Mergers, Acquisitions, & Takeovers

Question 1

What are Freeze-Out Mergers?

Answer 1

• Dominant shareholder forces minority shareholders out of their holdings by cashing them out against their will. Nothing inherently illegal or illegitimate however courts review with an inherent fairness standard and must show fair dealing and fair price.
  
  • In showing fair dealing:
    
    1. First minority shareholder must allege specific acts of fraud or misrepresentation to convince the court to apply the inherent fairness standard.
    2. Then the dominant shareholder bears the burden of proving the inherent fairness of their action (fair dealing and fair price)
       
       • Generally relies on shareholders vote to show fairness
    3. If a majority of shareholders have agreed then it shifts back to minority shareholder to prove that all relevant material information was not disclosed during the vote
    4. Majority has the burden to prove that all relevant material information was disclosed and inherent fairness of the transaction
  • Fair Price

Question 2

What is a Takeover?

Answer 2

• Can be a friendly or hostile takeover.
• Friendly = takeover a third party acquirer approaches management of a target company and expresses a desire to execute a merger and the two hopefully work out details favorable to both party.
• Hostile = takeover the acquirer may bypass the target corporation’s management and utilize a tender offer to acquire a block of controlling shares from the shareholders themselves.

Question 3

What rule comes from the **Unocal **case?

Answer 3

• Enhanced business judgment rule standard, directors often defend against a takeover attempt to protect their board positions and jobs which implicates the duty of loyalty so business judgment rule does not apply.
• Board must show that there are reasonable grounds to believe there is a danger to corporate policy and effectiveness by showing they acted in good faith and after a reasonable investigation.
• And any defensive devices implemented must be reasonable in relation to the threat posed (proportional).

Question 4

What are some Defensive Devices to being acquired?

Answer 4

1. Greenmail: buying off a hostile acquirer at a premium for their shares in order to avoid a takeover
2. Self-tender offer: corporation request that its own shareholder tender their shares back to the corporation and refrain from selling them on the open market
3. Pac-man: use its corporate assets to takeover the takeover artist
4. Additional debt: a corporation may take on additional debt to finance any of the defensive devices and makes the target less attractive
5. White knight: may request an uninterested corporation to negotiate a merger or acquisition on a friendly basis
6. Crown jewel: target company may sell or dispose of the crown jewel asset the hostile acquirer is interest on the open market
7. No-shop provision: identifies a preferred buyer, preventing the directors from putting the company on the auction block
8. Termination fees: requires the target corporation to pay a fee upon a triggering event
9. Poison pill: most basic, common defensive device, every shareholder is given by the board a right that attaches to every share issued by the corporation and outstanding. The shareholders right initiates upon the triggering event. The antidote is that the board may redeem the rights by purchasing back the right for some nominal mount.

Question 5

What rule comes out of the Revlon case / What are Revlon Duties?

Answer 5

• Court found that defensive devices may only go so far.
• Revlon duties kick in when
  
  1. Company initiates a sale or bidding process,
  2. Company tries to defend against a hostile acquisition and begins to negotiate with a white night, OR
  3. Company undertakes a transaction that will cause a change in control. Must seek the best value or price for its shareholder, must essentially act as an auctioneer and owes a duty to treat all parties fairly.