Take Overs & Debt Flashcards
BoP for Directors for Buyback of Shares
Directors have the burden of proof that a buyback of shares by a corporation in an attempt to remove a threat to the current corporate model is in the corporation’s interests.
Greenmail
Greenmail is the term used to describe a discriminatory self tender to prevent a hostile takeover by a corporation whose interests seem inimical to that of the current shareholders.
Greenmail Rule
in order for greenmail to be appropriate there must be a reasonably perceived threat to corporate policy and effectiveness. The burden can be satisfied by proving that the board acted in good faith and conducted a reasonable investigation into the matter similar to the burden of an independent committee appointed to determine the legitimacy of a derivative suit.
IRS GREENMAIL PENALTIES:
Section 5881 of the Internal Revenue Code was enacted in 1987 and imposes a penalty tax of 50 percent on the gain from greenmail, which is defined as gain from the sale of stock that was held for less than two years and sold to the corporation pursuant to an offer that “was not made on the same terms to all shareholders.” This has effectively put an end to traditional greenmail and has spurred the growth of other defensive methods.
BURDEN OF PROOF SIMILARITY:
The court notes that the burden of proof is somewhat analogous to the burden on directors who use corporate money to fund proxy statements regarding policy questions wherein there is the danger that a director will use the funds to perpetuate themselves in office.
Whether Defendant can exclude Plaintiff from participating in Defendant’s self-tender.
- The burden of proof was on the directors to prove that there was a legitimate business interest at stake to rebut the presumption of their conflicting interest in denying the takeover.
- Directors have a duty to protect the corporation from injury by third parties and other shareholders, which grants directors the power to exclude some shareholders from a stock repurchase.
RULE 13e-4(f)(8):
The SEC amended its rules to prohibit selective issuer tender offers such as the offer in Unocal. The rule does not prevent poison pills however.
Poison Pills
- RIGHTS OFFERINGS:
- At issuance the rights are out of the money and remain so until the triggering event occurs.
- FLIP IN:
- Allows shareholder to purchase 2 additional shares at half price, 2 for one, which is enacted by a triggering event
- FLIP OVER:
- After a merger occurs the rights holder can purchase two shares of the entire corporation at half price which dilutes the shares of newly formed corporation.
- REDEMPTION:
- The board at any time may redeem the rights for a nominal amount to allow a merger to go through in the case that the merger is friendly.
Duty if there is an inevitable takeover
- When a takeover becomes inevitable the corporation’s duty is to the shareholders to get the best possible price for the corporation.
- The duty arises when:
- there are two or more substantially similar offers, or
- when a takeover becomes inevitable.
Short Term v Long Term Plan
Directors are not required to favor a short-term shareholder profit over an ongoing long-term corporate plan as long as there is a reasonable basis to maintain the corporate plan.
SINGLE PERSON v. FLUID GROUP:
The courts in both Paramount cases make a distinction between transfers of shares to a fluid group of people and a single person.
A merger agreement is invalid when:
A merger agreement between a target company and an acquiring company that restricts the target company’s directors from upholding their fiduciary duties owed to their shareholders is invalid.
Duties of Directors to get bids?
- Revlon duties do not require the directors to seek out competing bids, only that they “get the best price.”
- REASONING: The Court found that the directors had a good idea of what their corporation was worth, and drove a hard bargain with the buyer. They acted in good faith to get what they believed was the best price. Therefore, under the business judgment rule the court shouldn’t second guess how the directors came to their decision. The directors felt that Basell was making them an offer that was too good to pass up, so taking it immediately was a better option than trying to shop the company around to a bunch of other people to see if they could get a higher price.
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Debt: Boilerplate successor obligor clauses
- Boilerplate successor obligor clauses, like other boilerplate contractual clauses, should be interpreted in a manner that balances the rights of all interested parties. In particular, an assignment of debt in a successor obligor clause that requires substantially all of the assets of the company to be transferred with the debt obligation should be read to require a transfer of substantially all assets.
- DISCUSSION: The decision ensures that parties who lend money to companies can be assured that the debt will not be transferred to an entity that had little to do with the original debtor. Companies could still use their contract to agree to an alternate arrangement, but it needs to be clear that it is the parties’ intention to do so.
Benefits in an Indenture Agreement
A court will not add any additional benefits for the parties in an indenture agreement when the benefits were not bargained for.
