Final Exam Flashcards
Unocal
When the board uses defensive measures to thwart hostile takeover attempts, the court analyzes the boards conduct under a heightened standard of review.
To receive deference under the business judgement rule, the board must show that:
It had reasonable grounds for believing a danger to corporate policy and effectiveness existed;
and Board action was reasonable in relation to the threat posed.
Unocal never had to actually buy its stock under this defense! Unocal’s offer to buy at $72 only kicked in when MESA hit 51% ownership. Shareholders wanted to 72, not the $54 MESA offered, so everyone would wait for that deal. That’s the beauty of it! And if no one sells to MESA, Unocal is all good!
We have BjR, BUT there’s a risk that the board will be acting in its own best interest. So we need a enhanced standard, take a closer look at what the board is doing before board gets BjR protection.
Paramount v. Time
Time’s response to Paramount’s threat was reaosnable! Not as good long term, price was bad, and threat to time culture. “ The Warner acquisition offered better long-term value for its stockholders and that it did not jeopardize Time’s corporate survival and “culture.”
“Without excluding other possibilities, there are two circumstances which may implicate Revlon duties”:
When the corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company.
When, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company.
However, if such a move is defensive, rather than an abandonment of the corporation, Revlon doesn’t apply —Unocal does (defensive measures reasonable in proportion to threat posed).
Note: If there is no change of control (like you have lots of unaffiliated shareholders), there’s no change of control to trigger the duty —more likely to trigger Revlon if there’s a sale of control and if it’s a cash sale!
Traditional Reasons for Acquisitions
- Economies of Scale
- Economies of Scope
- Synergies
- Market Share
- Diversification
- Technology
Triple SSS, Meintjes Does Tango
Deal Timeline
Parent and Subsidiary Relationship.
Board, elected by shareholders, runs the company. For the parent. What about the subsidiary? Same thing. Parent owns sub 100%.
That sub has a board, who elects that board? The parent company elects that board, since they own 100% of the stock. Often times it’s similar people that are on the board of parent company.
This matters when we discuss triangular transactions.
Mergers (Statutory)
DGCL §251(a): Any 2 or more corporations may merge into a single corporation, which may be any 1 of the , pursuant to an agreement of merger, complying and approved in accordance with this section.”
Constituent corporations: who are they? Super important. The corporations that are merging together!
Under normal contract rules, to buy out shareholders, or move them, would require unanimous consent. Statutes modify this — provides for majority voting. Statutes provide procedural protections for shareholders given that they’re giving up a veto vote.
Rule and exceptions for voting to approve a merger
Although the default rule under DGCL § 251(c) is that shareholders of each of the constituent corporations are required to vote to approve the merger, there are certain exceptions.
Under DGCL § 251(f), the shareholders of the surviving corporation are not required to vote on the merger if each of the following conditions is satisfied:
The company’s certificate of incorporation is not amended;
There is no change in the characteristics of the outstanding stock of the surviving corporation;
and the surviving corporation does not issue more than twenty percent of its outstanding stock in connection with the transaction.”
Basic Cash Out Merger
Stock for Stock Merger
Reverse Triangular Merger
Forward Triangular Merger
Reverse vs. Forward Triangular Mergers
Asset Purchase (Cash)
See the picture for step one. Step two is to dissolve the target by filing articles of dissolution (Apex). They have to take care of any liabilities not transferred though.
Asset Purchase (Stock)
Same as Asset Purchase with cash, except now the beta shareholders and the old apex shareholders co-own the surviving company (beta).
Stock Purchase for Cash
Now, former Apex shareholders own cash and no stock if they accepted the deal. Beta shareholders own Beta, which in turn owns Apex.
Stock Purchase for Stock
Same as the one for cash, except now the Beta shareholders AND the old Apex shareholders own Beta, which owns Apex.
Tender Offer
This is a:
* Public offer usually made to all shareholders of the target
* Buyer offers to purchase target company shares
* No formal shareholder vote (shareholders “vote” by tendering/not tendering)
Is a vote of target shareholders needed to approve a second-step merger following a tender offer if the acquirer owns at least the percentage of each class of target stock required to approve a merger?
No, if certain conditions are met. See §251(h).
What is §253’s exception to the shareholder vote requirement for a merger?
If at least 90% of each class of shares is held by a party and the merger is with that party or another company designated by that party (DGCL 253) —then no vote is reuiqred.
Difference between 251(H) and 253?
(these deal with shareholder approval requirements for a merger)
What’s a leveraged buyout?
Afterwards, PE Group owns the target, which in turn is indebted to the lender.
Considerations regarding shareholder voting and appraisal
Hart-Scott-Rodino — Act of 1976
- This covers more than just mergers, also acquisition of stocks, asset purchases, etc…
- ASR is applicable to both private and public transactions.
- Gives fed the opportunity to review potential effects on competition of certain mergers, ets…
- Only deals meeting HSR’s size and other tests are reviewed. These numbers change every year. Must file pre-merger notifications.
Should I Notify CFIUS of My Transaction?
CFIUS may pause or unwind transactions that might allow a foreign person to gain access or control of information sensitive to the interests of the U.S. Therefore, it is important to consider notifying CFIUS of transactions that may be subject to review. Under law, certain transactions require mandatory declarations, whereas others may call for voluntary notice.
Martin Marietta v. Vulcan
A party must not be able to breach a confidentiality agreement and reap the benefit of the misconduct in a takeover attempt.
Confidentiality agreements matter, and will be enforced.
Note: a standstill provision would have made this case a non-starter. So include them, and be unambiguous in all language as much as possible.
Jack from Sidley (Guest Speaker)
- NDA —remember term, definition of representatives, etc…
- LoI — make sure it’s non-binding. But some parts are binding, like provisions that relate to the process of conducting the negotiations and proceeding towards a more definitive agreement.
Letters of Intent
Make sure it’s non-binding. But some parts are binding, like provisions that relate to the process of conducting the negotiations and proceeding towards a more definitive agreement. See picture for pros and cons.
Agreement: Collars
There is a ceiling and floor, stock will fluctuate between them. This is meant to limit the risk. There is risk within the collar, but the ultimate price they must pay can’t go above or below those lines.
“For equity securities, a collar agreement establishes a range of prices within which a stock will be valued or a range of share quantities that will be offered to assure the buyer and seller of getting the deals they expect. The primary types of collars are fixed-value collars and fixed share collars.
A collar may also include an arrangement in a merger and acquisition deal that protects the buyer from significant fluctuations in the stock’s price, between the time the merger begins and the time the merger is complete. Collar agreements are utilized when mergers are financed with stock rather than cash, which can be subject to significant changes in the stock’s price and affect the value of the deal to the buyer and seller.”
Disclosure Schedules
he answer isn’t when they’re disclosing. They’re exceptions to the R&Ws! They provide additional information pursuant to R&Ws.
R&Ws Notes
Typical Pre-Closing Covenants
- Conduct of Business: run company in ordinary course of business (must get consent)
- Antitrust: hell or high water provisions: buyer has to close, even if crazy unforseen things happen in between
- Stockholder meetings and related documentation
- Deal Protection Devices: No shops, window shops, no talks
- Best Efforts, Reasonable Best Efforts, and Reasonable Efforts Clauses: reasonable person with these three effort standards (full force to middle to meh) to obtain regulatory clearances, etc… (like divesting certain company assets/divisions)
- Fiduciary Out Provisions: allow the board of directors of the target company to consider alternative offers or proposals from third parties, even after signing an agreement with a particular buyer. These provisions are designed to protect the interests of the target company’s shareholders and to ensure that the board fulfills its fiduciary duty to act in the best interests of the shareholders.
Pre-Closing Covenants: Hell or High Water
Pre-Closing Covenants: Deal Protection Devices
Use these for public transactions, or some super big private companies! They protect the transaction between signing and obtaining shareholder approval
Pre-Closing Covenants: Fiduciary Out Provisions
They allow the board of directors of the target company to consider alternative offers or proposals from third parties, even after signing an agreement with a particular buyer. These provisions are designed to protect the interests of the target company’s shareholders and to ensure that the board fulfills its fiduciary duty to act in the best interests of the shareholders.
Akorn, Inc. v. Fresenius Kabi AG (MAE/MAC)
Akorn: Target. Fresenius: Acquirer. A started to do terribly —whistleblower said theyir products didn’t comply with regulatory requirements.
Court: For F to have the right not to close, F must show that the effect was material AND would continue for a durationally significant period of time.
Durationally significant: Can’t be a hiccup, must be longer (years). And must impact the company specifically.
Note: Walking away from an M&A transaction based on a MAC, is nowhere near as easy as it is to walk away from another type of K with a force-majeure provision! MAC and MAE provisions are souped-up FM provisions. Harder to trigger. There are highly-negotiated carve-outs, lots of stuff that CAN’T trigger an MAE.
Indemnification Baskets, Individual Claims, and Caps
What do buyers and sellers want in terms of indemnifications baskets, claims, and caps?
Responses to Hostile Offers: Poison Pills
This is a defensive tactic used by target of hostile takeover to prevent the takeover:
Flip-In Poison Pill vs. Flip-Over Poison Pill — flip-in poison pills aim to dilute the value of a target company’s shares to deter takeovers, while flip-over poison pills offer shareholders of the target company the opportunity to benefit from the acquiring company’s success, thereby making a hostile takeover less appealing.
Unocal Factors to be Considered
These are in relation to the threat posed!
Unocal/Unitrin Test
Unitrin came out after Unocal. This applies to Deal Protection Devices! Two part test: Coercive or preclusive, and range of reasonableness.
Note: Every deal protection device is preclusive!! That’s the nature of a DPD! This makes it harder for people to make offers, and shareholders from hearing offers. No shop provision with limited fiduciary out (example).
So this is where the range of reasonableness comes into play.
Deleware Formation of the Business Judgement Rule
What are go shops?
Mostly used in financial deals as opposed to strategic deals
Target is allowed to actively shop itself
Duration — go shop period starts when deal is signed, and extends for some preiod after signing (25-50 days after signing, you can go out and actively solicit other offers and enter into transaction with someone who makes a superior offer during that time. This is opposite of a no shop). That’s the problem — have already set up the agreement, and other provisions in agreement coul prevent or inhibit others from coming to make an offer.
Some sort of termination fee will still be applicable!
Vested rights clauses: allow target to continue discussions with competing bidders identified during the go shop period
Two-tiered termination fees
Often lower fee of the accept a superior proposal during the go-shop period
Issue: does the whole deal need to get done (agreement signed) in the GS period? Or does lower fee also apply if proposal is submitted during the GS period but accepted afterward? This will be negotiated.
Timeline: Once signing of agreement, go shop starts. Once it’s done, you enter into the no shop period (can’t even continue conversations started in GS period). This lasts until shareholder approval of original deal.
What are DPDs?
Deal Protection Devices
Smith v. Van Gorkom (Sales Efforts)
Under the business judgment rule, a business determination made by a corporation’s board of directors is presumed to be fully informed and made in good faith and in the best interests of the corporation. However, this presumption is rebuttable if the plaintiffs can show that the directors were grossly negligent in that they did not inform themselves of “all material information reasonably available to them.” The court determines that in this case, the Trans Union board of directors did not make an informed business judgment in voting to approve the merger. The directors did not adequately inquire into Van Gorkom’s role and motives behind bringing about the transaction, including where the price of $55 per share came from; the directors were uninformed of the intrinsic value of Trans Union; and, lacking this knowledge, the directors only considered the merger at a two-hour meeting, without taking the time to fully consider the reasons, alternatives, and consequences. The evidence presented is sufficient to rebut the presumption of an informed decision under the business judgment rule. The directors’ decision to approve the merger was not fully informed.
Revlon v. MacAndrews & Forbes Holding Co.
Rule: When the break-up of a corporation is inevitable, the duty of the corporation’s board of directors changes from maintaining the company as a viable corporate entity (reasonable responses to the threat) to maximizing the shareholders’ benefit when the company is eventually and inevitably sold (reasonable value maximization)
Court: In cases where a board implements “anti-takeover measures,” the burden is on the directors to prove that their actions were reasonable. However, the business judgment rule kicks in if they prove a good faith and reasonable investigation resulted in their decision. In the present case, the Revlon board’s initial defensive measures—its exchange offer for Notes—was reasonable under the holding in Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), given the board’s determination that Pantry Pride’s offer was less than adequate. However, when Pantry Pride continually increased its offer, the court determines that it became obvious that “the break-up of [Revlon] was inevitable.” At that point, the Revlon board’s duty was changed from maintaining Revlon as a viable corporate entity to maximizing the shareholders’ benefit when the company was eventually and inevitably sold. By granting the lock-up option to Forstmann that in turn guaranteed par value for the Note holders who were threatening litigation against Revlon, it is apparent that the Revlon board of directors had their own legal interests in mind, rather than the maximization of Revlon shareholders’ benefits. There was essentially an auction ongoing between Forstmann and Pantry Pride for Revlon’s shares and the granting of the lock-up option effectively ended the auction rather than letting the auction play out to obtain the highest bid for the Revlon stockholders. The Revlon board put its own legal interests first to the detriment of the stockholders. This constitutes a breach of the board’s duty of loyalty and therefore the board is not entitled to the deference of the business judgment rule. The lock-up option should be enjoined.
“Revlon Mode” or “Revlon Land” — this means you can consider other constituencies (like employees, community, debtors, etc…) BUT those MUST be related to the maximization of shareholder value.
Other Flashcard: When the company puts itself up for sale and a break-up becomes inevitable, the directors’ role changes from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.
Burden shifts to the board of directors to prove that their actions were reasonable.
If the board can satisfy this burden, they are given business judgement rule deference.
When is Revlon Applicable?
When there’s a change of control (QVC)
WHen a transaction will cause a break-up of the corporate entity:
When the board started to negotiate the sale of the company —when they decided that they wanted to sell the company (Lyondell)
Active bidding process to sell itself, in response to a bidders offer, etc… (see picture).
When you have a cash transaction!
When is Revlon applicable? It’s not clear cut.
Courts have focused on change of control and the acquisition consideration. If all stock transaction, Revlon is inapplicable. BjR. BUT Companies should still try to maximize shareholder value?
Examples:
* 100% Cash, Revlon applicable — yes.
* 62% cash — likely yes
* 50% cash — yes, but “not free from doubt.”
* 42% cash — no
* 33% cash — no
* 100% stock — no, unless controlling stockholder (like in QVC).
Leveraged buy out, etc… that’s a Revlon transaction. Stock for Stock, normally BjR.
Will have friendly transaction on test! Revlon or BjR? Not Unocal, bc that’s only applicable in context of hostile takeovers. DPDs are a different thing. Process = BjR or Revlon!
Lyondell Chemical v. Ryan
Rule: a fiduciary satisfies its good-faith requirement if it cannot be demonstrated that the fiduciary intentionally failed to act in the face of a known duty to act.
Prof: to breach Revlon, board MUST breach duty of loyalty.
Certain steps, like an acution or market check may help a board maxmimize shoareolder calue, but there is no requirement that these steps be taken.
Prof: No single blueprint to satisfy Revlon duties! Lot’s of ways to do it. Throw this into your final when talking about Revlon!
Since they had an exculpation provision, the board members can only be liable for bad faith (hard to prove).
Inadequate attempt to perform revlon duties may be a breach of care but not bad faith or breach of the duty of loyalty.
If directors strive to fulfil thier duty, they have protection. It would take an exremem set of facts to sustain a disloyalty claim based on the idea that directors were intentionaly disregarding thier duties.
Revlon triggered: when the board started to negotiate the sale of the company. When they decided that they wanted to sell the company, that’s when Revlon is triggered.
Omnicare, Inc. v. NCS Healthcare (Compensatory Devices: Termination Fees and Lock-Ups)
Now, mergers must have a fiduciary-out provision!
Deal-protection devices that are designed to force the consummation of a merger and foreclose consideration of any superior transaction are preclusive and coercive, and they are thus unenforceable.
The court held that the deal protection devices here were unenforceable as they were unreasonable and disproportionate to the threat of potentially losing the deal. This robbed stockholder vote of any effectiveness!
The court also held that given the voting agreements, the requirement that the board submit the deal to stockholders for a vote, and the omission of a fiduciary out clause prevented the board from exercising its fiduciary duties to minority stockholders.
Note: maybe one of the above would have been ok, but taken together they totally and impermissibly locked up the transaction.
Dissent: board was on brink of bankruptcy, and tried for a long time to get a buyer. If they couldn’t negotiate those terms, they wouldn’t have found this buyer!
Prof: this was a stock for stock transaction, so ordinarily subject to BJR. Prof thinks this case was not decided correctly. But has gone back and forth. Courts will give more leeway when you’re in a situation like this company where you’re about to declare bankruptcy, backed into a corner. Now though, companies cite Omnicare and say they can’t agree to excessive lockup provisions.
What is a standsill and how does it work?
Buyer can’t go out and purchase more stock during period.
Typically will last for a year —depends on nature of information
Can waive standstill provisions —board can do this.
MAE/MAC types of risks covered refresher
MAC (Material Adverse Change) or MAE (Material Adverse Effect) clauses typically cover idiosyncratic risks, such as company-specific events or changes that materially impact the target company’s financial condition or operations. However, they often exclude systematic risks, which are broader market or industry factors affecting many companies, and merger-specific risks, which are risks directly related to the M&A transaction itself. Let’s break down these types of risks with examples in the context of a company acquiring another in the oil and gas industry:
Another merger-specifc risk: The acquiring company intends to merge the operations of the target company with its existing assets to achieve synergies and cost savings. However, during the integration process, unexpected challenges arise in aligning the two companies’ systems, processes, and corporate cultures. This could lead to delays in realizing the anticipated benefits of the merger, increased integration costs, and disruptions in operations.
What are the MAC/MAE requirements?
It must be a covered risk (idiosyncratic).
It must be durationally significant.
Other requirements below:
Some More Prof Q&As
What are some practical Revlon duties once in Revlon Land?
