"Just Say No" Defense

A "just say no" defense is a strategy used by corporations to discourage hostile takeovers in which board members reject a takeover bid outright. The legality of a just say no defense may depend on whether the target company has a long-term strategy that it is pursuing, which can include a merger with a firm other than the one making the takeover bid, or if the takeover bid undervalues the company.

The term refers to the "Just Say No" anti-drug campaign of the early 1980s and repeated by former First Lady Nancy Reagan as part of a campaign to advocate against drug use. An early use of the term referred to NCR Corp.'s takeover defense against AT&T in 1990. After rejecting AT&T`s initial $6.08 billion $90-a-share tender offer, NCR's board of directors stated that they intended to "just say no" to the telephone giant.

A just say no defense isn't necessarily in the best interest of shareholders, since board members can employ it even if an offer is made at a significant premium to the current share price.

The case of Paramount Communications vs. Time, Inc. helped establish the just say no defense as a viable anti-takeover strategy. In the case, Time, Inc. was close to merging with Warner Communications, but received a bid from Paramount that its board rejected because the publishing company had negotiated a long-term plan with Warner. In July 1989, the case was heard in the Court of Chancery in Wilmington, Del. In two previous cases, the Delaware courts had established precedents for corporate board actions during mergers and acquisitions. In the 1986 Revlon case, the Delaware Supreme Court ruled that if the board of directors decide to sell a company, they must accept the highest bid and not show any favoritism. In a 1985 case, Unocal, the court ruled that directors defending their company from a raider may respond only in a reasonable way.

The judge supported the Time board as the corporation’s fiduciaries in this matter, even if shareholders might well have preferred to accept Paramount’s bid. He wrote that corporate law does not compel directors to follow the wishes of the majority of the shares. To support his decision for the Time-Warner merger, he wrote, "In fact, directors, not shareholders, are charged with the duty to manage the firm.” On appeal, the Delaware Supreme Court upheld the decision unanimously.