therefore, the Court of Chancery's ruling that the Unitrin Board's adoption of a poison pill was a proportionate response to American General's Offer is not now directly at issue. Nevertheless, to the extent the Unitrin Board's prior adoption of the poison pill influenced the Court of Chancery's proportionality review of the Repurchase Program, the Board's adoption of the poison pill is also a factor to be considered on appeal by this Court.

Chancery Enjoins Repurchase Program
The Court of Chancery did not view either its conclusion that American General's Offer constituted a threat, or its conclusion that the poison pill was a reasonable response to that threat, as requiring it, a fortiori, to conclude that the Repurchase Program was also an appropriate response. The Court of Chancery then made two factual findings: first, the Repurchase Program went beyond what was "necessary" to protect the Unitrin stockholders from a "low ball" negotiating strategy; and second, it was designed to keep the decision to combine with American General within the control of the members of the Unitrin Board, as stockholders, under virtually all circumstances. Consequently, the Court of Chancery held that the Unitrin Board failed to demonstrate that the Repurchase Program met the second aspect or [p1377]  proportionality requirement of the initial burden Unocal ascribes to a board of directors.

The Court of Chancery framed the ultimate question before it as follows:

"This case comes down to one final question: Is placing the decision to sell the company in the hands of stockholders who are also directors a disproportionate response to a low price offer to buy all the shares of the company for cash?"

The Court of Chancery then answered that question:

"I conclude that because the only threat to the corporation is the inadequacy of an opening bid made directly to the board, and the board has already taken actions that will protect the stockholders from mistakenly falling for a low ball negotiating strategy, a repurchase program that intentionally provides members of the board with a veto of any merger proposal is not reasonably related to the threat posed by American General's negotiable all shares, all cash offer."

In explaining its conclusion, the Court of Chancery reasoned that:

"I have no doubt that a hostile acquiror can make an offer high enough to entice at least some of the directors that own stock to break ranks and sell their shares. Yet, these directors undoubtedly place a value, probably a substantial one, on their management of Unitrin, and will, at least subconsciously, reject an offer that does not compensate them for that value. . . . The prestige and perquisites that accompany managing Unitrin as a member of its Board of directors, even for the non-officer directors that do not draw a salary, may cause these stockholder directors to reject an excellent offer unless it includes this value in its 'price parameter.'"

The Court of Chancery concluded that, although the Unitrin Board had properly perceived American General's inadequate Offer as a threat and had properly responded to that threat by adopting a "poison pill," the additional defensive response of adopting the Repurchase Program was unnecessary and disproportionate to the threat the Offer posed. Accordingly, it concluded that the plaintiffs had "established with reasonable probability that the [Unitrin Board] violated its duties under Unocal [by authorizing the Repurchase Program]" because the Board had not sustained its burden of demonstrating that the Repurchase Program was a proportionate response to American General's Offer. Therefore, the Court of Chancery held that the plaintiffs proved a likelihood of success on that issue and granted the motion to preliminarily enjoin the Repurchase Program.

Repurchase Program
Before the Repurchase Program began, Unitrin's directors collectively held approximately 23% of Unitrin's outstanding shares. Unitrin's certificate of incorporation already included a "shark-repellent" provision barring any business combination with a more-than-15% stockholder unless approved by a majority of continuing directors or by a 75% stockholder vote ("Supermajority Vote"). Unitrin's shareholder directors announced publicly that they would not participate in the Repurchase Program and that this would [p1378]  result in a percentage increase of ownership for them, as well as for any other shareholder who did not participate.

The Court of Chancery found that by not participating in the Repurchase Program, the Board "expected to create a 28% voting block to support the Board's decision to reject [a future] offer by American General." From this underlying factual finding, the Court of Chancery concluded that American General might be "chilled" in its pursuit of Unitrin:

"Increasing the board members' percentage of stock ownership, combined with the supermajority merger provision, does more than protect uninformed stockholders from an inadequate offer, it chills any unsolicited acquiror from making an offer."

The parties are in substantial disagreement with respect to the Court of Chancery's ultimate factual finding that the Repurchase Program was a disproportionate response under Unocal. Unitrin argues that American General or another potential acquiror can theoretically prevail in an effort to obtain control of Unitrin through a proxy contest. American General argues that the record supports the Court of Chancery's factual determination that the adoption of the Repurchase Program violated the principles of Unocal, even though American General acknowledges that the option of a proxy contest for obtaining control of Unitrin remained theoretically available. The stockholder-plaintiffs argue that even if it can be said, as a matter of law, that it is acceptable under certain circumstances to leave potential bidders with a proxy battle as the sole avenue for acquiring an entity, the Court of Chancery correctly determined, as a factual matter, that the Repurchase Program was disproportionate to the threat American General's Offer posed.

Shareholder Franchise
This Court has been and remains assiduous in its concern about defensive actions designed to thwart the essence of corporate democracy by disenfranchising shareholders. Paramount Communications, Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 42 n.11 (1994). See also Stroud v. Grace, Del. Supr., 606 A.2d 75 (1992). For example, when this Court concluded that rescheduling an annual meeting date directly manifested an entrenchment motive on the part of a board, we stated:

"Management has attempted to utilize the corporate machinery and the Delaware Law for the purpose of perpetuating itself in office; and, to that end, for the purpose of obstructing the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management. These are inequitable purposes, contrary to established principles of corporate democracy."

Schnell v. Chris-Craft Indus., Inc., Del. Supr., 285 A.2d 437, 439 (1971). See also Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d at 42 n.11.

Nevertheless, this Court has upheld the propriety of adopting poison pills in given defensive circumstances. Keeping a poison pill in place may be inappropriate, however, when those circumstances change dramatically. See Moran v. Household Int'l, Inc., Del. Supr., 500 A.2d 1346, 1355 (1985). ''Cf. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,'' Del. Supr., 506 A.2d 173, 179 (1986). Similarly, this Court has recognized the propriety of implementing certain repurchase programs (as in Unocal itself), as well as the unreasonableness and non-proportionality of responding defensively to a takeover bid with a coercive and preclusive partial self-tender offer. See Paramount Communications, Inc. v. Time, Inc., Del. Supr., 571 A.2d 1140, 1154 (1990) (citing AC Acquisitions Corp. v. Anderson, Clayton & Co., Del. Ch., 519 A.2d 103 (1986)).

More recently, this Court stated: "we accept the basic legal tenets," set forth in [p1379]  Blasius Indus., Inc. v. Atlas Corp., Del. Ch., 564 A.2d 651 (1988), that "where boards of directors deliberately employ[] . . . legal strategies either to frustrate or completely disenfranchise a shareholder vote, . . . there can be no dispute that such conduct violates Delaware law." Stroud v. Grace, 606 A.2d at 91. In Stroud, we concluded, however, that a Blasius analysis was inappropriate. We reached that conclusion because it could not be said "that the 'primary purpose' of the board's action was to interfere with or impede exercise of the shareholder franchise," and because the shareholders had a "full and fair opportunity to vote." Stroud v. Grace, 606 A.2d at 92.

This Court also specifically noted that boards of directors often interfere with the exercise of shareholder voting when an acquiror launches both a proxy fight and a tender offer. Id. at 92 n.3. We then stated that such action "necessarily invoked both Unocal and Blasius" because "both [tests] recognize the inherent conflicts of interest that arise when shareholders are not permitted free exercise of their franchise." Id. Consequently, we concluded that, "in certain circumstances, [the judiciary] must recognize the special import of protecting the shareholders' franchise within Unocal's requirement that any defensive measure be proportionate and 'reasonable in relation to the threat posed.'" Id. (citation omitted).

Tender Offer/Proxy Contest
We begin our examination of Unitrin's Repurchase Program mindful of the special import of protecting the shareholder's franchise within Unocal's requirement that a defensive response be reasonable and proportionate. Stroud v. Grace, 606 A.2d at 92. For many years the "favored attack of a [corporate] raider was stock acquisition followed by a proxy contest." Unocal, 493 A.2d at 957. Some commentators have noted that the recent trend toward tender offers as the preferable alternative to proxy contests appears to be reversing because of the proliferation of sophisticated takeover defenses. Lucian A. Bebchuk & Marcel Kahan, A Framework for Analyzing Legal Policy Towards Proxy Contests, 78 Cal. L. Rev. 1071, 1134 (1990). In fact, the same commentators have characterized a return to proxy contests as "the only alternative to hostile takeovers to gain control against the will of the incumbent directors." Id.

The Court of Chancery, in the case sub judice, was obviously cognizant that the emergence of the "poison pill" as an effective takeover device has resulted in such a remarkable transformation in the market for corporate control that hostile bidders who proceed when such defenses are in place will usually "have to couple proxy contests with tender offers." Joseph A. Grundfest, Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates, 45 Stan. L. Rev. 857, 858 (1993). The Court of Chancery concluded that Unitrin's adoption of a poison pill was a proportionate response to the threat its Board reasonably perceived from American General's Offer. Nonetheless, the Court of Chancery enjoined the [p1380]  additional defense of the Repurchase Program as disproportionate and "unnecessary."

The record reflects that the Court of Chancery's decision to enjoin the Repurchase Program is attributable to a continuing misunderstanding, i.e., that in conjunction with the longstanding Supermajority Vote provision in the Unitrin charter, the Repurchase Program would operate to provide the director shareholders with a "veto" to preclude a successful proxy contest by American General. The origins of that misunderstanding are three premises that are each without record support. Two of those premises are objective misconceptions and the other is subjective.

Subjective Determination
The subjective premise was the Court of Chancery's sua sponte determination that Unitrin's outside directors, who are also substantial stockholders, would not vote like other stockholders in a proxy contest, i.e., in their own best economic interests. At American General's Offer price, the outside directors held Unitrin shares worth more than $ 450 million. Consequently, Unitrin argues the stockholder directors had the same interest as other Unitrin stockholders generally, when voting in a proxy contest, to wit: the maximization of the value of their investments.

In rejecting Unitrin's argument, the Court of Chancery stated that the stockholder directors would be "subconsciously" motivated in a proxy contest to vote against otherwise excellent offers which did not include a "price parameter" to compensate them for the loss of the "prestige and perquisites" of membership on Unitrin's Board. The Court of Chancery's subjective determination that the stockholder directors of Unitrin would reject an "excellent offer," unless it compensated them for giving up the "prestige and perquisites" of directorship, appears to be subjective and without record support. It cannot be presumed.

It must be the subject of proof that the Unitrin directors' objective in the Repurchase Program was to forego the opportunity to sell their stock at a premium. In particular, it cannot be presumed that the prestige and perquisites of holding a director's office or a motive to strengthen collective power prevails over a stockholder-director's economic interest. Even the shareholder-plaintiffs in this case agree with the legal proposition Unitrin advocates on appeal: stockholders [p1381]  are presumed to act in their own best economic interests when they vote in a proxy contest.

Actual Voting Power Exceeds 25%
The first objective premise relied upon by the Court of Chancery, unsupported by the record, is that the shareholder directors needed to implement the Repurchase Program to attain voting power in a proxy contest equal to 25%. The Court of Chancery properly calculated that if the Repurchase Program was completed, Unitrin's shareholder directors would increase their absolute voting power to 25%. It then calculated the odds of American General marshalling enough votes to defeat the Board and its supporters.

The Court of Chancery and all parties agree that proxy contests do not generate 100% shareholder participation. The shareholder plaintiffs argue that 80-85% may be a usual turnout. Therefore, without the Repurchase Program, the director shareholders' absolute voting power of 23% would already constitute actual voting power greater than 25% in a proxy contest with normal shareholder participation below 100%. See Berlin v. Emerald Partners, Del. Supr., 552 A.2d 482 (1989).

No Realistic Deterrent
The second objective premise relied upon by the Court of Chancery, unsupported by the record, is that American General's ability to succeed in a proxy contest depended on the Repurchase Program being enjoined because of the Supermajority Vote provision in Unitrin's charter. Without the approval of a target's board, the danger of activating a poison pill renders it irrational for bidders to pursue stock acquisitions above the triggering level. Instead, "bidders intent on working around a poison pill must launch and win proxy contests to elect new directors who are willing to redeem the target's poison pill." Joseph A. Grundfest, Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates, 45 Stan. L. Rev. 857, 859 (1993).

As American General acknowledges, a less than 15% stockholder bidder need not proceed with acquiring shares to the extent that it would ever implicate the Supermajority [p1382]  Vote provision. In fact, it would be illogical for American General or any other bidder to acquire more than 15% of Unitrin's stock because that would not only trigger the poison pill, but also the constraints of 8 Del. C. § 203. If American General were to initiate a proxy contest before acquiring 15% of Unitrin's stock, it would need to amass only 45.1% of the votes assuming a 90% voter turnout. If it commenced a tender offer at an attractive price contemporaneously with its proxy contest, it could seek to acquire 50.1% of the outstanding voting stock.

The record reflects that institutional investors own 42% of Unitrin's shares. Twenty institutions own 33% of Unitrin's shares. It is generally accepted that proxy contests have re-emerged with renewed significance as a method of acquiring corporate control because "the growth in institutional investment has reduced the dispersion of share ownership." Lucian A. Bebchuk & Marcel Kahan, A Framework for Analyzing Legal Policy Towards Proxy Contests, 78 Cal. L. Rev. 1071, 1134 (1990). "Institutions are more likely than other shareholders to vote at all, more likely to vote against manager proposals, and more likely to vote for proposals by other shareholders." Bernard S. Black, The Value of Institutional Investor Monitoring: The Empirical Evidence, 39 UCLA L. Rev. 895, 925 (1992). See also John Pound, Shareholder Activism and Share Values: The Causes and Consequences of Countersolicitations Against Management Antitakeover Proposals, 32 J.L. & Econ. 357, 368 (1989).

Proxy Contest Appears Viable
The assumptions and conclusions American General sets forth in this appeal for a different purpose are particularly probative with regard to the effect of the institutional holdings in Unitrin's stock. American General's two predicate assumptions are a 90% stockholder turnout in a proxy contest and a bidder with 14.9% holdings, i.e., the maximum the bidder could own to avoid triggering the poison pill and the Supermajority Vote provision. American General also calculated the votes available to the Board or the bidder with and without the Repurchase Program:

"Assuming no Repurchase [Program], the [shareholder directors] would hold 23 %, the percentage collectively held by the [directors] and the bidder would be 37.9%, and the percentage of additional votes available to either side would be 52.1%."

"Assuming the Repurchase [Program] is fully consummated, the [shareholder directors] would hold 28%, the percentage collectively held by the bidder and the [directors] would be 42.9%, and the percentage of additional votes available to either side would be 47.1%."

American General then applied these assumptions to reach conclusions regarding the votes needed for the 14.9% stockholder bidder to prevail: first, in an election of directors; and second, in the subsequent vote on a merger. With regard to the election of directors, American General made the following calculations:

"Assume 90% stockholder turnout. To elect directors, a plurality must be obtained; assuming no abstentions and only two competing slates, one must obtain the votes of 45.1% of the shares."

"The percentage of additional votes the bidder needs to win is: 45.1% - 14.9% (maximum the bidder could own and avoid the poison pill, § 203 and supermajority) = 30.2%."

[p1383] A merger requires approval of a majority of outstanding shares, 8 Del. C. § 251, not just a plurality. In that regard, American General made the following calculations:

"Assume 90% stockholder turnout. To approve a merger, one must obtain the favorable vote of 50.1% of the shares."

"The percentage of additional votes the bidder needs to win is 50.1% - 14.9% = 35.2%."

Consequently, to prevail in a proxy contest with a 90% turnout, the percentage of additional shareholder votes a 14.9% shareholder bidder needs to prevail is 30.2% for directors and 35.2% in a subsequent merger. The record reflects that institutional investors held 42% of Unitrin's stock and 20 institutions held 33% of the stock. Thus, American General's own assumptions and calculations in the record support the Unitrin Board's argument that "it is hard to imagine a company more readily susceptible to a proxy contest concerning a pure issue of dollars."

The conclusion of the Court of Chancery that the Repurchase Program would make a proxy contest for Unitrin a "theoretical" possibility that American General could not realistically pursue may be erroneous and appears to be inconsistent with its own earlier determination that the "repurchase program strengthens the position of the Board of Directors to defend against a hostile bidder, but will not deprive the public stockholders of the 'power to influence corporate direction through the ballot.'" Even a complete implementation of the Repurchase Program, in combination with the pre-existing Supermajority Vote provision, would not appear to have a preclusive effect upon American General's ability successfully to marshall enough shareholder votes to win a proxy contest. Accord Shamrock Holdings, Inc. v. Polaroid Corp., Del. Ch., 559 A.2d 278 (1989). A proper understanding of the record reflects that American General or any other 14.9% shareholder bidder could apparently win a proxy contest with a 90% turnout.

The key variable in a proxy contest would be the merit of American General's issues, not the size of its stockholdings. Moran v. Household Int'l, Inc., Del. Supr., 500 A.2d 1346, 1355 (1985). If American General presented an attractive price as the cornerstone of a proxy contest, it could prevail, irrespective of whether the shareholder directors' absolute voting power was 23% or 28%. In that regard, the following passage from the Court of Chancery's Opinion is poignant:

"Harold Hook, the Chairman of American General, admitted in his deposition that the repurchase program is not a 'show stopper' because the directors that own stock will act in their own best interest if the price is high enough. (Hook Dep. at 86-87). Fayez Sarofim, one of the Unitrin directors that holds a substantial number of shares, testified that 'everything has a price parameter.''"

Consequently, a proxy contest apparently remained a viable alternative for American General to pursue notwithstanding Unitrin's poison pill, Supermajority Vote provision, and a fully implemented Repurchase Program.

American General's Threat
This Court has recognized "the prerogative of a board of directors to resist a third party's unsolicited acquisition proposal or offer." Paramount Communications, Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 43 n.13 (1994). The Unitrin Board did not have unlimited discretion to defeat the threat it perceived from the American General Offer by any draconian means available. See Unocal, 493 A.2d at 955. [p1384] Pursuant to the Unocal proportionality test, the nature of the threat associated with a particular hostile offer sets the parameters for the range of permissible defensive tactics. Accordingly, the purpose of enhanced judicial scrutiny is to determine whether the Board acted reasonably in "relation . . . to the threat which a particular bid allegedly poses to stockholder interests." Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261, 1288 (1989).

"The obvious requisite to determining the reasonableness of a defensive action is a clear identification of the nature of the threat." Paramount Communications, Inc. v. Time, Inc., Del. Supr., 571 A.2d 1140, 1154 (1990). Courts, commentators and litigators have attempted to catalogue the threats posed by hostile tender offers. Id. at 1153. Commentators have categorized three types of threats:

"(i) opportunity loss . . . [where] a hostile offer might deprive target shareholders of the opportunity to select a superior alternative offered by target management [or, we would add, offered by another bidder]; (ii) structural coercion, . . . the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender decisions; and (iii) substantive coercion, . . . the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management's representations of intrinsic value."

Id. at 1153 n. 17 (quoting Ronald J. Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 267 (1989)).

This Court has held that the "inadequate value" of an all cash for all shares offer is a "legally cognizable threat." Paramount Communications, Inc. v. Time, Inc., 571 A.2d at 1153. In addition, this Court has specifically concluded that inadequacy of value is not the only legally cognizable threat from "an all-shares, all-cash offer at a price below what a target board in good faith deems to be the present value of its shares." Id. at 1152-53. In making that determination, this Court held that the Time board of directors had reasonably determined that inadequate value was not the only threat that Paramount's all cash for all shares offer presented, but was also reasonably concerned that the Time stockholders might tender to Paramount in ignorance or based upon a mistaken belief, i.e., yield to substantive coercion.

The record reflects that the Unitrin Board perceived the threat from American General's Offer to be a form of substantive coercion. The Board noted that Unitrin's stock price had moved up, on higher than normal trading volume, to a level slightly below the price in American General's Offer. The Board also noted that some Unitrin shareholders had publicly expressed interest in selling at or near the price in the Offer. The Board determined that Unitrin's stock was undervalued by the market at current levels and that the Board considered Unitrin's stock to be a good long-term investment. The Board also discussed the speculative and unsettled market conditions for Unitrin stock caused by American General's public disclosure. The Board concluded that a Repurchase Program would provide additional liquidity to those stockholders who wished to realize short-term gain, and would provide enhanced value to those stockholders who wished to maintain a long-term investment. Accordingly, the Board voted to authorize the Repurchase Program for up to ten million shares of its outstanding stock on the open market.

In Unocal, this Court noted that, pursuant to Delaware corporate law, a board of directors' duty of care required it to respond actively to protect the corporation and its shareholders from perceived harm. Unocal, 493 A.2d at 955. In Unocal, when describing the proportionality test, this Court listed several examples of concerns that boards of [p1385]  directors should consider in evaluating and responding to perceived threats. Unitrin's Board deemed three of the concerns exemplified in Unocal relevant in deciding to authorize the Repurchase Program: first, the inadequacy of the price offered; second, the nature and timing of American General's Offer; and third, the basic stockholder interests at stake, including those of short-term speculators whose actions may have fueled the coercive aspect of the Offer at the expense of the long-term investor. Unocal, 493 A.2d at 955-56. Accord Ivanhoe Partners v. Newmont Mining Corp., Del. Supr., 535 A.2d 1334, 1341-42 (1987).

The record appears to support Unitrin's argument that the Board's justification for adopting the Repurchase Program was its reasonably perceived risk of substantive coercion, i.e., that Unitrin's shareholders might accept American General's inadequate Offer because of "ignorance or mistaken belief" regarding the Board's assessment of the long-term value of Unitrin's stock. See Shamrock Holdings, Inc. v. Polaroid Corp., Del. Ch., 559 A.2d 278, 290 (1989). In this case, the Unitrin Board's letter to its shareholders specifically reflected those concerns in describing its perception of the threat from American General's Offer. The adoption of the Repurchase Program also appears to be consistent with this Court's holding that economic inadequacy is not the only threat presented by an all cash for all shares hostile bid, because the threat of such a hostile bid could be exacerbated by shareholder "ignorance or . . . mistaken belief." Paramount Communications, Inc. v. Time, Inc., 571 A.2d at 1153.

Proper Proportionality Burden
The Court of Chancery's legal conclusions are subject to de novo review by this Court. Merrill v. Crothall-American, Inc., Del. Supr., 606 A.2d 96, 99 (1992). The Court of Chancery's factual findings will be accepted if "they are sufficiently supported by the record and are the product of an orderly and logical deductive process." Levitt v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972).

We have already noted that the Court of Chancery made a factual finding unsupported by the record, i.e., that the increase in the percentage of ownership by the stockholder directors from 23% to 28%, resulting from the completed Repurchase Program, would make it merely theoretically possible for an insurgent to win a proxy contest. That finding was based upon a hypothetical risk which originated from the Court of Chancery's attribution of subjective "prestige and perquisite" voting motives to Unitrin's outside shareholder directors. See Stroud v. Grace, Del. Supr., 606 A.2d 75, 82 (1992). In addition, that factual finding was based upon two objective mathematically erroneous calculations regarding the relative voting strength of American General and the stockholder directors.

The Court of Chancery applied an incorrect legal standard when it ruled that the Unitrin decision to authorize the Repurchase Program was disproportionate because it was "unnecessary." The Court of Chancery stated:

"Given that the Board had already implemented the poison pill and the advance notice provision, the repurchase program was unnecessary to protect Unitrin from an inadequate bid."

In QVC, this Court recently elaborated upon the judicial function in applying enhanced scrutiny, citing Unocal as authority, albeit in the context of a sale of control and the target board's consideration of one of several reasonable alternatives. That teaching is nevertheless applicable here:

"a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the [p1386] board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness. See Unocal, 493 A.2d at 955-56; Macmillan, 559 A.2d at 1288; Nixon, 626 A.2d at 1378."

Paramount Communications, Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 45-46 (1994) (emphasis in original). The Court of Chancery did not determine whether the Unitrin Board's decision to implement the Repurchase Program fell within a "range of reasonableness."

The record reflects that the Unitrin Board's adoption of the Repurchase Program was an apparent recognition on its part that all shareholders are not alike. This Court has stated that distinctions among types of shareholders are neither inappropriate nor irrelevant for a board of directors to make, e.g., distinctions between long-term shareholders and short-term profit-takers, such as arbitrageurs, and their stockholding objectives. Id. In Unocal itself, we expressly acknowledged that "a board may reasonably consider the basic stockholder interests at stake, including those of short term speculators, whose actions may have fueled the coercive aspect of the offer at the expense of the long term investor." Unocal, 493 A.2d at 955-56. See also Ivanhoe Parmers v. Newmont Mining Corp., Del. Supr., 535 A.2d 1334, 1341-42 (1987).

The Court of Chancery's determination that the Unitrin Board's adoption of the Repurchase Program was unnecessary constituted a substitution of its business judgment for that of the Board, contrary to this Court's "range of reasonableness" holding in Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d at 45-46. Its decision to enjoin the Repurchase Program as an "unnecessary" addition to other complementary defensive mechanisms is also inconsistent with a similar analysis in Shamrock Holdings, Inc. v. Polaroid Corp., Del. Ch., 559 A.2d 278 (1989). In Shamrock, the Court of Chancery refused to enjoin any one of a series of transactions which included a repurchase plan. With respect to a repurchase program, the Court of Chancery held that a self-tender offer and buy-back plan constituted a reasonable proportionate response to the perceived threat to Polaroid shareholders by offering "some immediate value to those holders interested in cash while increasing the equity interest held by the remaining stockholders." Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d at 290. Although Shamrock dealt with an offer that did not reflect the very profitable litigation embodied in the Kodak patent case settlement and therefore implicated a potentially more serious threat than that involved here, Shamrock is nevertheless applicable considering American General's negotiable "low-ball" bid.

Range of Reasonableness
In assessing a challenge to defensive actions by a target corporation's board of directors in a takeover context, this Court has held that the Court of Chancery should [p1387]  evaluate the board's overall response, including the justification for each contested defensive measure, and the results achieved thereby. Where all of the target board's defensive actions are inextricably related, the principles of Unocal require that such actions be scrutinized collectively as a unitary response to the perceived threat. Gilbert v. El Paso Co., Del. Supr., 575 A.2d 1131, 1145 (1990). Thus, the Unitrin Board's adoption of the Repurchase Program, in addition to the poison pill, must withstand Unocal's proportionality review. Id.

In Unocal, the progenitor of the proportionality test, this Court stated that the board of directors' "duty of care extends to protecting the corporation and its [stockholders] from perceived harm whether a threat originates from third parties or other shareholders." Unocal, 493 A.2d at 955. We then noted that "such powers are not absolute." Id. Specifically, this Court held that the board "does not have unbridled discretion to defeat any perceived threat by any Draconian means available." Id. Immediately following those observations in Unocal, when exemplifying the parameters of a board's authority in adopting a restrictive stock repurchase, this Court held that "the directors may not have acted solely or primarily out of a desire to perpetuate themselves in office" (preclusion of the stockholders' corporate franchise right to vote) and, further, that the stock repurchase plan must not be inequitable. Unocal, 493 A.2d at 955 (emphasis added).

An examination of the cases applying Unocal reveals a direct correlation between findings of proportionality or disproportionality and the judicial determination of whether a defensive response was draconian because it was either coercive or preclusive in character. In Time, for example, this Court concluded that the Time board's defensive response was reasonable and proportionate since it was not aimed at 'cramming down' on its shareholders a management-sponsored alternative, i.e., was not coercive, and because it did not preclude Paramount from making an offer for the combined Time-Warner company, i.e., was not preclusive. See Paramount Communications, Inc. v. Time, Inc., Del. Supr., 571 A.2d 1140, 1154-55 (1990) (citing for comparison as coercive or preclusive disproportionate responses Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261 (1989), and AC Acquisitions Corp. v. Anderson, Clayton & Co., Del. Ch., 519 A.2d 103 (1986)).

This Court also applied Unocal's proportionality test to the board's adoption of a "poison pill" shareholders' rights plan in Moran v. Household Int'l, Inc., Del. Supr., 500 A.2d 1346 (1985). After acknowledging that the adoption of the rights plan was within the directors' statutory authority, this Court determined that the implementation of the rights plan was a proportionate response to the theoretical threat of a hostile takeover, in part, because it did not "strip" the stockholders of their right to receive tender offers and did not fundamentally restrict proxy contests, i.e., was not preclusive. Id. at 1357.

More than a century before Unocal was decided, Justice Holmes observed that the common law must be developed through its application and "cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics." Oliver Wendell Holmes, Jr., The Common Law 1 (1881). As common law applications of Unocal's proportionality standard have evolved, at least two characteristics of draconian defensive measures taken by a board of directors in responding to a threat have been brought into focus through enhanced judicial scrutiny. In the modern takeover lexicon, it is now clear that since Unocal, this Court has consistently recognized that defensive measures which are either preclusive or coercive are included within the common law definition of draconian.

If a defensive measure is not draconian, however, because it is not either coercive [p1388]  or preclusive, the Unocal proportionality test requires the focus of enhanced judicial scrutiny to shift to "the range of reasonableness." Paramount Communications, Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 45-46 (1994). Proper and proportionate defensive responses are intended and permitted to thwart perceived threats. When a corporation is not for sale, the board of directors is the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders. The fact that a defensive action must not be coercive or preclusive does not prevent a board from responding defensively before a bidder is at the corporate bastion's gate.

The ratio decidendi for the "range of reasonableness" standard is a need of the board of directors for latitude in discharging its fiduciary duties to the corporation and its shareholders when defending against perceived threats. The concomitant requirement is for judicial restraint. Consequently, if the board of directors' defensive response is not draconian (preclusive or coercive) and is within a "range of reasonableness," a court must not substitute its judgment for the board's. Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d at 45-46.

Proportionate With Poison Pill
In this case, the initial focus of enhanced judicial scrutiny for proportionality requires a determination regarding the defensive responses by the Unitrin Board to American General's offer. We begin, therefore, by ascertaining whether the Repurchase Program, as an addition to the poison pill, was draconian by being either coercive or preclusive.

A limited nondiscriminatory self-tender, like some other defensive measures, may thwart a current hostile bid, but is not inherently coercive. Moreover, it does not necessarily preclude future bids or proxy contests by stockholders who decline to participate in the repurchase. ''Cf. AC Acquisitions Corp. v. Anderson, Clayton & Co.'', Del. Ch., 519 A.2d 103 (1986) (enjoining a coercive self-tender and restructuring plan). A selective repurchase of shares in a public corporation on the market, such as Unitrin's Repurchase Program, generally does not discriminate because all shareholders can voluntarily realize the same benefit by selling. See Larry E. Ribstein, Takeover Defenses and the Corporate Contract, 78 Geo. L.J. 71, 129-31 (1989). See also Michael Bradley & Michael Rosenzweig, Defensive Stock Repurchases, 99 Harv. L. Rev. 1377 (1986). Here, there is no showing on this record that the Repurchase Program was coercive.

We have already determined that the record in this case appears to reflect that a proxy contest remained a viable (if more problematic) alternative for American General even if the Repurchase Program were to be completed in its entirety. Nevertheless, the Court of Chancery must determine whether Unitrin's Repurchase Program would only inhibit American General's ability to wage a proxy fight and institute a merger or whether it was, in fact, preclusive because [p1389] American General's success would either be mathematically impossible or realistically unattainable. If the Court of Chancery concludes that the Unitrin Repurchase Program was not draconian because it was not preclusive, one question will remain to be answered in its proportionality review: whether the Repurchase Program was within a range of reasonableness?

The Court of Chancery found that the Unitrin Board reasonably believed that American General's Offer was inadequate and that the adoption of a poison pill was a proportionate defensive response. Upon remand, in applying the correct legal standard to the factual circumstances of this case, the Court of Chancery may conclude that the implementation of the limited Repurchase Program was also within a range of reasonable additional defensive responses available to the Unitrin Board. In considering whether the Repurchase Program was within a range of reasonableness the Court of Chancery should take into consideration whether: (1) it is a statutorily authorized form of business decision which a board of directors may routinely make in a non-takeover context; (2) as a defensive response to American General's Offer it was limited and corresponded in degree or magnitude to the degree or magnitude of the threat, (i. e., assuming the threat was relatively "mild," was the response relatively "mild?"); (3) with the Repurchase Program, the Unitrin Board properly recognized that all shareholders are not alike, and provided immediate liquidity to those shareholders who wanted it.

The Court of Chancery's holding in Shamrock, cited with approval by this Court in Time, appears to be persuasive support for the proportionality of the multiple defenses Unitrin's Board adopted. In Shamrock, the Court of Chancery concluded that the Polaroid board had "a valid basis for concern that the Polaroid stockholders [like Unitrin's stockholders] will be unable to reach an accurate judgment as to the intrinsic value of their stock." Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d at 290. The Court of Chancery also observed, "the likely shift in the stockholder profile in favor of Polaroid" as a result of the repurchase plan "appears to be minimal." Id. Consequently, the Court of Chancery concluded that Polaroid's defensive response as a whole -- the ESOP, the issuance of stock to a friendly third party and the stock repurchase plan -- was not disproportionate to the Shamrock threat or improperly motivated, and "individually or collectively will [not] preclude the successful completion of Shamrock's tender offer." Id. at 288.

American General argues that the all cash for all shares offer in Shamrock is distinguishable because Shamrock involved a hostile tender offer, whereas this case involves a fully negotiable Offer to enter into a consensual merger transaction. Nevertheless, American General acknowledges that a determinative factor in Shamrock was a finding that the defensive responses had only an incidental effect on the stockholder profile for the purpose of a proxy contest, i.e., was not preclusive. See id. at 286-288. In Shamrock, the Court of Chancery's proportionality holding was also an implicit determination that the series of multiple defensive responses were within a "range of reasonableness."

Remand to Chancery
In this case, the Court of Chancery erred by substituting its judgment, that the Repurchase Program was unnecessary, for that of the Board. The Unitrin Board had the power and the duty, upon reasonable investigation, to protect Unitrin's shareholders from what it perceived to be the threat [p1390]  from American General's inadequate all-cash for all-shares Offer. Unocal, 493 A.2d at 958. The adoption of the poison pill and the limited Repurchase Program was not coercive and the Repurchase Program may not be preclusive. Although each made a takeover more difficult, individually and collectively, if they were not coercive or preclusive the Court of Chancery must determine whether they were within the range of reasonable defensive measures available to the Board. Accord Cheff v. Mathes, Del. Supr., 41 Del. Ch. 494, 199 A.2d 548, 554-56 (1964).

If the Court of Chancery concludes that individually and collectively the poison pill and the Repurchase Program were proportionate to the threat the Board believed American General posed, the Unitrin Board's adoption of the Repurchase Program and the poison pill is entitled to review under the traditional business judgment rule. The burden will then shift "back to the plaintiffs who have the ultimate burden of persuasion [in a preliminary injunction proceeding] to show a breach of the director's fiduciary duties." Moran v. Household Int'l, Inc., Del. Supr., 500 A.2d 1346, 1356 (1985) (citing Unocal, 493 A.2d at 958). In order to rebut the protection of the business judgment rule, the burden on the plaintiffs will be to demonstrate, "by a preponderance of the evidence that the directors' decisions were primarily based on [(1)] perpetuating themselves in office or [(2)] some other breach of fiduciary duty such as fraud, overreaching, lack of good faith, or [(3)] being uninformed." Unocal, 493 A.2d at 958 (emphasis added).

American General's Alternative Argument
American General's alternative argument on appeal is that the preliminary injunction should be affirmed, notwithstanding the reversible error that has been identified in the Court of Chancery's Unocal analysis, based upon breaches by the Unitrin Board of its duties of care, loyalty and disclosure. See A.I.D. v. P.M.D., Del. Supr., 408 A.2d 940, 942 (1979). We recognize that this Court may affirm on the basis of a different rationale than that which was articulated by the trial court. We also recognize that this Court may rule on an issue fairly presented to the trial court, even if it was not addressed by the trial court. Standard Distrib. Co. v. Nally, Del. Supr., 630 A.2d 640, 647 (1993).

Because of its erroneous determination under Unocal, the Court of Chancery did not reach American General's claims that the Unitrin defendants breached their duties of due care, disclosure and loyalty in connection with the adoption of the Repurchase Program. We have concluded that it would be inequitable to take the alternative course of action American General advocates in this expedited interlocutory appeal. The Court of Chancery should have the opportunity to address those alternative breach of duty arguments in the first instance.

Equitable Remedy

Preliminary Injunction

Unitrin's alternative argument is that the Court of Chancery should not have enjoined the Repurchase Program, even if it was not entirely persuaded that the Program's enactment was within a range of reasonableness. According to Unitrin, under such circumstances in the context of a preliminary injunction proceeding, the appropriate equitable remedy would have been to enjoin the defendants from exercising any increase in their voting power as shareholders that resulted from the Repurchase Program. Upon remand, it may be necessary for the Court of Chancery to address Unitrin's alternative argument.

After applying Unocal's proportionality test, the Court of Chancery may conclude that Unitrin's Repurchase Program was within the range of reasonableness. Nevertheless, this Court recognizes that in all preliminary injunction proceedings, after an application of Unocal's proportionality test, a bright line might not appear to delineate [p1391]  that a repurchase program is clearly within the range of reasonableness, even if it is clearly not coercive or preclusive. In such an ambiguous factual circumstance, the Court of Chancery could properly conclude that a non-coercive and non-preclusive repurchase program should not be enjoined. Yet, in balancing the potential hardships to the parties, it has broad power to fashion an equitable remedy. Therefore, it might enter a preliminary injunction against the voting rights which would accrue to the defendants from the non-preclusive and noncoercive repurchase program, until such time as there has been a trial on the merits of the plaintiffs' complaint with regard to reasonableness.

Conclusion
We hold that the Court of Chancery correctly determined that the Unocal standard of enhanced judicial scrutiny applied to the defensive actions of the Unitrin defendants in establishing the poison pill and implementing the Repurchase Program. The Court of Chancery's finding, that the Repurchase Program was a disproportionate defensive response, was based on faulty factual predicates, unsupported by the record. This error was exacerbated by its application of an erroneous legal standard of "necessity" to the Repurchase Program as a defensive response.

The interlocutory judgment of the Court of Chancery, in favor of American General, is REVERSED. This matter is REMANDED for further proceedings in accordance with this opinion. The mandate shall issue at

4:30 p.m. on January 16, 1995. Supr. Ct. R. 19(a).


text:
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 2 institutions which are being studied by the new and vigorous science of Institutional Archæology. And in studying the literature of the people—the ballad, the fairy-tale, the proverb, the chap-book—Folk-lore has often to resort for elucidation to the products of individual artistic creation which go to form Literature properly so-called, especially in that mediaeval phase of it that is known as Romance. And finally, as it has been found by practice that much of Folk-lore that eludes explanation from the thoughts and customs of civilised peoples finds ready elucidation from savage practice and belief, Folk-lore has here points of contact with Ethnography and Anthropology.

It has been thought fit that the enlarged scope and outlook that Folk-lore has reached in the present state of the science should find full recognition in the official organ of the Folk-Lore Society, henceforth to be called by the name of the science. will accordingly welcome contributions dealing with the above-named cognate sciences so far as they throw light on popular usage and belief. It will record from time to time, in special reports, recent research in these studies that may tend to throw light on the obscurer problems of Folk-lore. One of these studies is so intimately connected with it that no research in Institutional Archæology can be considered as altogether alien to Folk-lore. will, therefore, in this direction take over the functions performed almost exclusively in this country by the Archæological Review, and will welcome any contribution throwing light on the origin or development of institutions other than those brought into existence by the direct action of the State. And in all these studies an attempt will be made to give exact and prompt bibliographical information of noteworthy contributions in books or articles published at home and abroad. Readers of are requested to aid it in this attempt by forwarding to its Editor references to any of this kind that they think likely to escape notice.

license: Creative Commons - Attribution Share-Alike - https://creativecommons.org/licenses/by-sa/4.0/


text: Talk:Unitrin, Inc. v. American General Corp.


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ENGLISH AND SCOTCH FAIRY TALES.

HERE was a king and a queen, as mony anes been, few have we seen, and as few may we see. The queen she deeit, and left a bonnie little lassie; and she had naething to gie to the wee lassie but a little red calfy, and she telt the lassie whatever she wanted, the calfy would gie her. The king married again, an ill-natured wife, wi’ three ugly dochters o’ her ain. They did na like the little lassie because she was bonnie; they took awa’ a’ her braw claes that her ain mither had geen her, and put a rashin coatie on her, and gart her sit in the kitchen neuk, and a’ body ca’d her Rashin Coatie. She did na get ony thing to eat but what the rest left, but she did na care, for she went to her red calfy, and it gave her everything she asked for. She got good meat from the calfy, but her ill-natured step-mother gart the calfy be killed, because it was good to Rashin Coatie. She was very sorry for the calfy, and sat down and grat. The dead calfy said to her:


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 288 and whatever you want, come and seek it frae me, and I will give you it.” Yuletide came, and a’ the rest put on their braw claes, and was gaen awa’ to the kirk. Rashin Coatie said, “Oh, I wad like to gang to the kirk too!” but the others said, “What would you do at the kirk, you nasty thing? You must bide at hame and make the dinner.” When they were gone to the kirk, Rashin Coatie did na ken how to make the dinner, but she went out to the grey stone, and she told the calfy that she could not make the dinner, and she wanted to win to the kirk. The calfy gave her braw claes, and bade her gang into the house, and say:

Rashin Coatie put on the braw claes that the calfy gave her, and went awa’ to the kirk, and she was the grandest and the brawest lady there. There was a young prince in the kirk, and he fell in love with her. She cam’ awa’ before the blessing, and she was hame before the rest, and had off her braw claes, and had on her rashin coatie, and the calfy had covered the table, and the dinner was ready, and every thing in good order when the rest came hame. The three sisters said to Rashin Coatie, “Oh, lassie, if you had only seen the braw bonnie lady that was in kirk to-day, that the young prince fell in love with!” She said: “Oh, I wish you would let me gang with you to the kirk to-morrow”; for they used to gang three days after ither to the kirk. They said: “What should the like o’ you do at the kirk—nasty thing? The kitchen neuk is good enough for you.” The next day they went away and left her, but she went back to her calfy, and he bade her repeat the same words as before, and he gave her brawer claes, and she went back to the kirk, and a’ the world was looking at her, and wondering where sic a grand lady came from; and as for the young prince, he fell more in love with her than ever, and bade somebody watch where she went back to. But she was back afore anybody saw her, and had off her braw claes


text: Shaving Made Easy/Chapter 1

title: Shaving Made Easy/Chapter 1


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 Rh and on her rashin coatie, and the calfy had the table covered, and everything ready for the dinner.

The next day the calfy dressed her in brawer claes than ever, and she went back to the kirk. The young prince was there, and he put a guard at the door to keep her, but she jumped over their heads, and lost one of her beautiful satin slippers. She got hame before the rest, and had on the rashin coatie, and the calfy had all things ready. The young prince put out a proclamation that he would marry whoever the satin slipper would fit All the ladies of the land went to try on the slipper, and with the rest the three sisters, but none would it fit, for they had ugly broad feet. The hen wife took in her daughter, and cut her heels and her toes, and the slipper was forced on her, and the prince must marry her, for he had to keep his promise. As he rode along with her behind him to be married, there was a bird began to sing, and ever it sang:

The prince said, “What is that the bird sings?” but the hen wife said, “Nasty lying thing! never mind what it says”; but the bird sang ever the same words. The prince said, “Oh, there must be some one that the slipper has not been tried on”; but they said, “There is none but a poor dirty thing that sits in the kitchen neuk and wears a rashin coatie.” But the prince was determined to try it on Rashin Coatie, but she ran awa’ to the grey stone, where the red calf dressed her yet brawer than ever, and she went to the prince, and the slipper jumped out of his pocket and on to her foot, and the prince married her, and they lived happy all their days.


text: Dictionary of National Biography, 1885-1900/Bradley, James


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 292 II.—.

There once lived a king and a queen. They were long married and had no bairns; but at last the queen had a bairn, when the king was away in far countries. The queen would not christen the bairn till the king came back, and she said, “We will just call him Nicht Nought Nothing until his father comes home.” But it was long before he came home, and the boy had grown a nice little laddie. At length the king was on his way back; but he had a big river to cross, and there was a spate, and he could not get over the water. But a giant came up to him, and said, “If you will give me Nicht Nought Nothing, I will carry you over the water on my back.” The king had never heard that his son was called Nicht Nought Nothing, and so he promised him. When the king got home again, he was very happy to see his wife again, and his young son. She told him that she had not given the child any name, but Nicht Nought Nothing, until he should come home again himself. The poor king was in a terrible case. He said, “What have I done? I promised to give the giant who carried me over the river on his back, Nicht Nought Nothing.” The king and the queen were sad and sorry, but they said, “When the giant comes we will give him the hen-wife’s bairn; he will never know the difference.” The next day the giant came to claim the king’s promise, and he sent for the hen-wife’s bairn; and the giant went away with the bairn on his back. He travelled till he came to a big stone, and there he sat down to rest. He said:

“Hidge, Hodge, on my back, what time of day is it?”

The poor little bairn said, “It is the time that my mother, the hen-wife, takes up the eggs for the queen’s breakfast.”

The giant was very angry, and dashed the bairn on the stone and killed it.


text: Dictionary of National Biography, 1885-1900/Bridge, Richard


text: Dictionary of National Biography, 1885-1900/Bridge, William


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 Rh The same adventure is repeated with the gardener’s son.

Then the giant went back to the king’s house, and said he would destroy them all if they did not give him Nicht Nought Nothing this time. They had to do it; and when he came to the big stone, the giant said, “What time of day is it?” Nicht Nought Nothing said, “It is the time that my father the king will be sitting down to supper.” The giant said, “I’ve got the richt ane noo”; and took Nicht Nought Nothing to his own house and brought him up till he was a man.

The giant had a bonny dochter, and she and the lad grew very fond of each other. The giant said one day to Nicht Nought Nothing, “I’ve work for you to-morrow. There is a stable seven miles long and seven miles broad, and it has not been cleaned for seven years, and you must clean it to-morrow, or I will have you for my supper.”

The giant’s dochter went out next morning with the lad’s breakfast, and found him in a terrible state, for aye as he cleaned out a bit, it aye fell in again. The giant’s dochter said she would help him, and she cried a’ the beasts of the field, and a’ the fowls o’ the air, and in a minute they a’ came, and carried awa’ everything that was in the stable and made a’ clean before the giant came home. He said “Shame for the wit that helped you; but I have a worse job for you to-morrow.” Then he told Nicht Nought Nothing that there was a loch seven miles long, and seven miles deep, and seven miles broad, and he must drain it the next day, or else he would have him for his supper. Nicht Nought Nothing began early next morning and tried to lave the water with his pail, but the loch was never getting any less, and he did no ken what to do; but the giant’s dochter called on all the fish in the sea to come and drink the water, and very soon they drank it dry. When the giant saw the work done he was in a rage, and said, “I’ve a worse job for you to-morrow; there is a tree seven


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 294 miles high, and no branch on it, till you get to the top, and there is a nest, and you must bring down the eggs without breaking one, or else I will have you for my supper.” At first the giant’s dochter did not know how to help Nicht Nought Nothing; but she cut off first her fingers and then her toes, and made steps of them, and he clomb the tree, and got all the eggs safe till he came to the bottom, and then one was broken. The giant’s dochter advised him to run away, and she would follow him. So he travelled till he came to a king’s palace, and the king and queen took him in and were very kind to him. The giant’s dochter left her father’s house, and he pursued her and was drowned. Then she came to the king’s palace where Nicht Nought Nothing was. And she went up into a tree to watch for him. The gardener’s dochter, going to draw water in the well, saw the shadow of the lady in the water, and thought it was herself, and said, “If I’m so bonny, if I’m so brave, do you send me to draw water?” The gardener’s wife went out, and she said the same thing. Then the gardener went himself, and brought the lady from the tree, and led her in. And he told her that a stranger was to marry the king’s dochter, and showed her the man: and it was Nicht Nought Nothing asleep in a chair. And she saw him, and cried to him, “Waken, waken, and speak to me!” But he would not waken, and syne she cried:

The king and the queen heard this, and came to the bonny young lady, and she said:

“I canna get Nicht Nought Nothing to speak to me for all that I can do.”

Then were they greatly astonished when she spoke of Nicht Nought Nothing, and asked where he was, and she said, “He that sits there in the chair.” Then they ran


text: Translation:Romance of the Three Kingdoms/Chapter 14


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 Rh to him and kissed him and called him their own dear son, and he wakened, and told them all that the giant’s dochter had done for him, and of all her kindness. Then they took her in their arms and kissed her, and said she should now be their dochter, for their son should marry her.

And they lived happy all their days.

III.—.

Well, there was once a very rich gentleman, and he’d three daughters, and he thought to see how fond they was of him. So he says to the first, “How much do you love me, my dear?”

“Why,” says she, “as I love my life.”

“That’s good,” says he.

So he says to the second, “How much do you love me, my dear?”

“Why,” says she, “better nor all the world.”

“That’s good,” says he.

So he says to the third, “How much do you love me, my dear?”

“Why, I love you as fresh meat loves salt” says she.

Well, he were that angry. “You don’t love me at all,” says he, “and in my house you stay no more.” So he drove her out there and then, and shut the door in her face.

Well, she went away on and on till she came to a fen, and there she gathered a lot of rushes and made them into a cloak, kind o’, with a hood, to cover her from head to foot, and to hide her fine clothes. And then she went on and on till she came to a great house.

“Do you want a maid?” says she,


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 296 “No, we don’t,” says they.

“I haint nowhere to go,” says she, “and I’d ask no wages, and do any sort o’ work,” says she.

“Well,” says they, “if you like to wash the pots and scrape the saucepans you may stay,” says they.

So she stayed there and washed the pots and scraped the saucepans and did all the dirty work. And because she gave no name they called her “Cap o’ Rushes”.

Well, one day there was to be a great dance a little way off, and the servants was let to go and look at the grand people. Cap o’ Rushes said she was too tired to go, so she stayed at home.

But when they was gone she offed her cap o’ rushes, and cleaned herself, and went to the dance. And no one there was so finely dressed as her.

Well, who should be there but her master’s son, and what should he do but fall in love with her the minute he set eyes on her. He wouldn’t dance with anyone else.

But before the dance was done Cap o’ Rushes she slipt off, and away she went home. And when the other maids was back she was framin’ to be asleep with her cap o’ rushes on.

Well, next morning they says to her, “You did miss a sight, Cap o’ Rushes!”

“What was that?” says she.

“Why, the beautifullest lady you ever see, dressed right gay and ga’. The young master, he never took his eyes off of her.”

“Well, I should ha’ liked to have seen her,” says Cap o’ Rushes.

“Well, there’s to be another dance this evening, and perhaps she’ll be there.”

But, come the evening, Cap o’ Rushes said she was too tired to go with them. Howsumdever, when they was gone, she offed with her cap o’ rushes and cleaned herself, and away she went to the dance.

The master’s son had been reckoning on seeing her, and


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 Rh he danced with no one else, and never took his eyes off of her. But, before the dance was over, she slipt off, and home she went, and when the maids came back she framed to be asleep with her cap o’ rushes on.

Next day they says to her again, “Well, Cap o’ Rushes, you should ha’ been there to see the lady. There she was again, gay and ga’, and the young master he never took his eyes off of her.”

“Well, there,” says she, “I should ha’ liked to ha’ seen her.”

“Well,” says they, “there’s a dance again this evening, and you must go with us, for she’s sure to be there.”

Well, come this evening, Cap o’ Rushes said she was too tired to go, and do what they would she stayed at home. But when they was gone she offed with her cap o’ rushes and cleaned herself, and away she went to the dance.

The master’s son was rarely glad when he saw her. He danced with none but her and never took his eyes off her. When she wouldn’t tell him her name, nor where she came from, he gave her a ring and told her if he didn’t see her again he should die.

Well, afore the dance was over, off she slipped, and home she went, and when the maids came home she was framing to be asleep with her cap o’ rushes on.

Well, next day they says to her, “There, Cap o’ Rushes, you didn’t come last night, and now you won’t see the lady, for there’s no more dances.”

“Well, I should ha’ rarely liked to ha’ seen her,” says she.

The master’s son he tried every way to find out where the lady was gone, but go where he might, and ask whom he might, he never heard nothing about her. And he got worse and worse for the love of her till he had to keep his bed.

“Make some gruel for the young master,” they says to the cook; “he’s dying for the love of the lady.” The cook she set about making it when Cap o’ Rushes came in.