Class 4 powerpoint

Question 1

tobin’s queue

Answer 1

global market value divided by the replacement cost

replacement cost: replacement of obsolete machines for example

–> relevant because of certain sector’s characteristics

Question 2

The management entrenchment hypothesis

Answer 2

preconizes that nonparticipating shareholders lose wealth when management takes actions to deter attempts to take control of the firm

opposite to the The shareholder interest hypothesis

Question 3

The shareholder interest hypothesis

Answer 3

shareholders gain wealth when managers takes actions to prevent changes in control

opposite of The management entrenchment hypothesis

Question 4

As board ownership on the firm increases, shareholder wealth generally increases or decreases

Answer 4

increases except for a specific interval

Question 5

Rights of Targets’ Boards to Resist Under US laws and Canada

Answer 5

Under US laws, boards see their resistance as fiduciary activities

in Canada the laws are more shareholder rights-oriented and boards are restrained in their defensive actions

Question 6

true or false

In the first years after a firm goes public, takeover defenses could actually consolidate the bond between the firm and relevant stakeholders

Answer 6

true

Question 7

A corporate profile

Answer 7

a document that outlines the firm’s potential vulnerability and proposes ways to tackle hostile bids

Question 8

what could an unexpected increase in trading volume signal?

Answer 8

a hostile takeover

it could mean a lot of stuff such as earnings

Question 9

The most frequent preventive measures to hostile takeovers are

Answer 9

Poison pill

corporate charter amendments

Question 10

Poison pill

Answer 10

Securities issued by a potential target to render the firm less valuable from the hostile bidder viewpoint

Question 11

corporate charter amendments

Answer 11

The target firm may enact several amendments in its corporate charter so as to toughen a change in managerial control

–> precognizes that management is a bad evil

Question 12

A preferred stock plan

Answer 12

represents shares of a target firm that could be converted into a fixed amount of shares of an acquirer if a takeover occurred

Question 13

two drawbacks of a referred stock plan

Answer 13

The issuer could only redeem those shares after a substantial amount of time

Analysts often group preferred shares with debt when assessing a firm’s leverage

Question 14

Flip-over poison pills

Answer 14

rights allowing the holders to buy shares of an acquirer at a low price

–> they are distributed as dividends and become active following a triggering event

Question 15

Legality of Poison Pills

Answer 15

In Moran v. Household International, the Delaware Supreme Court rules that the pills do not keep bidders away, but rather favour target firms the chance to seek higher bids

In Unitrin v. America General Corp., the court does not bother with the target’s (i.e., Unitrin’s) use of poison pills, albeit it raises other issues with the target’s action to the unwanted bid

In Moore Corp. Ltd. v. Wallace Computer Services, Inc., the court favours the use of defences such as poison pills. In fact, the acquirer (i.e., Wallace) faces issues such as staggered board and shareholder support for the hostile bid

Question 16

who uses more poison pills between large and small firms

Answer 16

Today, poison pills are less used by big firms, and more used by smaller firms

Question 17

Shadow pill

Answer 17

stands for the adoption of a pill after a bid has taken place or an activist has targeted the firm

Question 18

On-the-shelf plans

Answer 18

plans that are ready to be carried out depending on the type of threat perceived by the board

Question 19

The issuing dynamics of Poison Pills

Answer 19

Issuance through a dividend of one right for each stock shareholders own (redeemable for 1¢ to 5¢)

Right plans are normally authorized by the board without shareholder approval

Question 20

the Rights (poison pills stuff)

Answer 20

Prior to the triggering event, the rights trade with the common shares and separate rights certificates are not issued

the bidder does not enjoy the benefits of the rights

Certain large shareholders with high ownership may be grandfathered by the target firm

Question 21

true or false

A poison pill plan may exempt specific qualified offers (e.g., all-cash considerations, and minimum offer price)

Answer 21

true

Question 22

A chewable pill (or qualified offer provision)

Answer 22

a shareholder vote on whether a specific takeover bid would be covered by the firm’s poison pill

Question 23

Net operating losses (NOLs)

Answer 23

tax losses that can be used to counterbalance profits two years past and up 20 years forward

Question 24

according to the IRS, when do ownership changes occur

Answer 24

when 50% or more of the shares change ownership over a three-year period

(it applies only to shareholders who got 5%+ of shares outstanding during that period)

Question 25

Auctions lead to what?

Answer 25

added takeover premum

Question 26

why is the board often pressured to deactivate posion pills?

Answer 26

because the bidding can get high af and they would end up losing a shit ton potential cash

Question 27

Poison puts

Answer 27

pertain to the issuance of bonds that contemplate a put option exercisable only if an unfriendly takeover occurs

Question 28

when are poison put bonds usually unnatractive?

Answer 28

If bonds are offered at higher than prevailing interest rates

Question 29

number of shares per warrant calculation

Answer 29

m = Pe / (Ps/2)

m: number of shares per warrant

Pe: exercise price of the poison pill

Ps: target’s share price

Question 30

total equity formula

Answer 30

shares (bidder) * Ps + Shares (others) * Pe

Pe: exercise price of the poison pill

Ps: target’s share price

Question 31

Pequity formula

Answer 31

Total equity / Total shares outstanding

Question 32

how to find the total shares outstanding?

Answer 32

Total Shares Outstanding = Shares bidder + Shares others * m

m: number of shares per warrant

Shares others = Shares Outstanding pre-deal - Shares bidder

Question 33

what are the steps when to find the total equity

Answer 33

1. find m: number of shares per warrant
2. find the total shares outstanding
3. find the total equi

Question 34

what are the steps when to find the Own Bidder’s Shares post-pill

Answer 34

Bidder’s amount of shares / total shares outstanding

put answer in percentages

Question 35

Bylaws are normally determined by whom?

Answer 35

the board of directors

Question 36

Bylaws

Answer 36

and describe important rules as to how the firm will operate

Question 37

Corporate charter (or articles of incorporation)

Answer 37

stands for a more fundamental document that presents the firm’s purpose and the different share class that could exist

Question 38

Common antitakeover measures are

Answer 38

Staggered boards

Supermajority provisions

Dual capitalization

Fair price provisions

Question 39

A staggered board (or classified board)

Answer 39

an arrangement whereby only one-third of the members (i.e., a class) can be replaced through election every year

could prevent a bidder with majority control from electing pro-bidder managers

The combination of poison pill and staggered boards curbs hostile takeovers considerably

Question 40

when does a leaky staggered board take place?

Answer 40

when a bidder increases board size so as to place pro-bidder members

Question 41

The adoption of a staggered board increases or decreases q over time? what about the opposite?

what does this mean for the firm’s long-term values?

Answer 41

The adoption of a staggered board increases firm’s q values over time, while de-staggering reduces them

Such a pattern reflects a firm’s commitment to long-run values; staggered boards could help prevent short-term-oriented attacks on firms with long-term orientation (e.g., R&D)

Question 42

A substantial shareholder

Answer 42

someone who holds more than 5%-10% of the firm’s outstanding shares

Question 43

A supermajority provision

Answer 43

a higher-than-majority vote to approve a merger (at least 80%)

In Seibert v. Gulton Industries, Inc., the court endorses a supermajority provision requiring an 80% approval for takeover by a 5% shareholder

Question 44

A board-out clause

Answer 44

enables the firm to waive or cancel the supermajority provision (e.g., a raider would not be able to exercise his votes on issues of approving a merger offer)

Question 45

A fair price provision

Answer 45

a change of a firm’s charter that requires the acquirer to pay minority shareholders at least a fair market price for the firm’s shares

can be gauged by either a specific price or the historical P/E ratio

Question 46

true or false

State corporation laws could have a more significant impact on shareholder wealth than other state antitakeover laws

Answer 46

true

In states with corporate fair price provisions, they normally yield higher prices for shareholders in merger offers