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Guhan Subramanian, The Emerging Problem of Embedded Defenses: Lessons from Air Line Pilots Ass’n, Int'l v. UAL Corp., 120 Harv. L. Rev. 1239 (2007).

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 defenses 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. 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.♦, 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 “embedded defenses” 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 defenses that draws heavily from Judge Posner's approach in ♦UAL♦. Such an approach will be important as boards increasingly engage in “defense substitution” away from the most important takeover defense of the past twenty years, the poison pill.