Final exam - know by name

Question 1

Van Gorkom - Facts

Answer 1

Trans Union has excess cash that they have to do something about b/c taxes. Someone suggests management buy-out. If they buy out the company, will get rich. Requires borrowing a ton of money but then get to be owners and directors. Van Gorkom says no. Goes to P for LBO. TU merges with NewCo. The shareholders approve and get $55 dollars, a price is determined after a brief meeting.
ALSO - lockup provisions: can’t talk to other buyers and promised discounted shares if doesn’t go through.

Question 2

Van Gorkom - Rule

Answer 2

DUTY OF CARE - rule for informed decision = whether the directors have informed themselves prior to making a business decision of all material information reasonably available to them.
Here, should have spent more time deliberating, hired experts, gathered reasonably available information, conducted market test, gotten proper ratification.
Directors liable for damages because compound breaches of duty of care and disclosure could not withstand entire fairness analysis.

Question 3

Caremark - Issue

Answer 3

Lack of good faith in exercise of monitoring/oversight duties

Question 4

Caremark - Rule

Answer 4

To be liable for lack of good faith/violation of duty of care in oversight cases, must show that directors:
1. Utterly failed to implement any reporting or information system of controls OR
2. Having implemented such system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention
REASONABLE NOT NECESSARILY EFFECTIVE

Question 5

Regulation D

Answer 5

Safe harbor from securities regulation for private offerings:
- $5 million or less in 6-12 month period
- no public solicitation
- restrictions on resale - applies only to first sale
- accredited investors (usually)
- still can’t mislead
- still need to give notice to SEC after issuing

Question 6

Section 10(b)

Answer 6

Regulates securities fraud:
a. “It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange –
i. To use or employ
ii. in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered [BOTH REGISTERED AND UNREGISTERED]
iii. any manipulative or deceptive device or contrivance
iv. in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” [NOT SELF-EXECUTING]

Question 7

Rule 10b-5

Answer 7

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Question 8

Rule 10b5-2

Answer 8

Provides a non-exhaustive list of relationships for misappropriation theory:
1. where agrees not to share
2. where history, pattern or practice where recipient of info knows or should know that confidentiality is expected by the person communicating the info
3. Where obtained from parent, spouse, child, sibling unless no practice of confidentiality

Question 9

Section 14(e)

Answer 9

“It shall be unlawful… to make any untrue [statement or omission] or to engage in any fraudulent, deceptive or manipulative acts… in connection with any tender offer… The Commission shall [promulgate rules to fill prohibition with content].”

Question 10

Rule 14e-3

Answer 10

Rule 14e-3 - INSIDER

(a): When a tender offer has commenced or is about to be commenced, it is a violation of §14(e) for a person other than the offering person to trade in the relevant securities, if that person has material non-public information relating to the tender offer, which the person knows or has reason to know was acquired (directly or indirectly) from:
i. The offering person,
ii. The target company, or
iii. Any officer, director, employee or other person acting on behalf of either the offering person or the target company.
(b) exemption for business associations
(c) offeror can purchase
(d) violation for offeror, target, their people and those working on their behalf, and anyone possessing material nonpublic info to share when reasonably foreseeable that it will result in a violation

Question 11

Regulation FD

Answer 11

If information is disclosed to some securities market professionals by someone acting on behalf of public corporation, same info must be disclosed to the market as a whole.

Question 12

Basic - Facts

Answer 12

Basic v. Levinson.
Basic makes public statements that engaged in merger negotiations. Allegedly in reliance, investors sold their stock. Ps allege that false public statements violated 10b-5.

Question 13

Basic - Rule

Answer 13

1. Under the fraud-on-the-market theory, reliance is presumed by the act of trading because it is assumed that the stock price reflects all public information. Rebuttable presumption can be overcome if D can sever the link between the alleged misrepresentation and the stock price - misrepresentation did not affect stock price, P would have traded anyway, remedied before sale/purchase, P did not believe misrepresentation.
2. Materiality standard: whether there is a substantial likelihood that a reasonable investor would consider the fact important.

Question 14

Halliburton - Facts

Answer 14

Halliburton makes statements regarding potential liability, expected revenue, and anticipated benefits of its merger in attempt to inflate stock prices. Investors who purchased within class period (between announcement and correction) sue.

Question 15

Halliburton - Rule

Answer 15

Upholds Basic and responds to Halliburton’s arguments that:
1. capital markets are not fundamentally efficient (says everyone acknowledges that public information affects stock price)
2. this allows for extortion of large settlements for meritless claims, punishes those who pay, imposes costs, and consumes judicial resources (that’s a problem for congress.

To apply Basic:
P must show that the stock traded in an efficient market
D may rebut price impact at class certification stage
To rebut: P would have transacted anyway, P did not believe, price did not reflect information (public did not believe), remedied before sale, market not semi-strong form efficient.

Question 16

O’Hagan - Facts

Answer 16

O’Hagan works at a law firm which is representing the acquirer making a tender offer for Pillsbury. He buys stock.

Question 17

O’Hagan - Rule

Answer 17

Misappropriation theory: A fiduciary’s undisclosed use of information belonging to his principal, without disclosure of such use to the principal, for personal gain constitutes fraud in connection with the purchase or sale of a security. Aka violates Rule 10b-5.

Fiduciary’s undisclosed, self-serving use of a principal’s info to purchase or sell securities in breach of duty of loyalty and confidentiality defrauds principal of exclusive use of that info.

Here, O’Hagan breached fiduciary duty to the law firm.

Question 18

Weinberger - Facts

Answer 18

Signal owns 50.5% of UPO and wants the rest. Plan to purchase through cash-out merger. Two people are officers of Signal and UOP directors, so have fiduciary duty to both. Tell UOP to prepare memo/feasibility study for Signal on reasonable price. That memo says up to $24 is good. Signal offers $21/share. UOP shareholders upset they didn’t get the information before ratified.

Question 19

Weinberger - Rule

Answer 19

The burden of proof [here in a freeze-out merger case] under entire fairness review is on the D if there is:
- some evidence of fraud, misrepresentation, or misconduct or
- no valid shareholder vote

Here, was on the D because failure to disclose the study meant the shareholders were uninformed and the ratification was not valid.

Entire fairness = fair price and fair dealings

Business purpose = don’t need one for a merger

Relief for unfair freeze-out merger is ordinarily limited to appraisal remedy, but if fraud, misrepresentation, and corporate waste, other forms of relief may be available.

Question 20

Unocal - Facts

Answer 20

Pickens owns some of Unocal’s stock, makes 2-tier cash tender offer for 64 million shares or 37% at $54/share. Second tier freeze out at $54 in junk bonds. Structural coercion. Unocal offers to buy back shares for $72 worth of notes if tender successful. Mesa excluded. Obviously then SHs have incentive to not tender to Pickens. Backend more attractive than frontend. Then Unocal waives purchase condition.

Question 21

Unocal - Rule

Answer 21

The board has a “large reservoir of authority on which to draw”
the modified duty of care analysis when considering defenses to hostile takeover is:
1. did the directors act in good faith and after reasonable investigation?
2. were the defenses a reasonable response proportionate to the risk posed?
Consider: price, nature and timing of offer, quality of securities

Question 22

Revlon - Facts

Answer 22

Pantry wants Revlon. Bank tells Revlon not a good price. Lawyer suggests back-end plan (poison pill), allowing shareholders upon trigger to exchange any share for a $65 note to be effective when anyone acquired ownership of 20% or more.

Then changes mind and decides on a MBO with Forstmann Little. Cancellation fee and lockup option to purchase crown jewels

Question 23

Revlon - Rule

Answer 23

The BJR does not apply to a board’s decision to implement anti-takeover measures, because it is presumed that they have a conflict of interest - to keep the power.

Directors have burden to prove that they had reasonable grounds for believing there was a danger to corporate policy and effectiveness, satisfying by showing good faith and reasonable investigation. Action taken in response to threat must be reasonable in relation to threat posed (see Unocal).

Initial defensive measures were fine, but when the break-up of the business was inevitable, the Revlon board had a duty as auctioneer to seek the highest price for its shareholders. The lock-up provisions with Forstmann Little stopped the bidding rather than encouraging it, and thus the directors breached their duties to the SHs.

Question 24

Time (Paramount 1) Facts

Answer 24

Time and Warner are in negotiations and contemplated a merger where Time would pay a premium - Warner shareholders would own the majority but Time would control.
Advance defensive tactics: no-shop, automatic share exchange agreement. Paramount offers all cash tender offer of Time at $175/share, above trading price. Time decides to make a cash and securities offer for Warner.

Question 25

Time (Paramount 1) Rule

Answer 25

Threat to business operations need not be economic - can also be that:
1. shareholders might tender in ignorance
2. conditions on the offer create uncertainty
3. timing of the offer was designed to upset or confuse the shareholders
Here, reasonable to finish negotiations that had been in the works.
Revlon does not apply when a board is simply taking action that continues long term plan. Only when board:
1. initiates active bidding process where it puts the corporation up for sale
2. the company, in response to hostile bid, abandons long-term strategy and looks for friendly bidder to break up the company.

Question 26

QVC (Paramount II) Facts

Answer 26

Friendly negotiations between Viacom and Paramount. Paramount CEO would remain in control. QVC launches tender offer, then two-tier tender offer. Paramount tries to enter deal with Viacom.
1. No shop obligation
2. Termination fee
3. Stock option
Eventually QVC’s top price is $90 and Viacom’s is $85. QVC sues because of the lock-up provisions between Viacom and Paramount

Question 27

QVC (Paramount II) Rule

Answer 27

Revlon applies in pending sale of control even when not impending break-up of corporation. Board had the duty to seek the best value reasonably available when the ownership would transfer from public to private hands and perhaps never be available again.