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The enhanced scrutiny test is a way to evaluate the decisions made by a company's board of directors during a takeover. The test has two parts: the reasonableness test and the proportionality test. The reasonableness test requires the board to show that they had a good reason to believe that the takeover would harm the company. The proportionality test requires the board to show that their response to the takeover was reasonable and not too extreme. If the board passes both tests, then their decisions will be evaluated using the business judgment rule. In constitutional law, the enhanced scrutiny test is used to determine if a law is constitutional.
The enhanced scrutiny test is a legal term used in corporation law and constitutional law.
In corporation law, the enhanced scrutiny test was established in Unocal Corp. v. Mesa Petroleum, 493 A.2d 946 (Del. 1985), also known as the Unocal Test. The test is applied to a target board's decision-making process when a takeover is occurring, to determine if the business judgment rule will apply to their decisions.
There are two prongs to the enhanced scrutiny test:
If both prongs of the enhanced scrutiny test are satisfied, then the court will use the business judgment rule to evaluate decisions made by the target board.
In constitutional law, the enhanced scrutiny test is a term used to refer to intermediate scrutiny, which is used to determine the constitutionality of a statute.
An example of the enhanced scrutiny test in corporation law is when a company is facing a hostile takeover bid. The target board must show that they had reasonable grounds for believing that the takeover would harm the company's policies and effectiveness. They must also show that their response to the takeover bid was proportionate to the threat posed.
An example of the enhanced scrutiny test in constitutional law is when a law is challenged for violating the Equal Protection Clause of the Fourteenth Amendment. The court will apply intermediate scrutiny to determine if the law is constitutional. This means that the law must be substantially related to an important government interest.