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• W137443045 abstract "How should courts regulate contract terms with nonshareholder constituencies that have an antitakeover effect? On one hand, contracts formed in the ordinary course of business would seem to be at the very core of operational decisionmaking, over which courts have traditionally exercised deferential business judgment review. On the other hand, contracts can have antitakeover effects, and takeover have long been subject to heightened intermediate scrutiny under Delaware corporate law due to the omnipresent specter that boards may be acting to entrench themselves. (1) Despite the seemingly fundamental nature of the question, it has, to my knowledge, been addressed only once in U.S. corporate law. The case was Air Line Pilots Ass'n, International v. UAL Corp., (2) which involved the short-lived business strategy of UAL, the parent of United Airlines, in the mid-1980s. Fortunately, the judge was Richard Posner, writing for a Seventh Circuit panel. Judge Posner affirmed a district court ruling that certain contractual provisions in a United Airlines collective bargaining agreement with its machinists' union violated Delaware corporate law. In doing so, Judge Posner suggested an approach toward defenses (3) that was not Delaware corporate law at the time but has increasingly become Delaware law over the past fifteen years. Like many great judges, Judge Posner was ahead of his time. This Commentary proposes a general approach toward embedded that draws heavily from Judge Posner's approach in UAL. Such an approach will be important as boards increasingly engage in substitution away from the most important takeover defense of the past twenty years, the poison pill. I. SUMMARY OF THE CASE In the mid-1980s, UAL bought Hertz, a leading car rental company, and Hilton International, a leading hotel chain, as part of an effort to become a full-service travel company. (4) The strategy proved less than successful: by January 1987, UAL's stock price was down fifteen percent from its 1986 peak, (5) and employee morale had deteriorated. (6) That April, the United pilots' union proposed a $4.5-billion highly leveraged employee buyout of the airline. (7) The pilots' plan envisioned the sale of the hotel and car rental businesses and would have given employees ownership of the airline in proportion to the wage and benefit concessions made by each employee group. (8) UAL's board unanimously rejected the proposal, concluding that its integrated travel services strategy was superior to the pilots' restructuring plan. (9) The board was able to block the pilots' offer through a dead-hand poison pill, which it had adopted in December 1986. (10) The International Association of Machinists (IAM), which represented approximately one-third of UAL's employees, also opposed the pilots' proposal because IAM preferred the integrated strategy and believed that the pilots' proposal would cause significant job losses in IAM's ranks. (11) Immediately after the pilots--in IAM's words--dropped their atomic warhead, IAM broke off the negotiations that were underway with UAL for a new collective bargaining agreement. (12) UAL and IAM eventually resumed talks and announced a new collective bargaining agreement that included several protective covenants designed to respond to the still-pending pilots' offer. (13) Section B(1)(b) of the agreement provided that, in the event of any change in control, IAM could file a notice under section 6 of the Railway Labor Act (14) that would allow the union to strike even though IAM had previously given up that right. (15) Section C allocated any UAL employee stock plan to each labor group by reference to wages, (16) in contrast to the pilots' proposal, which would have allocated employee participation in proportion to the magnitude of concessions from current wages. Because IAM believed that the pilots were overpaid and the machinists were underpaid relative to the rest of the airline industry, IAM wanted a market wages test for allocating employee ownership in any reconstituted company. …" @default.
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• W137443045 date "2007-03-01" @default.
• W137443045 modified "2023-09-28" @default.
• W137443045 title "The emerging problem of embedded defenses: Lessons from Air Line Pilots Ass'n, International v. UAL corp." @default.
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