Governance and Defence

Question 1

Governance and Failure because of (2)

Answer 1

• insider trading

- corporate fraud

Question 2

Regulatory responses (2)

Answer 2

• Sarbanes Oxley act

- NYSE review listing requirements

Question 3

Sarbanes Oxley act includes (6)

Answer 3

• auditor requirement
• accountability
• penalties
• certification
• full disclosure
• Sec power

Question 4

Corporate governance (2)

Answer 4

• corporate is an agency relationship

- corporate enterprise system that has developed includes limited liability corporation with widely disperse ownership

Question 5

Corporation includes (4)

Answer 5

• contractual relationship
• separation of ownership and control
• agency cost
• divergent stakeholder interst

Question 6

Agency cost includes (3)

Answer 6

• auditing system
• bonding assurance
• system change to improve control

Question 7

Internal control mechanism includes (3)

Answer 7

• BOD
• balances ownership concentration: entrenchment, convergence
• executive compensation: conflict of interest reduces by maximizing activity, conflict of interest increases from overvaluation of dishonesty and fraud

Question 8

Board of director (1)

Answer 8

• fiduciary duties to stakeholders (responsible, accountable, and legally liable)

Question 9

BOD job is to monitor management performance (4)

Answer 9

• independence: higher composition of other directors, more effective monitory
• stock ownership: positive link between director stock ownership and corporate performance
• director quality: diverse experience and background as well as firm industry expertise
• board activism: frequent and open communication

Question 10

BOD legal obligation (7)

Answer 10

• business judgement rule
• liability to failure to take care
• obligation to respond
• obligation to stakeholders
• obligation to use special committee
• obligation to maximize value
• fiduciary out: recommend but not promise

Question 11

Roles of BOD (5)

Answer 11

• board of chair
• auditor committee
• compensation committee
• negotiation/governance committee
• special committee

Question 12

External control mechanism(4)

Answer 12

• stock price performance: poor performance have higher management turnover
• institutional investors
• proxy contest
• takeover

Question 13

Corporation governance in action (2)

Answer 13

• execution by implementing and monitoring

- control, plan, and feedback mechanism utilize to ensure management have best interest of stakeholders

Question 14

Defense (1)

Answer 14

• structural or legally impediment of another firm to be able to conduct successful takeover

Question 15

Possible motivation for defense (3)

Answer 15

• target seeks better price
• management believes target performance is better as independent firm
• mangement seeks to entrench itself

Question 16

Impact of defense (2)

Answer 16

• reduction or removal of premium takeover

- board conflict of interest with fiduciary duties

Question 17

Financial defensive measures (1)

Answer 17

• one view: effective firms have favourable market conditions of natural defense from high valuation

Question 18

Financial conditions that make firms vulnerable (5)

Answer 18

• low q ratio
• liquid balance sheet
• low P/CF
• subsidiaries can be sold without having significant impairing cash flow
• small percentage owned by incumbent management

Question 19

Tobin Q ratio (2)

Answer 19

• stock are undervalued

- market value of firms securities to replacement of cost of physical assets

Question 20

Possible financial defense (9)

Answer 20

• increase debt
• increase dividends
• value increase by restructuring
• reduce excess cash
• use excess liquidity to acquire another firm
• liquidate securities performance
• loan covenant force acceleration of repayment
• divest or spin off of non essential subsidiaries
• undervalue of assets should be sold

Question 21

Method of resistance (6)

Answer 21

• poison pill
• Pacman defense
• legal and litigation
• greenmail
• white knight
• white squire

Question 22

Greenmail (1)

Answer 22

• target repurchases large block of stocks from specified SH at premium to end hostile takeover

Question 23

Two divergence views of greenmail (2)

Answer 23

• improvement by forcing improvement on firms operation

- damage SH by raiding firms assets

Question 24

Problem with greenmail (1)

Answer 24

• cannot buyout 20% of corporate stocks at a preferential price without making offer to all SH or pro rating offer

Question 25

Pac man defense (5)

Answer 25

• target firm counteroffer of bidder
• effective if target is much larger than bidder
• target finds combination desirable but seeks control of surviving entity
• cannot use antitrust issues as defense
• excessively expensive

Question 26

White knight (1)

Answer 26

• target chooses another company with which its want to be combined with

Question 27

White squire (1)

Answer 27

• target sell only a block of its stocks to friendly third party, more difficult to win proxy contest

Question 28

Poison pill (1)

Answer 28

• creation of securities carrying special rights exercisable by trigger events (bid announcement or large share accumulation)

Question 29

Types of plan poison pills (2)

Answer 29

• flip out plan: bargain purchases of bidder price at some trigger point
• flip in plan: bargain purchases of target price at some trigger point

Question 30

Dead had provision (1)

Answer 30

• redeem poison pill only by continuing directors

Question 31

Golden parachute (2)

Answer 31

• reward failure

- part of employment contract compensate managers for loss of jobs during control change

Question 32

reorganizing firms claims (3)

Answer 32

• debt to equity exchange
• leverage recaps
• dual class recaps