Mergers and Acquisitions Argumentative Essay

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Constituent Corporations
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The companies that plan to combine
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Target Corporation
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The corporation up for sale or acquisition.
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Bidder Corporation
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The corporation conducting the attempted sale or acquisition.
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Strategic Buyers
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Companies that are already in the target corporation’s industry (seeking to improve the corporation with the target’s assets).
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Financial Buyers
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Companies who seek out the target corporation with an eye on growing or improving the target corporation, and then selling for a profit.
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Leveraged Buyout
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When the bidder corporation employs the extensive use of debt to finance its purchase of target corporation and contemplates that the cash flow generated by target corporation’s business will be used to secure and repay the debt.
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Collar
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If the shares fall or rise too much between the agreement date and that closing date, there can be an amendment or an adjustment of the deal. Ceiling – the top value allowed Floor – the bottom value allowed
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Hostile Takeover
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When the management of the target corporation is opposed to the proposed takeover.
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Friendly Acquisition
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When the terms of the transaction are fully negotiated by the respective management teams, and where the board of directors of both corporations agree to the terms.
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Asset Acquisition
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When the bidder corporation provides cash to target corporation in exchange for assets. Bidder corporation does not take on the liabilities.
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Stock Acquisition
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Bidder corporation provides cash to target corporation in exchange for stock. Bidder corporation does take on the liabilities.
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Merger
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Bidder corporation provides shares of bidder corporation for shares of target corporation. Bidder corporation does take on the liabilities.
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Duty of Care
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The board of directors is obligated to manage the company’s business affairs in a manner that they reasonably believe to be in the company’s best interest.
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Duty of Loyalty
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The board of directors is obligated to make business decisions that are not tainted by any conflict of interest, or even the appearance of a conflict of interest.
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Business Judgment Rule
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A presumption 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 interest of the company.
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Delaware Section 251
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Basic merger statute; the board of directors of each DE constituent corporation must approve the merger agreement. Section 251(a) – gives corporations the permission for a merger agreement Section 251(b) – provides the requirements for a merger agreement Section 251(c) – requires that the merger agreement be submitted to the shareholders for their approval (absolute majority), unless: Section 251(f) – there is no need to vote if there is no amendment in the articles of incorporation, there is no change in the nature of the stock, and the amount of shares being issued is not at least twenty percent
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Delaware Section 259
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In the case of a direct merger, the surviving corporation succeeds to all of the rights and all of the liabilities of both constituent corporations (operation of law)
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Delaware Section 262
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Shareholders of both companies usually have the dissenters right to appraisal. However, Section 262(b)(1) eliminates the right of appraisal if the shares held are listed in a national exchange (\”market out\” exception). Section 262(b)(2) provides an \”exception to the exception\” as the \”market out\” exception does not apply if those who dissent are required to take any consideration other than stock.
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Appraisal Rights Flow Chart
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Step 1: Was there shareholder voting? (If yes, proceed to Step 2; if no, NO APPRAISAL RIGHTS) Step 2: Is the company publicly held? (If yes, proceed to Step 3; if no, APPRAISAL RIGHTS) Step 3: Is the consideration received survivor stock or publicly held stock? (If yes, NO APPRAISAL RIGHTS; if no, APPRAISAL RIGHTS)
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Three Steps for an Appraisal
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Step 1: Before the shareholders vote on the proposed merger, the objecting shareholder must notify the company of his intent to demand an appraisal [NOTICE] Step 2: At the time of the shareholder meeting, the dissenting shareholder must either abstain from voting or vote against the proposed merger, and then notify the company in writing of his intent to demand payment in cash for shares [ABSTAIN/WRITING] Step 3: The dissenting shareholder must keep his shoes through the effective date of the merger [HOLDING}
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Delaware Section 253
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Short-Form Merger – Allows a parent corporation to absorb a subsidiary without a vote of either the parent or the subsidiary’s shareholders, so long as the parent owns at least ninety percent of the subsidiary’s stock
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Delaware Section 271
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In cases involving the sale of a company’s assets, a threshold determination must be made in each case as to whether the company proposed to sell all or substantially all of its assets (as shareholders will need to vote with at least 20 days’ notice)
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Management Buyout
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When management buys the company.
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Spinoff
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Where the assets and business operations are disposed of and assembled in a subsidiary corporation.
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Gimbel v. The Signal Companies, Inc. (1) (DE)
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A three-part test is provided to determine whether a sale is for all or substantially all of the assets: 1) Assets being sold have to be quantitatively vital 2) The sale has to be out of the ordinary 3) The sale has to substantially affect the existence and purpose of the corporation going forward
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Katz v. Bregman (2) (DE)
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If the sale is of assets quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation, then it is beyond the power of the Board of Directors 1) Quantitative analysis (Ex. the Canadian subsidiary was 51% of assets, 44.9% of revenue; 52.4% of pre-tax net operating income) 2) Qualitative analysis (Ex. business of the corporation is not to buy and sell subsidiaries; sale of Canadian subsidiary is a radical departure from what is historically done)
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Hollinger Inc. v. Hollinger Intl., Inc. (3) (DE)
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A shareholder vote is needed if the assets to be sold are quantitatively vital to the operation of the corporation and that the sale of such assets would substantially affect the existence and purpose of the corporation 1) Quantitative analysis (Ex. The company has conducted such sales over the years, and the subsidiary is not substantially all of the assets) 2) Qualitative analysis (Ex. Yes, the sale of the subsidiary does change the nature of the corporation, but an important asset does not mean substantially all – the company will remain in the newspaper business and will continue to profit)
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Two-Step Transaction
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When bidder corporation conditions its obligation to purchase target corporation’s shares from the selling shareholders on its ability to obtain a sufficient number of target corporation shares to give bidder corporation a majority in the voting; bidder corporation then eliminates the outstanding minority shares via squeeze-out transaction
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Bust-Up Bid
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When the bidder corporation acquires the target corporation and sells off the pieces, because the target corporation is worth more if the pieces are sold off
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Merger of Equals
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A merger deliberately structured to avoid the perception that one firm is acquiring another company
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Steps of a Triangular Merger
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Step 1: Bidder corporation creates subsidiary (new corporation) Step 2: Subsidiary (new corporation) reaches out to the shareholders of target corporation and either offers money or shares of bidder corporation in exchange for shares of target corporation Step 3: A merger occurs between the subsidiary (new corporation) and the target corporation Step 4: Bidder corporation either has the new corporation as the subsidiary (forward triangular merger) or the target corporation as the subsidiary (reverse triangular merger) Note: with a merger vote, you need an absolute majority in Delaware, but just a majority in NYSE
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Doctrine of Independent Legal Significance
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Because Delaware does not accept the de facto merger doctrine, so long as a transaction is effected in compliance with the requirements of one section of the Delaware General Corporation Law, Delaware courts will not invalidate it for failing to comply with the requirements of a different section of the Delaware General Corporation Law, even if the substance of the transaction is such that it could have been structured under the other section
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Applestein v. United Board & Carton Corporation (4) (NJ)
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When a corporation sells or exchanges all, or substantially all of its property and assets, the stockholders of the selling corporation are given appraisal rights; in addition, of there is a virtual merger, where the term \”merger\” is not used, but where effective control changes, minority shareholders may object (de facto merger doctrine)
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Hariton v. Arco Electronics, Inc. (5) (DE)
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The general theory of the Delaware Corporation Law that action taken pursuant to the authority of the various sections of that law constitute acts of independent legal significance, and their validity is not dependent on other sections of the Act
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Pasternak v. Glazer (6) (DE)
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Because a certificate of incorporation is a contract between the corporation and its shareholders, it is interpreted according to the rules of contract construction
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California Section 181
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Reorganization statute; includes \”merger,\” \”exchange reorganization,\” and \”sale-of-assets reorganization\”
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California Section 1200
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Authorization is required by the board of directors of: 1) Each constituent corporation in a \”merger\” reorganization 2) The acquiring corporation in an \”exchange reorganization\” (Note: The only board approval not needed is that of the acquired corporation in an \”exchange reorganization\” because individual shareholders must decide whether to see their stock in such a reorganization) 3) The acquiring corporation and the corporation whose property and assets are acquired in a \”sale-of-assets reorganization\” 4) The corporation in control of any constituent or acquiring corporation under subdivision (a), (b) or (c) and whose equity securities are issued or transferred in the reorganization (a \”parent party\”)
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California Section 1201
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Each company that required board approval will need shareholder approval except if: 1) The \”rights, preferences, privileges, and restrictions granted to or imposed upon\” such shares remain unchanged by the reorganization; OR 2) The corporation will own, immediately after the reorganization, equity securities of the surviving corporation that equate to more than five-sixths of the voting power
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California Section 1300
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If the approval of outstanding shares of a corporation is required for a merger reorganization under Section 1201, each shareholder of that corporation may require it to pay, in cash, the fair market value of all \”dissenting shares\” Note: California does have a \”market out exception\” for those dissenting shares that are publicly traded Note: However, the \”market out exception\” is placed aside, and dissenters’ rights are restored if \”demands for payment are filed with respect to 5% or more of the outstanding shares of that class\”
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Control Premium
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Value of owning enough shares to have control over the company
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Minority Discount
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Value reduction due to the shareholder having no control over the company
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Market Discount
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When there is a small market for purchasing certain shares
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Restriction Discount
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Typically in privately-held companies; a discount applied for a restriction in transferring one’s shares
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Net Present Value
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Compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account
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Risk Free Rate of Return
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Rate of return giving money to an entity with no risk
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Risk Premium
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Amount of payment that you would make on top of the risk free rate of return
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Beta Value
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Variance of the stock in comparison to the stock market (ex. if beta value is 1.0, and the market goes up 1%, the stock will also go up 1%)
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VantagePoint Venture Partners 1996 v. Examen, Inc. (7) DE
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The internal affairs doctrine is a long-standing choice of law principle that recognizes that only one state should have the authority to regulate a corporation’s internal affairs – the state of incorporation (in this case, DE); the internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders
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Entire Fairness Rule
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Step 1: Initially, the plaintiff in a suit challenging a merger must allege specific acts of fraud, misrepresentation, or other items of misconduct to demonstrate the unfairness of the merger terms to the minority Step 2: The burden will then shift to the buyer to prove that there was fairness with procedure and price (\”fair price\” and \”fair dealing\”) Step 3: However, the burden will shift to back to shareholders if there is a \”cleansing movement\” (ex. an informed majority of minority voted on the deal – Delaware Section 144) Note:When looking at the value of the loss, the court needs to look at all of the pertinent facts
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Weinberger v. UOP, Inc. (8) (DE)
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The burden can only shift back to the plaintiff if there was an approval by the majority of the minority shareholders, and when there was complete disclosure of all material facts relevant to the transaction when that vote occurred
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Cavalier Oil Corp. v. Hartnett (9) (DE)
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A shareholder who dissents from a cash-out merger is entitled to receive the fair value of his shares, and that there is no minority discount (because to use such a discount would be against \”fair dealing\”)
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Cede & Co. v. Technicolor, Inc. (10) (DE)
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Only the speculative elements of value that may arise from the \”accomplishment or expectation\” of the merger are excluded
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Rabkin v. Philip A. Hunt Chemical Corp. (11) (DE)
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Appraisal might not be enough as a remedy in certain cases, where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved (absent fraud, appraisal is the exclusive remedy for mergers)
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Set-Offs
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Allows for the deal to close, but allows for the adjustment of price due to some issue coming to light.
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True-Ups
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Taking money off of the purchase price if the finances change.
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Non-Assignment
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Cannot transfer the agreement to another party.
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Tag Along
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If anyone listed in the agreement sells, it forces to buyer to purchase all of the shares.
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Take Along
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If anyone listed in the agreement wants to sell, it can force others to sell.
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PPG Industries v. Guardian Industries (12) (Sixth Circuit)
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Generally, agreements granting patent licenses are personal and not assignable unless expressly made so; just because a merger takes place by operation of law, it does not mean that a merger allows for a \”transfer\”
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Branmar Theatre Co. v. Branmar, Inc. (13) (DE)
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In the absence of fraud, a transfer of stock of a corporate lessee is ordinarily not a violation of a clause prohibiting assignment
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Change of Control Clause
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A contract term that gives one party increased protection if the other party’s controlling shares are transferred
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American Paper Recycling Corp. v. IHC Corp. (14) (MA)
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In order to hold a third party on a breach of contract, plaintiff must establish that the asset purchase was a de facto merger, and that the factors to look for include: 1) Continuity of Enterprise, 2) Continuity of Shareholders, 3) Seller Corporation Ceases Operations, 4) Purchasing Corporation Assumes Obligations of Seller Corporation that Are Necessary to Continue Normal Business Operations
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Ruiz v. Blentech Corporation (15) (Seventh Circuit)
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CA has a fifth exception (Products Line) to the general rule that a corporation that purchases the principal assets of another corporation does not assume the seller’s liabilities arising from tort claims (Express/Implied Agreement, De Facto Merger, Mere Continuation, and Fraud are the other four exceptions); the \”products line\” exception applies in cases involving tort claims where the plaintiff lacks an adequate remedy against the seller, the purchases knows about the product risks associated with the line of products it continues, and the seller transfers good will associated with the product line
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Questions to Ask for Securities
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1) Does the transfer involve a security? (If no, the transaction is not governed by either the Securities Act of 1933 or the Securities Exchange Act of 1934) 2) Is the transfer an original sale by the company? (If yes, the Securities Act of 1933 applies, and if no, the Securities Exchange Act of 1934 applies) 3) Does the transfer qualify for an exemption to having to register with the Securities and Exchange Commission? (Section 3(a)(11) – intrastate offerings; Section 3(b) – less than $5million; Section 4(a)(1) – transfer did not involve an issuer, underwriter, or a dealer; Section 4(a)(2) – transfer did not involve a public offering; various safe harbors, including Rule 506 of Regulation D – 35 or less \”non-accredited\” investors) 4) What liabilities are there for not abiding by the rules? (Criminal and civil liabilities) 5) Did the transfer abide by with Williams Act? (Section 13 and Section 14)
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General Rule About Sending Out Stock
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Any time a corporation, regardless whether it is a large, publicly traded or a small, privately held company, propose to use an instrumentality of interstate commerce in order to issue its stock, the corporation must register the offering or find an exemption for the transaction.
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Reports Under the Securities Act of 1933
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1) Registration (S-1) 2) Acquisition involving the issuance of shares (S-4) 3) Filing for companies who want to issue equity to employees (S-8)
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Reports Under the Securities Exchange Act of 1934
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1) Annual Report (10-K) 2) Quarter Report (10-Q) 3) News Release (8-K) 4) Proxy Statements (Section 14)
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Rule 14a-9
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1) There is liability for false and/or misleading disclosures in the proxy statement 2) The rule requires full and adequate disclosure of all material facts (which is usually beyond the requirements of Schedule 14A)
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\”Say on Pay\” Votes
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Where shareholders of a publicly traded company are asked to give a non-binding advisory vote on compensation amounts for the company’s senior executive officers
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Golden Parachutes
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Broadly defined to include all agreements and understandings between the target corporation or the acquirer and each named executive officer of the target corporation or the acquirer, that relate to a specific merger or acquisition transaction
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Fairness Opinions
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A professional evaluation by an investment bank or other third party as to whether the terms of a merger, acquisition, buyback, spin-off, or privatization are fair
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Basic Incorporated v. Levinson (16) (Supreme Court)
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A disclosure has to be truthful and timely, especially if a prior statement was made; materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information
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Rule 10b-5
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Does not impose a duty to disclose; however, once you speak, the rule requires that you speak truthfully, providing full and adequate disclosures of all material facts. (When the rules of the Securities and Exchange Commission affirmatively require disclosure; When a corporation or corporate insider trades on the basis of material, non-public information; When disclosure is required to make prior statements not misleading)
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United States v. O’Hagan (17) (Supreme Court)
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Rule 10b-5 can be violated via the misappropriation theory (if his employer violated its fiduciary duty, then he violated the rule by trading on the information); Rule 14e-3 can be violated if one has material information, there was a substantial step made to commence a tender offer, and there is not reasonable time following an announcement before the trading by the \”insider\” is made
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Texas International Airlines v. National Airlines, Inc. (18) (Fifth Circuit)
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For the purpose of preventing the unfair use of information which may have been obtained by a beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized from any purchase and sale (or sale and purchase), of any equity security of such issuer within six months, shall have profits disgorged and become recoverable by the issuer, regardless of intent, and even if the rule is \”inequitable\” (the only exception is if there is an involuntary sale)
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Turner Broadcasting System, Inc. v. McDavid (19) (GA)
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Even complex or expensive contracts may be oral, as long as the evidence establishes the parties’ mutual assent to all essential terms of the contract (McDavid being called \”the guy\” seemed to indicate an agreement)
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Martin Marietta Materials, Inc. v. Vulcan Materials (20) (DE)
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Since the confidentiality agreement was only pursuant to the merger, one cannot use confidential information for another purpose
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Earn Out
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A pricing formulation that allows the financial performance of target corporation’s business on a post-closing basis to affect directly the amount of purchase price that bidder corporation will ultimately pay for target corporation’s business
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Escrow
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Where bidder corporation holds back a specified portion of the purchase price at closing, and places those funds in escrow with an independent escrow agent, for a specified time (could also be used for indemnification claims)
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In re RJR Nabisco, Inc. Shareholders Litigation (21) (DE)
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The business judgment form of judicial review encompasses three elements: a threshold review of the objective financial interests of the board whose decision is under attack (independence), a review of the board’s subjective motivation (good faith), and an objective review of the process by which it reached the decision under review (due care) [stated value does not necessarily mean actual value]
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Basic Agreement Sections
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1) Introductory provisions 2) Description of the structure of the transaction 3) Terms of the purchase price* 4) Representations and warranties (target corporation, bidder corporation)* 5) Pre-closing covenants (target corporation, bidder corporation) 6) Closing on the transaction 7) Termination 8) Indemnification* 9) Miscellaneous
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Representation
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An assertion to a fact, true on the date the representation is made, that is given to induce another party to enter into a contract or to take some other action (looking back)
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Warranty
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A promise of indemnity if the representation is false (looking back)
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Disclosure Schedule
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Exceptions to the merger or acquisition agreement
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Covenants
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The promise of a party to the agreement that relates to the future, obligating the party to do something (affirmative) or not do something (negative), during the time period between the signing and the closing of the agreement (executory interval period) (looking forward)
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In re IBP, Inc. Shareholders Litigation (22) (DE)
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Once you sign a deal, it takes more than just a tipping of the scale to back out of a deal – there has to be devastation (\”material\” aspect)
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Material Adverse Effect
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Any event, occurrence, or development of a state of circumstances or facts which has had or reasonably could be expected to have a material adverse effect on the target corporation, and it could allow the bidder corporation to \”walk away\”
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Cap and Basket
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1) Basket – Establishes a threshold under which the bidder corporation cannot make a claim against the seller (Threshold – Deductible; Zero-Based – No deductible) 2) Cap – Limits the overall liability of the seller
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Non-Compete Clause
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Prevents the selling party from engaging in competition with the bidder corporation, should the sale go through, and must provide the following parameters: Terms, Location, Time
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Contribution Agreements
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1) Occurs when minority shareholders will not agree to an agreement, because they do not want to be \”joint and severally liable\” 2) Allows for the minority shareholder to only be severally liable, or in the alternative, allows for the minority shareholder to be reimbursed by the majority shareholder for certain liabilities
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Williams Act
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Part of the Securities Exchange Act of 1934; a tender offer must stay on the table for 20 days; 4 main sections (Section 13(d), Section 13(e), Section 14(d), Section 14(e))
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Section 13(d)
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Reporting at 5% – within 10 days 1) Rule 13d-2 requires that any \”material\” change in the information disclosed in a Schedule 13D must be filed \”promptly\”
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Section 13(e)
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Disclosure when corporation is repurchasing its own securities) 1) Rule 13e-1 (purchase of securities by the issuer during a third-party tender offer) 2) Rule 13e-3 (a company must file a Schedule 13E-3 when it goes private) 3) Rule 13e-4 (pure self-tender offer)
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Section 14(d)
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Disclosure obligations in connection with a tender offer by a third party 1) Rule 14d-3 (requirements of statement) 2) Rule 14d-6 (specific statement of tender offer) 3) Rule 14d-9 (requirement that the company has a board meeting and present a recommendation for its shareholders) 4) Rule 14d-10 (best price rule) [Requires the tender offeror to pay all security holders the highest paid to any security holder in the course of the tender offer; The Securities and Exchange Commission has made it clear that the best price rule only applies to the consideration paid for the securities tendered, not for other arrangements that may be integral to the tender offer (ex. employment agreements)]
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Section 14(e)
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Prohibits material misstatements, omissions, and fraudulent practices in connection with tender offers, regardless of whether target corporation is a reporting corporation 1) Regulation 14E discusses the conduct that must take place during a tender offer 2) Rule 14e-3 (if the source has a fiduciary duty, and you trade on insider information, there is a violation of Section 14(e))
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GAF Corporation v. Milstein (23) (Second Circuit)
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When two or more persons act as a partnership, limited partnership, syndicate, or other group, for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a \”person\” for the purposes of Section 13(d)
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Empty Voting
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The ability to separate a share’s voting rights from any economic ownership interest in the company itself
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Beneficial Owner
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All one needs is the ability to buy and vote (options count)
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Control Person
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A shareholder who has the ability to control the corporate policies and influence policy at the board level (10% is sufficient per the Securities and Exchange Commission)
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Rondeau v. Mosinee Paper Corporation (24) (Supreme Court)
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The purpose of the Williams Act is to insure that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information regarding the qualifications and intentions of the offering party, not to provide a weapon for management to discourage takeover bids (so the corporation might not be able to sue, but shareholders might have a cause of action for the depressed values of their shares caused by the delayed reporting)
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Chromalloy American Corp. v. Sun Chemical Corp. (25) (Eighth District)
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\”Control\” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person – however, if there is no harm to the corporation, there is no need for an injunction, as the injunctive process is designed to deter, not punish
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Go Private
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When a corporation is trying to go from a public corporation to a private corporation, where a few shareholders buy back the shares from the other shareholders via a self-tender offer
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White Knight
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When a company asks another company to buy it in a friendly deal, in order to prevent a takeover via hostile acquisition
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Crown Jewel
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A type of poison pill where a target corporation gets rid of its best asset when the hostile takeover corporation reaches a certain limit (on the number of shares owned); such deal usually benefits the buyer
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Basic Fairness Test
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1) Fair price and fair process 2) Burden is on the board of directors to prove fairness 3) Under DE law, if you get 90% of the company, you can squeeze out the remaining 10% and shift the burden to the shareholders (short-form merger; Glassman)
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SEC v. Carter Hawley Hale Stores, Inc. (26) (Ninth Circuit)
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Under the Wellman test, the existence of a tender offer is determined by examining the following factors: 1) Widespread solicitation 2) Desire substantial percent of stock 3) \”Premium\” offer 4) \”Firm\” offer that is not negotiable 5) Contingent offer 6) Limited offer period 7) Pressure from shareholders to sell stock 8) Public announcement of tender offer
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Hanson Trust PLC v. SCM Corporation (27) (Second Circuit)
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Private transactions or open market purchases do not qualify as tender offers; an offering to those who are shown to be able to fend for themselves is a transaction not involving any public offering (Section 4)
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Gilbert v. El Paso Company (28) (DE)
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Burlington had a right to terminate its tender offer, and not have the termination be a breach (those who initially tendered, sued for missing out on the \”sweetheart\” deal)
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Edgar v. MITE Corp
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1) IL statute was that the state can oversee acquisitions and can block the transactions under certain guidelines (if 10% of the shareholders and the principal place of business is in IL) 2) However, the statute was unconstitutional (impermissible state interference with interstate commerce), and was pre-empted by the Williams Act
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CTS Corp. v. Dynamics Corp. of America (29) (Supreme Court)
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Absent an explicit indication by Congress of an intent to pre-empt state law, a state statute is pre-empted only where compliance with both federal and state regulations is a physical impossibility (not pre-empted by the Williams Act); so long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one state (no unconstitutional via commerce clause)
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Amanda Acquisition Corp. v. Universal Foods Corp. (30) (Seventh Circuit)
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Skepticism about the wisdom of a state’s law does not lead to the conclusion that the law is beyond the state’s power; only if the state law discriminates against interstate commerce expressly would the negative Commerce Clause step in
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Smith v. Van Gorkom (31) (DE)
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The business judgment rule is a presumption 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 interest of the company; as for a vote with interested directors, an attack on their vote must fail if a majority of fully informed stockholders ratify the action (burden is on the defense to establish that the shareholder approval resulted from a fully informed electorate)
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Delaware Section 102(b)(7)
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Authorizes Delaware corporations to include provisions in their certificates of incorporation limiting directors’ personal liability in money damages for conduct constituting a breach of the duty of care (not duty of loyalty)
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California Section 310
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1) You can cure a transaction if there is an issue regarding the duty of loyalty 2) If there is a shareholder or board vote done by disinterested individuals, the burden will shift to the plaintiff
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Cheff v. Mathes (32) (DE)
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If the actions of the board were motivated by a sincere belief that the buying out of the dissident shareholder was necessary to maintain what the board believed to be proper business practices (good faith and reasonable investigation), the board will not be held liable for such decision, even though hindsight indicates the decision was not the wisest; however, if the board acted solely or primarily because of the desire to perpetuate themselves in office, the use of corporate funds for such purpose is improper
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Raider
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One who wanted to purchase a company, because he felt that he could make money by selling the parts (can lead to greenmail)
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Greenmail
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The practice of purchasing enough shares in a firm to threaten a takeover, thereby forcing the target corporation to buy back shares at a premium in order to suspend the takeover
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Poison Pill
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An anti-takeover device by a company, also known as a shareholder rights plan 1) Flip-In: All non-bidder company shareholders will get the opportunity to purchase shares at a lower price 2) Flip-Over: All non-bidder company shareholders will get a change to buy shares of the combined entity at a bargain price
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Staggered Board
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An anti-takeover device where board elections does not involve all seats (takes takeover corporations multiple years to take over a staggered board)
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No Removal Without Cause
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1) One cannot remove a director unless there is wrong-doing (avoids emergency voting) 2) In CA, the board member gets to complete the term (the default length is one year)
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Advance Notice
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1) Cannot hold a shareholders’ meeting without waiting a certain number of days 2) Cannot present a candidate for board membership within a certain number of days of the election
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Antitrust Setup
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Where a target corporation buys a competitor of the bidder corporation, to prevent takeover by the bidder corporation because of antitrust laws
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Poison Debt
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Where a target corporation takes on a lot of debt, to make it look less appealing
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Proxy Rules
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Obligates management to distribute to the shareholders of a publicly traded company, a proxy statement that provides full an adequate disclosure of all \”material\” facts necessary for the shareholders to make an informed decision with respect to a transaction that requires shareholder approval (Lynch v. Vickers Energy – One cannot be \”cute\” on the proxy statements (full disclosure is needed – no adequate disclosure or \”half truths\”))
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Schreiber v. Burlington Northern, Inc. (33) (Supreme Court)
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\”Manipulation\” as written in Section 14(e) connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities (which is not what happened to El Paso’s shareholders)
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Unocal Corporation v. Mesa Petroleum (34) (DE)
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Two-part test when a corporation uses a defense mechanism (Unocal Test) 1) Directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person’s stock ownership, by showing good faith and reasonable investigation 2) If a defensive mechanism is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed
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Timetable for a Takeover
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Time 1 – Raider finds a weakened target corporation, and the raider/bidder corporation approaches the shareholders of the target corporation in a public notice (tender offer), and offers a nice premium on the shares (board of target corporations still has fiduciary duties; raider/target corporation needs to abide by the Williams Act) Time 2 – Once the raider/bidder corporation receives more than 50% of the shares, the target corporation will become a partly-owned subsidiary of the bidder corporation, and now the bidder corporation can call for a merger Time 3 – Target corporation merges into bidder corporation, as bidder corporation provides the remaining shareholders junk bonds (same dollar value as the initial cash offer) Time 4 – Target corporation becomes a wholly-owned subsidiary of bidder corporation, and target corporation shareholders are no longer in the picture
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Moran v. Household International, Inc. (35) (DE)
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When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and it shareholders; 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
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Unitrin, Inc. v. American General Corp. (36) (DE)
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The proportionality review within the enhanced scrutiny test (Unocal’s second step) should have the following order: 1) First, the court must determine whether the defensive mechanisms were draconian, by being either preclusive or coercive (if draconian, the defensive mechanisms fail the Unocal test) 2) Second, if the defensive mechanisms were not draconian, the court must determine whether the defensive mechanisms were within a range of reasonable responses to the threat posed
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Carmody v. Toll Brothers, Inc. (37) (DE)
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iA target corporation’s board of directors cannot erect defenses that would either preclude a proxy contest altogether or improperly bend the rules to favor the board of directors’ continued incumbency; a defensive mechanism is disproportionate if it is either coercive or preclusive
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Quickturn Design Systems, Inc. v. Shapiro (38) (DE)
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To the extent that a contract, or a provision, purports to require a board to act or not act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable
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Revlon, Inc. v. MacAndrews & Forbes Holding, Inc. (39) (DE)
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When a sale is inevitable, the directors’ role changes from being defenders of the corporate bastion to auctioneers, charged with getting the best price for the stockholders; also, when a board ends an intense bidding contest on an insubstantial basis, in fear of personal liability for consequences stemming from its own defensive measures, the action cannot withstand the enhanced scrutiny under Unocal
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City Capital Associates v. Interco, Inc. (40) (DE)
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When a board faces a tender offer, and a request to redeem its poison pill, the board cannot arbitrarily reject the offer; the board will be held to the same fiduciary standards when facing a request to remove the poison pill as it would when deciding to implement a poison pill
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Paramount Communications, Inc. v. Time, Inc. (41) (DE)
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There are two circumstances which may implicate Revlon duties: 1) When a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; and 2) When in response to a bidder corporation’s offer, a target corporation abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company
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Paramount Communications, Inc. v. QVC Network, Inc. (42) (DE)
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When a corporation undertakes a transaction which will cause a change in corporate control, or a break-up of the corporate entity, the directors’ obligation is to seek the best value reasonably available to the stockholders; although the Paramount-Viacom deal was a \”merger,\” because Viacom had a controlling shareholder, there was a change in corporate control (and so, Revlon applies)
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Lyondell Chemical Co. v. Ryan (43) (DE)
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There is only one Revlon duty – to get the best price for the stockholders at a sale of the company; no court can tell directors exactly how to accomplish the goal of obtaining the best price, because they will be facing a unique combination of circumstances, many of which will be outside their control (so an auction is not the only option)
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Lock-Up Option
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A defensive measure where the board of directors agrees with a white knight to sell its crown jewel for bargain pricing, should there be a takeover threat
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Termination Fee
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If a party to an agreement cancels, it might owe a fee to pay for all of the other party’s expenses
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Break-Up Fee
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When the target corporation leaves the bidder corporation for another suitor
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No Shop Clause
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A promise within the agreement that the target corporation will not actively look for a better deal
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Standstill Agreement
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The bidder corporation will refrain from seeking out more shares of the target corporation in exchange for confidential information of the target corporation, or to allow for discussions with the target corporation regarding purchase
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Golden Parachute Types
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1) A management retention agreement allows for the target corporation’s management to receive a lot of money if it sticks around past the transaction 2) A severance agreement will allow management of the target corporation to receive money if there is a takeover and subsequent firing 3) A change of control agreement will allow management of the target corporation to receive money if fired, following a \”change of control\” (takeover or new board of directors) 4) An evergreen employment agreement will guarantee employment for a manager of the target corporation, so long as the manager is not fired (automatic renewals)
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Go Shop Clause
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A provision that allows a public company that is being sold to seek out competing offers, even if it has already received a firm purchase offer
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Brazen v. Bell Atlantic Corporation (44) (DE)
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Wrongful coercion that nullifies a stockholder vote may exist where the board takes actions which have the effect of causing the shareholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction; also, when it comes to liquidated damages, the amount is valid if the damages are uncertain and the amount agreed upon is reasonable (remember, Delaware follows the doctrine of independent legal significance)
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Omnicare, Inc. v. NCS Healthcare, Inc. (45) (DE)
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In applying enhanced judicial scrutiny to defensive devices designed to protect a merger agreement, a court must first determine those measures are not preclusive or coercive before its focus shifts to the \”range of reasonableness\” in making a proportionality determination 1) A response is \”coercive\” if it is aimed at forcing upon stockholders a management-sponsored alternative to a hostile offer 2) A response is \”preclusive\” if it deprives stockholders of the right to receive all tender offers or precludes a bidder corporation from seeking control by fundamentally restricting proxy contests or otherwise
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In re The Topps Company Shareholder Litigation (46) (DE)
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When directors propose to sell a company for cash or engage in a change of control transaction, they must take reasonable measures to ensure that the stockholders receive the highest value reasonably attainable; when directors bias the process against one bidder corporation and towards another bidder corporation, and not in a reasoned effort to maximize the advantage for the shareholders, there is a breach of fiduciary duties
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Gantler v. Stevens (47) (DE)
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1) The fiduciary duties owed by officers are the same as those owed by directors 2) One cannot claim a cleansing vote defense (majority of the minority) if the proxy statement was inaccurate
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Glassman v. Unocal Exploration Corp. (48) (DE)
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In a short-form merger, the parent corporation does not have to establish entire fairness, and absent fraud or illegality, the only recourse for a minority shareholder who is dissatisfied with the merger consideration is appraisal
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In re Cox Communications, Inc. Shareholders Litigation (49) (DE)
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A transaction between a corporation and an officer or director is not per se voidable so long as the transaction is approved, after full disclosure, either by a majority of the disinterested directors or a good faith vote of the stockholders (business judgment rule); however, with a merger involving a controlling shareholder, the entire fairness rule still applies, regardless of the procedural protections employed (but if the transaction is negotiated and approved by a special committee, and the transaction is subject to approval by a majority of disinterested shares, the burden shifts to the plaintiff)
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Air Products and Chemicals, Inc. v. Airgas, Inc. (50) (DE)
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The power to defeat an inadequate hostile tender offer ultimately lies with the board of directors; inadequate price has become a form of substantive coercion, which can allows target corporation’s board of directors to take defensive measures under the Unocal test (but even where an offer is non-coercive, it may represent a \”threat\” to shareholder interests because a board with the power to refuse the proposal and negotiate actively may be able to obtain higher value from the bidder corporation)

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