Mergers & Acquisition Outline Merger (251):  Mechanics:  251(b) requires (1) the board of directors of both firms

to approve the resolution on merger.  251(c) requires both A&B that a majority of all outstanding shares entitled to vote to ratify the agreement.  Exceptions to the voting procedures:  Small-Scale Merger Exception (20% Rule): y 251(f) holds that A shareholders do not need to vote if A does not issue to B shareholders an amount of shares that exceeds 20% of the voting shares of A.  Short-Form Merger (parent-subsidiary merger): y 253 permits the merger of the subsidiary into the parent solely on a resolution of the parent s board of directors when the parent holds over 90% of each class of the subsidiary s voting stock.  Holding Company Exception: y 251(g) holds that no shareholder voting is required in specified reorganizations of holding companies or in specified creations of holding company structure.  Acquisition (271) cash consideration:  Cash-for- Asset Acquisition: (40)  271 requires B to submit a resolution to shareholders and (2) to get a majority of the outstanding shares entitled to vote in order to sell all or substantially all of B s assets. Hollinger (Chancery Del. 2004) (42) held that if the portion of the business not sold constitutes a substantial, viable, ongoing component of the corporation, the sale is not subject to 271.  275 controls the dissolution and requires a shareholder vote for the dissolution to take place majority of the outstanding shares entitled to vote must ratify the resolution.  A may choose not to assume B s liabilities.  Cash-for-Stock Acquisition: (48)  The buyer purchases the seller s stocks in cash.  122(4) and (11) holds that, if both Delaware corporations, A can purchase and hold the stock of B.  Neither the shareholders of A nor B have a right to vote on the stock acquisition.  Class voting was required in a cash-out merger in Iowa because the sellers stock will be cancelled to cash within the meaning of the Iowa statute which requires a class vote under such a condition. Shidler v. All American Life & Financial Corp (Iowa 1980).  Beware of 203 anti-takeover provisions.  Asset acquisition > statutory mergers: (63):  Asset acquisition: No appraisal rights: Yes voting rights (Substantial or all assets sale):  Statutory merger: Yes appraisal rights. Yes voting rights (majority of outstanding shares):  Acquisition (271) stock consideration: Class 03:  Stock-for-Asset Acquisition: (57):  271. all or substantially all of assets a majority of the outstanding shares entitled to vote.  Shareholders in the purchasing firm do not get voting rights or appraisal rights.  Exceptions: CA, MBCA 6.21(f) (20% rule), and NYSE. CA provides voting and appraisal rights for A s shareholders in both the acquiring and acquired firms. The 1999 version of MBCA in 6.21(f) provides voting but not appraisal rights for shareholders in the acquiring firm. y In Heilbrunn v. Sun Chemical (Del. 1959) (58), the court held that, in a stock-for-asset acquisition, the dissenting shareholders of the buyer did not suffer any injury and, thus, do not receive any appraisal right a de facto merger doctrine inapplicable. y In Hariton v. Arco Electronics (Del. 1963) (64), in a stock-for-asset acquisition, disgruntled shareholders (of B) who lack appraisal rights asked the judges to reclassify a stock-for-asset acquisition as a de facto statutory merger. Here, the seller sold all its assets under 271 and dissolved under 275. The Court refused to reclassify the transaction as a de facto merger holding that simultaneous use of 271 & 275 is legal and they are separate from 251 (a statutory merger) equal dignity rule doctrine of independent legal significance.  Stock-for-Stock Acquisition: (65):  Liability Protection: A holds B s assets and liabilities in a wholly-owned subsidiary a separate legal entity preventing B s creditors of the subsidiary from going after A s assets.  Corporation B becomes a wholly-owned subsidiary, and then both A and B shareholders have A corporation s stock.


Comment [KA1]: Gimbel v. Signal (Del)(41). The question of what constitutes substantially all of the corporate assets under 271 is determined by whether the sale of assets [is[ quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation.

In IBC v. BNY (NY 1988), in a (stock-and-cash)-for-stock acquisition, the court rejected the seller s claim that the transaction is a de facto merger and can only be implemented after the approval by two-thirds of A s shareholders.  203 Anti-takeover provisions. Cash-Out Transaction: (68):  Benefits: (1) it takes place when cash is cheap (2) a buyer avoids dilution of its ownership. (3) a buyer uses cash-merger transaction to eliminate minority s/h in a two-step stock acquisition.  Planners often use cash merger transactions to eliminate minority shareholders in a two-step stock acquisition.  In Rauch v. RCA (2nd Cir. 1988) (70), the court held that on the basis of doctrine of independent legal significance that the merger is distinct from redemption (151). In this case, the contract stated that stock is subject to redemption at the company s election. There was no de facto redemption. Triangular Merger: (74):  Benefits: (1) limits the voting rights of the buyer. (2) isolate the liabilities the seller into the subsidiary.  Shareholders of a parent company do not vote on acquisition or have an appraisal right. The parent company s board only needs to vote on a merger as shareholders of its wholly-owned subsidiary.  Equity Group Holding v. DMG (Florida 1983): (76): This is a case in which the minnow is swallowing the whale in a forward triangular merger. The subsidiary offered the parent s shares as consideration for the target s assets and liabilities. No de facto merger. Two-Stage Acquisition (stock acquisition followed by back-end merger): (80):  Benefit: (1) Speed.  Stock acquisition is followed by a back-end merger. In the second stage, the purchasing firm drops down a subsidiary and mergers the subsidiary into the partially-owned target. Single-Firm Re-organization: (84): Class 04:  (1) Recapitalization: (e.g., elimination of preferred shares). 242(b).  Amend articles of incorporation.  Create a shell, and merge into a shell. (251 statutory merger: no class voting). Downstream merger.  (2) Reincorporation: (e.g., reincorporation as a DE corporation).  Amend articles of incorporation.  Create a shell, and then merge into a shell.  (3) Conversion: (e.g., change from an LLC to a corporation).  Conversation statutes.  Merger.  Accumulated dividends on preferred stocks in a downstream, cash-out merger.  The default rule is that there is no protection of accumulated dividends on preferred stocks in the case of a merger unless such interests are contracted around in the articles of incorporation. Havender (Del. 1940): (86):  Class voting & Certificate of Incorporation:  In a downstream merger, a class vote should have taken place for preferred stockholders because the certificate of incorporation stated that a class vote is required when the certificate is repeal[ed] by consolidation. Here, we have nullification of the certificate, a repeal, as a result of consolidation, a disappearance of the company. Elliot Ass (Del. 1998): (89).  Conversion and Duty of Loyalty:  The merger itself is legal, but there is a breach of duty by Quinn & Sahagen because Castiel (who held the majority interests in the LLC) had the power to stop the whole transaction even though a notice was not required. VGS (Del. Chan. 2000): (94): 

Comment [KA2]: Two factors necessary to establish a de facto merger: (1) The actual merger must take place soon after the initial transaction. (2) The seller corporation must quickly cease to exist. (68).

Comment [KA3]: Definition: 102 & 242 controls the statutory recapitalizations in which an ongoing, capitalized corporations amends its certificate of incorporation to change its capital structure. Common amendments include augmenting the corporation s authority to issue shares and include altering the rights, preferences and privileges of outstanding shares. Procedure: 242(b) controls. It requires (1) a board of director s resolution and (2) a ratifying shareholder vote. The holders of shares are entitled to vote as a class (even if otherwise specified as non-voting shares) if their shares are a subject of the resolution. A majority of vote of the outstanding shares of each class entitled to vote is necessary for the passage of the amendment. Avoiding class voting: Lawyers do not like class voting provisions of 242 and thus use a statutory merger under 251 which do not require class voting in recapitalizations. They do this through downstream merger.

Appraisal Rights: (97): Class 04 (slide 11):  Delaware:  Under 262, dissenting shareholders in statutory mergers who have a right to vote and minority shareholders in short-form mergers (who do not have a right to vote) have appraisal rights.  Under the market out exception in 262(b)(2), s/h in a public company (traded on a national exchange or with over 2,000 s/h) have no appraisal rights in a stock swap merger.  Delaware law does not shift attorney or expert witness fees to a firm unless a court finds bad faith.  The appraisal should be done by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.  Appraisal Right Trigger:  (1) Selling firm s/h: y Statutory mergers (including (non-voting) minority shareholders in short-form mergers). y Asset acquisitions. j DE no. j CA yes in stock-for-asset deals. j MBCA yes.  (2) Buying firm s/h: y Statutory mergers, except where no s/h vote. j Dilution less than 20% no. j Short-form no. j Cash no. y Asset acquisition (stock-for-asset deals allowing shareholder vote all or substantially all assets). j CA yes. j MBCA no. j DE no.  Market out exception:  No appraisal right if: y Stock is publicly-traded, unless j DE: deal consideration is  Cash (meaning there is an appraisal right).  Shares of stock in third party firm (not the survivor) that is not publicly traded. j MBCA:  Conflict of interest transactions  Consideration is stock in firm that is not publicly traded.  Fair value: y Under 262(h), dissenting s/h perfecting her appraisal right is entitled to the fair value of her shares in cash from the firm. y Under 262 in an appraisal proceeding, a corporation must be valued as a going concern based upon the operative reality of the company as of the time of the merger excluding a speculative expectation of the merger. The fair value of stock is measured by reference to the value of the business itself, divided by the number of outstanding shares excluding minority discounts. The value of the corporation itself must reflect a control premium attributable to majority ownership of the subsidiaries. MG Bancorporation v. Le Beau (Delaware 1999): (106).  Control Premium:  (1) (When an expert must use market prices from other analogous corporations comparables), An upward adjustment to market prices is needed to compensate for the built-in discount reflected in the price of stocks in the market because the market price of stock reflects only the purchase and sales of minority shares. Rapid-American (Del. 1992): (117).  (2) Adding a control premium attributable to control of the subsidiaries is appropriate.  Synergy Gain of the Deal:  Only the speculative elements of value that may arise from the accomplishment or expectation of the merger are excluded. Weignberger v. UOP (Del. 1983): (118)  Value Added During the Two-Stage Acquisition:  Thus, the value, added to the going concern by the acquirer during the transient period of a two-step merger, accrues to the benefit of all shareholders and must be included in the appraisal process for dissenting s/h in the 2-step squeeze-out merger. Cede v. Technicolor (Del. 1996): (123).  NYSE Requirements: (134). Class 05.  A majority vote of all shares represented or present at the s/h meeting, provided at least 50% of the firm s shares are voted.


Comment [KA4]: Dissenting shareholders in a short-form merger exercised their appraisal rights.

33 and 34 Act:
 Public companies:  Traded on national stock exchange. 500 s/h; 10 million in assets. Securities registered under 33 Act; more than 300 s/h. Williams Act: A part of 34 Act. 161-176.  Federal Regulation of tender offers.  Disclosure: Tender offers (Rule 14d-5) for more than 5% of a company s registered securities must be disclosed.  All-holders rule: tender offer cannot discriminate s/h holding the same type of shares.  Best price rule: any price increase during the tender offer applies to all s/h who have already tendered.  Golden Parachute agreement: Such an incentive contract does not violate rule 14d-10 if it is an integral part of the tender offer and not concluded solely between the acquirer and the target board. Purchasing Firms in Bankruptcy: Class 06.  Sound business purpose test: Under 363(b)(1) sale for cash, there must be sound business purpose (such as helping the debtor s reorganization), other than appeasement of major creditors, for a trustee (or debtor-in-possession) to sell the assets out of ordinary course of business for cash in a Chapter 11 case. Lionel (193). Successorship Assets: 206.  Mergers: 259 & 261.  All rights and obligations of the constituent parties pass to the surviving entity in a statutory merger as a matter of law. Assets and debts shall be vested in the surviving corporation.  All rights and obligations of the constituent parties vest in the surviving entity. An anti-transfer contract prevented patent rights to vest in the surviving entity. PPG (206).  A control change clause prohibits transfers under any and all of the various forms of acquisition.  Stock acquisition:  Transfer of stock of a corporate lessee does not violate anti-assignment clause. Branmar (215).  Asset acquisition: Very time-consuming (218).  Asset purchase agreement included seller s confidentiality agreement of its employee. Chemetall (218). Successor Liabilities: 226. Class 07.  The Doctrine of Successor Liability:  Under the doctrine of successor liability, frustrated creditors and product liability victims claim against a purchaser s asset arguing that the decoupling of the assets and liabilities was inequitable.  4 common law exceptions to the rule that an asset purchaser is not liable for the seller s debt or liability.  (1) A buyer formally assumes a seller s debts (expressly or impliedly):  (2) Transactions took to defraud creditors.  (3) A buyer de facto merged with a seller a key factor continuity of ownership. y Continuity of business (ownership). Cargo Partners (227). y Continuity of shareholders. y Seller dissolves. y Buyer assumes operation liabilities.  (4) A buyer is a mere continuation of a seller single firm reorganization asset sales for a shell company.  Expansion:  (5) Products Line Test only in California a matter of product liability law, corporate law. Ruiz (7th Cir. 229). Ray (California. 231). y (i) P lacks an adequate remedy against the seller/manufacturer. y (ii) Purchaser knows about product risks associated with the line of products that it continues. y (iii) Seller transfers good will associated with the product line. y Nguyen (Illinois 233) doubts the rationale in Ray. Domine (Illinois 233) also doubts Ray.  (6) Continuity-of-Enterprise Test only in Michigan a twist of a de facto merger test.  Federal Statute Labor Law (NLRA):  Notice Test: A buy on notice of a seller s unfair labor practice will be liable for the seller s such a practice after the purchase. Golden State Bottling (234).  Substantial Continuity Test: There was a substantial continuity between the former and the new firm. Also, under the substantial and representative complement rule, when a majority of the original firm s employees had been employed by a new firm, the new firm has the obligation to bargain with and recognize the former union that represented them. Fall River Dyeing (237). Canteen (244).  Federal Statute Environmental Liabilities (CERCLA):

Comment [KA5]: Fall River Dyeing: The dissenters argued that there was no direct contractual relationship between the new and the previous firms because the new firm purchased most of the machinery and equipment from the former firm in an auction and there was a 9-month interval. Comment [KA6]: Canteen: (1) When substantial continuity of operations and (2) of workforce are found, the duty to bargain with the union is triggered. Perfectly Clear Exception: A successor would be required to bargain with the union before setting its initial terms of hiring when it was clear that it intended to hire a majority of the predecessor s workforce.

The substantial continuity test does not extend to CERCLA. Instead, state common law should apply. National Service Industries (2nd Cir. 247).  Acquisition Documents: Class 08.  Acquisition Documents:  Preliminary documents (305): Confidentiality agreement. Letter of intent (no-shop clause, break-up fee, inspection rights.  Basic documents (326): Details of exchange. Representation and warranties. Covenants. Indemnification.  Supplemental documents (341): Disclosure letter. Employment or non-competition agreement. Earnouts.  Acquisition review documents (352):  Deal Protection documents (358): No-shop & no-talk clauses. Lock-up clause. Fiduciary-out clause.  Closing documents (360): Release. A bring down clause.  Cases:  Promissory esptoppel: (1) A clear and unambiguous promise to sign. (2) A reasonable and foreseeable reliance by the party to whom the promise is made. (3) An injury sustained by the party asserting the estoppel by reason of his reliance. AIH (308).  Tortious interference with a contract: There was a contract even though the magnitude of the transaction was such that normally a signed writing would be expected. Texaco (315).  Earn-Out Consideration: The buyer violated a duty of good faith and fair dealing when it changed the course of business to make it virtually unrealistic for the seller to receive earn-outs. O Tool (343).  Misleading statements in the purchase agreement by a seller: Marcus (364).  Buyer claims breach of contract: A seller made various misrepresentations to defraud a buyer. Medcom (369).  Buyer claim violation of Rule 10b-5: In a stock acquisition, this provision prohibits fraudulent misrepresentation. In an attempt to limit such claims, a seller asks the buyer to sign no-reliance clause. Thus, there is a tension between Rule 10b-5 and a no-reliance clause. The court in AES held that enforcement of the non-reliance clauses to bar the buyer s fraud claims (Rule 10b-5) against the seller would be inconsistent with 29(a) of the Exchange Act which forecloses anticipatory waivers of compliance with the duties imposed by Rule 10b-5. AES (372).  Buyer refuses to close: The court held that a buyer cannot use a Material Adverse Effect clause to close the deal when it simply regarded the deal unattractive. IBP v. Tyson (379). 

Comment [KA7]: AES v. Dow Chemical: 29(a) prohibits a party from inserting a nonreliance clause in the contract. But a non-reliance clause still has some evidentiary value regarding a party s reasonableness in relying on the misstatement in a fraud claim.

Duty of Candor (Disclosure):

 It obligates directors to disclose all material information to the stockholders when the board asks them to approve deals requiring a shareholders' vote or to ratify invalid or questionable deals.  Business Judgment Rule (Duty of Care): Class 10.  Application: 141(a) gives a board of directors to manage the business and affairs of a firm.  A board recommends a merger to stockholders. Was the board grossly negligent? Van Gorkom (401).  When the two firms merged, one of the firm s directors (McKesson) should have noticed the earnings overstatement of the other firm (HBOC). Ash v. McCall (Del. Chan. 2000): (427).  Definition:  BJR is the presumption that courts will not interfere with, or second-guess, business decision made by directors. BJR is used to evaluate the conduct of the board of directors of the selling corporation in a negotiated acquisition. BJR applies to cases that do not involve fraud or conflicts of interest are termed duty-of-care cases. Cases dealing with conflicts of interests are termed duty-of-loyalty cases.  How it works: P must raise particularized facts that enable the court to infer that  The presumption of BJR is rebutted when the board acts grossly negligent. Van Gorkom (401). y Examples of gross negligence: j (1) Uninformed decision two hour consideration. Van Gorkom. j (2) Unreasonable reliance on expert opinion 141(e) and fairness opinions. Van Gorkom. j (3) Inadequate investigation. Van Gorkom.  Grossly negligent action Entire Fairness Test (burden on the board) CEDE II (412).  (1) BJR:  In making a business decision, directors must act on an informed basis in good faith and in the honest belief that the action taken was in the best interests of the company. y (1) Disclosure: j A corporate director owes to his s/h a fiduciary duty to disclose all facts germane (material) to the transaction at issue in complete candor. y (2) Informed Decision: (in the decision making context) j A director must inform themselves of all material information reasonably available at the time he made his decision (by conducting adequate investigation). Van Gorkom (seller: 401). Ash v. McCall (buyer: 427). Fairness opinion by an investment banker. j Due care in the decision making context is process due care. y (3) 141(e) Expert Opinion: j Under 141(e), a director can make an informed decision by relying, in good faith, on an expert opinion (or fairness opinion). Van Gorkom.  (2) Entire Fairness Test: (burden on the board): CEDE III (415).  (i) Fair Process (Dealing) Analysis: y (1) Timing of transaction, (2) how transaction was initiated, (3) structured, (4) negotiated, (5) disclosed to directors, (6) how approvals of directors and s/h were obtained. No-shop provision is permissible as long as it does not foreclose competing bids. CEDE III.  (ii) Fair Price Analysis: y The economic and financial considerations of the proposed merger including all relevant factors: assets, market value, earnings, future prospects. No shop clause is ok when it doesn t foreclose competing bids. In a sale of a company, the court will analyze whether the sale price constituted the highest value reasonable available? CEDE III.  (iii) Entire Fairness.  Other Claims:  Waste Claim against the buyer s board: y Mere bad outcome is not enough to prove corporate waste against buyer s board. ASH v. McCall.  Oversight Claim: y A current s/h may be able to assert a claim for breach of duty of care against the directors of the combined company as a result of the directors decision not to pursue a potential claim against the former directors of HBOC for the alleged accounting fraud. ASH.  Vote-Buying Claim: Hewlett v. Hewlett-Packard (440): Class 11. y A vote-buying agreement is not illegal per se, even when company management is buying votes. y Vote-buying is illegal per se, if object or purpose is to defraud or disenfranchise the other s/h. y A board cannot use corporate assets to buy votes in opposition to s/h who did not favor a merger. y Some steps should be taken, such as independent committee, to ensure s/h franchise is protected. A contractual obligation is not required.

Comment [KA8]: Van Gorkom: The court found that the selling board had not made an informed decision. The initial board meeting in which the board decided to sell the company (1) was held on short notice, (2) was concluded very quickly, (3) featured only a brief, oral recommendation from the target CEO, and (4) a lukewarm, general endorsement from the target CFO. Van Gorkom s 20-minute oral presentation of the proposal did not qualify as 141(e) reports, Unfounded reliance on both the premium and the market test.

Comment [KA9]: CEDE II: Where the presumption of the business judgment rule has been rebutted, the board of directors action is examined under the entire fairness test.

Threshold requirement: A plaintiff must plead facts from which it is reasonable to infer that in exchange for consideration personal to a shareholder, a shareholder has agreed to vote, or has in fact voted his shares as directed by another.  Disclosure Claim: Hewlett v. Hewlett-Packard (440): Duty of Candor. y There must be a substantial likelihood that the disclosure of the additional information by the board would have been viewed by the reasonable investor as having significantly altered the total mix of information made available to the shareholders.  Duty of Loyalty: (449):  (1) Normal case: Orman v. Cullman (450):  Two ways to rebut the duty of loyalty under BJRP: y (i) A director was personally interested in an outcome of the transaction. He gained or sought personal benefit significant enough to make him unable to perform his fiduciary duty to s/h. y (ii) A director lacked the independence to consider objectively whether the transaction was in the best interest of its company and its entire shareholder. This could be proved if they were dominated or controlled by a materially interested director. Independence means that a director s decision was based on the corporate merits of the subject before the board rather than extraneous considerations or influences.  (2) Entire Fairness Test: Conflict of Interests Transactions:  A board or a controlling shareholders standing on both sides of a transaction bears the burden of proving its entire fairness (fair dealing & fair price). y (a) Fair dealing: a court will analyze when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the s/h were obtained. Weinberger v. UOP (461). y (b) Fair price: ct. will analyze fairness of economic & financial considerations of a proposed merger.  Sanitizing (cleansing) procedures: y (a) A transaction was approved by a special committee of independent & disinterested directors. y (b) A transaction was approved by an informed vote of a majority of company s minority s/h. y (c) Full disclosure of the conflict and abstention from any participation in the matter.  Specific application of sanitizing procedures: y (a) Board conflict EFT with burden on board: Sanitizing procedures BJR applies. y (b) S/H conflict EFT with burden on board: Sanitizing procedures EFT with burden on P.  Squeeze-out Merger (triangular or upstream) EFT:  In a squeeze-out merger by a controlling s/h, EFT applies regardless of sanitizing procedures. The use of cleansing procedures only shifts the burden of proof. Kahn v. Lynch (465).  Short-form (90%) merger (253): Appraisal Remedy:  Short-form (90%) merger 253: EFT is inapplicable. Exclusive remedy for minority s/h is an appraisal remedy (253). Controlling s/h owes a duty of candor (disclosure). Glassman v. Unocal (466).  Coercion Test: (A combination of tender offer/short-form (90%) Merger): less burdensome than EFT.  A coercion test applies when a controlling shareholder makes a tender on a condition of acquiring 90% control or more of the target. A controlling s/h cannot coerce or threaten minority s/h to induce them to tender their shares. Solomon (472). Siliconex. Pure Resources (471). Tender offer is non-coercive only when:  (1) the tender offer is subject to a non-waivable majority of the minority tender condition. y Fully informed. Protected by recommendation of fully informed independent directors.  (2) it will commence a 253 merger at the same price if it obtains more than 90% of the shares.  (3) the controlling s/h has made no retributive threats.  A Parent Seeking 100% Control of majority-owned subsidiary:  Choice (1): A squeeze-out merger (upstream or triangular). Entire Fairness Test. Kahn v. Lynch (465).  Choice (2): A combination of tender offer/short-form merger a tender offer from a controlling shareholder is conditioned on obtaining over 90% ownership. Coercion Test. Pure Resources (471).  The coercion test is less burdensome to the board because it only looks at the absence of pressure.  A board can win on summary motions in a tender offer/short-form merger. Test Appraisal rights Summary motions Deal price Squeeze-out- ETF. Kahn v. Entire minority Hard to win for the board: Lynch. s/h must suffer the full trial. merger Tender Coercion s/h in a short Possible to win if a party can (1) Control premium is offer/shorttest. Flexible form merger prove that a majority-of-the- lower. form merger & less (those who did minority tendered their (2) Higher rate of constraining. not tender their shares without fearing any success. (2-step procedure) Solomon. shares) retribution by the parent. (3) Close faster. y

Comment [KA10]: Orman pled a legally cognizable claim that made it reasonable to question the independence and/or disinterest of a majority (6/11) of the General Cigar Board. They received benefits from the merger that were not shared with the rest of the s/h. The six board members will continue to have an equity interest in the surviving firm. Disabling interests: Director Solomon suffered a disabling interest when considering how to cast his vote in connection with the challenged merger when the Board s decision on that matter could determine whether or not his firm would receive $3.3 million. Lack of independence: It is reasonable to question the objectivity of a director who has a consulting contract with his company and will continue to have a consulting contract with the surviving company. He will be controlled and pressured by the shareholders to renew the consulting contract. Comment [KA11]: The court held that the procedure were not fair because two members of the board of a target-subsidiary (who were also on the board of the parent) used their special access to target company s information to the advantage of the acquirer (parent).

Comment [KA12]: The offer was coercive because the offer included within the definition of the minority those s/h who are affiliated with the parent as directors and officers.

 Other cases: Class 12:  Minority Stock Re-purchases in Anticipation of an Acquisition:  The 2 majority s/h and directors of a closely held corporation breached a fiduciary duty to disclose material information (such as their reasonable expectations to sell the firm) to minority s/h when the directors offered to redeem the shares of those s/h. Lawton v. Nyman (1st Cir. 2003): (478).  Recapitalization: a parent merges into the subsidiary.  In a case involving recapitalization where a company is going to buy back one class of shares with significant amount of cash which might result in financial detriment to the other class, the board has the burden must prove its fairness. Levco Alternative Fund v. RDA (Delaware 2002): (484). y (1) The special committee never sought an opinion from Goldman Sachs. y (2) Independent committee never evaluated fairness of recapitalization on the Class A s/h.  Duties of Controlling S/H in Negotiated Acquisition:  (1) No obligation to share the proceeds from a sale of controlling block of stock. Zetlin (478).  (2) Duty of care and loyalty to minority s/h in a sale of a controlled subsidiary. McMullin v. Beran (489).  (3) Controlling s/h owes a duty of reasonable investigation and due care to the corporation and not to sell it to a looter who has numerous liens, judgments, and bankruptcies against it. Debaun (496).  (4) Corporate opportunity doctrine: Duty no to sell a management control itself, but a buyer should have a management control after securing the controlling block of shares. Essex (502).  (5) Duty of loyalty not to usurp corporate opportunities. Thorpe v. Cerbca (506).  Void defenses:  A dead hand provision states that only the original directors who put the provision into place can dismantle the pill, so any new directors are prevented from interfering with it.  A no hand (or delayed redemption) provision states that the newly elected board cannot redeem poison pill rights for 6 months after the board s election.  These provisions are invalid because 141(a) confers upon any newly elected board of directors full power to manage and direct the business of and affairs of a corporation. Any limitation on the board s authority must be set out in the certificate of incorporation. Quickturn v. Shapiro (523).

Comment [KA13]: Court said that the usurpation of corporate opportunity doctrine is applied in circumstances where the director and the corporation compete against each other to buy something (such as a patent, license, or an entire business.) However the doctrine doesn t apply in this case, because the Erikson s stock and East were not rough substitutes in the eyes of INA. Court held that Eriksons did not improperly usurp a CERBCO business opportunity, since Eriksons may vote on the deal under Del Corp Code 271 because a sale of East would be a sale of substantially all of the assets. Eriksons owe no duties to other SHs in their role as majority SHs.

 If a target board employs a defensive measure against an unwanted binder, the board does not enjoy BJR unless the takeover defense passes the Unocal Test.  (1) Reasonability Test: y A target board must have a reasonable ground to believe that a tender offer poses a threat to corporate policy and effectiveness. Courts recognize two types of coercions as a threat. j Opportunity loss: A better deal is coming. Protection of preexisting deal. j Structural coercion: A threat of non-tendering s/h receiving less value in the 2nd stage merger than tendering s/h in the first stage tender offer. j Substantive coercion: (1) A low bidding price. Unitrin. (2) Journalist quality and magazine independence. Paramount v. Time. (3) Inability of s/h to assess intrinsic value of firm b/c of possible damage from a lawsuit. Shamrock . Skepticism of the tender offer. Chesapeake .  (2) Proportionality Test: y The defense must not be draconian. A defense is draconian if it is either coercive or preclusive. j (a) Coercive: The defense measure is coercive if the board is cramming down the defense measure on its s/h and s/h is left with no choice must to accept it.  In Paramount v. Time, the board s response was aimed at carrying forward of a pre-existing transaction and not coercive. Excessive termination fee may make the defense coercive. j (b) Preclusive: The defense measure is preclusive if it makes virtually impossible for the bidder to pursue a bid and/or proxy contest. j (c) Even if not draconian, the defense was within a range of reasonable response to the threat perceived.  Pass If the board satisfies the threshold test, then the board enjoys BJRP. j P can rebut BJRP by showing that directors decisions were primarily based on (1) perpetuating themselves in office or (2) some other breach of fiduciary duty such as fraud, overarching, lack of good faith, or (3) being uninformed. Unitrin. (543).  Fail If board does not satisfy either of threshold tests, its conduct is evaluated under ETF.  Revlon Test (Best Price on Sale of Control Test): Reasonability test.  When a target pursues to sell itself to a favorite bidder instead of an unwanted bidder, the target board must make reasonable efforts to sell the company at the best price realistically achievable given the market for the company. Revlon (558). Paramount v. QVC (566). Netsmart (sup).  Trigger: (1) Change of control to a controlling S/H. (2) Put up for Sale. (3) Consideration is cash.  Stock-for-stock deal No change of control. Not Revlon test. A firm must be sold for cash or debt. Page 578 Trigger Test Cases Unocal Test. (1) There is no change of control. (1) Reasonableness test. Paramount v. (2) Stock-for-stock deal. (2) Proportionality test. Time. Revlon Test. (0) Blocking bidder to favor another. Whether the directors acted (1) Revlon. (stricter) reasonably in obtaining (2) the best QVC. (1) A change control will take place. (2) A firm has put itself up for sale. price for target s/h. (3) Sold for cash/debt/choice of cash or debt. 

Unocal Test (Enhanced Scrutiny Test) Blocking Takeovers: Class 13. (533).

Comment [KA14]: Unitrin: (534): Poison Pill: Repurchase program. Unitrin board (target) could protect its s/h from an all-cash, all-shares tender offer by AG by employing anti-taker defenses for 2 concerns: (1) inadequate price (2) antitrust problem. Unitrin s/h was susceptible to accepting an inadequate price ignorantly or mistakenly. Comment [KA15]: Paramount v. Time: (548): Poison pill & No-shop clause: Court upheld takeover defenses employed by Time against Paramount to protect Time s acquisition of Warner. Time reasonably determined that price was low and its magazine s independence was in threat. Comment [KA16]: Shamrock: (549): Polaroid had a possibility to collect a large sum of damages from Kodak which was confidential. Until amount of damages will be quantified, Polaroid can regard Shamrock s non-coercive but inadequate tender offer to be a threat. S/h is unable to reach an accurate judgment as to intrinsic value of the stock in light of the current status of the litigation. Comment [KA17]: Chesapeake: (544): A board may consider a tender offer as a threat when it believes that company s present strategic plan will deliver more value than the premium offer and the s/h might tender based on a mistaken belief. Comment [KA18]: Revlon: Revlon employed defensive measures (lock-up & noshop) against Party Pride s tender so that it can sell itself to Forstmann. Defensive measures failed Revlon test because they foreclosed further bidding to seek the highest price for the company. When is a firm up for a sale? P.563. The board s authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. Comment [KA19]: Paramount v. QVC: Paramount refuses the tender offer from QVC and plans to merge with Viacom (sale of control) by employing poison pills, no-shop clause, and termination fee. Defenses were not reasonable. Comment [KA20]: Netsmart (Supp): Netsmart didn t have a reasonable basis to conclude that Insight deal (private equity firm) was the best one because it failed to take any reasonable steps to explore whether strategic buyers might be interested in Netsmart. Strategic buyer: someone in the same market looking for some sort of synergy. Private equity buyer: It will buy a company as an investment financial transaction Comment [KA21]: A board s decision to protect its decision to enter a merger agreement with defensive devices against uninvited competing transactions that may emerge is analogous to a board s decision to protect against dangers to corporate policy and effectiveness when it adopts defensive measures in a hostile takeover contest. Comment [KA22]: Omnicare: The board was required to negotiate a fiduciary out clause to protect the s/h if the transaction they are protecting became an inferior one. Comment [KA23]: Brazen: 2-factor reasonability test: What is the anticipated loss by either party should the merger not occur. Amount can t be either unconscionable or irrationally related to damages a party might conceivably sustain.

Deal Protection Measures in Friendly (Negotiations) Acquisition: Class 14.

 Unocal test applies to deal protection covenants in a negotiated acquisition since all deal protection measures in acquisition agreements inherently favors one bidder other unwanted bidders. Rationale.

 Omnicare v. NCS Health Care (Delaware 2003): (581): Under Unocal test, the court invalidated the deal protection measures of NCS-Genesis merger deal (stock swap) against Omnicare s tender offer. Fiduciaryout Clause.  Termination (Break-up) Fees:  Termination fee constitutes liquidated damages, not penalty. Amount must be reasonable. Brazen (593).

Meaningful Opportunity of Success Test (Anti-takeover statutes: 203): (605):  It prohibits business combinations between an interested stockholder (who holds 15% of the stock) and the target corporation for a three-year period unless one of the three exceptions to the statute applies.  (1) A prior board approval of the second step merger.  (2) Getting 85% of the disinterested outstanding stocks. This passes the test. RP Acquisition. (613).  (3) After the initial stage, two-thirds of the non-tendering shareholders approve the transaction. y Illusory option because those remaining s/h already rejected to be cashed out in the initial stage.  Anti-takeover state statutes such as 203 of Delaware law (that prohibits the second stage merger and that has substantial deterrent effects on tender offers) are valid as long as hostile tender offers which are beneficial to target shareholders retain a meaningful opportunity for success. BNS (603).  Meaningful opportunity test is rejected by 4th Cir. WLR Foods (614).  201(b)(7).  Blasius Test (Compelling Justification Test): Class 15.  A defending board must show a compelling justification in order to justify a takeover defense that is primarily aimed to preclude shareholder vote (disenfranchisement) when it is faced with tender offer/proxy contest. Blasius (652). If the board passes the Blasius test, BJR applies.  Blasius Test must be applied within the application of the Unocal Test because the defensive measure was presumably

applied in response to some threat to corporate policy and effectiveness which touches upon issues of control which must be analyzed by Blasius Test. Liquid Audio (630).

 Even if the board s takeover defense is normally permissible, and the board adopts it in good faith and with proper care, a board cannot undertake such an action if the primary purpose is to disenfranchise the shareholders in light of a proxy contest. Hilton v. ITT (631).  Invalid defense in the face of proxy fights: (1) creating a staggered board (2) expanding the number of board (3) adding new members.  Constituency Statute: Class 16. (641 & 619).  A constituency statute allows the board to consider the interests of not just the shareholders but also various constituencies that would be affected by corporate action.  Conrail (3rd Cir. 1997): (641). Herald v. Seawell (10th Cir. 1972): (647).  Bonds:  Pre-existing bondholders right in LBO: (649):  Bondholders interests are protected by terms of contracts. RJR Nabisco (US District NY 1989): (657).  Poison Pill Covenants in Bonds:  Terms in poison pill covenants in bonds must be clearly set forth. Wherehouse (2nd 1990): (657).  Fiduciary duty of Acquisition Consultants & Advisors:  Whether the investment bankers owed any fiduciary duty to its client (corporation) depends on whether the company lacked any sophistication and was relying heavily on judgment of the bank. Daisy (9th 661). Disclosure Requirements: Class 17: (677).  There is no general duty to disclose.  (1) A duty to speak: triggers.  The 1934 Act requires publicly-traded firms to file periodic reports, annual reports, and quarterly reports. Proxy solicitations. Major transactions tender offers, share repurchase, public offering of securities, purchase of 5% of registered stocks, voting stock.  (2) Voluntary statements.  Half-truth rule: SEC Rule 10b-5.  Definition: (1) Misleading (2) Material.  A half-truth or a partial disclosure of facts that are literally correct but misleading in light of facts that are concealed is as culpable as an affirmative misrepresentation.  Under the half-truth rule, a board has to add such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading. Rule 10b-5.  Test of materiality: y There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. y An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. y It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. TSC v. Northway (US 1976): (682).

Comment [KA24]: Conrail: The court held that the Pennsylvania anti-takeover statutes empowered the Conrail board to refuse to deal with Norfolk Southern on the basis of interests of employees and communities affected by the target s business. Comment [KA25]: Herald v. Seawell: The court upheld Denver Post s takeover defense that considered non-shareholder interests because Denver Post, as a newspaper corporation, is a quasipublic institution with an obligation serve the public byproviding quality of journalism. Comment [KA26]: RJR Nabisco: A bondholder acquires no equitable interest, and remains a creditor of the corporation whose interests are protected by the contractual terms of the indenture. Thus, the board does not owe any fiduciary duty to them. Comment [KA27]: Daisy: A fiduciary relationship can exist between a firm and the investment bankers. The court held that there may have existed between the parties a fiduciary relationship. (666).

Comment [KA28]: TSC v. Northway: The proxy statement failed to state that the chairman of the buyer was CEO of the seller, and that chairman of the executive committee of the buyer was the seller s VP.

Courts are hesitant to require companies to disclose all that much in a voluntary press release. Lewis v. Chrysler Corporation (3rd Cir. 1991): (691).  Projections of Post-Acquisition Performance: (704):  Disclosure required:  (1) Proxy statements: (a) Pro formas. (b) Reasons (not internal valuation reports) (c) MD&A (Management Discussion and Analysis)  (2) Tender offer: (a) Pro formas. (b) Purposes and plans. (c) MD&A.  (3) Going-private transactions. (a) Statement on fairness Detail of material factors valuation. (b) Internal reports prepared by hired consultants.  Projections permitted:  Safe-harbor rules (Rule 175 and 3b-6): Revenues, income, management s plan. Reasonable basis and good faith.  Projections are misleading:  Management s statements about the future are only actionable under 14(a) when: y (1) Management makes a statement it actually knows is false or misleadingly incomplete. j For example, directors did not think that $42 was a fair price. y (2) The statement was in fact false or misleading. j For example, the price was not in fact fair. y Misbelief standing alone, are insufficient to satisfy the element of fact that must be established under 14(a). Virginia Bankshares v. Sandberg (US 1991):(713).  Forward-looking statements: Grossman v. Novell (10th Cir. 1997): (717):  Forward-looking statements are immaterial and not required to be disclosed under two doctrines. y (1) Mere puffing or corporate optimism: must be analyzed in context. j They are generalized statements of optimism that are not capable of objective verification. Vague, optimistic statements are not actionable because reasonable investors do not rely on them in making investment decisions. (720). y (2) The bespeaks caution doctrine: j Under this doctrine, the forward-looking statements are considered immaterial when the management has provided the investing public with sufficiently specific risk disclosures or other cautionary statements concerning the subject matter of the statements at issue to nullify any potentially misleading effect.  Uncertain Statements : Walker v. Action Industries (4th Cir. 1986): (725):  Before making a self-tender offer, the company did not have a duty to disclose internal documents concerning month-to-month projections because such information is too uncertain and misleading. Such information would be unhelpful and impractical to an investor.  Duty to Disclose Preliminary Merger Negotiations: Class 18: (731).  NYSE Manual: (738):  False rumors must be denied or clarified. 202.03.  True rumors must be explained despite the business inconvenience. 202.03.  Unfounded rumors which result in unusual market activity or price variations must be dispelled. 202.05.  However, SEC has recognized the propriety of temporarily withholding material information when there is a good business reason.  Materiality Test: Rule 10b-5.  Probability/Magnitude Test: y Under such circumstances, materiality will depend at any given time upon a balancing of both indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.  To be actionable, a statement must also be misleading. Silence, absent a duty to disclose, is not misleading under Rule 10b-5. No comment statements are generally the functional equivalent of silence. The board could have just made no comment at all. Basic v. Levinson (US 1988): (731).  Potential Source of a duty to disclose merger negotiations:  Periodic & episodic reports: item 303 (MD&A).  NYSE listing requirements.  Duty to update. Weiner v. Quaker Oats (effect on earnings) (744).  Disclosing stock purchase of 5% of greater: 13D-1:  An entity that purchases over 5% of the stock of another company must comply with the disclosure provisions of the Williams Act. Rondeau v. Mosinee (748). y

Comment [KA29]: Lewis v. Chrysler: Press release: enhance the ability of the board to act in the best interest of all shareholders. Allegation: Press release omitted statement that board has new power to stop tender offers in shareholder s best interest Nothing is left unsaid. Cost to s/h is speculative.

Comment [KA30]: Grossman v. Novell: Novell merged with WordPerfect. P brought a 10b5 suit, alleging that Novell s future projections relating to the merger were false. In press releases and interviews, Novell said generally that this deal was going to be great. Novell engaged in puffery.

Comment [KA31]: Walker: A shareholder sold his shares before the firm s selftender offer took place. The court held that there is no duty to disclosure internal documents.

Comment [KA32]: Basic v. Levinson: Combustion Inc was to buy Basic. Before the deal was sealed, Basic publicly said that they weren t engaged in any merger negotiations. Comment [KA33]: Rondeau: An investor filed his schedule 13D very late in violation of 13(d). Purpose of 13(d) was to protect SHs by allowing them time to respond to a tender offer. Now that 4 has filed a 13D and has agreed to abide by the law from now on, the Mosinee SHs are adequately protected.

 13D-3:  Investors that form a group controlling over 5% of the target stock must be disclosed when formed even if the campaign has not begun. A group is defined as two or more persons who act as a group for the purpose of acquiring, holding, or disposing of securities of an issuer.  Tax Treatment of Mergers/Acquisitions/Reorganizations: (799-818):  A Reorganization: Tax-free transaction.  Statutory merger or consolidation with at least 50% of the consideration received by the acquired firm s/h be stock in the acquiring firm.  Forward triangular mergers.  B Reorganization: Tax-free transaction.  Stock-for-stock acquisition. The acquiring firm exchanges its voting stock (and nothing else) for an 80% or larger block of stock of the target corporation.  C reorganization: Tax-free transaction.  It is a stock-for-asset acquisition. The acquiring firm exchanges its voting stock for substantially all of the assets of the target.  Buy 90% of net assets, 70% of gross assets of target.  Target must liquidate. 

Notes:  Asset acquisition: Purchaser s trade-off.  Pro. Buyer need not assume all obligations, not purchase all assets, bargaining flexibility.  Con. Transaction costs, assignment costs, government licenses & permits.  Tender offer/short-form merger:  A tender offer will be conditioned on acquiring 90% ownership coercion test.  Tender offer/cash-out merger:  A tender offer is not conditioned on acquiring 90% ownership EFT. Votes:  Delaware: a majority of vote of all outstanding voting shares:  MBCA: a majority of the shareholders present or represented by proxy at a meeting, provided there is a quorum. Voting rights of purchasers shareholders:  DE: None:  20% rule: (1) NYSC (2) MBCA 6.21(f):  20% rule when the seller s considerations are stocks Shareholder approval is required prior to the issuance of stocks if the stocks have or will have upon issuance voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock. (132). Rule 10b-5: Employment of Manipulative and Deceptive Practices:  It is unlawful to make any untrue statement of a material fact  It is unlawful to omit a state a material fact necessary in order to make the statements made not misleading. Unocal test:  Proportionality:  A quote from Unitrin: y A response is coercive if it is aimed at forcing upon stockholders a management-sponsored alternative to a hostile offer. y A response is preclusive if it deprives stockholders of the right to receive all tender offers or precludes a bidder from seeking control by fundamentally restricting proxy contests or otherwise.