The White Knight Defense in United States Corporate Law

The White Knight Defense in United States Corporate Law: A Strategic and Legal Analysis

Introduction

In the landscape of corporate control contests, the "white knight" defense represents a significant strategic option for a target company's board of directors aiming to fend off an unsolicited, or "hostile," takeover bid. A white knight is a friendly third-party acquirer sought out by the target company to make a counteroffer, thereby providing an alternative to the hostile bid.[1] This strategy is typically employed when the target's board believes the hostile offer is inadequate, coercive, or otherwise detrimental to the corporation and its shareholders. The engagement of a white knight can lead to a more favorable outcome for shareholders, either through a higher acquisition price or a more strategically aligned merger. This article analyzes the white knight defense under United States federal and state law, with a particular emphasis on Delaware corporate jurisprudence, which is highly influential in this domain. It will explore the conceptual underpinnings, the legal framework governing its deployment—including directors' fiduciary duties and applicable standards of judicial review—strategic implementation, and distinguish this corporate defense from other uses of similar terminology in disparate legal contexts.

I. Conceptual Framework and Rationale

The emergence of the white knight strategy is intrinsically linked to the rise of hostile takeover activity. Target company boards, faced with what they perceive as predatory bids, began to explore mechanisms to preserve corporate policy or secure better terms for shareholders. As articulated in Staffin v. Greenberg, the board of Bluebird, confronted by activities from an acquirer they deemed a "marauder," decided to "seek a 'white knight,' that is, a friendly merger partner who would save the company from control by" the hostile party.[1] This illustrates a primary motivation: the protection of the company from an acquirer whose interests are not perceived to align with the long-term welfare of the corporation or its shareholders.

The rationale for seeking a white knight often extends beyond merely thwarting an unwelcome suitor. As detailed in the context of Allied Stores' response to Campeau's hostile tender offer in Matter of Federated Dept. Stores, Inc., the target board may deem the hostile offer's price inadequate.[5], [6] In such circumstances, the board resolves to investigate "alternative defensive measures to block the Campeau hostile offer, and as a result, decided to explore recapitalization plans, asset sales, corporate acquisitions, leveraged buyouts, and white knight mergers."[5], [6] The white knight, therefore, can represent an opportunity to maximize shareholder value by eliciting a superior offer or by merging with a partner offering better long-term strategic synergies.

II. The Legal Landscape: Directors' Fiduciary Duties and Judicial Scrutiny

The decision by a board of directors to employ a white knight defense, like other defensive measures, is subject to judicial review, primarily under state corporate law. Directors owe fiduciary duties of care and loyalty to the corporation and its stockholders. The application of these duties in the context of takeover defenses has led to specific standards of judicial scrutiny.

A. The Business Judgment Rule as a Starting Point

Ordinarily, director decisions are protected by the business judgment rule, which presumes 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.[2] Moran v. Household Intern., Inc. noted that "sale to White Knight" is one of several defensive measures directors might employ.[2] The court in Moran further observed that "pre-planning for the contingency of a hostile takeover might reduce the risk that, under the pressure of a takeover bid, management will fail to exercise reasonable judgment," suggesting that the business judgment rule is appropriately applied to such pre-planned defensive mechanisms.[2] However, the adoption of defensive measures in the face of a specific takeover threat often invites a more rigorous standard of review.

B. Enhanced Scrutiny: The Unocal Standard

When a board implements defensive measures in response to a perceived threat to corporate policy and effectiveness, Delaware courts apply an enhanced scrutiny standard, famously articulated in Unocal Corp. v. Mesa Petroleum Co.[14] This standard, more exacting than the traditional business judgment rule, requires directors to demonstrate: (1) that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed, which involves showing good faith and reasonable investigation; and (2) that the defensive response was reasonable in relation to the threat posed (proportionality). The Unocal standard is pivotal in assessing the legitimacy of seeking a white knight and the terms agreed upon with such a party. As discussed in Unitrin, Inc. v. American General Corp., defensive responses are evaluated for proportionality, ensuring they are not "draconian" by being coercive or preclusive.[7]

C. The Revlon Duties: When the Company is for Sale

A critical modification of the directors' duties occurs when the sale or break-up of the company becomes inevitable. In such circumstances, under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the directors' primary responsibility shifts from defending the corporate bastion to maximizing the company's value for the stockholders' benefit.[3] The board's role effectively becomes that of an auctioneer, charged with obtaining the best possible price for the shareholders. The Revlon court scrutinized lock-up provisions and other related agreements granted to a white knight (Forstmann Little in that case), emphasizing that such measures are permissible only if "untaimed by director interest or other breaches of fiduciary duty" and must confer a benefit upon the stockholders.[3] If a white knight transaction is pursued, the board must ensure it does not unduly favor the white knight to the detriment of potentially higher offers from the hostile bidder or others, unless such favoritism (e.g., reasonable break-up fees) is necessary to induce the white knight's bid and ultimately benefits shareholders.[5], [6] The concern for various corporate constituencies, while generally proper, is limited under Revlon by "the requirement that there be some rationally related benefit accruing to the stockholders."[3]

III. Strategic Implementation and Associated Measures

A. The Search for and Engagement of a White Knight

The process of engaging a white knight involves identifying suitable candidates, initiating discussions, and negotiating terms, often under intense time pressure due to an active hostile bid. As seen in Staffin v. Greenberg, Bluebird's board members considered Northern Foods, Ltd. as a potential white knight with whom they had prior discussions.[1] Similarly, Allied Stores, after rejecting Campeau's offer, "began negotiating a possible merger with DeBartolo in what is known as a 'white knight' transaction."[5], [6] These negotiations frequently involve considerations beyond price, such as management retention, strategic fit, and the speed and certainty of closing the transaction.

B. The "White Knight Privilege" in Litigation

In the context of litigation arising from hostile tender offers, target companies may assert a "white knight privilege" to protect the confidentiality of ongoing negotiations with potential friendly acquirers. In BNS Inc. v. Koppers Company, Inc., the plaintiff sought documents related to Koppers's analysis of BNS's offer and alternative defensive measures.[4] BNS conceded that "the identities of any third parties with which Koppers is currently negotiating the sale of its assets or any part thereof" were protected by the white knight privilege.[4] This limited privilege acknowledges the sensitive nature of such negotiations and the potential harm to the target's ability to secure a favorable alternative if premature disclosure is compelled.

C. Interaction with Other Defensive Tactics

The white knight defense is often deployed as part of a broader defensive strategy. It can be used in conjunction with other measures such as shareholder rights plans ("poison pills"),[2], [8] sale of treasury shares or grant of stock options to the white knight,[2] or the "crown jewel" defense (selling valuable assets to make the target less attractive to the hostile bidder, or more attractive to the white knight).[5], [6] The Matter of Federated Dept. Stores, Inc. cases illustrate how Allied Stores explored a "crown jewel" defense and also negotiated "break-up" protections for its white knight, DeBartolo, including a per-share fee and expense reimbursement if the merger failed.[5], [6] Such deal protection measures must withstand scrutiny under the Unocal and Revlon standards to ensure they are not overly preclusive and serve shareholder interests.[3] Empirical studies cited in In re Gaylord Container Corp. Shareholders Litigation suggest that an array of defensive measures, including rights plans, do not necessarily deter takeovers but may be associated with higher offer rates and premiums, a context relevant to the board's decision to employ a white knight strategy.[8]

IV. Distinguishing the Corporate White Knight Defense from Other Legal Contexts

It is important to distinguish the corporate "white knight defense" as a term of art in mergers and acquisitions from uses of "white knight" or "defense" in unrelated legal fields, some of which appear in the provided reference materials. For instance:

  • In criminal law, "defense" refers to a defendant's legal arguments and evidence presented to counter the prosecution's case, as seen in Knighton v. Mullin, where the defendant argued another individual committed the crime.[9] This is wholly distinct from corporate takeover defenses.
  • The term "self-defense" in criminal law, discussed in State v. Kirkpatrick, is an affirmative defense justifying the use of force and bears no relation to corporate strategies.[10]
  • In Lints v. Graco Fluid Handling (A) Inc., "White Knight's second affirmative defense" refers to a defense raised by a corporate defendant named "White Knight" in an employment dispute.[11] Here, "White Knight" is a proper noun identifying the litigant, not a description of a takeover strategy.
  • Similarly, the cases involving White Knight Diner LLC (e.g., White Knight Diner LLC v. Owners Ins. Co.) concern a business entity named "White Knight Diner" involved in insurance and contract disputes.[12], [13] The name is coincidental and does not implicate the corporate takeover defense.

These examples underscore that while the term "defense" is ubiquitous in law, and "white knight" may appear as a party name or colloquialism, the "white knight defense" in the context of this article refers specifically to the corporate strategy of engaging a friendly acquirer to counter a hostile takeover bid.

V. Conclusion

The white knight defense remains a potent and legally recognized strategy within the arsenal of a target company's board of directors in the United States. Governed by fundamental principles of fiduciary duty and subject to rigorous judicial scrutiny under standards such as Unocal and Revlon, its deployment requires a careful balancing of directorial discretion with the paramount interest of shareholder welfare. While federal securities laws, such as the Williams Act,[15] regulate the tender offer process itself, state corporate law provides the substantive rules for board conduct in responding to such offers. The white knight defense, when pursued diligently, in good faith, and with a demonstrable benefit to shareholders, serves as a critical mechanism for ensuring that corporate control transactions unfold in a manner that maximizes shareholder value and protects legitimate corporate interests. Its continued relevance underscores the dynamic interplay between market forces, corporate governance, and legal oversight in the realm of mergers and acquisitions.

References

  1. Staffin v. Greenberg, 672 F.2d 1196 (3d Cir. 1982).
  2. Moran v. Household Intern., Inc., 500 A.2d 1346 (Del. 1985). (Citing, inter alia, Treadway Cos., Inc. v. Care Corp., 638 F.2d 357 (2d Cir. 1980) for "sale to White Knight").
  3. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
  4. BNS Inc. v. Koppers Company, Inc., 683 F. Supp. 458 (D. Del. 1988).
  5. Matter of Federated Dept. Stores, Inc., 135 B.R. 950 (Bankr. S.D. Ohio 1992).
  6. Matter of Federated Dept. Stores, Inc., 135 B.R. 962 (Bankr. S.D. Ohio 1992). (Note: These two citations refer to opinions in the same overarching bankruptcy case, often cited together or for distinct aspects of the proceedings).
  7. Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995).
  8. In re Gaylord Container Corp. Shareholders Litigation, 753 A.2d 462 (Del. Ch. 2000).
  9. Knighton v. Mullin, 293 F.3d 1165 (10th Cir. 2002).
  10. State v. Kirkpatrick, 286 Kan. 329, 184 P.3d 247 (2008).
  11. Lints v. Graco Fluid Handling (A) Inc., 347 F. Supp. 3d 990 (D. Utah 2018).
  12. White Knight Diner LLC v. Owners Ins. Co., 552 F. Supp. 3d 853 (E.D. Mo. 2021).
  13. White Knight Diner, LLC v. Owners Ins. Co., 63 F.4th 737 (8th Cir. 2023).
  14. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
  15. Williams Act, Pub.L. 90–439, 82 Stat. 454 (1968), codified in relevant part at 15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f).
  16. Delaware General Corporation Law, e.g., 8 Del. C. § 101 et seq. (providing the general statutory framework for corporations domiciled in Delaware, including board powers under § 141(a)).