Corporations: Corporate Control Transactions (Prof D)

Question 1

Corporation control transactions are

Answer 1

five types of transactions:

1. Purchase of assets,
2. Share exchange,
3. Merger,
4. Tender offer,
5. Private purchase of control shares.

Question 2

THE DE FACTO MERGER DOCTRINE

Answer 2

If an agreement changes the corporate character and interest of shareholders therein such that preventing a dissenting shareholder from exercising the right to claim fair value for the shares forces the dissenting shareholder to give up stock in one corporation and, against his will, accept shares in another.
Farris v. Glen Alden Corp.

Question 3

What is a “freezing-out” merger?

Answer 3

It is a merger where a majority of shareholders attempts to eliminate unwanted minority shareholders.

Question 4

Weinberger v. UOP, Inc.

What is the duty of loyalty in this case (rules)?

Answer 4

When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate utmost good faith and the most scrupulous inherent fairness of the bargain.
The duty of demonstrating fairness is on the directors.

When the directors are in a parent-subsidiary context, they owe the same duty of good management to both corporations, and in the absence of an independent negotiating structure, or the directors’ total abstention from any participation in the matter, this duty is to be exercised in light of what is best for both companies.

Question 5

“Concept of fairness has two basic aspects.” What are they?

Answer 5

Fairness in dealing and fairness in price.

Question 6

How does the court assess “fairness in dealing?”

Answer 6

The court analyzes questions of when the transaction was timed, how it was initiated, how approvals of directors and shareholders were obtained.

Question 7

How does the court assess “fairness in price?”

Answer 7

The court analyzes the economic and financial considerations of the proposed merging including all relevant factors: assets, market value, earnings, future prospects, etc.

Question 8

Weinberger v. UOP, Inc.
What does the court mean when it says that the test for fairness is not a bifurcated (divided into two branches or forks) one as between fair dealing and price?

Answer 8

It means that neither is sufficient (nor deficient) in itself. You must look at the transaction as a whole—price and dealing—because the rule is looking for entire fairness.

Question 9

A freeze-out merger

Answer 9

is a merger where the majority stockholder uses that majority control to force the minority stockholders to sell their shares to the majority.
In general, when a controlling stockholder engages in a freeze-out and that freeze-out is challenged by minority shareholders, the transaction is assessed using an “entire fairness” standard.
The controlling stockholder has the burden of proof here.
But, the controlling stockholder may shift the burden of persuasion to the plaintiff if either:
1. They show the transaction was approved by a well-functioning committee of independent directors, or
2. They show the transaction was approved by an informed vote of a majority of minority shareholders.

Question 10

A “controller merger”

Answer 10

is a merger caused by the majority stockholder.
The entire fairness standard of review is applied in the controller merger context as a substitute for the dual statutory protections of disinterested board and stockholder approval, because both protections are potentially undermined by the influence of the controller.

Question 11

That duty of loyalty

Answer 11

requires the directors to demonstrate utmost good faith and the most scrupulous inherent fairness of the bargain.
Fairness is dual: fairness in dealing and fairness of price (although fairness in price predominates).
The duty of demonstrating fairness is on the directors.
When the directors are in a parent-subsidiary context, they owe the same duty of good management to both corporations, and in the absence of an independent negotiating structure, or the directors’ total abstention from any participation in the matter, this duty is to be exercised in light of what is best for both companies.

Question 12

When do courts apply an entire fairness standard?

Answer 12

When addressing issues of duty of loyalty.

Question 13

How does applying an “entire fairness” standard resolve the problem of divided loyalties/conflicts?

Answer 13

If the transaction is fair in dealing and price, then the “entire fairness” of the transaction produces the same result as a (1) disinterested board and (2) stockholder approval.

Question 14

Kahn v. M&F Worldwide Corp.

What are the six parts of the standard in controller buyouts, applied by the court?

Answer 14

the business judgment standard of review will be applied if and only if:

1. The controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders,
2. The Special Committee is independent,
3. The Special Committee is empowered to freely select its own advisors and to say no definitively,
4. The Special Committee meets its duty of care in negotiating a fair price,
5. The vote of the minority is informed, and
6. There is no coercion of the minority.

Question 15

Zetlin v. Hanson Holdings, Inc.

When a party purchases a controlling interest in a corporation, they usually pay more than the face value of the shares

Answer 15

(they pay a premium in order to be able to know they can control the company).
That premium price is what is paid to the shareholders who sold their controlling shares.