Chapter 21 Directors, Officers, and Controlling Shareholders

Question 1

asset lock-up option

Answer 1

A lock-up option relating to assets of the target company.

Question 2

breakthrough rule

Answer 2

A provision in Article 11 of the European Union Directive on Takeover Bids that permits a hostile bidder to weaken a target company’s prebid differential voting structures to ensure that a bidder that acquires a majority of the target’s equity can successfully mount a takeover.

Question 3

breakup fee

Answer 3

An amount agreed to in a merger agreement to be paid to a friendly suitor company if the agreement with the target company is not consummated through no fault of the friendly suitor company.

Question 4

business judgment rule

Answer 4

In a case challenging a board decision, this rule holds that as long as directors have made an informed decision and are not interested in the transaction being considered, a court will not question whether the directors’ action was wise or whether they made an error of judgment or a business mistake.

Question 5

bust-up takeover

Answer 5

An acquisition in which the acquired corporation is taken apart and its assets are sold piecemeal.

Question 6

constructive trust

Answer 6

A trust imposed on profits derived from an agent’s breach of fiduciary duty.

Question 7

controlling shareholder

Answer 7

A shareholder who owns sufficient shares to outvote the other shareholders, and thus to control the corporation.

Question 8

corporate opportunity doctrine

Answer 8

The doctrine that holds that a business opportunity cannot legally be taken advantage of by an officer, director, or controlling shareholder if it is in the corporation’s line of business.

Question 9

crown jewels

Answer 9

The most valuable assets or divisions of a target company in a takeover battle.

Question 10

dead-hand pill

Answer 10

A type of poison pill anti-takeover device that can be redeemed only by the directors of the target who initially adopted it. It violates the directors’ duty of loyalty; applicable to defensive tactics touching upon issues of control because it purposefully disenfranchised the company’s shareholders without any compelling justification.

Question 11

deal protection devices

Answer 11

These devices dissuade other bidders and thereby protect the consummation of the friendly merger transaction favored by the target.

Question 12

duty of care

Answer 12

The fiduciary duty of agents, officers, and directors
to act with the same care that a reasonably prudent person would exercise under similar circumstances. Sometimes expressed as the duty to use the same level of care a reasonably prudent person would use in the conduct of his or her own affairs.

Question 13

duty of loyalty

Answer 13

The fiduciary duty of agents, officers, and directors to act in good faith and in what they believe to be the best interest of the principal or the corporation.

Question 14

fiduciary out

Answer 14

The obligation of a trustee or other fiduciary to act for the benefit of the other party.

Question 15

freeze out

Answer 15

The majority forces the minority shareholders to convert their shares into cash, as long as the transaction is fair.

Question 16

greenmail

Answer 16

Payment by a target company to buy back shares owned by a potential acquiror at a premium over market. The acquiror in exchange agrees not to pursue its hostile takeover bid.

Question 17

inside directors

Answer 17

A member of a board who is also an officer.

Question 18

line-of-business test

Answer 18

If an officer, director, or controlling shareholder learns of an opportunity in the course of business for the corporation, and if the opportunity is in the corporation’s line of business, a court will not permit that person to keep the opportunity for personal gain.

Question 19

mandatory bid provision

Answer 19

Prohibits coercive two-tier hostile tender offers and market purchases by requiring any person who acquires 30 percent or more of a target company’s stock to offer to buy all remaining shares at the highest price paid to acquire the 30 percent block.

Question 20

neutrality rule

Answer 20

Requires the target’s board of directors to remain neutral when faced with a hostile takeover bid and stipulates that once a takeover bid has been launched, the target’s board cannot adopt any antitakeover devices, such as poison pills, without first obtaining the specific approval of shareholders. Applicable in certain member states of the European Union.

Question 21

no-hand pill

Answer 21

A poison pill antitakeover device that cannot be redeemed for six months even if the insurgent’s slate of directors is elected and votes to redeem it. Contrast with dead-hand pill.

Question 22

no-shop agreement

Answer 22

An agreement whereby the target agrees not to actively solicit other bidders but retains the right to negotiate with parties who submit unsolicited bids to the target.

Question 23

no-talk clause

Answer 23

A clause permitting a corporation to engage in discussions with and provide information to other bidders only if the board has concluded, based on the written opinion of outside legal counsel, that engaging in discussions or providing information was required to prevent the board from breaching its fiduciary duties to its stockholders.
not an underwrite

Question 24

poison pill

Answer 24

A plan that would make any takeover of a corporation prohibitively expensive. Also called shareholder rights plan.

Question 25

proxy

Answer 25

A written authorization by a shareholder to another person to vote on the shareholder’s behalf.

Question 26

proxy contest

Answer 26

A battle for corporate control whereby someone wishing to replace the board with its own candidates seeks to acquire a sufficient number of shareholder votes to do so.

Question 27

quasi-foreign corporation

Answer 27

A corporation incorporated outside of California, for example, but with more than 50 percent of its stock owned by California residents and with more than 50 percent of its sales, payroll, and property tax derived from activities in California.

Question 28

Revlon mode

Answer 28

A company is said to be in Revlon mode when a change of control or breakup of the company has become inevitable.

Question 29

self-tender

Answer 29

An offer by a corporation to buy back its stock or shareholder rights for a fair price.

Question 30

shareholder derivative suit

Answer 30

A lawsuit brought against directors or officers of a corporation by a shareholder on behalf of the corporation.

Question 31

standstill agreement

Answer 31

An agreement whereby the shareholder agrees not to commence a tender offer or proxy contest or to buy additional shares of the issuer for a period of time, often ten years.

Question 32

substantive coercion

Answer 32

A threat that shareholders may agree to sell their shares in an otherwise noncoercive tender offer out of ignorance about the target company’s true value. Also occurs when management structures a deal in such a way that deprives shareholders of a meaningful choice.