Hostile Acquisitions II & Securities Fraud Flashcards
Which of the following terms is NOT correctly described?
A. Golden Parachutes: Provisions in executives’ employment contract that grant them large payments in the event of a change of control in the company.
B. Greenmail: When a target buys back it’s own shares from a hostile raider to persuade the raider to stop pursuing the target.
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C. Poison Pills: A takeover defense in which target’s management discovers scandalous material about buyer’s CEO and uses that information to blackmail buyer into leaving target alone. This process often causes great depression in Buyer’s CEO, with sometimes tragic results (hence the name).
D. MBO: When a target’s management finances an alternative takeover offer by borrowing money against the target’s assets and future earnings.
C. Poison Pills: A takeover defense in which target’s management discovers scandalous material about buyer’s CEO and uses that information to blackmail buyer into leaving target alone. This process often causes great depression in Buyer’s CEO, with sometimes tragic results (hence the name). WRONG DESCRIPTION OF A POISON PILL
CORRECT:
Poison Pills - Stock rights or warrants issued to a potential target’s shareholders prior to a takeover in event of certain takeover conditions
–>Flip-In Poison Pill - When buyer acquires trigger percentage of company’s stock, the target’s shareholders get the right to buy the company’s stock at a steep discount. Shareholders get right to buy stock in the corporation for reduced price. Acquirers are excluded. Can be redeemed by board.
–>Flip-Over Poison Pill -Target gives its own shareholders the right to buy stock in the buyer after a merger at a steep discount subject to the trigger percentage.
Farms, Inc. was a Delaware corporation publicly traded on the NYSE. The board of Farms, Inc. consisted of seven outside directors with no financial or personal connections to the company’s officers and the company’s CEO. The largest shareholder owned 3% of the company’s outstanding shares. The directors noticed that many public companies in their industry had been the subject of hostile takeover attempts. They therefore decided to investigate the advisability of putting in some takeover defenses. They hired an investment banker and outside counsel who both advised that they pass a poison pill bylaw. The bylaw would provide that the poison pill could only be withdrawn by the current directors or the successors that these directors had nominated; directors nominated by anyone other than the majority of these directors would not have the power to withdraw the poison pill. If challenged in court, this poison pill is likely to be held:
A. Valid, because the directors were fully informed.
B. Valid, because poison pills have long been held valid in Delaware.
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C. Invalid, because changes to the board’s power can only be made in the certificate of incorporation.
D. Invalid, because there was no threat to the corporation’s policy or effectiveness.
C. Invalid, because changes to the board’s power can only be made in the certificate of incorporation.
Rejected Types of Poison Pills: (board doesn’t have authority to do these
defenses w/out shareholders. Almost never works bc shareholders hate these.)
- Dead Hand Poison Pill - Only original board and their nominees that enacted poison pill, can remove it. Removes some powers of board. Changes to the board’s power can be only made in the certificate of incorporation.
- Slow Hand Poison Pill –If new board, must wait a certain amount of time to act.
Cell Phones, Inc. is a public corporation traded on the New York Stock Exchange that manufactures and sells cellular telephones. The CEO of Cell Phones made a public announcement that their new, cutting-edge smart phone, the Wizard, would be ready three months ahead of schedule. In reliance on this statement: Alice, who had been planning to sell her stock in Cell Phones that she had owned for many years, decided not to. Betty, who had never invested in Cell Phones, decided to buy some stock in the company (and did buy some). Calista, who already owned some stock in Cell Phones, decided to buy more (and did buy more). Dorothy, who had planned to buy stock in Cell Phones, bought exactly the number of shares she’d already planned to buy. Which of the above investors most clearly CANNOT sue Cell Phones under Rule 10b-5?
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A. Alice.
B. Betty.
C. Calista.
D. Dorothy.
A. Alice
Only the defrauded buyers or sellers have standing to sue under Rule 10b-5. Investors who chose not to buy or sell bc of allegedly fraudulent statements or omissions have NO standing.
Alice was only planning to sell her stock but decided not to. Thus, Alice did not buy or sell at all which means no standing to sue under 10b-5.
Parent, Inc. (“Parent”) owned 91% of Subsidiary, Inc. (“Sub”). Both corporations were registered in Delaware and their stock was traded on the New York Stock Exchange. Parent’s Board decided to implement a short-form merger to cash out Sub’s public shareholders at a price of $50/share, a 10% premium over the pre-announcement market price. Parent’s board disclosed to Sub’s public shareholders that an investment bank had estimated the fair value of Sub’s shares at $50-$65 per share. Sub’s minority shareholders sued for violation of 10b-5, arguing that Parent’s board had implemented the short-form merger at an unfairly low price, and that this was either a “device, scheme or artifice to defraud” or “an act, practice, or course of business which operates or would operate as a fraud or deceit.” The suit by Sub’s minority shareholders is likely to:
A. Fail, because under Delaware law, the only remedy in a short-form merger is an appraisal.
B. Fail, because the facts do not demonstrate any deceit.
C. Fail, because there can be no 10b-5 suit based on conduct that would also constitute a state law fiduciary duty claim.
D. Succeed.
B. Fail, because the facts do not demonstrate any deceit.
Short Form Merger- A parent corporation owns at least 90% of subsidiary to be consumed.
- Board Vote: Only need parent board approval
- Shareholder Vote: No shareholder vote needed in either corporation
- Appraisal Rights: Minority Shareholders of the subsidiary
-Entire Fairness Test DOES NOT APPLY. Fundamentally incompatible. Absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal.
Here, while minority SHs of the Sub have appraisal rights, there was no real indication of fraud or deceit.
Do Good, Inc. is registered as a public benefit corporation in Delaware. The company’s certificate of incorporation adopts the specific public benefit of helping to house the homeless by providing low-income housing. The board quickly discovered, however, that building luxury condominiums was far more profitable, so it devoted the company’s resources exclusively to luxury projects and did not build a single unit of low-income housing. A coalition of homeless people sued the board for failing to fulfill their duty to balance profit against their social mission. This lawsuit will most likely:
A. Fail, because the board is free to ignore the company’s social mission completely.
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B. Fail, because the coalition of homeless people lack standing to assert their claim.
C. Fail, because the board has reasonably prioritized profit over social mission.
D. Succeed, because the directors have utterly failed to attempt to fulfill their social mission
B. Fail, because the coalition of homeless people lack standing to assert their claim.
