Introduction

Tuesday, January 10, 2012 5:14 PM

1-7; 9-37, HBS Case Time Inc's entry into the Entertainment Industry (A)

Time Warner Case Study

Rationale for transaction Why the drive to do soemthing different (regarding sources of revenue) Vertical integration Time has interest in expanding presence in Cable Television Moving into production size of business -want reosurces n housr to produce programming that can be pushed threw it's distribution channels Company is profitable but wants to do better, looking for possibilities Why - perception-> integrated media companies seen as on the forefront Perception's role on shareprices Types of things determining if share will incrase in value Growth prospects Perception of growth prospects If they don't keep growing business, shareprice will drop, managers will be out of job Managerial incentives Want incentive to maximize shareholder value Paying with stock options Market for corporate control If managers are perceived to manaing busienss to maximize shareholders, someone else could come in Replaced by board Hostile bidder Forms of growth Increased revenue Increase prices Sell greater quantities Increased profitability Opportunity for growth Why does Time want to grow by acquisition (versus Organic Growth) Faster Known quantity - track record, etc Market penetration, strengths Buy vs. Build: Is it cheaper to grow internally or to acquire? Analysts predicitng consolidation, Time wanted to be leader Increasingly expensive to purcahse content Regulatory climate made it possible for this kind of consolidation to occur What's driving this (summary) Internal need for growth (manager's perspective) Industry dynamics New distribution channels Deregulation Warner Had movie and progream production business Low cost access to programming Provide HBO Warners film library Stood out because also had local cable TV franchises, international distribution capabilities Appeared to be well managed Debt Capacity Capacity to take on additional debt Determined by looking at balance sheet and seeign how much room they have Long term debt on balance sheet Debt to Total Cap ratio (Debt/ TotalCap)-> divide debt by Debt+Shareholder equity Debt/ (Debt+Shareholders' equity)
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 Debt/ (Debt+Shareholders' equity) If you canlever (additional debt) can get financing without diluting equity stakes Warner - > only 25% debt in Capital Structure So room for additioanl debt to finance operations Did Time shareholders have anything to do with this decision Managers decide whether or not the company will uruse a business combination Only after they've decided the deal makes sense, then they publcly announce and present to sharehodlers for approval Business Combinations are not shareholder initiatied -> initaited by managemtn

How deal is structured

Warner (WCI) Time Acqusition Subsidiary (SUB) Triangular merger (aka subsidiary merger) Time incorproated a separate company - > wholly owned subsidiary Put into company the consideration or the merger transaction (the Time stock) Sub mergerd into Warner Result -> Warner is wholly owned subsidairy of Time So Time is acquirier in this transaction Under State corproate law -> only merger is between subsidiary and warner So Warner is the suriving corporation This is improant in decidign who gets to vote Benefits/ considerations Successor liabilities Voting Rights Consideration Stock for Stock Exchange ratio - .465 shares of Time for Each Warner share

Shares outstanding
Time

57 mm

Warner 178.3mm 0.465*178.3mm shares = 82.9 Million new shares to be issued by Time So combined business will have the 57 Million origianl shares + the 82.9 mm new shares for a total of 138.8 mm shares Time shareholders left with 41% of total combined business, Warner Shreholders left with 59% So whose the acquirer? Legally - Time What they're striving for here is a merger of equal 12 directors from each side Point: merger vs. acquisition Not related to size of parties, or how much managerial corol they share Structure (merger vs. acquistion) chosen on Timing considerations Who gets to vote Required filings Tax Considerations Why only using stock here? If borrowing cash have to put debt on balance sheet More leverage -> less room for missteps Need to service/pay debt Fiduciary Duties Rights and Responsibilities of Shareholders

Valuation Issues
Upcoming How sharheolders know gettign fair price
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 How sharheolders know gettign fair price How managers determien if shareholders are getting a fair shake Context of appraisal proceedings How to know if your'e getting a fiar price Ask investment Bankers Warner - 65-73 dollars a share Times sk price( 109.125) * .465 (conversion ratio) = 50.74 Only a 10% premium on market price of warner (45.875) But if managmetns promises kept, and if Time and Warner wind up being strong partners and business takes off, new combined entity stock price could really appreciate Betting on long term as opposed to short term Would you make the same calculation if only getting cash? Would no longer particiapte in managemnet and get acccess to upside All you could look at is the amount of cash getting today Probably want more cash than initial value of stocks Foreshadow: if cash transaction, borad members have duties to get highest price But if get to particaipate in updiside, no duty to get highest price Cash trasnaction is shareholdders last opportuntiy to obtain premium Exhibit 8- valuation models Project cashflows into the future Assume it will have residual/terminal value Look at EBIT mulpile paid in similar transactions Predictions into the future with discountign into the present (NPV) Gives sens On Exam - will need to analyze a Discoutned Cash Flows Won't need to permform, but will need to check it out Other thigns Comparable company analysis Vlauation analysisz

Reverse Subsidiary Merger -> requires shareholder approval

Only shareholders of constitutent coprorations Because acquirign sub is the constituent corpo - TIMES shareholders don't get vote onthis transaction under state corproate law But Time subject to rules of NYSE -> If issuing more than 20% of your shares as aprt of business transaction must get sharehodler approval Question 8 -> If sharheolder objects to transaction, but the hodlers of a majroity of the shares approve transaction, can the objecting shareholder be forced to surrender her shares? Time Sharhoelders no -> those shares still in place, no surrendering Warner -> Majority approval Delaware - aboslute majority of all shares outstanding If majority aprpvoal -> transactions goes throguh regardless Most objector can hope for is a n appraisal of share Could maybe sue for breach of fiduciary duties Question 10 -> any cocnern to shareholder reactions, how can management gauge raction, what factors are likely to determient he market's reaction to the transaction? Yes concern Management reads reaction of market place by looking at its stock price Buyers and sellers meeting at equilibirum to decide what stock price should be But maybe other thigns going on in the market that can effect price If stock price falls-> market sayign this is a bad transaction from the view of Time's shareholders Notice here though, eit 1 -> after announceing acquisitions, historically, every time announced the stock price falls This could say
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This could say This deal is a bad idea Good idea, but time paying too much General market sentiment -> history shows that acquirers tend to do worse in acquistions than the target company sharheodlers Warner's performance (target ifmr) Increased But licnreased to less than value of stock exhange Why? Consummation risks Risks that merger swon't be consumated Merger arbitrage Question 11 Why is Paramoutn bidding for Time? Complimentary assets/ good investment opportunity Possibility - disrupt merger with Warner Stop strengthening of competitors Question 12 - what is the structure of Paramount's purchase to time? What is the consdieration? Cash-for-Stock Go to individual stock owners in smaller corps Special form: Tender Offer Tender offers, williams act Publish annoucnemnt say you'd like to purchase any and all shares of Time Inc for 175$ cash, deadline on 5th of july Subject to some conditions Paramount has created an acquisiton subsidiary That subsidiary will purchase the shares Quesiton 13 - is the approval of Time's shareholders necessary for Paramount's bid to succeed Not a formal vote, but sharehodlers must tender shares Paramount wants to be in the majroity Minimum tender conditon usually contorlling Once have control, can use squeeze out / freeze out transascitons, to take over the rest of it Question 14 - regualtory approvals necessary for Paramounts bid? Yes- approval for antitrust, telecomm Also financing not done yet Why are they offering Cash and not stock Would shareholders prefer stock or cash? Cash - get it now Can buy the stock if you want to particiapte in upside Stock - if managers do well, get to be part of it Participate in upside Which would shareholders prefer?
Warner's Equity Value Before the Transaction 45.875 * 178.4mm Shares = 8.2 b Time's Equity Value Total 109.125 * 50mm shares = 6.2 b 14.4 B

Per share

102.92$

So if you're a time Sharehodler, your'e offered 175$ by Paramount 60.4% premium over pre announcemtn price (109.125) 70% premium over post merger combined value How to convince sharheodlers to take Warner proposal Revnue increases If you can sell more products and services because of combination More distribution channels Economies of scale Cost Cutting / Synergies

Time's ownership in combined entity 41% Warners Ownership 59% Total value (before Merger)= 14.4 B 6.2 Time
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Total value (before Merger)= 14.4 B 6.2 Time 8.2 Warner Time's ownership in combined entity = 5, 866, 501, 828 billion, Warner's ownerhsip = 8, 533, 135,672 So Time is paying a 353. 6 MM premium Tor Time's owners to be indifferent about warner transaction Times Curren MV = 6.2 B/.41 = 15.4B So combined firm must be 15.3B for Time sharehodlers to be inidfferent So will need 868 mm in synergy just to feel this merger will get some return What about managers - why commited to Warner Get to keep job - Entrenchtment Succession plan in place where Time managers get to stay in If you're a time shareholder and you hear Time mangers wayign Warner is better, but you're not convicned, what would you want your management team to do? Note: shareholder Primary Delaware Other staes have various stakeholder considerations The goal of the board is to maximize shareholder wealth So editorial independence, etc, only to be taekn into account in terms of shareholder weatlh Managers have access to more information than shareholders Thus maybe they should have discretion But why don't' managers share info with shareholders and allow them to make the decision Might be confidential What are Time's Options Go with Paramount (accept or negotiate for more), terminate Warner Deal Risks - decided not to merge before Managers out of a job Continue with Original Plan and Merge with Warner(requires Time shareholder approval) Note: Poison Pill Structured such that ocne someone makes a bid for a company and acquires a certain percentage of companeis shares, something bad ahppens to make it less attractive on an economic basis Time and Warner agreement made it more costly for a hostile bidder to acqurie either Regualtory approcal FCC because of telecomm shits Antitrust Permits and licenses for cable franchises Requires permission of various municipalities SEC approval for issuing stocks Form S-4 Combination prospectus and proxy statement Prospectus -> issuance of securities Proxy - required to solicit proxies from shareholders Require lenghty documetns with host of dislcousreson target company and acquiring company Warner Sharehodler need to know how much Time and Warner are worth to decide if they want to trade in their Warner Shares Implementing fiduciary dutiestakign What Time did: Risk of Shareholders saying yes to Paramount to great Restructured transaction Changed it to a transaction in which Time became acquirer of Warner, via a tender

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offer A friendly tender offer Time is purchasing the shares of Warner with Cash Thus Warner became a wholly owned subsidairy of Time Didn't get 100% all at ocne, performed freezeout Implications of using Cash Times sahreholders don't get voting rights Only voting rights if stock being issued NYSE rules - voting rights if doing 20% more of shares otustanding Weakens balacne sheet Ignores debt capacity shit talked about before This combined company was unattractive to paramount Too debt ridden So basically Th ecompany was weak and suffered greatly Only to be outdone by their merger with AOL Situation Time shareholders taken out of equation Times board sued BJR: a deferential standard of judicial review employed by court when asked to evulate the busienss decision of a company's board of directors Presumption informed directors acting in good faith belief their actionsare n best interest of shareholders Can rebut So initialdecision for Time to merge with Warner protected by BJR Other forms of judicial review Entire fairness Unical For defensive measures because of fear of entrenchment Must show a reasoanble fear of threat to copraote policy And must be tailored We'll come back to this later in the semester Revlon duties When does a board of directors have the obligation, once company for sale, to obtain the highest price available to shareholders

What Business Activity is Covered by Mergers and Acquisitions Law Two Different Stories- Two Different Deals The story of Pfizer Corporation's Acquisition of Pharmacia, Inc. - Wall Street M&A The story of Nestle's Acquisition of Chef America, Inc- Main Street M&A The Flow of a Deal: Introducing Timing, Pricing, and Other Structural Considerations Deal Flow: How did the Pfizer-Pharmacia Deal Get done? "Deal Flow": conceptualizing the Deal Process The Start of Negotiations The role of financial Advisors Use of confidnetiality agreements Use of Non-Cash Consideration to Finance the Purchase Price The Due Diligence Process Board Approval of an Acquisition Shareholder Approval of an Acquisition Regulatory Approval of an Acquistiion Closing on the Acquisition Transaction Business Incentives for M&A transactions Senate Judicairy Committee Hearigns on Mergers and Corproate Consolidation in the New Economy Greater operating efficiencies and lower costs Anticompetitive motives or managerial hubris Historical Perspective and Current Status of Mergers and Acquisition Activity Historical Perspective on M&A activity Senate Judiciary Committee Hearings on Mergers and Corporate Consolidation in the New

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Economy Current Satuts of M&A activity Treatment of Fundamental Changes under Modern Corporation Codes Historical Perpsective Shareholders must vot e on fudnamental change Threshold question - what is a fundamental change Modern Perspective Simple majority required for fundamentla changes To prevent holdout. But now a minority sharheolder may be depried of their shares by convicing sa majority fo the shares to approve a business combination as proposed by the company's management
An introduction ot Relevant Public Policy Concerns The role of Modern Appraisal Rights To address the plight of disenfranchised minority interst Statutory relief- right of appraisal For shareholders who object to/dissetn from certain types of propsoed cbusiness combinations Compels the corp to pay them cash for fair value of their shares Issues Avaialbity - what transations Prefectign the right to an appraisal Valuation issues Exclsuivity of the appraissal rmeedy The Modern Importance of Fiduciary Duty Law Directos owe fiducaiary oblgiatiosn ot he company itself Duty of care Business judment rule Duty of loyalty Sarbanes-Oxley

Overview of Different Methods for Structuring Business Acquisitions

Traditional Form: Direct Merger (Diagaram 1) Boards of both Bidder and Target initaite a transaction that contomplates that Bidder will swallow up Target, who will then cease to exist as a sperate entity Typically requires approval of the merger agreement by the boards of both consituent corporations Merger agreement must then be submitted to shareholders Usually just need an absolute majority, used to require supermajority Forms Target sharheolders receive Bidder Co stock Successory liability Thus need to know which company is to surive Advantage Successor liablity has transaciton cost savings Because indivaul assets and liabilities of Target do not have to be separately transferred to Bidder May be most efficeint way to trasnfer certain large and complex busiensses Appraisal rights traditionally available to dissenting shareholders of both constituent corporations Traditional Form: Asset Purchase for Cash Bidder purchases all of Targets Assets for Cash Allows Bidder to take on only those dbts of Target Co that Bidder had specifically agreed to assume
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assume Target Co continues to be obligated on all claims not speicaifically transferred to Bidder Usually followed up by voluntary dissoltuion and orderly winding up of Target co's business affairs Usually - board of selling corpaoiton msut approve trasnaciton to sell all of its assets Consitutes a fundamental change for Target Co Usually no board or shareholder voting requiremnts Does not invovle a fundamental change for Bdider co. Business discretion of Bdider co Protoected by BJR Most states deny right to appraiseal to Target's shareholders Traditional Form: Stock Purchase for Cash Approaching Target Co sharehodler invidiually and offerign to buy target shares directly from indiviudal sharehodlers Transaction does not invovle target co. Stock purchase agreement will be made directly between Bidder co and indivual sharehodlers Target's board is not requried to approve the transaction No vote of sharheolders Shareholders express objections to Bidder's propsoal by refusing to tender their shares Thus, Bidder suually conditions obligation to purcahse Target sahres on Bidder's ability to get a sufficient nubmer of Target sharehodlers to accept offer Target Co. remains in tack, as does bidder Target's busienss operated as wholly owned or controleld subsidiary of Bidder All of Target's assets remain avialbe to satisfy claims of creditors No appraisal rights to sharehodlers of either Bidder orTarget 3 party transactions Summary of First 2 classes What drives merger activty Business rationale for the transaction General economic conditions Interst rates low, etc Stock market values high Stock as acquition currency seems cheap Particular companies may realize that industry condition makes it preferable to merge Threat to guard against Might want to acquire special capabilities from compeitotr Economies of scale Fixed cost of production being spread over a larger output Economies of scope Reduce costs Spreading costs over broader range of related business activities Hubris Empire buidlign Merger market mania Agency costs Market for corpraote control Deregulation Changes in demand Changes in barriers to enty Haigher growth rates in partiuclar areas Desire to create monopolies Structure of the transaction Who gets to vote Desire to get rid of voting rights Avoid time and expensive of proxy solicitation process What the conomics look like Incentives of parties when consideration is cash vs. stock Regulatory concerns Required approvals
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 Required approvals Fiduciary duties

IV. TIME INCS ENTRY into the ENTERTAINMENT INDUSTRY A. Background 1. Time Inc. a. Magazines 42% of revenues: Sports Illustrated, People, Fortune, Money, and Time and Life. 20% of advertising b. Books 15% of revenues: Time-Life books largest and direct mail, Book of the Month Club general circulation book club, Little, Brown, and Company trade and professional books, Oxmoor House How-to and illustrated. 1986 acquired Scott, Foresman and Company publisher and distributor of textbooks c. Cable Television 17% of Revenues. Become dominant vehicle for distributing news. Operated HBO and Cinemax in 1989. Also had 14% interest in Turner Broadcasting d. Local Cable Television Franchisees 25% of revenues. American Television and Communications Corporation 82% owned subsidiary of Time largest cable TV franchise 2. Industry and Competitive Dynamics a. Boundaries blurred b/w film, TV, and publishing industries. b. Film producers integrated vertically w/ exhibitors and production and distribution to ensure access to outlets for products. Deregulation also spurred it. Cost of producing up and number of films increased the risky c. Proliferation of cable networks increased demand for high-quality programming. Networks sold products to consumers through local cable TV franchises. Either charge customer fees or sold advertising.

3. Times Strategy a. Magazine business not growing fast enough. HBO and cable side largest and fastest growing component of profit. But had to pay high prices so wanted ownership of production and associated copyrights. Presence of guaranteed distribution reduce risk of paying a lot for making movies. Recognize need to compete in video sector B. Possible Merger Partners 1. Warner Communications: Communications and entertainment: film, recorded music, cable, and publishing. Through subsidiary, produced financed and distributed to theaters feature motion pictures. One of top three studios. a. Investment banks said that expertise in operating management, leadership in film, records, video, TV and cable and international business in record and film and debt capacity. Difficulties were cultural differences 2. Paramount: Three lines of business: Entertainment, publishing/information, and consumer/commercial finance. Entertainment produced, financed and distributed motion pictures, TV and prerecorded videos, and operated movies in US and Canada. W/ MCA owned USA. Produced series and made for TV movies. Sold videos produced by self and others. Published hardcover and paperback a. Bank said that presence in filmed industry and library and publishing interests asset, but not provide major cable assets and financing not fit. C. Managements Decision 1. Warner most attractive b/c movie studio, Warner Brothers, cable operations, music business. Board supported Munro that best fit. 2. Valued Warner at $65 to $73 and Time at $189 to $212. 3. Agreement: Call Time-Warner and have 12 Board from each. Share swap so that time not incur debt. Ensure that Time take advantage of future opportunities. Warner said that preserve SH ownership. a. Old Warner SH and old Time SH both being owners in new Time Warner. Did a valuation and came up w/ ratio of 59% Warner and 41% Time. b. Exchange Ratio: 0.465 shares of Time for 1 share of Warner i. 57M shares outstanding of Time and 178.4M shares outstanding for Warner ii. Number of Time issued for Warner: 82.9M (.465 *178.4M). Existing outstanding Warner is 57 and therefore total number of shares is 159.9 shares. iii. Therefore, old Time SH have 41% of and new [former Warner SH] have 59% c. Tax free reorganization lawyers for transaction structure in a way that Warner need not recognized taxable gain. 4. Delay b/c SH needed to approve b/c stock swap. 5. Announced Time at $109 before then fell to $106, then rolls to $107 when news of hostile bid. Warner went from $45 to $48. Analysts reacted positively.

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D. Paramounts Offer 1. After announced, Morgan Stanley and other banks began to recruit potential hostile bidders. 2. Paramount announced plans to sell Associates for $4B to $5B. Launched cash bid for $175 (60% premium) and willingness to negotiate. Time price rose from $44 to $170, Warner $1.75 to $53.50 and Paramount from $0.75 to $54.75. Conditioned on termination of Warner merger. Davis, CEO of Paramount, guaranteed editorial integrity b/c knew that Time worried about this. E. Times Dilemma 1. In order to figure this out, need to do due diligence and figure out a. Time stock price $109.125 w/ 178.3M outstanding rates. Market value $8.2B. Warner stock price $58.75 w/ 57M outstanding shares. Market value is $6.2B. Total Value is $14.4B b. Therefore, Times share now worth $102.92 value went down from $109.125 c. Have to believe that to get back at $868 additional value in synergies. 2. Synergies calculation: Shares Outstanding Price
Warner 57.0M $45.875

Net Worth % Ownership Market Value $8.2B 59% $8.5B

Time

178.3M

$109.125 $6.2B

41%

$5.9B

a. Exchange Ratio: 0.465 i. .465 * 178.3 = 82.9M ii. 82.9 + 57 = 139.9M total shares outstanding b. Total net worth: $8.2 + $6.2B = $14.4 B i. $14.4B/139.9M = $102.92 price per share post deal c. Bid from Paramount: $175/share i. 60.4% higher than then pre-price deal and 70.0% higher than post-deal price d. Time is paying premium of $350M [$8.6B-$8.2B] e. New firm must have value of $15.3 [$6.2B/41%] to be indifferent. But really off by $868M [$15.3B-14.4B].

3. Times Options (1) Accept the $175 from Paramount. Negotiate and maybe even drive price up (2) Continue on same path w/ merger that planned. Problem is that for stock-swap, need SH approval. Need to go to meeting and convince SH that will be more than $175 (3) Can do cash merger if think that SH will not approve. Come up w/ another structure that will ultimately combine. Chose a different method that not allow SH right to vote. 4. How should management decide? What factors should play a role? a. Might like Warners role b/c guaranteed management role. Might lose jobs w/ Paramount. Thought that Warner is better merger partner b/c of strategy and management position. But fact that sold financial division might offset a little b. Best interest of Time SH have to ask if able to achieve increase in value required to make the Warner merger worth it. LT v. ST c. Directors might be at informational advantage vis--vis SH and analysts. Spent a lot of time w/ Warner good feel for what the Time-Warner entity would be like. d. Is it good that board is given options? e. Other considerations: Employees and Business; Editorial integrity
F. What happened: 1. Time did not negotiate w/ Paramount. Abandoned original merger deal and went w/ Option 3 acquired Warner for $170. 2. Munro said that disappointed that Paramount did not keep promise not to make hostile offer. Also, said that deal is farce did not get FCC approval. 3. To finance, incur $14B in debt. Sold $5B in assets 4. SH eventually sued breach of fiduciary duty. A lot of litigation. But Time and Warner prevailed.

G. Why didnt Paramount just go on regardless? 1. Defensive measures Companies erect fences to make it impossible for hostile takeover to occur. Effectively an offering that is attached and given to SH as dividend and attached to all shares of company. If someone makes hostile bid or gets certain percentage, poison pill is triggered. Makes it expensive to get deal done. a. Exhibit 11: Companies agreed to exchange 7.1M shares of Ts CS for more than 25%of Time before merger was completed.

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Exchange to Other Company Price/Share Value

Time 7.1M $175 $56 1.2B 969M Warner 17.3M

b. Warner will get better end of deal by $273.7M [$1.2B-$969M] c. Idea is that have now have another 7.1M shares that will have to purchase at increased cost.

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Structures, Voting and Appraisal Rights

Tuesday, January 17, 2012 1:24 PM

CB (ch.2 corporate formalities: the mechanics of structuring acquisition transactions) 39-50, 54, 55-57, 60-64, 88-89; 91-95; 99-100; 228-231 DGCl 241a-f, 253 a, c,d,; 259a; 262(b),c, 271; 275;278
An Introduction to Corporate Law Statutes: The Statutory Scheme of Delaware, Model Act, and California The requirement of Board and /or Shareholder Approval Under State Law Failure to satisfy corpaote faomraliteis requried to consumate an m and a may reate the basis for a shareholder challenge to the validity fo the transaction Threhsold requriemetn of board authorization Federal Securities Laws and the Stock Exchange Rules The Federal Proxy Rules When mngmt solcits votes form sharehodlers of a reporting company, SEC proxy rules require compnay's managers file a proxy statement with the SEC and distribute the proxy statmetn to the company's sharhoedlers Provide informaiton to make informed decision The securities Act of 1933 Applies where Bidder propsoes to sue its stock as the acquistion consideration Must reister or find an exemption in order to uses its stock Shareholder Approval Requirements of the NYSE Rule 312 Sharheodler approval required prior to issuance of common stock, or of securities covnertible into commonstock in anys transaciton if Common stock, upon issuance, has voting power equal or in excess of 20 % of voting power outstanding before the isuance of such stock; or The number of shares of common stock to be issued is, or will be upon isuance, equal to or in excess of 20% of the number of shares of common stock outsntanind before the issuance of the common stock or of securiteis covnertible inot common stock Shareholder approval not required for issuance invovlign Any public offerign for cash Any bona fide private finacning - if scuh finacning invovles a sale of common stock, for cash, at a price at least as great as each of the book and market value of the issuer's common stock; or securities convertible into common stock, for cash, if the covnersion or exercise price is at least as great as each of the book and market value Notes How many shareholders Must approve the Acquisition? Business Combinations in Which one Party is not a Corporation: "Interspecies" transactions Are the Modern Corporation Statutes Enabling or Regulatory in Nature? Corporate Formalities Required for Statutory Mergers Under Delaware Law and the MBCA General Background- Delaware Law of Direct Mergers Section 251 Board Approval Board of director of each cosnituent delware corp must approve merger agreement Shareholder Approval 251(C) - sharheolder approval required - majority of outstanding shares Merger Consideration Virutally any type of consideraiton permissible Successor Liability Direct merger - surivign corpatoin succeeds to all the rights and all the liabltieis of both constiuent corpoations by operation of law See 259 Abandonment of Merger (251) Board of directors can abandon merger without approval of sharheolders, even if plan already approved by sharehodlers, as long as merger agreement expressly reserves that power to the board Must be exercised consistnet with fiduciary duties Can also amend merger agreemnt any time before filed with secretary of states office provided the agreemnt expressly reserves this power to thwe board Even after sharheodler approval But any amendment made after adoption of the agremetn by the stockholders may not change the consdieraiton to be received int eh merger, change any term of the certificate of incorpatoion of the surviign corpaiton, or chagne the agreement in such a way as to adversely affect any class or series of stock of any constiuent corpaiton"

I.

II.

III.

IV.

V.

VI.

VII.

a. Executive decision - not taking notes on slides- see on ctools as transactional form Types of transactions- generally i. Note- only responsible for provisions under Delaware law a. Corporations combining with corpaitons - Mergers i. Deal between corps b. Corporations purchasing Stock from individual stockholders-Stock acquisitions c. Corpraotions buyign assets (and assuming certain liablities) from other corporations - Aseet acqusitions Basic Transaction Structures a. Missed slide1 b. Sale of assets i. Cash-for assets acuisitions ii. Stock for assets acqusitions c. Missed rest of slide Terms a. Missed slide Assumptions a. Only two possible forms of consideration: i. Cash ii. Stock iii. Note- delawre authorizes all sorts of consideration b. Parties are Delaware C corpations c. Stockhodlers means "common stockhodlers" d. No provisions in the certificates of incorpation of the constituent corporations alter the default provisons of the delware Code Statutory Mergers- overview a. Step 1 (DGCL 251(b) i. T corp andA corp boards negotiate deal and terms of merger agreement ii. A corp and T corp Baords adotp a resolution approvign the merger agreement and declaring the advisability of the transaction iii. A corp's charter may be amended (251(b)(3) b. Step 2 DGCL 251(c) i. Vote by AC-SH and TC-SH: majority of shares entitled to vote thereon 1) Unlike corpaote govenrmetn - just need majroity of present shares ii. AC-SH (Sahroelders of the surivign corpaiton, A corp) do not vote if (251(f)) 1) A Corp stock issued is 20% or less of A Corp shares outstanding (which includes cases in which consideration is cash) a) Number of shares not terribly dilutive 2) No change to certificate of incorporation of the suriving corpaotion (A Corp), and 3) Each share of stock of A corp contineus in place as an idnetical share after the merger is effective c. Step 3 251(c) i. File merger agreemetn or cerficate of merger with secretary of state ii. Merger effective at time specified in certificate of merger iii. T Corp A and L merger into A corp: creditor claism are assumed by A corp (259(a) iv. TC-Sh get A Corp stock d. See stock for stock charts Short-Form Merger- overview a. Shortened proceudres for short-form mergers (253) b. Merger Between Parent Corp (A corp) and its 90% or more owned subsidiary (T corp) c. A corp board must approve the terms of the merger, inclduing the consdieration to be paid to the minority sharoedlers of T corp; no board action at the T corp level d. Up stream merger- merger fo the subsidiary ( T-Corp) ino the parent (A corp) i. May be effected without approval of the parent's (AC-SH) or the subsidiary's stockholders (TC-SH) e. Downstream merger - merger of the parent (A corp) inot the subsidiary (T corp) i. Approval of the parent's stockholders (AC-SH) requried); Parent (A corp) is not the suriving corporation Triangualr Merger - overview a. Triangular mergers i. Means to effect business combination between A Cop and T cop with use of 3 parties ii. Thre parties - A cop, A sub and T cop b. Steps i. A corp icnorporates a new subsidiary (A Sub) 1) In exchange for 100% of the outstanding stock of A sub, A corp contributes eh consdireation necessary to

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of any constiuent corpaiton" Introduction to Dissenter's Right of Appraisal No right of apprasial in the case of a sale of assets or an ammendment to the company's certifacte of incoraption Section 262 Market Out Exception 262(b)(1) - no right of appraisal for shares listed on a naitonal exchange/ nasdaq Even if not liste,dn o appraisal rights if shares so widely held to imply a liquid and substanial trading market - makret out excetipn The "Exception to the Exception" - restoring the Right of Appraisal 252(B)(2) Where the market out exception is triggered, and the dissenting shares are required to take any consdieration other than stock (such as bonds, debentures, cash, or proepty) then an exception to the marekt out exception (262(b)(1) is triggered, operates to restore the dissenters right to an apraisal Appraisal Rights Under the MBCA Mor broad than dleawre Perfecting the Statutory Right of Appraisal Must notify company of intnet before sharehodlers vote Msut abstain or vote agaisnt propsoal After approval of merger, dissenter must notify of itnent to dmeand payment in cash Must continue to hold shares thorugh date of merger Corporate Formalities Required for Short Form Mergers - Under Delaware Law and the MBCA Sec 253 - short form mergers When parent corp absorbs subsidary Can do so without a vote of either the parent or the subs sharehodlers as long as parent owns at least 90 percent of subs stock Parent corps dealings with minoirty sharehodlers analayzed under entire fairness test See Weinberger v. UOP Corporate Formalities Required for Asset Acquisitions - Under Delaware Law and the MBCA General Background - Delaware Law on Asset Acquisition Section 271- sale f all or substantially all of corops assets Only if sale of all or substnaially all is it a fudnmental change requiring sharehodler approval If sale of all or substianllyall -> need aboslute majroity vote of sahrehodlers Need authorization by board of directors Judment that the terms of an asset sale are expedient and for the best interests of the corpation Sahrehodlers recive at elast 20 days notice of meeting to vote on company propseosed sale Majroity vote needed Notes Non-acquisitive restructuring of a Single Firm: Reorganizations and Recapitalizations Spin-offs Recapitalization Leveraging the Company's Balance Sheet Blank Check Prefered Stock An Introduction to Leveraged Buy-Outs The Era of the "Mega-Buy out" Corporate Formalities Require for Stock Acquisitions General Background
Notes An introduction to Hostile Takeovers An Introduction to Two-Step Transactions Corporate Formalities Required for Triangular Mergers Under Delaware Law and the MBCA General Background on Triangular (Three -Party) Mergers Benefit - unlike direct merger, acquirign company doesn't need shareholder approval because using wholy owned subsidiary -> parent company owns all the shares Forward triangular merger -> NewCo is surivign corpaiton, Target co disspears Reverse - Newco merges into Traget, leavign target Elemintes need to obtain approval from Bdider's sahrehodler And htus no appraisal rights for Bidder co. stockholders Note Distinguish the "Bust Up Bid" and the "Merger of Equals" Successor Liability in Asset Acquisitions (page 228) Introductory Note Dissolution is a fudnematnal change requiring sharheolder approval Dissolution of Target Co. Failrue to follow staturoy dissoltuion requriemtns may result in personal laiblity to the companys directors or shaholders DGCl 241a-f, 253 a, c,d,; 259a; 262(b),c, 271; 275;278

sub, A corp contributes eh consdireation necessary to compelte the acquisition of T Corp 2) A corp is left as the sole stockholder of A Sub ii. A sub and T corp Merger c. Approval of boards of A sub and T corp, the consitutnet corpaotions, requried for consumation (251(b)) d. Approval of A corp board not requried for consumation of merger 251(b) because A corp is not a constinuent corpaotion: however i. A corp board approval is requried for the issuance of stock or use of other A corp resources (e.g., cash) to effect the transaction (141(a), 161) e. No vote of AC-Sh on merger under state law (but see applicable stock excahnge rules) i. In a merger, only the stockholders of the constituent corporations are entitled to vote ii. Sharehodlers who are entitled to vote are TC-Sh and A corp, the sole stockholder of A sub iii. A corp board votes all shares of A sub on behalf of A corp f. Use o fA sub means T corp liablities not assuemd by A corp g. Triangular merger preserves T corp's business as a separate entity i. For example, no problems integrating labor forces under union contracts h. T corp is soelly resposnbile for its obligations, unless the p is able to pierce the corproate veil and hold the parentcompany (A Corp) liable i. See Forward Diagram and Reverse Diagram i. Note - tax code gives different treatemtn to reverse/forward mergers ii. We'll cover this later VIII. Asset Acquisition -Overview a. A Corp and T Corp boards negoiate the deal and set forth the terms of the transaction in an asset prucahse agreement b. Voting i. TC- SH vote when "all or substnatially all" of T corp's assets are sold (271 (a)) ii. Generally, no vote for AC-SH, but AC-SH may vote under stock exchange rules if sufficent shares need to be issued in stock-for-assets acqusition c. In cash-for-assets acqusition, remaining assets, inclduign cash from asset sale, are distributed to TC-SH following dissolution of T Corp d. In stock-for-assets acqusition: i. Remaining asssets, inclduing A corp Stock, are distributed to TC-SH following dissolution of T corp ii. TC-SH become new stockholders of A corp, along with AC-SH e. A corp must specifically assume T Corp's laiblities, otherwise, stay with T corp f. If A corp does ot want to subject itself to the laiblities of T corp assumed in the transaciton, A corp could form A sub and have A sub acquire T corp's assts and assume certain of T corp's liabiliteis i. Issue: A corp can never be sure about what hairy liabliteis T corp is carrying around - so having it meged with a subsidiary protects A corp IX. Mergers v. Asset Acqusitions a. Bothe mergers and sales of assets requrie approval of the T corp board b. Merger takes effect whent eh certificate of merger is field with the secretary of state i. Key events thereupon take place by oepration of law c. Statutory sale of assets is mcuh more complicated i. Many questions resovled by statue in merger context must be resovled through acquistion agreement ii. As a result, the mechanics of transfering controla nd consdieration are complex d. When a merger becomes effective, the separate existence of the parties, with the exception of the surivign corpaiton, comes to an end e. In an asset sale, the target company remians in existence at elast for a little while after the asset sale has been compled i. Only title to the assets chagnes hands; both corpaotions remain alive f. In merger, title to all proeprty owned by each paty is automatically vestd int eh surviing corporation g. In an asset sale, transaaciton costs are hgiher i. Documetns of transfer must be prepared with respect to every asset being sold and those documetns must be field with every applciable agency (e..g, a deed of transfer will have to be proeprly field with every county in which the target owns real estate) h. In mergers, consideration passes to non-dissenting stockholders at clsoing i. In an asset sale, the process of distributing the considreaiton to TCSH is more complicated i. Distibute consdireation as divident, or more, often, liquadating distribution following dissolution of T CORP X. Stock Acqusition- overview a. Cash-for-stock i. A corp purcahses shares of T corp directly form TC-SH for cash

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laiblity to the companys directors or shaholders DGCl 241a-f, 253 a, c,d,; 259a; 262(b),c, 271; 275;278 251: Merger or consoldiation of domestic corpaotions 253: Merger of parent corporation and subsidiary or subsidiaries 259: status, rights, liabilities, of constituent and surviign or resutling corpoations following merger or consolidation 262: Appraisal Rights 271: sale, lease or exchange of assets; cosndieration; procedure 275: Dissoltuion generally; procedure 278: Continuation of corpaotin after dissoltuion for purposes of suit and winding up affairs

XI.

XII.

XIII.

XIV.

XV.

cash b. Stock-for-stock i. A corp purcahses sares of T corp directly form TC-SH in exchange for shares of A corp c. Neither AC-SH nor TC-Sh have any voting rights with trepsect to the trasnaction i. But TC-SH must choose to sell d. Cash-for-stock post trasnaciton i. A corp is the new owenr of T corp stock ii. T Corp is either a wholly-owned or paritally-owned subsidiary of A corp; and iii. TC-SH have cash (though TC-SH holdouts still on stock in T corp e. Stock-for-stock post-transaction i. A corp is the new owner of T cop stock ii. T corp is either a wholly owned or paritally owned subsidiary of A corp iii. TC-SH are new shareholders of A corp along with AC-SH (though TC-SH holdouts still onw T corps Mergers vs. Stock Acqusition a. Mergers require approval oby the T corp board i. T corp board approval not requried for stock acqusitions b. When a merger becoems effective, the separate existence of all constinuent corps, with the exception of the suriving corpation, comes to an end i. In astock acqusition, T Corp remains n existence c. In a merger, A Corp ends up with all of T Corp's assets and laibliteis i. In a stock acqusition, T corp's existing assets and liabliteis remain in place at the subsidiary (T Corp) level -removed from A Corp ii. In a stock acqusition, in the absence of veil peircing, A corp is expsoed to T Corp's laiblities only to the extent of T Corrp's assets Tender Offer i. A kidn of stock acqusition 1) Public companies, public ntoice of tender offer a. A stock offers to purcahse T corp Stock b. May bypass T corp Board i. T corp board does not have to vote to approve the trasnction (though it can do so) 1) Friendly tender offer -faster than mergers c. No TC-SH vote d. IF TC TC-SH accept offer, A corp prucahses shares of T corp for cash or stock e. May follow with a back-end merger i. Or squeeze out ii. Getting rid of minority shareholders Two Stage Acqusition a. Two steps i. Stock acqusition ii. Freeze-out (squeeze-out) merger b. A corp acquires a controlling interest in T corp by acquiring stock directly from TC-SH in a stock acqusition c. A corp then drops down A sub and merges T corp and A sub d. Stockholders of ST corp (A corp and TC-SH hold-outs) and A sub (A corp) vote to approve the merger e. However, A corp, as soel stockholder of A sub and majroity of stockholder of T corp, can determien the outcome of the vote f. Non-selling TC-SH typcially gets cash in exchange for their sahres g. Reasons for transaction i. First step: speed with which A corp can cacquire control of T corp ii. Second step: turn paritally owned T corp into wholly-owned subsidairy Stock exchange rules a. Stock exchanges and organized trading markets, including NYSE and Nasdaw are self-regualtory organizations b. Each SRO has own set of requriemetns for firmst that trade on its exchange, which incldue matters related to public flaot and governence c. Penalties for viaotlion of listing rules include i. Suspension of trading ii. De-listing d. Today we will epxlore the rules applciableto public companies listed on NYSE i. Similar rules on toehr exchanges NYSE rules a. NYSE listed company munual 312.03(c) i. Shareodler approval is required prior to the issuance of common stock, or of securiteis convertible into or exercisable for common stock, in any tranasction or serires of realted transactions if: 1) The common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securiteis convertible into or exercisable for common stock 2) The number of shares of common stock to be issues is,

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XVI.

XVII.

XVIII.

XIX.

XX.

common stock 2) The number of shares of common stock to be issues is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issaucne of the common stock or of securities convertible into or exerciable ofr common stock ii. However, shareholder approval will not be requried for any such issuacne invovlign: 1) Any public offering for cash 2) Any bona fide private fianicng b. 312.07 i. The minimum vote which will constitue sharehodler approval.. Is defiend as approval by a marjoity of votes cast provided that the total vote cast rperestent over 50% in itnerst of allsecurtieis entiteld to vote c. DGCL vs. NYSE rules i. DGCL requreis AC-SH vote I 1) A corp is constiuent corpaiton and 2) A corp stock, reprsenting mfore than 20% of the nubmer of shares of A corp, is issued in connection d. Missed the rest of the NYSE rules part. Appraisal rights a. Hyp i. Sharehodler can't unilaterally stop merger if majroity is infavor ii. Hold-out shareolder have no remedy where they simply want to keep their T corp sahres b. However, 262 does give dissenters who vote agaisnt the tranasaction or those who abstain the right to challenge the price being paid for their shares (i.e., appraisal or dissenters' rights) under certain circumstances c. Appraisal rights give dissenting shareholders the right to make the corporation buy their shares at a judicailly determined fair market value i. Payment in cash d. If many shareholders exercise appraisal rights, the acquisition may be threatened e. Delware law provides for appraisal only in connection with mergers. i. Excludes other transactions with the potnetial for overreaching, such as assets sales 1) Many other states provide for appraisal in these situations f. Even in connection with mergers, Delaware law exclsudes ahreholders from appraisal if they have other access to liqudity (the market out exception) or if they do no have voting rights in connection with the transaction See appraisal rights road map a. No state law appraisal rights if i. Not sharhoelder of consitneunet ii. No state law voting rights Appraisal Rights a. There are special appraisal rules with repsect to shrot-form mergers: i. DGCL 253(d): "in the vent all fothe stock of a subsidiary delwarea coeproation party to amreger effected under. ii. DGCL 262(B) - subsidiary delware corps have appraisal rights b. Basically : 253 short firm mergers- appraisal rights for minority sharehodlers Summary charts (see charts themselves) a. Appraisal rights summary i. Market out exception 1) Getting stock in public company - no appraisal rights ii. Exception to the exception 1) If getting anything other than stock, appraisal rights restored for Targets iii. Acquriign firm is private 1) If buyign cash a) 251(F) - consideration paid is cash, shareholders lose voting rights b) Since lose voitng rights via 251F, also lose appraisal rights 2) If A corp giving more than 20% -> yes apprasal rights, because of right to vote a) Small scale merger exception doesn't apply when more than 20% of shares being issued iv. Acquiring firm ubpublic b. Triangular mergers, appraisal summary i. Note: even if SER implements voting for acquriign company in triangular merger, appraisal rights odn't follow ( 1) Only where state law requires shareholder voting Random note: Market out exception a. Appraisal rights when TargetBoD may be in cahoots i. Idea: if market avaialbe, and you don't think it's a good idea, you can bounce via market b. But should still have appraisal rights when being cashed out (exception to the exception) i. If you're being cashed out, you've completely lost any

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(exception to the exception) i. If you're being cashed out, you've completely lost any opporutnity to participate in the upside

Transactional Forms and Voting / Appraisal Rights Mergers

Types of Transactions Generally o Mergers corporations combining with corporations o Stock acquisitions corporations purchasing stock form individual stockholders o Asset acquisitions corps buying assets (and assuming certain liabilities) from other corps Basic Transaction Structures o Statutory merger Stock-for-stock statutory merger Cash-for-stock statutory merger o Short form merger o Triangular (subsidiary) merger Forward subsidiary merger Reverse subsidiary merger o Consolidation o Sale of assets Cash-for-assets acquisition Stock-for-assets acquisition o Stock purchase Cash-for-stock acquisition Stock-for-stock acquisition o Tender offer

Statutory Mergers DGCL 251

Step 1 (DGCL 251(b)) o T Corp and A Corp boards negotiate deal and terms of merger agreement o A Corp and T Corp boards adopt a resolution approving the merger agreement and declaring the advisability of the transaction o A Corps charter may be amended (DGCL 251(b)(3)) Step 2 (DGCL 251(c)) o The agreement required by subsection (b) . . . shall be submitted to the stockholders of each constituent corporation . . . . o Vote by AC-SH and TC-SH: majority of outstanding stock of the corporation entitled to vote thereon . . . . (50% of total shares) o Small Scale Merger Exception (DGCL 251(f)): AC-SH (shareholders of the surviving corporation, A Corp) do not vote if (1) No new governance provisions No change to the certificate of incorporation of the surviving corporation (A Corp), (2) No change in share preference Each share of stock of A Corp continues in place as an identical share after the merger is effective, (3) No dilution of shareholders A Corp stock issued is 20% or less of shares outstanding immediately prior to the effective date of merger 20% day before merger = 16.7% post-consummation (1/6) If cash mergers, stock issued is 0% Step 3 (DGCL 251(c)) o File merger agreement or certificate of merger with the secretary of state o Merger effective at time specified in certificate of merger o T Corp assets & liabilities merge into A Corp; creditor claims are assumed by A Corp (DGCL 259(a)) o TC-SH get A Corp stock or cash (or other consideration)

Short Form Mergers DGCL 253 (Parent-Subsidiary Mergers)

Shortened procedures for short-form mergers Merger b/w parent corp (A Corp) and its 90% or more owned subsidiary (T Corp) A Corp board must approve the terms of the merger, including the consideration to be paid to the minority shareholders of T Corp; no board action at the T Corp level is required Upstream merger merger of the subsidiary (T Corp) into the parent (A Corp) o May be effected without approval of the parents (AC-SH) or the subsidiarys stockholders (TC-SH) Downstream merger merger of the parent (A Corp) into the subsidiary (T Corp) o Approval of parents stockholders (AC-SH) required; parent (A Corp) is not the surviving corporation b/c this changes parents identity (charter) so it must be approved by the shareholders Means to affect a business combination between A Corp and T Corp with use of three parties: A Corp, A Sub and T Corp o No voting rights for shareholders of the parent (A Corp) Forward Subsidiary (Triangular) Merger T Corp merges into A Sub Reverse Subsidiary (Triangular) Merger A Sub merges into T Corp Steps: o A Corp incorporates a new subsidiary (A Sub) In exchange for 100% of the outstanding stock of A Sub, A Corp contributes the consideration necessary to complete the acquisition of T Corp A Corp is left as the sole stockholder of A Sub o A Sub and T Corp merge Approval of boards of A Sub and T Corp, the constituent corporations, required for consummation (DGCL 251 (b))

Triangular Mergers (or Subsidiary Mergers)

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New York Stock Exchange Rules

consummation (DGCL 251 (b)) Approval of A Corp board not required for consummation of merger under DGCL 251 (b) because A Corp is not a constituent corporation; however o A Corp board approval is required for issuance of stock or use of other A Corp resources (e.g., cash) to effect the transaction (DGCL 141(a), 161) 161 Bd issues shares 141(a) Business and affairs of corp governed by Bd of Directors No vote of AC-SH on merger (But see applicable stock exchange rules) o In a merger, only stockholders of the constituent corporations are entitled to vote o Shareholders who are entitled to vote are TC-SH and A Corp, the sole stockholder of A Sub, and A Corp board votes all shares of A Sub on behalf of A Corp Use of A Sub means T Corp liabilities not assumed by A Corp Triangular merger preserves T Corps business as separate entity o for example, no problems integrating labor forces under union contracts T Corp is solely responsible for its obligations, unless the plaintiff is able to pierce the corporate veil and hold the parent company (A Corp) liable.

Appraisal Rights DGCL 262

Penalties for violation of listing rules o Suspension of trading o De-listing NYSE Listed Co Manual 312.03(c) o Shareholders approval is required for the issuance of common stock or securities convertible to common stock if: Upon issuance the common stock has voting power equal to or in excess of 20 percent of the voting power outstanding The number of shares of common stock issued is equal to or in excess of 20 percent of the number of shares outstanding o However, shareholder approval will not be required for any such issuance involving: any public offering for cash; any bona fide private financing . . . NYSE Listed Co Manual 312.07 o Total vote must represent over 50% of all securities entitled to vote (quorum) o Majority of vote cast NYSE vs. DGCL o DGCL requires AC-SH vote if: 1) constituent corp; 2) more than 20% of the number of shares of A Corp, is issued in connection w/ transaction. 251 (c)(f) o NYSE Rules require AC-SH vote if at least 20% of the voting power or number of shares of A Corp is issued in connection w/ transaction e.g., rev. sub. merger when >= 20% shares outstanding issued in transaction, where ACSH do not have right to vote under DGCL 251 b/c A Corp isnt a constituent corporation, but do under NYSE 312.03(c). o DGCL requires approval of holders of 50% of all stock outstanding and entitled to vote. 251(c) o NYSE Rules require a quorum of 50% of corps shares and majority vote of the quorum present or represented o In sum, voting is more likely under NYSE rules, at least for the issuing corp, but it is easier to gain approval of the merger than under DGCL.
Key Point Appraisal Rights follow voting rights Delaware law gives dissenters who vote against the transaction or those who abstain the right to challenge the price being paid for their shares under certain circumstances Appraisal rts give dissenting shareholders the right to make the corporation buy their shares at judicially determined fair market value payment in cash If many shareholders exercise appraisal rights, the acquisition may be threatened o This is unlikely, but still want to minimize appraisal claims Delaware law provides for appraisal only in connection with mergers; excludes other transaction with the potential for overreaching, such as asset sales Market out exception - Even in connection with mergers, Delaware law excludes shareholders for appraisal if they have other access to liquidity, or if they do not have voting rights in connection with the transaction. DGCL 262 (b)(1). o Appraisal rights can be restored for the TC-SH if the consideration they are required to receive is anything other than (1) stock of the surviving company; (2) stock of any public company; (3) cash in lieu of fractional shares; (4) Any combination of the above. DGCL 262(b)(2) Thus, when T Corp is public, appraisal rights are restored if the consideration required to be received for the merger is all or part cash. DGCL 262(b)(2). If hybrid deal, would get appraisal rts for the whole deal, both stock and cash, not just the cash part. There are special appraisal rules with respect to short-form mergers: o TC-SH (minority shareholders) have appraisal rights, even though they have no voting rights with respect to the transaction o There is no market out exception. o AC-SH have no appraisal rights o DGCL 253(d) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under this section is not owned by the parent corporation immediately prior to the merger, the stockholders of the subsidiary Delaware corporation party to the merger shall have appraisal rights as set forth in 262 of this title. o DGCL 262(b)(3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation.

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Appraisal Rights: Valuation Methodologies An offer for a firm may be more than the market price, but lower than the intrinsic market value (DCF, etc.) When you value the company, you value it as a going concern, not on a liquidation basis o Market Value current quoted price at which an investor sells a stock or bond o Intrinsic Value - The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. Calculating Intrinsic Value o Discounted Cash Flow Analysis (DCF) project firms cash flows to present (see Kleinwort Benson Limited v. Silgan Corp.) Values the entire firm, assumes control. There are many assumptions that go into a DCF Know how to calculate a WACC Enterprise value of a firm is equal to the PV of its cash flows. Theoretically, an owner could take all of the CFs out of the bus But the capital that generates these cash flows has a cost (Cost of Money) o Debt has interest rates o Equity has a required rate of return Risk there is also a risk of lower CFs than expected Steps in a DCF Project CFs Calculate Discount Rate WACC FV=PV(1+r)^n PV=FV/(1+r)^n Discount Rate = Opportunity Cost of Capital + Risk Opportunity Cost of Capital = Rate could receive on other similar investments ??? WACC = Weighted cost of capital given a Cos debt-equity mix (capital structure) o (After Tax Cost of Debt * %D) + (Required Rate of Return on Equity * %E) o (Kd*(d/V))+(Ke*(e/V)) V=(d+e) d = assume book value of debt e = assume mkt value of equity o Mkt Cap Kd = i * (1-t) Kd = Cost of Debt (after tax) i = interest rate on debt t = tax rate Int. expense is tax deductible, so use AfterTax cost Ke = Rf +B(Rm-Rf) Ke = Cost of Equity Rf = Risk Free Rate (US govt bonds) o 10-yr T-Bond Rm = Return on Market (Rm-Rf) = Equity Mkt Risk Prem. B = Return of firm vs returns of market overall (stock volatility) Expected Return on a Risky Asset o Opportunity Cost (Rf) o Inflation (Rf) o Risk (B) (Rm) FCF = EBIT * (1-t) + Non-cash expenses CapEx Incremental working capital Incremental working cap = amount of cash needed to fund the business and keep in operating Terminal Value Can only project cash flows out 5 10 years at the most. Assume that at the end of the projection period the business will be sold. Perpetual Growth Equation = Cash flow will continue to grow past the projection period at a constant rate. Must discount terminal value back to present. o TV in Year X = (FCF in year X+1)/(WACC-g) g = growth rate (rule of thumb = inflation, 2-3%) DCF Analysis = Total Enterprise Value = Debt + Equity Excess Cash Debt means interest bearing debt, both short and long-term Value of Equity = Total Enterprise Value Value of Debt + Cash Price per Share = Value of Equity / Shrs Outstanding Final to attack DCF, question growth rate, WACC, Minority Discount, Lack of Marketability latter 2 arent allowed o Comparable Co. Analysis value one particular company based on how other similar business are valued and compare results. Comparing one company to other companies in the same industry, broader mkt. Does not assume control Value summing up the value placed on the firm by minority shareholders 1. Market Cap = Stock Price * Shrs Outstanding a. Can also use Mkt Cap to calculate certain multiples to see the return on equity, e.g. Mkt Cap / NI 2. Enterprise Value = Mkt Cap + Book Value of Interest Bearing

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2. Debt - Cash 3. Can then use EV to calculate various multiples: a. EV/Last Twelve Months (LTM) Sales b. EV/EBIT c. EV/EBITDA 4. Then calculate the Mean and Median of the sample of cos. 5. Look at Targets LTM Sales figures (or EBIT & EBITDA) and multiply times average industry or sector multiple. This will give you the target cos implied EV. Final to attack comparable company analysis, question selection of companies, time period, control premium, volatility in earnings, etc. o Precedent Transaction Analysis - (uses acquisition multiples) uses the value of transaction that have been announced or closed of companies that are similar to your company and calculate multiples and compare. Value of the firm, assumes control. o If these calculations are taking place in the environment of a acquisition, need to discount for the value of control premium. Final attack Precedent Transaction Analysis by attacking the sample of companies and transactions, and also by attacking the earnings volatility/performance of those companies

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Problem Sets on Mergers

Monday, January 23, 2012 3:09 PM

Overveiw When cosndieration is stock, Maynard says "amounting to 30 percend of stock after the merger is compelted" DGCL 251(f) Pre-transaction: Before transaction is consumated, compare the number of shares to be issued with the number of outstandign shares of the corporation So no required AC-SH vote if shares issued don't exceed 20% of the shares of stock of A Corp outstanding immediately prior to the merger Post transaction - no AC-SH vote if TC-SH receive no more than 1/6 of the stock of the surivign corpoation (alterantively, if AC-SH retain 5/6 of stock of surivign corpaiton) Can see if the need for voting are triggered Hypo A Corp has 100 shares outstanding Merger consideration = 20 shares of A Corp stock So 20% of shares of A Corp issued (20/100 = 20%) - pre cosnummation So small scale merger exception applies - > 20% or less takes voting rights away of acquiring sharehodlers Post transaction - 20/(100+20) = -0.1667 = 16.7% So threshold for amount of shares post-transaction is 16.7% Problem Set one (page 51) Stautory (or direct) Mergers Under Delaware Law and the MBCA Stock for stock mergers Merger consideration of 30% of Bidder's Stock Facts Target is clsoely held, mergering with Bidder, also clsoely held 30% of common stock after merger is compelted Only one class of coting common stock outstanding Surviign corp Bidder Action required by boards Bidder Negotiate the terms, adopt resoltuion 251(b) Requires board of directors of acquirer to approve trasnaction Need to issue shares Targer 251(b) - approve and adopt resoltuion Do shareholders of B co and T co have right to vote B co 251(F) does not take away B Co's rights, Since B a constinuent corp, sahreholders do have right to vote T co 251(f) applies So Yes, right to vote doB co and T co have right to dissent Yes, both No market-out eception - clsoely held What action required under delware law if Bidder Co did not have a suffient number of sahres authorized DGCl 242 - process for amendmign charter to authorize more shares Absolute majority required (all shares eligible)
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 Absolute majority required (all shares eligible) Assume Pfizer - Delware Co, NYSE -lsited, and plans to merge with Pharmacia; Pfizer surivign; Pfizer common stock amounting to 27 Percent of Pfizer's outstanding stock after merger Action requried of the boards of both Under Both must adopt and and recommend (251(b) Under 161 - board of pfizer must approve issuance of shares Do the shareolder of Pfizer and/or Pharmacia have the right to vote Pfizer Right to vote b/c constituent corportionu Not taken away because of small scale merger exception More than 20% pretransaction (more thatn 16.7 % post trnsaction) Also under NYSE rules Sharheolder approval for issuance of sahres over 20% (pre transaction) Pharmacia Right to vote b/c constiunet corp (251(c) gives voting rights to constiuent corpaotins) 251(F) odes not apply b/c not a surivign corpoation No application of NYSE rule b/c not issueing shares Do the sharehodlerss of Pfizer have appraisal rights? Pfizer No, public corporation, market out exception (262(b)(1)(market-out exception) 262(b)(2) not restored because not Pharmacia No, market out exception Rights not restored under 262(b)(2) because receiving stock from publicy traded, surivign company What action would be required under Delware law and or/ fed securities laws if Pfizer did not have a sufficeint number of authorized but unissued common shares to competle the transaciton? Would require board and sahrehodler approval to ammend charter See Delware Fed Securities law Must prepare proxy statements Required whenever asking for shareholder approal Assuming pfizer has 1 million shares otustanding entitled to vote; how many sahres must vote in favor of the trasnaciton? Delware? 500,001 Majority of all sahres otustanding Not just sahres voting Rules of NYSE (rule 312) Require majroity vote of shares present at meeting So in order to have quorum, need a marjoity (500,001), then need a majority of those present (so 250,001 is minimum) Will this merger automatically become effective once the requisite sharehodler approval is obtained? See 251(c) and 259 Not complete not till approvaed by secretaryof state Also, usually waiting for additional approvals to take palce Transafer of licesnes, etc Merger Cosnideration consisting of 15% of Bidder's Stock - stock for stock direct merger Facts
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 Facts Assume Target plans to merge into Bidder, except that Target will receive stock in privately held bidder accoutning to only 15% of Bidder's otustanding stock after merger is competled Action requried by boards Approve transaction 251(b) Bidder Target Boards of constituent corpraotions must approve trasnaction, so both target and bidder Do the sahreohdlers have right to vote? B co. No - 251(f)- small scale merger So rights under 251(c) -> gives rights, but taken away by 251(f) small sacle merger exception T co Yes under 251(c) Small scale merger exception not in play for target firm Still a terminal/ fundemtnal change for target firm Do the Sharehodlers of B co and T co have the right to dissent/ Appraisal right) B co. No appraisal rights because no voting rights (taken under 251(f)) 261(b) (1) - not voting rights - > no appraisal rights T co. Since still have voting rights, still have appraisal rights Assume Pharmacia, publcily traded co, plans to merge with Pfizer, also public, in exchange for 13 % of Pfizer's outstanding stock after merger Board action? Both must approve Do shareholders of Pfizer and/or Pharamcia have the right to vote Pfizer No right to vote, small scale merger exception Pharmacia Yes right to vote, no small scale merger excpetion 251(c) gives right to vote to constituent corporation shareholders Under NYSE rules? Still no vote for pfizer because under 20% of pre-transaciton Phararmacia ? 312 doesn't apply because not issuing any shares Do the sharehodlers of Pfizer and/or Pharamcia have the right to dissent? Pfizer No, no right to vote Pharamcia Market out exception 251(f) -> restored if receiving something other than stock Receiving stock in pfizer which is the surivign corpaotion So no restoration of appraisal rights Cash Mergers- merger cosndieration consits of al cash Target co, clsoely held, plans to merge into Bidder. Plan calls for the three sharehodlers of T co to receive all cash Action required by boards of B and T B 251(b) - requires approval T
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251(b) - requires approval T Sharehodler have right to vote? B No - 251(f) -small scale merger exception Takes away voting rights of 251(c) Small scale merger Anytime not issuing 20% or more of you (pre-cosnumation shares) Cash = 0% shares T Co yes, under 251(c) - > Do acquring sharehodlers have the right to vote? Appraisal rights? Market out excpetion doesn't apply to closely held corporations Bidder Yes constinuent corporation But no voting rights Because of small scale merger exception So no appraisal rights T Co Yes constineunet corporation Yes right to vote No market out exception -> privately held So yes appraisalrights Pfizer cash statutory merger to acquire Pharmacia for cash Actions of board Board approval 251(b) B and T Shareholders voting Pfizer? No, under 251(C), but removed under 251(f) -small scale exception 141- board determines use of company resources AND no shares being issued, no voting rights under NYSE rules Pharmacia Yes voting rights (251(c)) Appraisal rights Pharmacia Yes Market out exception, but resotred under the exception to the exception Offered something other than stock in publicly traded company Pfizer No voting rights (small scale merger exception) Problem Set 2 - short Form Merger Assume parent co. owns 92 percent of outstanding voting common stock of Target. P propses to acuqire remaining 8 percent of Target co. common stock by cashing out Action required by boards of parent and target Parent board approval is requried under 253(a) (for short form mergers) Target board does not need to approve - forgone conclusion since almost wholly owned Under 253(A) Shareholders of either? Neither has right to vote in short form merger
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Shareholders of either? Neither has right to vote in short form merger b/c upstream merger Appraisal rights Parent No, no right to vote 253(d) -> parent co's don't have appraisal rights Target Yes -> dissenting rights Special rule, even though no voting Assume both are publicly traded, any change to appraisal rights? Doesn't change anything Note: market-out exception does not apply to short-form merger This is upstream/ as ooposed to downstream Target moving up into parent corporation Problem Set 3 - Asset Acquistiions Sale of Assets for Cash: Target co is bike store founded by lance, owns 1/3 of common stock; remaining shares divided between Abe and Biff; Lance has decided to sell all of Targets assets and transfer certain of the laiblities to Bidder, clsoely held firm; Target will dissolve and liquidate; any remaing cash go to sahrehodlers Action taken by boards Target board msut approve under 271 Bidder -141a - actions must be approved by board Sharheolders vote B co No under 251 T co Yes - 271 Also must vote on dissoltuion of company (275) Requires majroity vote of outstanding stock for dissolution to occur Can do this all at once, combined vote, or two separate votes Appraisal rights? B co No T co. No appraisal rights for asset purchases Chef america, privately held, deicded to sell all assets to Nestle (traded on NYSE) for 2 billion cash; following sale, owners of CA planto dissovle and idistribute to themselves (As sole sharheolders) Boards Chef (target Must approve under 271 Nestle Must approve under 141(a) (board managesx business and affair of corpaotion Sharheolders vote? Nestle No right to vote under 271 (b/c cash transaction) No stock being issued, NYSE rules do not apply Chef T co has right to vote under 271 And 275 for dissolution Privately held, not issuing securities, no SER apply Appraisal rights Chef No Nestle No
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 No No appraisal rights in asset deals Sale of Assets in Exchange for 30 percent of Bidders Stock: Assume Chef agreed to sell all assets ito Nestle in exchange for Stock accoutnign to 30% of Nestle's outsatning stock. Chef will be dissolved, transfering Nestle shares to its two shareholders Boards Nestle Approval 141(a) Chef Approval under 271 Sahrhoelder Nestle No - 271 Yes- NYSE rule 312 30% outstanding stock (post-confiramtion)> 16.7% Chef Yes -271 Appraisal rights Nope, no appraisal rights in asset transaction Sale of Assets in Echange for 15% of Bidder's Stock; Same as above but 15% of outsnatind stock after compelted Boards Board approval the saem above Nestel -141 Cehf -271 Sharehodlers vote Nestle No changes under Delware law No under NYSE b/c less than 16.7% of outstanding shares Chef Still not right to vote Appraisal rights? No change, no appraisal rights Problem Set 4 - Stock Purchases Stock Purchase for Cash. Assume 2 brothers, Paul and David, each own half of common stock of Chef, signed purcahse agreemnt with Nestle - Nestle pays 2 billion cash on clsoing of parties stock purcahse agreement Parties? Chef america sharehodlers and Nestle i.e. Paul, David and Nestle Nestle buying stock directly form sharehodlers Corp isn't selling stock, brothers are Board action requried of Chef America No action rqeuired, b/c not a party Target companies board does not need to approve the transaction This makes hostile tender offers possible Board ation required of Nestle 141(a) - need approval to use firm resources But not statutory provision specficially related to approval rights for stock purcahses Do Chef sharehodlers have right o vote? No- individually decide wehther or not to sell shares, no shareholder approval process Do Nestle Shareholders have right to vtoe? No statutory provison for right to vote durign stock purchase Options avaialble to shareholder of Chef if they object
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No statutory provison for right to vote durign stock purchase Options avaialble to shareholder of Chef if they object Can only decline not to sell, can't be deprived of share against own preference Options avaialble to shareholder of Nestle if they object to Nestle's proposal to acuiqre chef Sell stock Vote current directors out Try to sue to enjoin transaction Breach of fiduciary duty Stock Purchase- in Exchange for 24 Percent of Bidders Stock; same as above except paying a poriton of the purcahse in stock amounting to 24% of Outstanding stock after transaciton completed Parties Chef sharehlders and Nestle Board action required of Chef None, not party to the transaction Board Action requrie dof Nestle Approval under 141(a) And approve share ussiance under 161 Sharheolders of Chef right to vote? Not really, sell shares or don't No formal shareholder vote Sharhoedlers of Nestle right to vote? Not under delware law Yes under NYSE How does analysis chagne if only 14% of stock used? Only change is about stock exchange rule Stock Purchsae- in excahgne for 14% of Bidder's stock; 3 sahrohelders of Target plan to sell all of their stock to Bidder Corp in excahgne for stock of bidder- amounting to 14% of the outstanding stock of B Col. After the stock urcahse is compelted Board actions B co 141(a) approval - use of firms resources 161 approval for issuign new stock T co No action required Shareholder right to vote? B co No right to vote, no voting rights for acquriing sharehodler in stock NYSE not applicable - only 14% T co. No, just choose to sell or not Appraisal rights No, no appraisal rights in connection with stock transaction Problem Set 5- Forward and Reverse Triangular Mergers Forward Triangualr Merger- Merger cosndiration cosnsists fo 30 Percent Stock of Bidder Co.; Closley held Bidder Co and Target Co; Bidder forms New Co. Target Co sahreholders receive stock of Bidder Co to 30 percent of post-merer stock; Target will be hled in NEwCo to be operated as wholly owned subsidairy Who surivies Forward tiriguare merger New Co surivies Target Co dissapears Actions of Board requried Bidder Co 161 approval of issuing new stock 141(a) - approve transaction in managing business
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 141(a) - approve transaction in managing business Target Co Yes 251(b) need board approval - target company is constiuent corproation New Co Yes must approve under 251(b) Sharheolder voting Bidder co No right to vote Not a constinuent corpoation (251(c)) new Co Bidder co sole shareholder Yes right to vote - 251(c) No small scale merger exception Under 251(f), no shares being issued Other requriemtns not meant - character of shares pre and psot consumation can't chagne Here: pre consumation - new co shares, but they are canceled outafter the merger Targetco Yes votign rights under 251(c) Appraisal rights Bid No, not sahrehodlers of consituent corporation Target Yes,b/c right to vote and market out exception doesn't apply b/c closely held New Co Not that it matters - bidder co only shareholder, wants transaction to go through Does 251(f) operate to take away their voting rights? Not issuing any of their shares, transaction is in property So just giving up property So no right to vote (even though issuign Bidders stock, it's treated like property) So no apprasal right What if not suffient authorized but unissued sahres to competle transaciton Need majority of bidder co shareholders outstanding to approve Difference between forward triangular merger and direct merger Assets and liabilities housed in sepearte facility Reverse Triangular merger- merger consideration conists of 23% of Bidder stock; P forms NEW co; reverse triagula, Pharmacia sharheolders to receive 23 percent of Pfizer's stock in exchange for all of their pharmacia; pharamcia will be operated as a wholly owned subsidiary of pfyzer Parties Pfizer, new co, and pharmacia Include parent corporation Reps and warranties on both sides Want to know a lot about this stock they're exchanging for So need representations from acquirer Need acquierer to cooperate with regualtory approval, etc Acquisition consideraiton? 1.4 shares of pfizer for each share of pharmacia Which company to disappear and which is to surive Pharmacia remains, newco disspears What is the effect of a reverse trianfular merger? Hows does it differ form forward
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 What is the effect of a reverse trianfular merger? Hows does it differ form forward triangualr merger described above? Whether forward or backward - partent has wholly owned subsidairy with companies assets Distinction - which survives, new co or target What action requried by boards Pfizer 141(a) - manage business and affairs 161 - issue stock No role under 251(b) b/c not constiuent cor Pharmacia 251(b) requires board approval Newco 251 (b) requires board approval Do sharheodlers have right ot vote? Pfizer No right to vote under delware law -not constituent corp Yes right to vote under NYSE because over 23% post consumation Yes b/c issuing shares Pharmacia Yes right to vote -251(c) - constiuent corporation Not taken away by 251(f) - requiremnts not all menat Each sahre of pharamcia stock otustanding before the merger notidentical to shares restulting Those shares are to be canceled in connection with the transaction Target sharehodlers always have right to vote Can only try to get rid of right of acquriing shareodler No additioanl vote requried under NYSE - b/c not issuing shares NewCo Yes but formaltiy No one cares 251(c) - constiuent 251(f) doesn't matter because not surivign corp Will merger automtically become effective once requiriste sharehodler approvals obtained When you file certificate - if it says -immeidately upon effective- that's when its effective Based on date on certiifcate Closign conditions to be satisfied in 1.3 of merger agreement What happens to the shares of (considering 1.8 of merger agreemnt) Pharmacia Each share is replaced with 1.4 shares of pfizer stock Happens as a matter of law Sharheodlers don't need to take nay action for this Each sahre held by pfizer will be canceled and not replaced with anything else Shares of NewCo Automtically converted into shares of surivign corpraotion Pfizer shares Nothings changed except dillution Assume sharheolders owns 151 shres of Pharmacia, how many Pfizer shares will she receive? 151 x 1.4 = 211.4 Get 211 shares .4 shares will be cashed out Based on pfizer's clsoing stock price on date merger becomes effective
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 Based on pfizer's clsoing stock price on date merger becomes effective Do sharheodlers of Pfizer and /or Pharmacia have appraisal rights Pfizer Even though can vote under NYSE, not voting rights under delware law, so no appriasal rihts Pharmacia No, market out exception Pfizer is publicly traded No restoration - consideraiton consists of stock of publicly traded company Reverse Triangular Merger - Merger consideration conssts of 4.8 % of Bidder's stock; Bidder (NYSE ) intends to acquire clsoely held High Tech in reverse triangualr merger; Sharheodler of High Tech to receive Bidder common stock of 4.8 percent of outstanding ; High Tech has 4 equalsharehodlers; Parties New co Target co Bidder co See the pfizer thing Even though not consituent Who surives, who disappears Newco dispears High tech surivies Consdieraiton 4.8% of Bidder Co stock Effect of reverse triangualr merger; what happens to the shares of: Bidder Shares remain the saem, just dilluted High Tech Co Shares are cancled, receive Bidder Stock in exchange New Co Shares (all owned by Bidder co) canceld, repalced with shares of surviign corpaiton (High Tech) Actions requried by boards Bidder 161 - issuing stock 141(a) - managmetn of business affairs Unless really small - then could delegate High Tech Yes approval under 251(b) New Co Yes approval under 251(b) Do sahreholder have right to vote Bidder No- not consituent (delaware) Exempt from NYSE rule because under 16.7% post merger High Tech Yes right to vote 251(c) Need majroity of shares outstanding to approve Small scale merger exception doesn't apply New Co Yes, but doesn't have mattter Appraisal rights Bidder co
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Appraisal rights Bidder co No, not a constiuent corporation High Tech Yes, because right to vote No market out exception to take appraisal rights away because high tech is a private company New Co Assume Founder does not want to sell her sahres of High Tech, what canshe do? If founder votes agaisnt transaction, 75% still voting for -she'll be outvoted Could threaten to exercise appraisal rights That'd be 25% of the consideration, judges would have to determine the cash value Worrying to parties- judge will detemrine 25% of the consideraiton Reverse Triangular Merger- Merger Consideration Consists of Cash; Assume Pfizer, Inc, a NYSE listed plans to acquire Pharmacia, another NYSE listed co, in reverse triangualr merger; Pharma sharholders receive 60 billion in cash, Phfizer has formed Newco. Boards Pfizer 141(a) - board needs to approve use of company resources of this transaction Newco Need board approval because constituent corporation 251(b) Pharmacia Need board approval because constiuent corpoation Shareholders Pfizer No, not a constiuent corporation No stock being issued, SER not triggered Pharmacia 251(c) - consituent corpraoiton sharheolders have right o vote Not taken away by 251(f) even though target corpaotion is technically the surviing corpationm Newco 251(c)Yes, constituent corpraotion Appraisal rights Pharmacia Taken away from market out but restored because receiving cash Hewlett-Packard's acquistion of Compaq: Hp's stock as the acqusition consdieration. Wholly owned sub of HP will merge with and into Compacq, and compaq will survie merger as a wholly owned subsidairy of HP; What kind of merger is this? Reverse triangular merger Compaq merging with merger sub and is surivign HP and Compaq will surive Merger sub dissapears Do shareholders of compaq have the right to vote? Yes, 251(c) - constitutent corpation, SH have right to vote (not taken away by 251(f) even though suriving) Do HP shaholders have right to vote Not under delware- not a constituent corpartion Under NYSE - 20% pre consumation, 16.7% post-consumation 1,800,000,000 * .6325 = 1,138,500,000 Number of compaq shares times exchange ratio = number of shares to be
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 Number of compaq shares times exchange ratio = number of shares to be issued in the transaction HP shares 1, 939, 159, 231 1138500000/1939159231 = 0.5871 58.7% of the shares oustanding preconsumation So 58.7% > 20% so need NYSE sharehodler aprpoval based on issuing new stock Assume that in the parties' agreemnt, HP represented that "all shares of capital stock of HP which may be issued as contemplated or permitted by this agreement will be ,when issued, duly authorized." Does hp have sufficeint authorized unissued shares to compelte the transaction? If not what must be doen in order for Hewlett- to fuliflfl commitment 9.6 billion authorized, 1.9 billion outstanding, only issuing 1.13 b new shares, still plenty If not enough authorized Would need to amend charter 241(b)(ii) Need vote of majority of sharehodlers registered to vote Asuume HP's managmetn reproted the following results with respect ot eh vote of HP's sharheodlers on the transaciton with compaq: There were 838,401,376 sahres of HP stock voted for the proposed transaction There were 793,094,105 shares voted agaisnt the propseod transaction and There were 13,950,651 HP common shares that abstaiend from voting. Did the proposed transaciton receive sharehodler approval under Note- this does not include sahrehodlers who do not turn in their proxy card Abstained is people who checked off "abstain" Delware law No right to vote in this situation If it did apply: Need absolutely majroity of outstnading votes 1.9 billion shares outstanding- need 50%+1 = 1.5 969,579,617 Not enough votes NYSE rules Yes right to vote Need majority of those present and voting Yes votes = 838,401,276 No votes = 793,094,105 Abstain = 13,950,651 Total = 1,645,446,132 84.9% voted on this transaction Yes/total = 838,401,276/1645446132 = 0.5095 51% is enough to meet the threshold Which test is harder to meet? Delware - need absolutely majroity Need more sharehodlers on your side if sharheodler approval needed under delaware law than if just voting triggered on NYSE Take aways Have a lot of shares authorized, so you don't need a delwawre absoulte majroity of all votes But smaller companeis, franchise tax based on number of authroized shares, but capped at certain amount, so doesn't matter for larger companies

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Meaning of Substantially all

Tuesday, January 24, 2012 7:15 PM

Substnailly all, dee facto merger doctrine and Successor Liability 65-88, 102-103, 112-114, 209-213; 244-246 DGCL 280-282

I. What qualifies as "Sale (or Transfer) of Substantially All assets? i. Circumstances where target is selling something less than 100% of assets, trying to figure out when sahrehodler approval is met 1) If it is required, and you don't get it a) Transaction could be enjoined b) Required to go back and get shareholder approval 2) Worry about deal mechanic for documenting transaciton a) b/c of consequences b) Use of legal opinions, reprensations, warranties, etc i) Required corporate actions, etc a. Gimbel v. The Signal Companies, Inc. (Del. Ch. 1974) i. F: 1) Proposed Transaction a) Signal selling Gas and Oil Subsidiary to Burmah Oil Company i) By selling all the outstanding capital stock of Gas and Oil One. Parent company is selling it's asset - the shares of the subsidiary Two. Even though stock for cash deal, Signal is selling it's asset 2) Shareholders though price being offered too low a) trying to stop through preliminary injunciton b) Says should have had right to vote because Oil and Gas constitutes 'substnatially all' 3) Burmah has walk away agreemet if certain things happen a) Including transaction being enjoined ii. Preliminary injunction standard 1) Need reasonable probability of previaling on merits 2) And need irreperable injury if it goes through 3) And no adequate remedy at law iii. Note: receission hardly ever granted 1) Hard to unscammble the eggs iv. All or substantially all? Gimbel Test a) Sale of assets quanatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and prupsoe of the corpaiton 1) No bright line rule a) Compare Model Act 2) Quantitative component a) How big a piece of business is this b) Here i) % assets = 26% ii) Net worth = 41% iii) Earnings = 15% iv) Revenue = 15%
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iv) Revenue = 15% c) What does 'quantatively vital' mean?

3) Qualitative component a) Out of the ordinary for what the board does? i) How do you determine if selling this business is out of the ordinary? One. Here: multi-business corpraotin, has bought and sold businesses before Two. AD: does this mean the first time you sell a business, you're on the hook? b) Does it substnaillly effect the existence and purpose of the corporation? i) What is the purpose of a corporation? One. Strike at the fundamental existence ii) How do we know when you cross the line, c) When are you striking at the heart of the corporation's existence i) 1 idea: expectations as to what sort of risk a company is taking/ line of business One. CA: why not just sell your shares d) Here: i) Had already changed charter prupsoes (via sharolder vote) to beocme a conglomerate ii) And they've been buying and selling busiensses as well

v. Overview: 3 main factors 1) Qualitatively vital 2) Out of the ordinary 3) Strike at fundamental existence
vi. Holding 1) Not substantially all a) No shareholder approval required under 271 vii. b. Questions c. Katz v. Bregman (Del. 1981) i. F: 1) Plant industries a) Subsidiary - Plant National Quebec 2) Proposed sale of all National Quebec stock to Vulcan 3) Was only profitable divison for sometime 4) Decided to sell to Vulcan, despite bidding war with Universal a) So also claiming violation of fiducairy duty ii. Metrics here 1) 51% assets 2) 52.4% earnings (pre tax) 3) 45% of revenue iii. Court finds this to be substantially all 1) Almost all the profits for the company a) But maybe distored by allocation of overhead expenses and taxes iv. AD: not clear what 271 is supposed to do under the standards set up by court 1) Under language of statute seems to say that 271 voting is to keep management from getting around voting requiremtn by holding on to a little bit of the assets
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getting around voting requiremtn by holding on to a little bit of the assets a) Insufficeint certainty of common law test 2) People think this case is an outlier d. Questions e. Hollinger Inc. v. Hollinger Intl., Inc. (Del. 2004) (Strine) i. Factual Background 1) Hollinger Inc as Shareholder a) To prevent sale of Telegraph gorup to Press Holding international i) Saying it represents substnailly all of the assets b) Note: Hollinger owns 18% of the sahres, but 68% of the votes i) So if shareholder vote required, Hollinger Inc (controlled by Conrad Black) can unilaterally block it One. Conrad black has been barred from exercising any managerial control over these businesses First. For violations of fiduciary duties 2) International is company a) Selling Telegraph group subsidiary b) Has other subsidiaries, Chicago, Jerusulem, Canada 3) ii. International Operating Units After the Canwest Sale 1) Jerusalem Group 2) Canada Group 3) Chicago Group 4) Telegraph Group iii. Legal Analysis 1) Preliminary Injunction standard 2) As a matter of economic substance, does the Telegraph group comprise substantially all of international's assets a) The Legal Standards to measure whether. Substantially All of assets b) Is the Telegraph Group Quantitatively Vital to the operations of Interantioanl c) Does the Telegraph Sale "substantially Affect the Existence and Purpose of" International? d) Summary of sect 271 Analysis iv. Class 1) D: a) Telegraph does not represent substnailly all of the assets i) Not quantatively vital ii) Not out of ordinary business iii) Does not strike to fundamental existence 2) Metrics (quantatively vital) (if only comparing to Chicago) a) Telegraph - 57% value based on auctions (market value) b) 49% of revnue c) 35.7% of book value d) Assets 35.7 % e) 41.9% of earnings 3) Court: none of these above approach 50%, except market vlaue, but still under 60% a) So people use as a rule of thumb - less than 60% i) But not reliable, no reason to think this is partiucalrly riht 4) EBITA - Free Cash flow 5) Court: If it's not quantitaviely vital, how could we possibly say it substnailly effects purpose/existnece of corp a) But does the analysis anyway 6) Court on qualative
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6) Court on qualative a) Rational shareholder only cares about rates of return, not social prestige b) Should expect to buy and sell assets over time v. Not substnatially all f. Wrap up i. Sell 100% of assets - shareholder vote ii. Less than 50% of assets, unless really strong qualative - in pretty good shape, no sharheodler vote iii. Hollinger: focus on what's left behind 1) Even though language of 271 says selling all or substnailly all 2) But like model act, focus on what's left beind a) If whats left behind is viable, and part of ongoing corpation iv. Look expansively at number of metrics 1) Profits, net worht, historical projections, furture projectiosn, etc a) Hard to say which numbers matter v. So even if most important asset/ flag ship asset, not enough to say substnailly all g. More Wrap-up /questions i. What if several transactions over time? 1) No clear guidance in determining if substnailly all assets sold 2) But last Spring: Liberty Media Corpv. Bank of New York Mellon Trust (Delaware 2011) a) Dicta: might be able to use this test under 271 as well 3) Test: look to a) End result test - prearranged i) Was a set of transactions, prearranged, designed from the outset to achieve an ultimate result b) Interdependence Test i) Trying to figure out if the particular transactions are so interpdependent with the other steps that the legal relations created by one transaction would have been fruitless without the rest of the series of trasnactions c) Binding Commitment Test i) Look to see if binding commitment - if at the time the first step was entered into - was there a commitment to complete the series 4) Summary a) What is the overall goal, is ther interconnectedness, and was there a binding commitment b) Court is trying to find out whether or not we have these particular steps together i) Are all these things in place? ii) Does it look like tis all one deal ii. Final exam 1) Won't get any in depth questions on this

Asset Sales State Law Considerations: All or Substantially All & De facto Merger Doc. Gimbel v. The Signal Companies, Inc. (1974) (sale of stock of a subsidiary is an asset of the parent; all or substantially all means sale is quantitatively vital; out of ordinary; substantially affects existence and purpose of corp) Plaintiff stockholder of Signal Co. sued Signal to enjoin sale of stock of wholly owned subsidiary, Signal Oil and Gas Co., to Burmah Oil, Inc. Signal Oil & Gas Co (subsidiary) represented 26% of total assets, 41% of net worth (Assets-Liab), 15% of earnings, 15% of revenue of Signal Co. (parent) Was the last step of a diversification plan & stockholders had plenty of opportunities to object beforehand if they wanted to do so Rule: 271(a) requires majority stockholder approval for the sale of all or substantially all of the assets of a Delaware Corp.
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substantially all of the assets of a Delaware Corp. Test: Quantitatively and Qualitatively Vital: If the sale is of assets quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation, then it is beyond the power of the Bd of Dir. o Quantitative No. < 50% of the value of Signals (parents, conglomerates) total assets. o Qualitative Out of the ordinary? No. Signal is now a conglomerate, and nature of business now contemplates the acquisition and disposal of independent branches. Such transactions are part of the ordinary course of business Existence & purpose No. History not compelling Doesnt matter that oil & gas historically 1st and that authorization for such operations is listed first on the charter. Holding: Sale of stock of Signal Oil (wholly owned sub) does not constitute all or substantially all of Signals (parents) assets. Katz v. Bregman (1981) (Gimble, quant. & qual. test sub. constitutes 51% total assets, 45% net sales is quantitatively vital; ordinary course of parent isnt to buy & sell indust. facilities; existence & purpose of parent is to sell steel drums; after sale, will focus on plastic drums) Facts: Pl seeks to enjoin Plant Industries (parent) from selling corporate assets of National (subsidiary) to Vulcan o Was the first step and maybe the last step in a reorganization, so maybe court reconciled it w/ Gimble by saying that the shareholders here had not yet had a chance to vote. Rule: 271(a) all or substantially all Signal Oil quantitative and qualitative test o Quantitative Yes. Quantitatively vital = 51% of total assets, 52.4% of pretax earnings, 45% of net sales o Qualitative Out of ordinary Yes Plant is not in the business of buying and selling industrial facilities Existence & purpose Yes purpose of business is to sell steel drums, upon selling National, will focus on plastic drums Holding: Sale of National would constitute a sale of substantially all of Plants assets. Note:Case is considered to be an outlier Hollinger Inc. v. Hollinger Intl, Inc. (2004) (if the portion of the business not sold constitutes a substantial, viable, ongoing component of the corporation, the sale is not subject to 271) Facts: Inc. (parent) seeks injunction against Intl (partially owned sub18% stock, 68% vote) from selling Telegraph Group to Barclay. Telegraph apparently constitutes approximately half of value of Intl assets Rule: Gimble quantitative & qualitative test o Quantitative No. Telegraph appears to be less than 50% of Intls assets. o Qualitative Out of ordinary No Intl has continually bought and sold publishing assets Existence & purpose No Will continue with substantial publishing assets. if the portion of the business not sold constitutes a substantial, viable, ongoing component of the corporation, the sale is not
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 viable, ongoing component of the corporation, the sale is not subject to 271. Holding: Sale of Telegraph group does not constitute substantially all of Intls assets. Dicta: 271 is designed as a protection for rational owners of capital and its proper interpretation requires this court to focus on the economic importance of assets and not their aesthetic worth.
Considerations for whether asset is vital, and sale constitutes fundamental change: Profitability of whats left behind; lost synergies b/w business units Quality of ongoing operations Aesthetics are not key Going to new core competency

Shareholder Vote: Sale of 100% of assets Shareholder Vote Required Sell all but a de minimus amount Shareholder Vote Required Sell assets, but what remains behind is viable ongoing component No Shareholder Vote Required (Hollinger) Sell 51% of assets is probably not enough for shareholder vote Katz is an outlier 60% -66.7% range of assets and other financial metrics Shareholder vote more than likely required Alternative, some interpret as a 60% safe harbour if sell less than 60%, you are OK
Hariton v. Arco Electronics, Inc., (1963) (No De facto merger doctrine in Delaware) Facts: Arco sold all its assets to Loral for shares of Loral. Stockholders voted to approve the transaction under 271 and to dissolve Arco under 275 in one vote. Vote was approved. Shares of Loral were distributed to Arco shareholders. Holding: Asset sale & dissolution is legal; No De facto merger doctrine Reasoning: o Sale of assets statute 271 and Merger Statute 251 are independent of each other they are of equal dignity; framers of reorganization plan may resort to either type of corporate mechanics to achieve their desired end o Both steps independent of each other would be legal; thus to institute a de facto merger doctrine would create confusion in the law. Note: Asset sales dont have appraisal rights; 251 mergers do. Asset sales could look like and have result identical to merger, but it doesnt matter no appraisal rights if transaction took place under 271.

Pros & Cons: De facto Merger Doc Argument Against: Reduces transaction costs; allows parties to chose desired transaction form, thus creating options. Argument For: Shareholder Protection gives them greater access to appraisal rights; better opportunity for minority shareholders to receive fair value of shares.
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II. De Facto Merger Doctrine: Form vs. Substance Debate i. De Facto Mreger Doctrine 1) Not recognized in Delaware 2) DoctrineLong Page 37

2) Doctrinea) Equitable remedy b) Acqusition, not structured as direct merger, but substantively the same, courts can grant injunciton against transaction intill the statutory requiremtns of merger are completed a. De Facto Merger Doctrine under Delaware Law i. Delaware coruts have rejected de facto merger doctirne ii. The Doctirne of independent Legal significance 1) Action taken under oen section of the law is legally independent, and its validity is not dependent upon, nor to be tested by the requriemtns of other unrelated sectins under whicht eh same final result might be attained by different menas a) i.e. So long as transaction is effected in compmliance with the requirments of one section of the DGCL, Delware courts will not invalidate it for failing to comply with the requirements of a different section of the DGCL i) Even if the substance of the transaction is such that it could have been structured under the other section 2) Provides certainty a) The statues and most transactions are carefully planned and result from thoughtful, rational process

III. Scope

of Successor Liability: Transferring the Assets (And Liabilities) of Target Co. to Bidder Co.
a. Successor Liability in Merger Transactions and Stock Purchases
i. Introductory Note 1) Statutory merger -> assets and liabilites of the disapearing corpraiton are pooled together with assets and liabiliteis of surviign corpaiton a) By operation of law - all rights and all laibiliteis of Target go to bidder b) All assets of surivign company avaialbe to satisfy creditors of both constituent corpations 2) Stock Purchase-> leaving Target co in place- > all of Target's assets remain in place, but assets of Bidder Co insulated (minus piercing of corpoate veil) a) Target co is wholly owned subsidiary b) Also some federal regulatory schemes with enterprise liability 3) Asset Transaction-> Target Corp stays in place, Acquirer purcahses asset it wants, assumes liabilites it chooses to acquire, everything left behind are liablitieis of target corp a) Dissolution proceeding i) Proceeds distributed

ii. Commercial Leases 1) Issue: restraints on alientation (restrictions on right to assign/transfer leasehold) 2) Issue if acquisiton qualifies as a transfer triggering nonassignmetn clause in lease 3) Common law i. Freely assignable unless agreemetn restricting assignment
iii. Intellectual Property Licensing Agreements 1) Issue: restrictions on transferability iv. Tort Liability 1) same rule of successor liabiltieis appleis aregardless oof acauistion beign prucahsed as stock purcahse or merger i. Assets of target co generally avialble to satisfy prior tort claims
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stock purcahse or merger i. Assets of target co generally avialble to satisfy prior tort claims 2) Straetegies for avoiding i. Due diligence ii. Use of representation and warranties in acqusition agreement iii. Indmenificiton provision b. Notes i. Statue of Limitations ii. Delaware's (innovative) Procedures for Dissolution. i. Allows target corp to put money aside in escrow fro security for any long-tail claims that might arise after asset sale ii. After period of time, if no takers, sharheodlers off the hook 1) DGCL 280-282 280. Notice to claimants; filing of claims 281. Payment and distribution to claimants and stockholders 282. Liability of stockholders of dissolved corporations c. What happens to particular contracts? i. This will effect value of company 1) Do they automically go or is there something else required ii. Assignable - have the right under this contract to assign rights and benefits of contract to someone else 1) If restriction on assignemtn in agreement -non-assignemtn clause 2) Change of control clause a) If control changes, agreement can be terminated iii. If assignment restrictions in place, need to reflect that in value of company
IV. Problems page 227 a. Ten years left on commercial lease (target has) (assuming no non/assigment, no change of control clauses) i. Direct merger 1) All assets and liabliiteis automitcally transfer to suriving corporation 2) Lease transferred by operation of law ii. Stock purchase 1) Lease stays in place, T stays in place 2) Change in ownership, but no change in T's persona iii. Reverse Triangular Merger 1) Target Co remains in place 2) Lease interest will continue the same as it was previosuly iv. Forward Triangular mergers 1) Target co disspeares, New co survivies 2) But lease interest still remains in place since all assets and laibities of target now part of new co as matter of law v. Sale of assets 1) The only assets and benefits of target the acqurirer is entiteld are those specifically assigned to it 2) So the lease would have to be assigned in asset deal a) But with no restrictions - don't need permission of landlord vi. Summary - all 5 of these cases, the acquirer has benefit of tarets contract 1) But in sale of assets, need transfer process, all the rest happens as operation of law b. Assume Target has 10 years left on commerical lease, but inclease nonassignemtn clasue that requires consent of landlord in order for target to assign interst under lease. Trights and obligtions of Target if Bdider acquires by way of i. A direct merger? 1) This and forward tringualr merger-> Target Co dissapears 2) Assets and liabiilities succeed by operation of law 3) Question: is this a transfer that a non-assignability clause would capture
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2) Assets and liabiilities succeed by operation of law 3) Question: is this a transfer that a non-assignability clause would capture a) Most states: yes transfer, but transfer by operation of law, i) Automatically all the rights and obligations of Target Co succeed ii) 3rd party consent not required even in presences of non-assignment clause b) But See PPG case- (7th circuit) i) Under federal patent law, for the patent to be assigned, needs to be specifically assented to c) So specialized areas of laws -> might be different rules applied because of some federal statute ii. A stock purchase 1) Same company in place, just different owners 2) So no transfer of assets to another party, a) But if there had been a change of control clause, it would have been triggered iii. A reverse triangular merger 1) Target Co remains, is suriving copman, not transferign assets, instead absorbing New Co's assets 2) No transfer to trigger clasue a) No consent required iv. Forward triangular merger 1) Target Co disspears, new co survives v. A sale of assets 1) Asset transactions would trigger a transfer if they wanted the lease on the manufacturing facility a) Here would need consent of landlord because of non-assignment clause V. Products liability and Environmental Liability a. CERCLA - 1980 law i. Hold companies liable for environmetnal impact even if merger 1) Even if you have an asset deal -> still going to say there is liability if the following factors present: a) Buyer expressly assumes liablity b) Transfer is considered a defacto merger b. Successor liability generally looks to these i. Buyer expressly assumes ii. Transfer is considered a de facto merger 1) But not recognized in Delaware 2) But here - look to state law related to subject matter( Choice of law) a) That is what controls wether or not successor liability would attach b) So if defacto merger, and trial not in delware, could find successor liability based on defacto merger iii. Fraudulent activity 1) i.e. buyer and seller in cahoots, knows target co doesn't have assets to meet all its liabiltieis, doing this transfer to avoid it iv. Mere continuation of the seller 1) Look to see if these are affiliated companies merging - looks like part of the saem family of corpaiton,s have same ownership v. Enterprise continuing 1) Most commonly in CERCLA 2) Same employees, same factories, carrying on same business-> liable

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Appraisal Rights
Monday, January 30, 2012 11:10 AM

Organizational Note Corporate Formalities Appraisal Rights Intro Likely to be a big part of practice Valuation center of issues with clients Need to understand where valuation numbers come from Know where they're derived Be able to look at fairness opinion What makes valuation fair Avoid duty of care claims Barry Wertheimer - The Purpose of the Shareholders Appraisal Remedy (1998) Quid pro quo for loss of shareholders' right to veto fundamental corporate changes Liquditiy rationale - provides way out of an investment involuntarily altered Minotirty sharehodler protection rationale - today mergers often used solely to eliminate minority sharehodlers Class on policy Give objecting sharehodler the value of their shares 262(h) Appraisal proceedings - court of chancery shall determine fair value exclusive any element of value derived from propsoed transaction Take into account all releveant factors 262 leaves how to determine the value open But no we're looking at the value of the business without any expectation to what merger would do Instructions form 262 Can't vote in favor of merger Must comply with procedural requriements Evidence on issues of breach of fiducairy duty, largely irrelevant for appraisal purpsoes Largely irrelevant, but if looking at credibility of the parties, the court is less likely to believe a controlling sharhoelder shown to act in ways contrary Availablity of Appraisal remedy Closely held corporations Public companies when cash-out merger (because of exception to the market-out exception) Short form mergers Appraisal rights avialbe to minority sharehodlers regardless to whether corp is publiclytraded or not What is Fair value 1950 - tri continent (SCOTUS) Stockholders entitled to be paid for that which has been taken from them, his proportionate interest in a going concern So what % of corp do they own What is the corp worth Going concern - business as an on-going business, not one about to be liqudiated Going-concern value vs. intrinsic value vs. true value Hard to figure out what intrinsic or true means Before Weinberger - courts confined to suing Delaware Block method Court determined Value of assets Market price of stock (if public) Value of earnings Value of dividends (but almost never used) Each of these assigned a weight, based on what the valuation expert though each component should contribute to the value of the compnay Sum all weighted components = overall value Widely criticized Weinberger- can use any valuation method accepted in finacne community Discounted Cash Flow Analysis FV Excludes

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 FV Excludes Any gains arising from expectations of merger Gains from economies of scale Gains from increased market share Gains form A Corp's plan to operate the business more efficiently Because shouldn't benefit from combination if objecting to it But note - in two step transactions Purcahse majority interest Freeze out minority sharheolders Valuation of busienss is on date of business, so if acquirer has already come in and started implementing plans, valuations take into account those plans Procedural Requirements to Perfect Appraisal Rights Steps Filing before the shareholder vote - the sharheodlers notice of intent to dissent Later followed up by separate filing of sharehodler's written dmeand for payment (filed after the transaction has received the requisite approval of the sharheodlers) Proxy Statement Example Special Factors-Dissenters' Rights

Valuation Techniques and Fair Price

Under Weinberger- can use any methods generally considered acceptable in the financail community Barry Wertheimer- The Sharheodlers' Appraisal Remedy and How the Courts Determine Fair Value (1998) Notes Use of Minority Discounts Notes (page 203) The Problem of "Dueling Experts." Choosing One Party's Valuation Court-Appointed Neutral Experts Methods of Valuation Rutherford Campbell - The impact of Modern Finance Theory in Acquisition Cases (2003) (supplemented in class) Valuation based on Discounted Cash Flows Future- Not Historic Cash Flows Discounting to Reflect the Time Value of Money and Risk Asset Value Deal Value Comparative Ratio Value Weighted Average Value Methods (class) Market price not trusted as intrisnci/true price Don't trust there's an efficeint market Even if heavy trading, stocks could be mispriced Belief in judiciary that stock prices can be wrong Noise trading Going concern value vs. liquidation value Going concern- present worth of expected future cash flows generated by business Things to know Assumptions underneat methods Why use one method over another Know that a single underlying assumption can wildly change the value Methods Discounted Cash Flow Theory: value of business overall (Enterprise Value) = Present Value of Future Cash Flows Components Cost of capital interest rate on debt Cost of equity?

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Cost of equity? Based on expected rate o return Note- Need to make return as high as cost of debt/equity, or not making nay money Risks that the cash flows won't materialize Promise of a safe dollar worth more than a promise for a risky dollar (prediction of )Future cash flows Usually talk to controller/ budging staff Quality of these predictions hugely important Discount rate What is the approrpaite dsicoutn rate -(various ways) CAPM - Capital asset pricing model Weighted average cost of capital Time Value of Money Time to receive the Cash Flow Matters Risk/Reward Greater risk cashflows won't materialize, greater expectations needed in order to depart with cash dollars Future Value = A(1+r)^n A = initial amount n= years r= interest rate 1(1=.06)^1 = 1.06 Present Value = FA/(1+r)^n FA = amount to be received r= discount rate n= number of years till received 1/((1+.06)^ 5)=0.7473 Thus present value is the opportunity cost of capital adjusted for risk Discount Rate The rate used to bring future cash flows back to present value Cost of capital Minimum rate of return demanded by investors based on what they could get investing in other, equally risky instruments WACC - weighted average cost of capital Weighted average because looks at the various weights of debt and equity in the capital structure to come up with the appropriate weight Cost of debt (this is the one formula you need to know for the final exam) Kd (cost of debt) Kd = interst rate on debt * 1 (1-t) t=tax rate Only interest bearing debt Mulitple that by 1-t because tax is deductable Ke (cost of equity) Ke = Rf +B(Rm-Rf) Rf- risk free rate Amount we would expect to earn even with no risk Controversy - different methodologies to determine what reate to use Most common - 10 year treasury bond Rm - market rate B = Beta Measures a stock's volitility Measures how much the stocks price reacts against the market as a whole Calculated with regression analysis Beta of 1 means security moves in line with market 2 means twice as volatile as market .5 means half as volatile as the market (Rm-Rf) -= Equity market risk premium The returns investors expect for taking on the risk of investing in a stock instead of investing in a risk free instrument

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 EMRP cited in press is based on historical average return of investing in the stock market instead of investing in treasuries (or whatever) Other places use other ways to cacluate this Higher this number, the higher the cost of equity EMP is a genral number for the stock market as a whole Beta is tailored to the company Equity doesn't have concrete price company ahs to pay But common equity sharehodlers expect to receive return, if odn't receive that return they will sell stock So it is a real cost that need to be accounted for Cost is what it cost the compnay to maintain a shareprice satisfactory to sharehodlers Above formula = CAPM Capital asset pricing omdel Expected return on a risky asset should be the risk free interest rate + inflation premium +risk premium Governmetn security = risk-free rate + inflation premium Risk premium
WACC = ((D/v) *Kd) +((E/B)Ke) (The proportion of debt to value)* cost of capital)+ (equity to value)*cost of equity Example on Cost of capital Beta = 1.38 Rf = 8.15% EMRP = 7.5% Int. rate on debt -9.25% Tax rate =40%

Ke (cost of equity) = Rf(8.5%)+beta 1.38*(EMRP (7.5%) = 18.5% Kd = int rate(1-t) = 9.25(1-40%) = 5.55% Now Weighted average cost of cpital Need to figure out the relative weights Issue : beofre or after acquisition? Most common = use target compnaies capital structure as it exist at the time you're doing it 1.75 million debt Should be market value Principal amount on balance sheet should be close proxy for the market value of the debt 100,000 shares outstanding 32.50 per share =3.25 mm market value Debt + Equity = 5 mm d/v = 1.75/5 = 0.35 35% e/v = 3.25/5 = 0.65 65% WACC ( 35%)*5.55% + (65%)*18.5% = 13.9675% And this is the discoutn rate that we'll use to discoutn the companeis future cash flows back to present value Issue: valuation experts have lots of room here to Company wants discoutn rate higher, means present value will be less and thus fair value for shares will be less Plaintiff wants lowest discount rate, higher present value, higher share prices Free cash flows Now that we've got discount rate, need to figure out free cash flows Looking for how much cash we can pull out of the business over each year

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 Looking for how much cash we can pull out of the business over each year of the projection period Cash flows available to equity and debt holders after consideration for taxes, capital expenditures, and working capital (inventory, accts payable) Cash flows- amount of cash that could be paid to the acquirer EBIT(1-t) + Non-cash expenditures - Captial Expenditures - incremental working capital EBIT = Earnings of business before paying interest and debt and taxes Non-cash.. = (depreciation and amortization) Capital Expenditures Don't recognize expense when purcahse them, so need to project captial expenditures seperately Incremental increases in working capital Looks at what projections are for how working cpaital is goingto change over time Amount of additional cash you need just to keep business going Tied up in accounts payable, receivable
Discount each cash flow (for each time period) back to the present Generally use same discount rate (WACC here) in each year Need assumptions about when these cash flows happen Beginning, middle, or end of the year Courts in Delaware have expressed preference for assuming cash flows come in on June 30th Company would prefer assumption at end of the year- take longer for cash flow so value would be lower Then need assumption about what happens at end of projection period Need to assume at the end of the 5 year period, company either has an indefinite life or is sold to a 3rd party acquirer Terminal Value Then discount terminal value to the present and add that to discounted cash flows to find total enterprise value of the company Terminal Value in year X (end of projection period) Need to know FCF in year X+1 Multipley above by discount rate (WACC) - Growth rate Formula FCF in year X +1/ (k-g) G = how much it will grow in perpetuitie Usually just slap a terminal value based on final years FCF instead of having to proejct growth of the compnay indfieintiely into the future

Perpetual growth assume So now we get enterprise value Total Enterprise Value (TEV) = DCF Value Market Value of equtiy + market Value of Debt - excess cash But if trying to value just the equity portion TEV - value of debt = equity value Divide Equity value by sahres outstanding = per share value Notes Only responsbile for understanding, generally, what's at stake, how the parties might have divergent incentives and where parties have opporutntiy tomanipulate the numbers Also the general theory behind DCF
Comparable Company Analysis Like comparison shopping Find companies comparable to the business you're trying to value Most useful in private company context where there's no market price But even see this in respect to public companeis, just to see how their competitors are faring Important factors Which companies to compare to This is where experts will diverge

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 This is where experts will diverge Similar size, same line of business, same risks profile After finding comporable company, need to pick metrics for comparison and see how the two companeis match up Example Sales multiple Total enterprise mutlple / Lastest twelce months sales) Ebitda muliptle TEV/ LTM EBITADA Equity mkt Cap/LTM Net Income = P/E i.e. price to earnings Leave out the debt holders when you do this (so use Equity market cap not TEV) End up with means and medians of comparable firms metrics Multiple the media and mean multiples by the sales, ebitda, net income of target corp Example Comparable company analysis gives you a series of values, a range How doe investment bankers choose amongst this range? Preferences People usually like EBITDA, and means (instead of medians) Precedent Transaction Analysis Looks like comporable company anslysis, except, use companies that were the subject of M and A activity Cavalier Oil Corp v. Harnet (Del. 1989) F: Cavalier Oil 2 controling sharehodlers Billman McCuistion Owns 90 % of EMSI (private company) Hartnett owns 1,250 shares of stock in EPIC MORTgAGe Servicing Closely-held corp 1.5% of EMSI corp Majority owners Billman and McCusition together owned over 90% of shares Offered 93,950 for his shares - rjected to assert appraisal rights under 262 Court of chancery valued stock at 347k Issues Whether or not Harnett could use his accustaions of missparition of a coproate opproutntiy as part of his appraisal process Diverted opportuntiy from EMSI to EMI (where Harnett had no control) Wants to look at what EMSI shares would be worth in the absecence of that missaprortion of corpoarte opportuntiy Should Harnetts minority status be reflected in value of his shares AD - trick s in valuation Minority discount Applied to DCF and Precednet transaction analsyis in an individual shares Lack of marketability discount/ illiquitdity discount Applied in circumstances when there is no active market in the shares Value in ability to get in and out of investment quickly Makes private companeis worth less than public companies Control premium Assume premium for control of compnay, should be added to value determined by comporable company analysis Comporable company analysis is about value of shares Shares don't reflect the control premium Courts have different views whether these should apply in certaincircumstnaces affirmed Scope of the appraisal action limited, with only issue being determintion of the value of petitioner's sahres on the date of the merger All relevant factors are to be considered D: Corporate opprotuntiy claim impermissibly expands appraisal remedy to include questions of breaches of fiducairy duty

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questions of breaches of fiducairy duty Fidicuary duty/common law fraud claims disallowe din appraisal actions Court - nthis rule not applicable here Cede case : where allegations of fraud and breaches of fiducairy duty exist in conenction with amerger, an action separate and distinct from an appraisal proceeding may and indeed must be maintained And a determiantion of fair value does not invole an inquiry into claims of wrongdoing in the merger But here: wrongdoing alleged by Harnett relates directly to the fair value of his stock, not to the validity of the merger itself Thus claim viewed as more personal than derivative Sole minority shareholder whose claims of fraud are directed agaisnt 2 controlling shareholders Here - corporate opportunity be unlawfully diverted, if business not been transferred, EMSI's earnings would have increased- resulting in a higher per share valuation at the tiem of the merger D: should apply minotirty discounting since limited marketability CORUT - fair value based on busienss as going concernt Thus no mintoirty discounting Prupsoe of appraisal is to value corporation istself, not the value of parituclar shares Use of minority discount is inapproriate No replicating a hypothetical sale in appraisal rights AD: Delware No to minority discounts Would penalize sharehodlers for not having control
No to lack of marketability/illiqudity discount Yes To Control Premium

Questions Court is tyring to figure out what the value fo the company is as a going cocnern Why is it fair to get more in appraisal than on open market Courts worried companies are overreaching, partiuclarly in short form merger If we start applying discoutns, need to ask how much of a discount Control premium Allowed b/c helps dissenting shareholder Going from comporable company analysis and grossed up for what contorl will capture Don't need it for DCF or precedent transaction analysis - already assume value level is based on having control of the business DGCL 262(a), (d)-(k) - Appraisal rightsf

Appraisal Rights DGCL 262

Key Point Appraisal Rights follow voting rights Delaware law gives dissenters who vote against the transaction or those who abstain the right to challenge the price being paid for their shares under certain circumstances Appraisal rts give dissenting shareholders the right to make the corporation buy their shares at judicially determined fair market value payment in cash If many shareholders exercise appraisal rights, the acquisition may be threatened o This is unlikely, but still want to minimize appraisal claims Delaware law provides for appraisal only in connection with mergers; excludes other transaction with the potential for overreaching, such as asset sales Market out exception - Even in connection with mergers, Delaware law excludes shareholders for appraisal if they have other access to liquidity, or if they do not have voting rights in connection with the transaction. DGCL 262 (b)(1). o Appraisal rights can be restored for the TC-SH if the consideration they are required to receive is anything other than (1) stock of the surviving company; (2) stock of any public company; (3) cash in lieu of fractional shares; (4) Any combination of the above. DGCL 262(b)(2) Thus, when T Corp is public, appraisal rights are restored if the consideration required to be received for the merger is all or part cash. DGCL 262(b)(2). If hybrid deal, would get appraisal rts for the whole deal, both stock and cash, not just the cash part. There are special appraisal rules with respect to short-form mergers: TC-SH (minority shareholders) have appraisal rights, even though they have no

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 o TC-SH (minority shareholders) have appraisal rights, even though they have no voting rights with respect to the transaction o There is no market out exception. o AC-SH have no appraisal rights o DGCL 253(d) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under this section is not owned by the parent corporation immediately prior to the merger, the stockholders of the subsidiary Delaware corporation party to the merger shall have appraisal rights as set forth in 262 of this title. o DGCL 262(b)(3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. Appraisal Rights: Valuation Methodologies An offer for a firm may be more than the market price, but lower than the intrinsic market value (DCF, etc.) When you value the company, you value it as a going concern, not on a liquidation basis o Market Value current quoted price at which an investor sells a stock or bond o Intrinsic Value - The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. Calculating Intrinsic Value o Discounted Cash Flow Analysis (DCF) project firms cash flows to present (see Kleinwort Benson Limited v. Silgan Corp.) Values the entire firm, assumes control. There are many assumptions that go into a DCF Know how to calculate a WACC Enterprise value of a firm is equal to the PV of its cash flows. Theoretically, an owner could take all of the CFs out of the bus But the capital that generates these cash flows has a cost (Cost of Money) o Debt has interest rates o Equity has a required rate of return Risk there is also a risk of lower CFs than expected Steps in a DCF Project CFs Calculate Discount Rate WACC FV=PV(1+r)^n PV=FV/(1+r)^n Discount Rate = Opportunity Cost of Capital + Risk Opportunity Cost of Capital = Rate could receive on other similar investments ??? WACC = Weighted cost of capital given a Cos debt-equity mix (capital structure) o (After Tax Cost of Debt * %D) + (Required Rate of Return on Equity * %E) o (Kd*(d/V))+(Ke*(e/V)) V=(d+e) d = assume book value of debt e = assume mkt value of equity o Mkt Cap Kd = i * (1-t) Kd = Cost of Debt (after tax) i = interest rate on debt t = tax rate Int. expense is tax deductible, so use AfterTax cost Ke = Rf +B(Rm-Rf) Ke = Cost of Equity Rf = Risk Free Rate (US govt bonds) o 10-yr T-Bond Rm = Return on Market (Rm-Rf) = Equity Mkt Risk Prem. B = Return of firm vs returns of market

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 B = Return of firm vs returns of market overall (stock volatility) Expected Return on a Risky Asset o Opportunity Cost (Rf) o Inflation (Rf) o Risk (B) (Rm) FCF = EBIT * (1-t) + Non-cash expenses CapEx Incremental working capital Incremental working cap = amount of cash needed to fund the business and keep in operating Terminal Value Can only project cash flows out 5 10 years at the most. Assume that at the end of the projection period the business will be sold. Perpetual Growth Equation = Cash flow will continue to grow past the projection period at a constant rate. Must discount terminal value back to present. o TV in Year X = (FCF in year X+1)/(WACC-g) g = growth rate (rule of thumb = inflation, 2-3%) DCF Analysis = Total Enterprise Value = Debt + Equity Excess Cash Debt means interest bearing debt, both short and long-term Value of Equity = Total Enterprise Value Value of Debt + Cash Price per Share = Value of Equity / Shrs Outstanding Final to attack DCF, question growth rate, WACC, Minority Discount, Lack of Marketability latter 2 arent allowed o Comparable Co. Analysis value one particular company based on how other similar business are valued and compare results. Comparing one company to other companies in the same industry, broader mkt. Does not assume control Value summing up the value placed on the firm by minority shareholders 1. Market Cap = Stock Price * Shrs Outstanding a. Can also use Mkt Cap to calculate certain multiples to see the return on equity, e.g. Mkt Cap / NI 2. Enterprise Value = Mkt Cap + Book Value of Interest Bearing Debt - Cash 3. Can then use EV to calculate various multiples: a. EV/Last Twelve Months (LTM) Sales b. EV/EBIT c. EV/EBITDA 4. Then calculate the Mean and Median of the sample of cos. 5. Look at Targets LTM Sales figures (or EBIT & EBITDA) and multiply times average industry or sector multiple. This will give you the target cos implied EV. Final to attack comparable company analysis, question selection of companies, time period, control premium, volatility in earnings, etc. o Precedent Transaction Analysis - (uses acquisition multiples) uses the value of transaction that have been announced or closed of companies that are similar to your company and calculate multiples and compare. Value of the firm, assumes control. o If these calculations are taking place in the environment of a acquisition, need to discount for the value of control premium. Final attack Precedent Transaction Analysis by attacking the sample of companies and transactions, and also by attacking the earnings volatility/performance of those companies Appraisal Rights: Cases In appraisal proceeding, Ct is supposed to obtain a fair value as of the date of the transaction Minority shareholders cant stop the merger, but they can request an appraisal to make sure that they are paid the fair value of their shares in the firm as a going concern. Fair value should take into account all relevant factors, but cant use any value that comes from the accomplishment of the merger, e.g. synergies. What is the business worth right now, before the merger. see Weinburger; see also Technicolor. Must exclude acquiring firms business strategy. Delaware Block Method had various components that were weighted (revenues, liquidation value, market value) Weinberger said that other methods could be used. DCF & Precedent Transaction Analysis values the entire firm, assuming control. Comparable Company Analysis values the company summing up the value placed on the

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 Comparable Company Analysis values the company summing up the value placed on the firm by minority shareholders. Does not assume control. Minority Discounts discount for value of non-control stake in firm o Implicit in Comp Co Analysis; must adjust DCF & Precedent Trans if used to value a minority stake in firm. (5%-20%) o Delaware law Minority Discounts are not allowed in appraisal proceedings (Cavalier Oil) Lack of Marketability Discounts When shares are not easily marketable, private co, must discount shares that dont have the ability to be easily sold. o Delaware law No discount allowed in appraisal proceeding for lack of marketability Control Premia Amount over the publicly listed market price for a stake that entails control of a company o Implicit in DCF and Precedent Trans. Analysis; must be added to Comp Co Analysis o Look at pre-merger price vs. acquisition price paid o 20% is a good rule of thumb o Delaware law Control premia can be added in an appraisal proceeding Regarding Discounts in an appraisal proceeding, if it can hurt a minority, it is not allowed (minority, lack of marketability); if it can help a minority, it is permissible to use in an appraisal proceeding (control premia)
Kleinwort Benson Ltd. v. Silgan Corp. (Del. 1995) (Example of DCF Analysis) Silgan Holdings forms an A Sub. Silgan Corp was merged into A Sub. In the merger, forward subsidiary merger, Class B shareholders received 6.50 per share Petitioners expert valued the company at 12.65 per share (Paone) Respondents expert valued the company at 4.88 per share (Kovacs) Both experts started with managements projections for cash flows o Court accepted Kovacs changes to managements DCF w/r/t working cap, deferred taxes, and estimates for 2d of 1989, and working cap interest Investment in working capital is a use of cash (paying down AR, inventory restocking) = decrease FCF lower PV lower per share value Cos Goal Lowering Deferred Taxes Use of Cash (pay more taxes) decrease FCF, lower PV, lower per share value (difference b/w Tax Expense & Tax Liability) o Kovacs terminal value estimate, based on growth in perpetuity, is more accurate o Respondent had a more reliable DCF Analysis Court adopted 12.8% discount rate b/c could not justify why Kovacs rounded up to13%. Thinks it is b/c he wanted lower the final result. (Lower discount rate leads to higher PV) Court, assumed mid-year receipt of cash flows. If cash flows come in at end of year, gives you a lower PV than mid-year. Court then made deductions from EV to arrive at value of equity Court ultimately valued Silgan at 5.94 per share Less than original merger consideration, and Petitioner is stuck with it. Policy Is it fair to shareholders for them to have to make a decision as to whether to exercise their appraisal rights when not all of the financial information (statements) may not be available to them on the date of the merger. Could exercise rights, and then wait on the statement and make a decision later. 262(e) B/c have 60 days after dissenting to withdraw their dissent if they want to. Gonsalves v. Straight Arrow Publishers, Inc. (Del. 1996) (Precedent Transaction Analysis; Delaware Block Multiples) Court adopted the Respondents valuation that was a variation on the Delaware Block method. Multiples were calculated based on 5-year historical earnings averages. Comparable companies included one group of magazine publishers and a larger group of publishing companies Using these multiples, EV of the company was calculated. Petitioner tried to use 1985 earnings only, capitalized, to calculate multiples, but the Ct found that this was not appropriate given that SAP had a history of volatile earnings. o Delaware wanted 5-year average Subsequent History Del Sup Ct wants courts to engage in an independent valuation exercise, rather than selecting one of the valuations offered by the parties. Note This case highlights the problem with appraisal from the shareholders point of view: the delay in receiving payment. Merger occurred in 1986, but the appraisal action was not resolved until 2002. Appraisal statutes typically compensate for this by giving the

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was not resolved until 2002. Appraisal statutes typically compensate for this by giving the petitioner interest on the appraised value of the shares from the date of the appraisaltriggering transaction. Court eventually came to a value of $269.96; 12 years later.
Cavalier Oil Corp v. Harnett (Del. 1989) (In appraisal, No Minority Discount merger; value corp itself and not the block of shares) Harnett dissents from 253 Short-form merger of EMSI into Cavalier Harnett had a 1.5% interest in Cavalier Issue: Should the court apply a minority discount in valuing Harnetts interest in EMSI Rule: 262 requires that the Court determine the fair value of the dissenting stockholders shares, which represent a proportionate interest in a going concern (TriContinental Corp.) Holding: Objective of 262 is to value the corporation itself, as distinguished from a specific fraction of its shares as they may exist in the hands of a particular shareholder. o Relied on Tri-Continental and distinguished it finding that discounts (for minority status and control premiums) at the shareholder level after enterprise value has been calculated are barred. o Where there is no objective market data available, the appraisal process is not intended to reconstruct a pro-forma sale but to assume that the shareholder was willing to maintain his investment position, however slight, had the merger not occurred. Policy: Discounting individual shareholdings injects speculation as to which market factors may dictate the marketability of minority holdings. Discounting minority interests imposes a penalty for lack of control and unfairly enriched the majority shareholders. A clearly undesirable result. o But minority shareholder would not receive control premium if sold on the open market, so why should they receive it here?

Cede & Co. v. Technicolor, Inc. (Del. 1996) (In a Two-Step TO-CO merger, any plans or strategies implemented (operationalized) by the acquirer between the first and second step (date of merger) will be included in an appraisal valuation; date of merger is the date the shareholders vote to approve the merger) Two-Step TO-CO reverse subsidiary merger b/w MAF and Technicolor. Cinerama (Cede) sued Technicolor in an appraisal action. Perleman plan was implemented after step 1, obtaining majority, but before step 2, when the dissenting shareholders voted on the merger. Issue: Can Cinerama share in the value that would be created as a result of MAFs postmerger plans? Rule: In an appraisal, Court shall determine fair value exclusive of any element of value arising from the accomplishment or expectation of the merger . . . . 262(h) [E]lements of future value, including the nature of the enterprise, which are susceptible of proof as of the date of the merger and not the product of speculation, may be considered [in an appraisal proceeding]. Weinberger Holding: - Technicolor was operating under the Perelman Plan on the date of the merger, so the value of that plan has to be included in the appraisal process o In a two-step merger, to the extent that value has been added following a change in majority control before cash-out, it is still value attributable to the going concern, i.e., the extant nature of the enterprise, on the date of the merger o Weinbergers authorization to exclude speculative values relating to the completion of a merger did not includ[e] those [values] which exist on the date of the merger because of a majority acquirers interim action in a two-step cash-out transaction o The accomplishment or expectation of the merger exception in Section 262 is very narrow, designed to eliminate use of pro forma data and projections of a speculative variety relating to the completion of the merger. Weinberger Two step transaction if on the date of the merger there is a new plan in place, and it has been formulated and implemented at the date of the merger minority gets value from the implementation of the plan One step transaction acquirers plan cannot have been implemented on the date of the merger because the minority does not have a majority stake on date of merger minority does not get value from the implementation of the plan Two step transaction plan formulated but not implemented at the date of the merger like a One step in that plan may be formulated, and in one step there is time between shareholder vote and closing and if plan is formulated during that time, dissenters dont get value from formulation; but the form would dictate that because is a two-step appraisal rights determined on date of merger, and owners plans at date of merger should be considered In Delaware, likely that as long as plan is formulated, but not implemented, Ct is not

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o In Delaware, likely that as long as plan is formulated, but not implemented, Ct is not going to value the plan at the date of the merger; like a one-step. It would be speculative. Implementation assumes implementation at the operational level, not at the managerial level company is being run in a different way.

Kohler Case Study Note- want us to be able to caclulate a WACC for exam What's at stake here? Kohler owned and managed, largely, by family members 1998 underwent recapitalization Alters company's capital structure ins ome way Changed equity capital structure Exchanged pre existing securities Kohler family, employee plans, foundation New shares have transfer restrictions Only for trsuts, family members, affiliated businesses Kohler has right of first refusal on outside sales of restricted stocks Ultimate plan: Stewardship trust would have majority control Why recapitalize here? Maintain Family control But already control 78.3- 96% of shares Having outside shareholders is a nuisance Fiduciary duties owed to minority shareholders Shares trading (amongst outside shareholders) at high price Might encourage more family members to sell More outside shareholders- if you go above 500 shareholders- subject to disclosure requirements Avoid take over Don't want to be subject to market for corporate control Shareholders might agitate for IPO Speculation on IPO, one of the reasons share prices had gotten so high Benefits from being private Avoid 'short-term-ism' of public companies Sharehodlers want to see you maintain earnings growth, etc Put pressure to take short-term views Downsides to being private Can't access public equity capital markets Private lending limits ability on company to grow Kohler has been taking 90% of earnings and investing back in business Generates funds internally Takes longer to expand No publicly traded stock to use as acquisition currency Stock in Kohler not as attractive because no public pricing, liquidity, etc Why are there dissenting shareholders here? Think the price is too low, 55.4k not enough, want 227k per share All non-family members being booted - might think that's unfair How is this okay? UNOCAL case- shareholder discrimination is fine Entire fairness test - to see that the transaction is fair in its entirety Thought would get in at ground floor for IPO Tab1- DCF analysis WACC too high, should be 11.37, not 11.9 Because it was higher, the present value was lower Constant Growth assumption Note- slight changes in growth rate have large impact in Total Enterprise value Minority Discount Calculated by comparign to other companies, sales etc But delware Courts say no Lack of marketability Delaware says not to this Removing discounts (and different WACC) value per share up to 108.6 Tab 3 and 4 - Comparable company analysis Comparable companies may not be comparable

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 Comparable companies may not be comparable i.e. American Standards gets 60% of sales from air conditioning, othey also do automobile components See exhibit 4- Sales of kitcehn and bath are 74.4%, Power systems is 27.3 % of We can't pull out the debt (for example) dedicated just to the kitcehn and bath segment Note- courts could strike some of the comparable companeis for not being comparable Judges could even higher neutral expert to advise the court Issue with company size Different set of investors for larger cap companies than smaller cap companies Small companies get less analyst attention -> fewer investors even learns about stock, less demand, price lowers Institutional investors have restrictions on how large a percentage of companies they can own American Woodwork might be too samll Market values highly levered companies differently Higher leverage, lower equity value when But if achieved optimal captial structure, using debt wisely, could add value to enterprise b/c all the residual profits, after paying off debts, Capital structures of comparable companies totally different Weighting Note: delaware courts don't like to only see the last twelve months, prefer to see average of last 3 to 5 years - unless you can show court that only metric releveant is whats associated for last year If averaged last 5 years - would have lower numbers for Kohler- would lead to lower valuation in comparable company analysis Control Premium What is an appropriate control premium One way - look at purchases for control in comparable transactions
Issue - P's don't have control - why use control premium? Comporable company analysis based on market price- which is minority price But we're valuaing the overall company

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Federal Securities Rules

Sunday, February 05, 2012 1:16 PM

Issuance of Shares, Federal 7 Proxy Rules, Rule 10b-5 and Disclosure

CB: 247-253 (through first paragraph); 257-269; 921-931 (skim) Securities Act 4(2); 5(a)-(c) Securities Act Rules 501(a),(e); 502(a); 506 Exchange Act 14(a)(1) Exchange Act Rule 10b-5

Basic Incorporated v. Levinson

Selected Federal Securities Law Provisions that Apply to Negotiated Business Combinations: Intro 3 scenarios Bidder proposes to use its own stock acquision consideration Issuer must comply with registration requirements of 1933 Act, or find an excemption See section 5 registration requirement Whenever Bidder or Target is publicly traded and must obtain sharheolder approval for a proposed transaction Then company msut comply with federal proxy rules Both Bidders and Targets must be mindful of the antifraud provsions of federal securites laws in context of any communication (oral or written) regardign the proposed transaction Be aware of implications of rule 10b-5 in cotnext of negotiated or hostile acqusition Class Intro Federal securiteis laws provide additional procedural requirements for M and A Sometimes these laws will effect the choice of structure Failure to comply with federal securities law acan result in civil and criminal penaliteis Capital Markets and Capital Formation in US governed at state and fedderal level Federal Governemtn framework releant to issuing securities developed in 30's Securities Act of 1933 Regulates the offer and sale of securities Based on idea that investors can only evaluate a security if provided adequate info about issuer, offer Relies on combinatation of regulatory enforcment and provide litigation SEC regulates registratn process Section 5: Registartion requiement Offer to sell securities cannot be made unless the issuer has filed a registration that contains the disclsoures required (by rules and regulations under the 33 act) i.e. sale cannot be consumated till the registration statement declared effective Declared effective: reviewed registration statemtn, back and forth on questions, then declaration of effectiveness Includes waiting period Prospectus Portion of registration statemnt that contains the disclsoures the invesotr would need to have to make an informed investment decision Form S-4 Registration is transaction focused, not securities focused Has the transaction been registered? Any subsequent resales require a nother registration (b/c separate transation) unless an exemption
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transation) unless an exemption Sections 11 and 12 Impose penalties on offering particiaptins that violate disclosure or other requriemtns Section 3 exempts certain transactions from requiremtns of section 5 All regulated in other ways These aren't important for our class Gov't obligations Municipal obligations Bank security commerical paper Section 4 exemptions (relevant) 4(1) Transactions not invovling an issuer, underwriter 4(2) Private Placement Exemption Securities Exchange Act of 1934 Priniple source of regualted requriemntes for reproting companies Rules of secondary sales Disclsoures required for solciitng proxies Contains key anti-fraud provsions relating to the purcahse and sale of securiteis 10-b prohbitis fraud or manipualtion in connection with the purchase or sale of securities Rule 10b-5: Prhobitis making an untrue statement of a material fact. See below Rule 10b-5 liabliity attaches even when we're talking about secuirties that don't need to be registered under 1933 act Requirements for trading on national securities exchanges Must be a registered security Section 12: what is a reporting company A reporting company are those companies required to file periodic reproting requiremtns 10-k, 10-Q, 8-K If you're a reporting compny, you're subject to the requirements of the 34 act Requirements extend to the preparation of proxy statements as required under section 14 General Guideline: all public companies are reporting companeis subject to proxy rules But private companies may also be subject to proxy rules See Klor - had public debentures Some private companies considered so large, that they ulitamtely become reproting companeis 12-G If you have more than 500 million shareholders or over 10 mm in assets then requried to report Sources of requirements from Federal secruties laws Proxy rules Section 14 of 34 Registration requirements (section 5 of 33) General Antifraud Prhibiton (section 10(b), rule 10b-5) Fraudulent statements made in prpearation of merger documents Note: can face duplicative vioaltions 10b-5 and 14a violations for lying in proxy statemnts Also prohibition on insider trading State Securities laws (Blue-Sky laws) State securiteis laws effectively exempted if fed laws apply Listed on national exchange
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 Listed on national exchange But if not pre-empted, and no other exemption, will need state blue-sky lawer We won't deal with these in this course

Securities Act of 1933: Issuance of Shares (or other Securities) to Complete the Acquistiion If a corporation propsoes to use an insturmentality of itnerestate commerce in order to issue its stock, the corporation must register the offering or find an exemption So if bidder offers all cash to acqurie target, requriemtns of 1933 act do not apply (Bidder not issueing (selling) any securities) Registered Transactions If acquirign consideration is stock- > acquirer msut register securites on form s-4 (unless exemption from registration) Registration process File registration statement covering securiteis to be offered Before securites can be sold, registration statement msut be made effective Form S-4 First part is prospectus Used by the SEC in connection with business combination transactions and exchange offers A lot of the same disclosures as scheudle 14a But b/c consideration is stock, the will be new sharheolders They're making an investment decision -> should they invest in acquireers stock So more info on fincnail conditon Finacnial statements Pro form fincnail statements of proposed business combination i.e. what will they look like on a post-confimation busienss Form S-4 gneerally known as Proxy Statement/Prospectus Used for solciting proxies and by the buyer to register securiteis it plans to issue to targeting companies sharheolders But S-4 known as Joint Proxy Statement /Prospecuts If both target and acquirer needs to vote S-4 must be filed With SEC And with the Exchange traded on Division of corporate Finance reviews these disclosures Time to review depends on a number of factors Staff tries to give initial comment letter within 30 days of initial filing If issuer in troubled industry, SEC might take more time Worried about investor losses

Exempt Transactions 4(1) Most of the trading activity in the U.S. publci markets is exempt under 4(1) Transaciton "not invovling an issuer, underwriter or dealer"are exempt Those who fall under statutory defintion of "underwriter" or dealer are not entitled to 4(1) exemption
Private Placements 4(2) - statutory private palcements Issuer must show that he proposed transaction does not invovle a public offering of its securities-> must show it is a nonpublic offering SEC v. Ralston (SCTOus 1953) Nonpublic offering for purpose of 4(2) as a transaction where propsoed offer and sale of the issuer's securites was limited to those who coould "fend for
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and sale of the issuer's securites was limited to those who coould "fend for themselves" - i.e. the issuer must establiash that all the offerees and purchasers had access to the "kind of informaiotn which registration would disclsoe" Factors indicating public offering General solciition Investment intent Buying to dsiturbte to toerhs Regulation D. Safe harbor for what applies as private palcement If you comply fully with provision of regulation D -> you'reprotected If you don't fully comply, you may still qualify for section 4(2), but determined on case by case basis But every practioner will try to do this 3 regualtory safe harbors 504 and 505 Exempt certain offerings under 5 million Intended to help small businesses raise money Only private companeis can use these 506 Non exclusive safe harbor under 4(2) Applies to offerings of any size Rule 506 - Safe harbord standard for 4(2) Exempt from state registration requriements No dollar limit on private offering exemption under rule 506, so long as offerign made only to "accredited purchasers" and no more than 35 "nonaccredited purcahsers" who must also satifsy a regulation D standard of fianncailsophistication Both public and private companies can rely on this exemption No limit on size of offering Can have unlimited number of accredited purcahses and up to 35 nonaccreddited prucahsers Certain disolures must be furnished to non-accredited investors Can have no general solicition or advertising Limits on resale Form D filing required What are accredited investors? Sophisticated investors Business development companies Corporations with total assets over 5 million Director or executive officer of issuer The wealthy -> joint net worth over 1 million exclduing value of primary residence Or net income of 200k Trusts with assets over 5million See rule 501 definitoin of accredited investors 35 non accreddited nvestors must still be sophisticated Be sophisticated by having a purcahser represeantitive Must be someone unaffilaited with issuer 501-508 have safe harbor Limited offering exemptions; 504 and 505 Based on 3(b) of 1933 act -> rulekamking aurhotiry to exempt offerigns up to 5 million Offerigns under 5 million are exemptd Requirements even under exemptions No registration statement
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 No registration statement May still need sahrehodler approvals Need form S-4 Proxy statement if shareholders vote Form D Whether reporting (public) or not Filed within 15 days of first sale of securities Purchasers Identify companies issuign securiteis Exemptions being relied on Date of first sale of offering

Scope of Federal Proxy Rules Under state corp law, shareholders can delegate voting power So proxy statmetns issued to reachquorum Proxy rules under 34 Act Mostly in 14A of 1934 Exchange Act If shareholder approval is reuqired for a prticular acqusition and the company has a class of securities registered under section 12 of 1934 Act (reporting companeis) then any solicitiatoin of shareholder votes will trigger the provisoins of section 14 of he 1934 act Proxy - solicitaiton directly to corporation sharehodlers, for managers to vote on behalf of sharehodlers
SEC's Proxy Rules 14(a) of 1934 act prohibits soliciton of proxies from shareholders of reporting companies unless made in compliance with federal proxy rules (governed by regualtion 14A) With certain exeptions - no soliciton of sharehodlervotes may be made unless sharehodler provided with a written proxy statemtn that contains items of information required by sechedule 14A 14(a) Sechulde 14(a) List of discloures required Give sharheolders info on rationale for transaction Why mngment thinks sharheolders should vote in favofr of transaction Potential conflicts of interest Whether or not board thinks transaction is fair Fairness opinions from investment banks Not as extensive as disclsoure requriemetns for registration If only doing transaction with cash -> this is all we have But if stock deal -> need additional registration disclsoures Proxy statement must be filed with SEC 10 days before being sent to stockholders SEC will notify within 10 days if there will be any review If SEC chooses not to review, company can file definitive version of proxy statement (definitive version, but with date) Then can begin mailing to sharhoelders If SEC does review -> company must delay mailing and go thorugh review process 1st set of comments usually within 30 days Can request revision based on SEC's interperation of rules and laws Company files an ammended proxy stament that include resposne to each comment from SEC Length varies greatly, determined by kinds of comments by SEC
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 Length varies greatly, determined by kinds of comments by SEC Thus another reason to avoid shareholder vote is that it can slow down process because of review of proxy statment But target company sharhoelders almost always have right to vote if public compnay Proxy Statement Filed with SEC Ultimatley approved by the SEC and then delivered with sharehodlers If buyer's stockholders also have to approve transaction (through SER rules, or State law) and it's a reporting company, then must solicit proxies, file proxy statemtn, etc If we have an acquirer and a target company the discloures are usually redundant So SEC allows Joint Proxy Statements 1 document for both sets of shareholders Fairness Opinions No requirement under federal proxy rules that a company obtain a fairness opion But federal proxy rules do requrie disclsoure of the fairness opinion obtained by the company as part of its proxy statement NASD Rule 2290 (national assocaiton of dealers) Requires certain disclsoures must be incldued in fairness opion if member firm knows or has reaosn to know the fairness opinion will be provided or described to the public shareholders of the company SEC: If stockholder approval of the transaction is requried -> the member firm will be deemd to have reason to know that the fairness opinion will be shared with the public Rule 14a-9 Liability for fales and/or misleading discloures in the proxy statement Strong resemeblance of terms of rule 10b-5, but extends only to materially misleadign disclosures contained in proxy statement filed purusant to regulation 14A. Closing mergers Takes months and months Drafting merger discloure documents Accountants prepare financial statements SEC review process Hart-Scott-Rodina Antitrust review Other regulatory review License transfers Expense Lawyers to prepare docuemtns Accountants to prepare fiancial documents Exposing self to liability Could be sued for ommissions or misleading disclsoures

Securities Act 4(2); 5(a)-(c) 4(2) Section 5 does not apply to transactions by an issuer not involving a public offering Section 5 -- Prohibitions Relating to Interstate Commerce and
the Mails

A)Sale or delivery after sale

of unregistered securities

Unless a registration statement is in effect as to a security, it shall be unlaw ful for any person, directly or indirectly--

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person, directly or indirectly-1. to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or 2. to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale. B)Necessity of prospectus meeting requirements of section 10 It shall be unlaw ful for any person, directly or indirectly-1. to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to carry or transmit any prospectus relating to any security w ith respect to w hich a registration statement has been filed under this title, unless such prospectus meets the requirements of section 10; or 2. to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 10. C) Necessity of filing registration statement It shall be unlaw ful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or w hile the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8.
Pasted from <http://taft.law.uc.edu/CCL/33Act/sec5.html>

a. Securities Act Rules 501(a),(e); 502(a); 506

501 Definitions and Terms Used in Regulation D A)Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:
1.

2. 3.

4. 5. 6.

Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act w hether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan w ithin the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, w hich is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, w ith investment decisions made solely by persons that are accredited investors; Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, w ith total assets in excess of $5,000,000; Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; Any natural person w hose individual net w orth, or joint net w orth w ith that person's spouse, at the time of his purchase exceeds $1,000,000; Any natural person w ho had an individual income in excess of $200,000 in each of

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6.

7. 8.

Any natural person w ho had an individual income in excess of $200,000 in each of the tw o most recent years or joint income w ith that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; Any trust, w ith total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, w hose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and Any entity in w hich all of the equity ow ners are accredited investors.

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e)Calculation of number of purchasers. For purposes of calculating the number of purchasers under Rule 505(b) and Rule 506(b) only, the following shall apply: 1. The follow ing purchasers shall be excluded: i. Any relative, spouse or relative of the spouse of a purchaser who has the same principal residence as the purchaser; ii. Any trust or estate in which a purchaser and any of the persons related to him as specified in paragraph (e)(1)(i) or (e)(1)(iii) of this section collectively have more than 50 percent of the beneficial interest (excluding contingent interests); iii. Any corporation or other organization of which a purchaser and any of the persons related to him as specified in paragraph (e)(1)(i) or (e)(1)(ii) of this section collectively are beneficial owners of more than 50 percent of the equity securities (excluding directors' qualifying shares) or equity interests; and iv. Any accredited investor. 2. A corporation, partnership or other entity shall be counted as one purchaser. If, how ever, that entity is organized for the specific purpose of acquiring the securities offered and is not an accredited investor under paragraph (a)8 of this section, then each beneficial ow ner of equity securities or equity interests in the entity shall count as a separate purchaser for all provisions of Regulation D, except to the extent provided in paragraph (e)1 of this section. 3. A non-contributory employee benefit plan w ithin the meaning of Title I of the Employee Retirement Income Security Act of 1974 shall be counted as one purchaser w here the trustee makes all investment decisions for the plan.
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Rule 502 -- General Conditions to Be Met

The following conditions shall be applicable to offers and sales made under Regulation D:
a. Integration. All sales that are part of the same Regulation D offering must meet all of the terms and conditions of Regulation D. Offers and sales that are made more than six months before the start of a Regulation D offering or are made more than six months after completion of a Regulation D offering w ill not be considered part of that Regulation D offering, so long as during those six month periods there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those offered or sold under Regulation D, other than those offers or sales of securities under an employee benefit plan as defined in rule 405 under the Act. Note: The term offering is not defined in the Act or in Regulation D. If the issuer offers or sells securities for w hich the safe harbor rule in paragraph (a) of this Rule 502 is unavailable, the determination as to w hether separate sales of securities are part of the same offering (i.e. are considered integrated) depends on the particular facts and circumstances. Generally, transactions otherwise meeting the requirements of an exemption w ill not be integrated w ith simultaneous offerings being made outside the United States in compliance w ith Regulation S. See Release No. 33-6863. b. The following factors should be considered in determining whether offers and sales should be integrated for purposes of the exemptions under Regulation D: a. Whether the sales are part of a single plan of financing; b. Whether the sales involve issuance of the same class of securities; c. Whether the sales have been made at or about the same time; d. Whether the same type of consideration is being received; and e. Whether the sales are made for the same general purpose.

Rule 506 -- Exemption for Limited Offers and Sales without

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 Rule 506 -- Exemption for Limited Offers and Sales without Regard to Dollar Amount of Offering
a.

b.

Exemption. Offers and sales of securities by an issuer that satisfy the conditions in paragraph (b) of this Rule 506 shall be deemed to be transactions not involving any public offering w ithin the meaning of section 4 (2) of the Act. Conditions to be met1. General conditions. To qualify for an exemption under this section, offers and sales must satisfy all the terms and conditions ofRule 501 and Rule 502. 2. Specific Conditionsi. Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this section.

Note: See Rule 501(e) for the calculation of the number of purchasers and Rule 502(a) for what may or may not constitute an offering under this Rule 506.
ii. Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.

Exchange Act 14(a)(1)

Rule 14a-1 -- Definitions

Unless the context otherwise requires, all terms used in this regulation have the same meanings as in the Act or elsewhere in the general rules and regulations thereunder. In addition, the following definitions apply unless the context otherwise requires:
a.

b.

c.

d.

e.

f.

Associate. The term "associate," used to indicate a relationship w ith any person, means: 1. Any corporation or organization (other than the registrant or a majority owned subsidiary of the registrant) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities; 2. Any trust or other estate in w hich such person has a substantial beneficial interest or as to w hich such person serves as trustee or in a similar fiduciary capacity; and 3. Any relative or spouse of such person, or any relative of such spouse, w ho has the same home as such person or w ho is a director or officer of the registrant or any of its parents or subsidiaries. Employee benefit plan. For purposes of Rules 14a-13, 14b-1 and 14b-2, the term "employee benefit plan" means any purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan primarily for employees, directors, trustees or officers. Entity that exercises fiduciary powers. The term "entity that exercises fiduciary pow ers" means any entity that holds securities in nominee name or otherwise on behalf of a beneficial ow ner but does not include a clearing agency registered pursuant to section 17A of the Act or a broker or a dealer. Exempt employee benefit plan securities. For purposes of Rules 14a-13, 14b-1 and 14b-2, the term "exempt employee benefit plan securities" means: 1. Securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, w here such plan is established by the registrant; or 2. If notice regarding the current solicitation has been given pursuant to Rule 14a-13(a)(1)(ii)(C) or if notice regarding the current request for a list of names, addresses and securities positions of beneficial ow ners has been given pursuant to Rule 14a-13(b)(3), securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, w here such plan is established by an affiliate of the registrant. Last fiscal year. The term "last fiscal year" of the registrant means the last fiscal year of the registrant ending prior to the date of the meeting for w hich proxies are to be solicited or if the solicitation involves w ritten authorizations or consents in lieu of a meeting, the earliest date they may be used to effect corporate action. Proxy. The term "proxy" includes every proxy, consent or authorization w ithin the meaning of section 14(a) of the Act. The consent or authorization may take the form of

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g. h. i.

j.

k.

l.

meaning of section 14(a) of the Act. The consent or authorization may take the form of failure to object or to dissent. Proxy statement. The term "proxy statement" means the statement required by Rule 14a-3(a) w hether or not contained in a single document. Record date. The term "record date" means the date as of w hich the record holders of securities entitled to vote at a meeting or by w ritten consent or authorization shall be determined. Record holder. For purposes of Rules 14a-13, 14b-1 and 14b-2, the term "record holder" means any broker, dealer, voting trustee, bank, association or other entity that exercises fiduciary pow ers w hich holds securities of record in nominee name or otherwise or as a participant in a clearing agency registered pursuant to section 17A of the Act. Registrant. The term "registrant" means the issuer of the securities in respect of w hich proxies are to be solicited. Respondent bank. For purposes of Rules 14a-13, 14b-1 and 14b-2, the term "respondent bank" means any bank, association or other entity that exercises fiduciary powers which holds securities on behalf of beneficial owners and deposits such securities for safekeeping with another bank, association or other entity that exercises fiduciary powers. Solicitation. 1. The terms "solicit" and "solicitation" include: i. Any request for a proxy whether or not accompanied by or included in a form of proxy: ii. Any request to execute or not to execute, or to revoke, a proxy; or iii. The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy. 2. The terms do not apply, how ever, to: i. The furnishing of a form of proxy to a security holder upon the unsolicited request of such security holder; ii. The performance by the registrant of acts required by Rule 14a-7; iii. The performance by any person of ministerial acts on behalf of a person soliciting a proxy; or iv. A communication by a security holder who does not otherwise engage in a proxy solicitation (other than a solicitation exempt under Rule 14a-2) stating how the security holder intends to vote and the reasons therefor, provided that the communication: A. Is made by means of speeches in public forums, press releases, published or broadcast opinions, statements, or advertisements appearing in a broadcast media, or new spaper, magazine or other bona fide publication disseminated on a regular basis, B. Is directed to persons to w hom the security holder ow es a fiduciary duty in connection w ith the voting of securities of a registrant held by the security holder, or C. Is made in response to unsolicited requests for additional information with respect to a prior communication by the security holder made pursuant to this paragraph (l)(2)(iv).

Problem Sets
Problem Set #1 A Corp, a publicly traded Delaware corporation, plans to acquire all of T Corps assets for $270 million in cash. T Corp, also a Delaware corporation, is a publicly traded company. 1) Do T Corps shareholders have the right to vote in connection with this transaction? 1. Yes - 271(a) - sharehodler vote for sale of all or substainlly of assets 2) Do A Corps shareholders have the right to vote in connection with this transaction? 1. No requiremnt for sharholder vote b/c cash transaction 2. No stock being issued so no SER rules triggered 3) Do the requirements of the 33 Act apply to this transaction? 1. No - no stock being issued 4) Do the parties have to comply with the federal proxy regulations of the 34 Act? 1. Only applicable here to Target Co - because they're the only one with a shareholder vote requried i. Target co must prepare 14a proxy statments 5) Suppose, instead of cash, the consideration is shares of A Corp stock equal to 22% of A Corps outstanding shares. Would T Corps shareholders have the right to vote in connection with this transaction? A Corps shareholders? 1. T Corp
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1. T Corp i. Still right to vote under 271(a) 2. A Corp i. Right to vote now under NYSE rule 312 if on NYSE, but no need to vote if no SER rule 6) Assume again that the consideration is shares of A Corp stock equal to 22% of A Corps outstanding shares. Do the requirements of the 33 Act apply to this transaction? Do the parties have to comply with the federal proxy regulations of the 34 Act? 1. Yes 33 Act requirements will apply because A is issuing shares i. Section 5 - must register securities A. Form S-4 2. Federal proxy regulations will apply to both Target and Acquirer (if on NYSE) i. Need proxy statements issued because both publicly traded companies One. AD says to assume this SER rule if publicly traded A. Can do joint proxy statement B. Form s-4: Joint Proxy statement/Prospectus

Problem Set #2 A Corp, a publicly traded Delaware corporation, plans to acquire T Corp in a reverse subsidiary merger. The consideration consists of shares of A Corp stock equal to 1% of A Corps outstanding shares, valued at $27 million. T Corp, also a Delaware corporation, is privately held and has two shareholders. 1) Do T Corps shareholders have the right to vote in connection with this transaction? 1. Yes, 251(c) - constiuent corporations shareholders have right to vote 2) Do A Corps shareholders have the right to vote in connection with this transaction? 1. No, and SER would not be triggered 2. No rights to vote under state law 3) Do the parties have to comply with the federal proxy regulations of the 34 Act? 1. No because T Corp isn't a reporting company, 34 act only applies to reproting companies i. Reporitng companeis need 500 sharehodlers and 10 million in assets 2. So no need to worry about federal proxy rules 4) Do the requirements of the 33 Act apply to this transaction? 1. Yes because A Corp issuing shares 5) Does A Corp have to file a registration statement with the SEC before it can issue shares in connection with this transaction? 1. No -> this transaction is probably exempt under 4(2) as a private placement assuming they're accreddited investors or have an accredited pruchase adivsor and all other requriemnts met i. Question is if the two shareholders are financially sophisticated ii. Might fit under safeharbor of rule 506 if they're rich enough

Rule 10b-5 and the Timing of Disclosure of Acquisition Negotiations

Class intro No affirmative duty to dislcsoe But upon dislcoign, must not be misleading on any material fact Issue: when is something material intro Redundant liability under fed security law SEC, DOJ Civil liability 33 act Proxy rules 10b-5 liability for misrepresenation in communicaitons with sharheolders when solciiting approval for mergers SEC vs. National Securiteis (1956) Mergers about sales of securiteis, so 10b-5 attaches to mergers Corporate disclosures regulated by
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 Corporate disclosures regulated by 33 act Proxy rules General antifraud provisions of 10b-5 Public statements, written and oral can be attacked by 33 act, and 10b -5 And also statements/transactions exempt under 33 act, proxy rules, can still be held laible under 10b-5 Rule 10b-5 applicaiblity to early merger negotiations Generally done under cloud of secrecy Public compnay must decdie when to release info to public markets If too soon -> deal can fall apart If you disclose too late -> company can be accused of failing to disclsoe material informaiton or being misleading No general duty to disclsoe merger negotiationsabsent purchases of own stock (insider trading rules) But form 8-k reporitng requiremtns once entering a defintive agreement Many companies have adotped a "no comment" policy on prelimnary merger negotiations
Basic Incorproated v. Levinson (Blackmun 1988)1 This area is one where there is no birght line rule regarding materiality F: Shareholder sold Basic stock relying on statmetns by Basic that no merger negotiations going on Basic issued statemtns that management unaware of any reason for unusaul trading movemnets But were under merger negotiations Why are shareholders suing? Arguing sold at artificially depressed prices because denied merger negotiations on the way Arguign would have made more if were being truthful 3rd circuit adopted an -agreement-in-principle rule Agrumetn for Don't want to overwhelm investors Risks merger might fail Undue optimism Reserve confidnetialtiy Easier to administer bright line rule SCOTUS: these don't go to the question of materialtiy And better to inform the investors and let them know what stage They know merger talks could fail To determien if these statemnts violate rule 10b-5, need to know if these are material If the defendant had publicly made a fraudulent statement, every investor could sue if it could be shown that the statement affected the market as a whole - this is the "fraud on the market" theory enunciated by the Supreme Court in Basic Inc. v. Levinson.[5] This "fraud on the market" presumption of the plaintiff's reliance upon the deceit is only available in situations (like in Basic) where the security is traded on a well organized, and presumably efficient, market. Basic Questions What is the definition of materiality under Rule 10b-5?
f TSC Industries, Inc. v. Northway, Inc.,[2] the word "material" was defined by the U.S. Supreme Court - "an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." - + signfincanlty altered the total mix of informaiton made available

How do you know when somethings material?

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 How do you know when somethings material? What kind of informaiton do you need- how do we know when the total mix is altered? Something that effects that stock price Something that a reasonsable investor would act on this decision
What are the kinds of things investors find material?

Possibilities Something they'd trade on Something that refelcts the value How important is this event in the life of the company? Basically anything of sufficient value For target company, almost always material, for an acquiring company, depends on relative sizes of company But when do preliminary negotiations reach the point where just knowing the negoiations are underway effects the value of the compnay Judge Friendly: things material at earlier stage for target So probabliyt can be lower for target firm than acquriing firm What test will courts apply when assessing the materiality of preliminary merger negotiations? Probability x Magnitude Test: The test for forward-looking information: materiality depends on balancing of probability event will occur and the anticipated magnitude of the event in light of the totality of company activity Probability for mergers: what to look for to measure (page 265) Look for board resoltuions See if reached highest corporate levels Negotiations between pricnipals or their intermediatires? Magnitude: Look at permium If there's a premium - there'll be a big jump If buying at current market price, less liekly to be material Realtive sizes of corporations Will determine if very important for acquirer Mergers super important because end of company in current form Assume you are general counsel to a company in the midst of ongoing merger negotiations. What analysis would you undertake to determine whether information related to the merger negotiations is material? What factors would you consider in assessing the probability of merger discussions ripening into an acquisition? See above Additional Look to see if arraigning financing Employing consultants and advisors But should probably measure their activity Are they advisign on feasibility, cost/benefit Or are they performing due diligence Or are they performing due diligence with non-public information Are there regulatory hurdles, like antitrust approval? Makes probability much lower High level communication By the time the board gets involved, trasnaction is pretty far along Managemtn comes up with the idea By the time they brign it to the board, some real thinking has een done Might even have approached the other corps management The corporate sharing of nonpublic informaiton Only sahred if have entered in non-disclsoure, confidnetialty agreements Frequency and level of contact
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 Frequency and level of contact More contact -> higher the probability If there's been due diligence If they've started to tour factories, talk to managers If you've heired lawyers and investment bankers looking at this transaction generally Have they been reatiend for that partiuclar deal? Fairness opinion If you're talking about price and going back and forth about it, makes transaction looks more probable If you've decided on the major deal points, transaction looks highly likely Transaciton History If lots of talks with no deal going thorugh, makes less likely If history of executing a lot of deals -> makes more likely Answer to set of factors about materiality No set set of factors that says conclucisvley Notes NYSE Guidelines NYSE Listed Company Manual 202.05 Timely Disclosure of Material News Developments Affimative obligation to relase quickly to the public any news or informaiton which might reaosnbly be expected to materially affect the market for its securities Should act promplty to dispel unfounded rumours which reuslt in unusal market activitey i.e. if lots of market activity, exchange wants you to say why, or that there is no reason 202.01 Intenral Handling of Confidential Corproate Matters Lots of price volitiltiy because of leaked info that should be confidentail -> Company encouraged to confine merger negoiations to small gorup Confidnetialiy agreemetns As soon as unusual market activity occurs, should be prepared to public announcemnt Form 8-K Disclosure Requriements Question: Will statemnts not direclty related to particular merger under negotiations give rise to duty to disclose? Hypo: A corp negotiating with T Corp for a cash acqusistion Smaller target Purchased by acquirer through bank debt Has no comment policy with respect to mergers No abnormal trading acitvity or other indicia giving rise to formal duty to disclose merger negotiatons But company is releasing finacnail results and providing projections of future performance Annual report and 10-Q Debt to total capitalization is 59% -> goal to move to upper 60% range But company knows that if transaction goes through, its' debt to cap ratio will really be 80% Even assume disclaimer that projections of finacnail resutls may vary over time due to changes of fincanil conditions, etc Only rule 10b-5 liability if material misstatemtn Statement here: expect debt to cap ratio to icnrease from 59% to 69% Effictively telling market you won't do a cash acquisiton
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Effictively telling market you won't do a cash acquisiton Is this a misstatement, false or misleading? Not really false, but maybe misleading? This is based on the Quaker Oats case (3rd Cir. 1994) Had repreatedly made statemtns about future fincial projections Showed debt to total captilziation of up to 69% Said look - we did what we said we'd do At no point did they make it known to the market they had been in merger negotiations with snapple Quaker made staemtns 10/93 11/93 9/94 Negoitaitons started in spring 94 Due diligence commnced in 8/94 11/94 - announce merger And at no point before did they disclsoe that they were negoitating with snapple Had to increase debt to cap ratio to 80% Resulted in 10% decline in quaker oats stock P: quakers knew pending negoation with snapple, which would icnrease debt to cap ratio, which would make statemnts prior to negotaions and Sept 94 statemtn materially misleading 3rd cir: although all statements accurate at time made, could induce reaonable investor to believe would stay at upper 60's or that quaker would update statements if they've changed This appears to be a rule 10b-5 violation So need to not only worry about statmetn beng true, be sure won't be made misleading because of new developments And must update previosu statmetns so as not to mislead market Should update when probabiltiy of merger occuring reaches level of materialtiy Tips for public companies in this realm Review forward looking statements to ensure that they contain cautionary langauge i.e. if you buy companies all the time say: Potential M and A activity could effect these numbers Put market on notice If you are going to disclose hard financial projections Think about whether you need to update those numbers in light of potential merger activity General no comment policy Just be quiet When are affirmative disclsorues requried Do you need to update prior public annoucnemtns now made misleading as a result of later events If you want to be conservative when it comes to complaince with the law Disclsoe merger negotiatons as soon as they become material Early if large If you want to be aggressive Remain silen ton issus even tangentially into affirmatively requried i.e. don't disclsoe financial proejctions that could be effected by mergers More activity in this area Sears Case Sears in middle of negotation of K mart Sears disclsoed that someone bought 5% share But did not disclsoe the negoiton
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 But did not disclsoe the negoiton Non disclosure og negotiaon did not make equity purchase dislcosrue misleading That transaciton not related to merger in any way Even if material, no affirmative duty to disclsoe merger negoitaiotns But must disclsoe if material and non-disclsoure makes previosu statemtns misleading Materiality based on probability x magnitude

Fairness Opinions (Skim 921-931) Lazard's Fairness Opion- Annex B to Pfizer/Pharmacia Form S-4 Bear Stearns Fairness Opinion - Annex C to Pfizer / Pharmacia Form S-4 Goldman Sachs Fairness Opinion - Annex D to Pfizer /Pharmacia Form S-4

Exchange Act Rule 10b-5

"Rule 10b-5: Employment of Manipulative and Deceptive Practices": 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." In the case of TSC Industries, Inc. v. Northway, Inc.,[2] the word "material" was defined by the U.S. Supreme Court - "an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." [edit]Elements of the offense In order to establish a claim under Rule 10b-5, plaintiffs (including the SEC) must show (i) Manipulation or Deception; (ii) Materiality; (iii) "In Connection With" the purchase or sale of securities; and (iv) Scienter. Private plaintiffs have the additional burden of establishing (v) Standing - Purchaser/Seller Requirement; (vi) Reliance; (vii) Loss Causation; and (viii) Damages.

Federal Securities Laws and State Tender Offer Regulations

Federal Securities Laws
Lecture is all that we are responsible for on the final need to know, basically, what the implications are if all cash deal, all stock deal, or mixed deal First, care about the distinction b/w private and public placement b/c if private, is likely that the transaction is exempt from registration. If in a transaction that falls under 1933 Act and requires proxy solicitation, use Form S-4 for both proxy solicitation of proxy and SEC registration. Registration of Securities Transactions (1933 Act, Form S-4) Securities Act of 1933 Register the transaction. o Registration requirement for securities transactions Cash deals N/A Stock deals apply here; both stock for cash and stock for stock o Anytime a corporation, large or small, publicly traded or privately held, proposes to use an instrumentality of interstate commerce in order to issue its stock, it must register the transaction OR find an exemption. o Must register disclosures and transactions with the SEC before issuing the shares. SEC will approve or send it back for more info. File with Form S-4 target stockholders are going to become shareholders in the acquiring firm, so they have a right to disclosures
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shareholders in the acquiring firm, so they have a right to disclosures about the financial position, etc. of the acquiring corp. (1) Filing of issuance w/ SEC, (2) deliver prospectus to shareholders, (3) finding of effective by SEC, (4) issue shares o Fundamental Premise prospective investors must be provided with adequate information about the issuer and the terms of the proposed offering so the investor can make an informed decision on whether to purchase the issuers securities Exempt Transactions (Private Placements, Regulation D) Private Placement Exemption 4(2), under Regulation D, Rule 506 issuer must show that the proposed transaction does not involve a public offering of its securities, i.e., the issuer must show it is a nonpublic offering. o Regulation D, Rule 506 dealing w/ a private, closely held target w/ small number of shareholders (accredited or < 35 nonaccredited); no dollar limit may be exempt. Federal Proxy Rules (1934 Act, Schedule 14A or Form S-4) Securities Act of 1934: Federal Proxy Rules ( 14a) o If transaction is going to require a shareholder vote, these rules apply Cash deals if target is a public company proxy rules apply Stock deals proxy rules apply o Regulates secondary market activity what goes on after the initial shares have been issued and the shares are on the open market. This refers to public companies, meaning trading on an organized exchange. Limited intervention into corporate governance o Proxy is a voting instrument to delegate voting authority to an agent o These rules dictate how management goes about soliciting proxies from shareholders, and stipulates the content and form of the proxy statement o If in a transaction that requires solicitation of shareholder vote (state law, or NYSE Rules) going to use Schedule 14a Regulation 14a w/ info required in proxy statement in Schedule 14a Rule 10b-5 (17 C.F.R. 240.10b-5) Anti Fraud Provision (everpresent) Rule 10b-5 (17 C.F.R. 240.10b-5) Anti-fraud Provision o Acquiring parties often want negotiations to be secret, while targets sometimes want to open an auction. o Among other things, 10b-5 renders unlawful materially misleading statements that are reasonably calculated to influence the investing public. By its terms, applies the purchase or sale of any security (whether registered or not under 1933 Act, or subject to proxy rules) o Basic Incorporates v. Levinson (SCOTUS 1988) (materiality in the merger context depends on probability of consummation and its magnitude) Facts: Basic Industries wanted to acquire Combustion, and began negotiating in 1976. Made three public statements in 1977 & 1978 denying that it was engaged in merger negotiations. As a result of these statements, Respondents sold their shares. Later, Basic announced the merger; its stock shot up. Respondents brought class action suit asserting that Basic made material, misleading statements in violation of 10b-5. Rule [a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. Materiality in the merger context depends on the probability that the transaction will be consummated, and its significance to the issuer of the securities. Materiality depends on the facts and thus is to be determined on a case-by-case basis o Probability & Magnitude test (to the issuer of securities, means the issuer from where the complaining shareholders come; could be bidder or target) Probability * Magnitude
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 Probability * Magnitude Probability How long have negotiations been going on? How far have the negotiations gone? How high are the negotiations? Magnitude Size of respective corporations and the amount of the premiums over market value Easily satisfied when target, because nothing is larger than company ceasing to exist For acquiring stockholder is harder to tell; is this deal going to change make-up of corp? Holding: Reversed & Remanded Note: After this decision, it is permissible for company to reply to inquiries about M&A activity w/ a no comment approach, but must be consistent in this approach from the beginning of the rumors; otherwise, subsequent no comments could be interpreted one way or the other. Disclose Merger Activity o Conservative approach Disclose all merger negotiations when they become (remotely) material; this would probably satisfy the magnitude & probability test But, would invite competition for target, and perhaps would lose merger o Aggressive Approach Remain silent on all matters even tangentially related to the merger; the no comment approach There are lots of corp. activities that may send out signals about a merger, so if remain silent on everything, could have to go back and update statements that were made in the past, like forward looking statements. If going to follow this approach, must be consistent Every time the company comes out with a new quarterly report, new statements, and new forward looking statements, company needs to check and make sure that new statements are in line with old ones Caveats If merger negotiations are going on, need to provide cautionary statements an acquisition or merger could affect your forward looking statements be consistent. If are a company that is in constant business of M&A activity, should provide statement that M&A could change the numbers and projections in forward looking statements. Judgment call as to whether should provide caveat statement or update projections The closer you get to your merger, the more likely that a simple caveat may not be enough, b/c when it is almost certain that you are going to merge, your prior statements may be misleading A-Corp, T Corp equal size o stock deal, direct merger o CEOs of A & T agreed to go forward; roughly agreed on price o Antitrust concerns 50/50 o Board approval, iffy 50/50 o CFO says, No merger negotiations underway 10b5 liability? misleading statement? YES; this is different than no comment. Is a denial of merger negotiations when there are in fact in progress material? maybe; hard case o magnitude = cos are same size, is not a shark-minnow. o probability 25% Would be wise to counsel CFO not to lie anyway, and if he does lie, 10b-5 is somewhat likely

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Federal and State Tender Offer Regulation

Monday, February 06, 2012 7:04 PM

Ch. 6: Federal Regulation of Stock Purcahses: Tender Offers and the Williams Act From perspective of Acquiring company Statutroy mergers take a long time Asset sales give target sharehodlers a vote - take a long time Both the above need approval of target board of directors However, originally Williams Act offer slowed down tender offers Tried to solve problem of presssuring these sales b/c of Saturday Night Special Short time frames, etc Williams Act Procedural dislcosure requriemetns for tender offer Substnative act State Anti-takeover laws Delaware code 203 Williams act added 13(d) 13(d)(1) Certain acquistions of shares trigger disclsorue requrientm Once cross 5% threwhold of stock ownerhisp of pbulic compnay, requried to file form 13D 13D is an early warning system for target compnay manageers and shareholders that someone is interested in stock 13D must be filed within 10 days of crossing 5% threshold By time filing is made, may have purcahsed more than 5% Info Identiy Soruce of funds Prucahse of acqusition How much stock purchase Any arraingemnts made to do with shares Must amend 13D if info related to purcahse has changed Thus it is an on-going obligation of people who own over 5% of the outstanding shares 14(d) Tender offer regulation What has to happen with a tender offer Tender offer: public offer to purcahse substantial portion of company's tock Substnail protion usually controlling but not cnecessarily When, at least part of consdieration is security it's refered to as an exchange offer With exchange offer, need to be worried about Williams act and compliance with '33 act (issuance of securiteis Requires registration statemnt to be filed and declared effective before acquirer can issue shares 2 types of requriemtns Dislcosure reugaliton Discloure of terms Similar to 13D acquriing stock Info about person Responses of companies that are subejct of tender offers

Federal and State Tender Offer Regulation

CB: 371-375; 413 (beginning with Note 3) 418 CMCMA: 318-325; 394-401 Exchange Act 13(d); 14(d); 14(e) Exchange Act Rule 14d-4(d)(2)

Substantive regualtion Regulations that control the form the tender offer takes 14(d)(1) Tender offers for any public companies sharesa are regualted bytender offer rules assuming its for at least 5% of a companies stock Disclosure must be made at time tender offer is commenced Commenced when a means to tender (transmit) is given to the stockholders i.e. mere intention of commencing a tender offer not enoguh Must announce and provide a means for transmittal Letter of transmital: provides instructions for how to tender 14(d)(3): obligation to file schedule TO upon commencemnt of tender offer Items Subject company (company buyign stock in) Background of bidder Terms of transaction Any relationsnhips between target co and bidder Bidders plans for targets Source and amount of funds needed to consumate transaction How much stock the bidder currenlty owns Who has been comepnsated to make decisions realted to this transactions Financial informaiton of bidder if material If its all cash, then don't care Unless financing deal, then their current fiancial state will show their ability to get finacnaing What approvals are requried What antitrsut laws are applicable Any legal proceedigns related to this transaction Must file amendments if any material changes i.e. changes in terms Additonal info 14(d)(4)-(6) Controls how info contained on Form TO get into target co stockholders

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Controls how info contained on Form TO get into target co stockholders

14(e) How the informaiton gets to shareholers of the target company Schedule TO filed with SEC Copy made available to target company Anyone can check it out on SEC website But still need notification to sharehodlers; Options for Cash Tender OFfers Long form advertisment Probably national circulation Lay forth all the things in Scheudle TO Summary Publication Just a summary of the offering Material terms of the transaction Bidder How security holders can obtain the tender offer materials Will also say that if you want a full copy of tneder offer info, you can get it maield to you Cheaper Following either of the above publications, bidder can request Target co to mail out the material or get the shareholder list from Target to then mail out info 14(b)(4)(a) Says you can use other means beyond these Just need to make sure you give all the informaiton Summary terms sheet Adequate summary of whats provided in schedule TO So definitely need to file schedule TO How to notify for Exchange Offer: Need to file registration statement - S-4 Registration statement requirmeents similar to scheudle TO Bidder co's id But more info on bidder co. b/c asking target co sharehodlers to become shareholders in Target Co going forward Can file prospectus (top protion of regsitration stament, on day you commence your offer Cash Tender vs. Excahgne offer Cash a little easeir No registration No waiting for security offering to be declared effective Biddign co Files scheudle TO (or Form S-4) Target Co. Filing obligations in respect to Tender offers Must file form 14d-9 Reccomendation whether or not target sahrehodlers should tender their shares Usually say yes when a friendly transaction Likely to say no if it's a hostile deal Allowed to say they're neutral or make no reccomendation Explanation for why making reccomendation Descrie any arraignemtns in place between bidder and target before commencemnt of tender offer Any plans target board might have for the compnay as far as seeking out more palatible business combination (a white knight) If this is a conentious battle - often advertisements and stuff taken out by oppsoing sides Williams ACT substantive Regulation In Act itself 14(d)(5) - withdrawal rights If sharehodler teners share, but later changes her mind, has right to withrawal Under statute - withdrawal rights only applicable for first 7 days This also meant the offer had to be open for minimum of 7 days 14(d)(6)- Proration Rights Rights of sharheodlers to tender shares in resposne to partial offer and have shares taken up on a pro rata basis during first 10 days, rather than first come first serve With out this, under first come first servefirst set of shares would be purcahses, the rest shut out Major fucnitonal impact is that must stay open for at least 10 days 14(d)(7) Best Price Rule Bidder is required to pay the same price to everyoen who tenders their shares, regardless of what the original offer is So if bidder icnreases bid after some sharehodlers have tenered, those who have previously tendered get the higher price In rules promulgated by the SEC pursuant to the rules granted to it by Congress SEC expanded rights, strengthened rights under Williams aCt Rule 14d-7: Withdrawal rights Provides that withdrawal rights run with tenitre offering period As long as original offer preiod open, can withdraw Rule 14d-8 Proration rights Available on all sahres for duration of offering, not just 10 days Ruel 14d-10(a)(2) Best Price Rules Clarified that best price is about price, not ancillary agreemetns, for example, related to compensation for managers Rule 14d-10(a)(1): all holders rule Requires that all tender offers be open to all holders of a class of the class of security Can't make it open to some members of the class and not to others Reaction to Unocal case (delaware) that said a discrimiantory tender offer is fine. Rule 14e-1 minimum offering period

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 Rule 14e-1 minimum offering period Tender offer must be held open for minimum of 20 busienss days 14(e)(1) (a) 14(e)(1)(b) -> says must extend offer period if any improtant info change (price, percentage of shares) Before knew needed to be at least 10 days, now needs to be at least 20, more if you change terms Rule 14d-4(2) If there are any materail chagnes to the offer, must extend offerign period by 5 days, if there's anyting deemd to be material if anythign other than price 10 days extension if changes to price or percentage of sahres 20 days if need to change registration/schedule TO (erik, look into this, this might be wrong) Rule 14e-5 Prhbiotis sales outside tender offer Prevents side deals with favored investors Policy Extension, minimum time periods Hold open to increase likelihood of actuion Helsp target company shareholders get a higher price Hold open to ensure investors are well informed Best price and proration rules, and all holders rule, and prohbition on sales outside tender offer Put investors on even footing Block sweet heart deals to particular shareholders Cynical people Substantive reugaltiosn make it more expensive to to launch hostile aqcuisitions, Hostile bids discipline managers The min. timeperiods give the target companys time But if you think target companies should have more authority, time, think this is good Under best price rules, bidders acqusition cost will be higher than it would otherwise Because of locking out price discrimiantion Summary Tender offer rules protect investors But make these types of transacitons more expeensive and thus less likely to happen On exam Need broad understanding at level of detail AD has described to us Should know File scheudle TO or 14d-9 File S-4 A few things about substantive rules above Question: when does an offer become a tender offer The satute doesn't say Just 5% or more Lots of cases on what is and isnt' a tender offer (won't be tested on this William test Looking for active and widespread soclitiation of compnay sharehodlers Premium Subsntail precentage Fixed terms Open only for limited time Make public announcement Regulation of third Party Tender Offers Rule 14d-10: The Impact of the SEC's Best Price Rule David Grinberg and Gordon Baca, A comeback for Tender Offers (Merger and Acquistions March 2007) Tender Offers' advantages Speedy Process Direct offer to Sahrehodlers Telescoping control Elimianting appraisal rights Uncerntainty under the Old Rules The SEC's Best-Price Rule Amendments The Amendments Lasting Impact CMCMA 318-325, 394-401 Federal Law Regulations 14D and 14E Rule 14d-7 Additonal Withdrawla rights Rule 14d-8/ Exemption from statutory pro rate requriemtns Rule 14d-10. Equal treatment of security holders Rule 14d-11 Subsequent offering period Rule 14e-1. Unlawful Tender Offer practices Rule 14e-5. Prhobiting Purcahses outside of a tender offer Notes and Questions Expanded withdrawal rights under Rule 14d-7 Expanded proration rights under rule 14d-8 Best price and all-holders rules under Rule 14d-10 Minimum offering periods under Rule 14e-1 Prohibition on purchasing outside the tender offer under Rule 14e-5 Subsequent offering periods under Rule 14d-11 Purposes of substantive restricitons on terms of tenders Disclosure of withdrawla rights, proration rights, etc State law DGCL 203 Business Combinations with Interested stockholders

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 Designed to impede hostile acquistiions Makes it more difficult for hostiel acqusitions to succeed or make the transacitosn less attractive (a): bans business combidnations between a corporation and interested stockholder, unless Period board approval of business combination or the transaction by which the stockholder became an interested stockholder Interested stockholder to own 85% of the shares of the subject compnay Exclduing shares held by directors, officers, employee share plasn 2/3 vote of disinterested shares (c)(5): Intersted stockholder: owns 15% or more of a copraotion except for certain stockholders grandfathered in or those who ended up with 15% stake thorugh no action of their own (company action (c)(9) Demed to own shares owned by affilaited firms, persons Also benficialy owned I.e. presumed to be an owner of all the stock you own, your affialtied companies own, and the stock that is imputed to you because of voting arraignemtns or similar arraignemtns that amount to 15% of a corproatiosn otustanding stock What is this designed to do Make hostile transactions less attractive by bannign business comibndations Most applicable business transaction:freezeout To do hostile take over, usually impossible to get 100% of all the shares So have to effectuae a freezeout to get to 100% Eitehr by freezing minority sharoedlers out of business in direct merger Or subsidiary merger Merge into new subsidiary or merge subsidiary into target corproaiton Target serves - reverse Acqusition subsidiary survies - forward Can also do an asset deal Have bidder copany form subsidiary that busy all the assets of the target compnay Then liquidate target compnay Stock transaction Reverse stock split-> Amend company charter Specify that a number of otustanding shares will be converted into shares of newly issued stock And those receiving an insufficent amount of shares will be given cashh Set the ratio so everyone but bidder company has less than a full share coming their way Thus they all get cashed out So 203 is making it difficult to effecutate a freezeout transaction giving you 100% control for 3 years Why companies want to do freezeouts? Costly to own a company that is publicly traded Want to get rid of minority free riding Get rid of minority sharhoelders ability to free ride on improvements bidder company is giving Spend less time worrying about fiduciary duties of minority sharehodlers c(3): how business combination is defined (i)Mergers and consolidations involving interested stokcholder or majroity owned subsisiary (ii)Asset sales Bans the type of freezeout transaciton where you create a subsidiary and buy the target co's assets and put them in that subsidairy 10% threhsold for assets Msut be 10 percent or more of market value assets of corpo (iii) and (iv) get at toehr ttransacitons Like reverse stock split (v) bans any agreement with intersted stockholder for benefits i.e. like allowing security itnerst toin company assets with a bank for lons Thus can't use asstets as security/collateral for loans Thus a secured creditor -at the front of the line While if used equity as collateral - at the end of the line
Ways to get out of 203 beyond 3 exceptions in (a) (b)(1) Can opt out in original certificate of corpaotion b(3) - shareholder approval to opt out But not effective for 12 months after charter ammendment And doesn't apply to transactions with interested stockholders who became so before the charter ammendment So you can't gain control and then ammend to get a 1 year ban b(4) - be a privately held corporation b(5) people who become interested stokcholders inadvertently They must immediately take steps to rectify this sitution How much of a detterent is 203 if there are these ways out? If hostile, won't have prior board approval Hard to iwn proxy constest by hostile bidder

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 Hard to iwn proxy constest by hostile bidder And even harder if staggered board Could try to get injunciton saying board of directors in place is vioalting its fiducairy duties by refusing to consider transaction and remove antitakeover But courts reluctant to go this route Could get 85% of shares But very diffiuclt to get 85% in public company tender offer Because going to have large number of shareholders opposed to you b/c officer, directors, employees, and people who don't even know they own the shares 2/3 vote of disinterested shares All shares eligible to vote So if sharehodlers aren't paying attention, will have a ahrd time getting them to vote The 85% threhsodl excludes managers, directors, the 2/3 vote does not From perspective of acquirer 203 is not an easy thing to overcome Best thing you can do is to convince the board that the transaction is in their best interest and they should approve the transaction by waiving 203 and waive their poison pill provision Notes Delaware GCL 203 explained The meaning of "Business Combination" and "interested Stockholder" The impact of Del. GCL 203's ban on business combinations with nterested shareholders Exemptions from the requiremtns of DGCL 203.
Reports by persons acquiring more than five per centum of certain classes of securities 1. Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is registered pursuant to section 12, or any equity security of an insurance company which would have been required to be so registered except for the exemption contained in section 12(g)(2)(G), or any equity security issued by a closed-end investment company registered under the Investment Company Act of 1940 or any equity security issued by a Native Corporation pursuant to section 1629c(d)(6) of Title 43, is directly or indirectly the beneficial owner of more than 5 per centum of such class shall, within ten days after such acquisition, send to the issuer of the security at its principal executive office, by registered or certified mail, send to each exchange where the security is traded, and filed with the Commission, a statement containing such of the following information, and such additional information, as the Commission may by rules and regulations, prescribe as necessary or appropriate in the public interest or for the protection of investors-A. the background, and identity, residence, and citizenship of, and the nature of such beneficial ownership by, such person and all other persons by whom or on whose behalf the purchases have been or are to be effected; B. the source and amount of the funds or other consideration used or to be used in making the purchases, and if any part of the purchase price is represented or is to be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, or trading such security, a description of the transaction and the names of the parties thereto, except that where a source of funds is a loan made in the ordinary course of business by a bank, as defined in section 3(a)(6), if the person filing such statement so requests, the name of the bank shall not be made available to the public; C. if the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which such persons may have to liquidate such issuer, to sell its assets to or merge it with any other persons, or to make any other major change in its business or corporate structure; D. the number of shares of such security which are beneficially owned, and the number of shares concerning which there is a right to acquire, directly or indirectly, by (i) such person, and (ii) by each associate of such person, giving the background, identity, residence, and citizenship of each such associate; and E. information as to any contracts, arrangements, or understandings with any person with respect to any securities of the issuer, including but not limited to transfer of any of the securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or guaranties of profits, division of losses or profits, or the giving or withholding of proxies, naming the persons with whom such contracts, arrangements, or understandings have been entered into, and giving the details thereof. 2. If any material change occurs in the facts set forth in the statements to the issuer and the exchange, and in the statement filed with the Commission, an amendment shall be transmitted to the issuer and the exchange and shall be filed with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 3. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a "person" for the purposes of this subsection. 4. In determining, for purposes of this subsection, any percentage of a class of any security, such class shall be deemed to consist of the amount of the outstanding securities of such class, exclusive of any securities of such class held by or for the account of the issuer or a subsidiary of the issuer. 5. The Commission, by rule or regulation or by order, may permit any person to file in lieu of the statement required by paragraph (1) of this subsection or the rules and regulations thereunder, a notice stating the name of such person, the number of shares of any equity securities subject to paragraph (1) which are owned by him, the date of their acquisition and such other information as the Commission may specify, if it appears to the Commission that such securities were acquired by such person in the ordinary course of his business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer nor in connection with or as a participant in any transaction having such purpose or effect. 6. The provisions of this subsection shall not apply to-A. any acquisition or offer to acquire securities made or proposed to be made by means of a registration statement under the Securities Act of 1933; B. any acquisition of the beneficial ownership of a security which, together with all other acquisitions by the same person of securities of the same class during the preceding twelve months, does not exceed 2 per centum of that class; C. any acquisition of an equity security by the issuer of such security; D. any acquisition or proposed acquisition of a security which the Commission, by rules or regulations or by order, shall exempt from the provisions of this subsection as not entered into for the purpose of, and not having the effect of,

Exchange Act 13(d); 14(d); 14(e) (i.e. the Willimas Act) 13(d)

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subsection as not entered into for the purpose of, and not having the effect of, changing or influencing the control of the issuer or otherwise as not comprehended within the purposes of this subsection.
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14(d)
a. Tender offer by owner of more than five per centum of class of securities; exceptions 1. It shall be unlaw ful for any person, directly or indirectly, by use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, to make a tender offer for, or a request or invitation for tenders of, any class of any equity security w hich is registered pursuant to section 12, or any equity security of an insurance company w hich w ould have been required to be so registered except for the exemption contained in section 12(g)(2)(G), or any equity security issued by a closed-end investment company registered under the Investment Company Act of 1940, if, after consummation thereof, such person would, directly or indirectly, be the beneficial owner of more than 5 per centum of such class, unless at the time copies of the offer or request or invitation are first published or sent or given to security holders such person has filed w ith the Commission a statement containing such of the information specified in section 13(d), and such additional information as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. All requests or invitations for tenders or advertisements making a tender offer or requesting or inviting tenders of such a security shall be filed as a part of such statement and shall contain such of the information contained in such statement as the Commission may by rules and regulations prescribe. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors, and shall be filed w ith the Commission not later than the time copies of such material are first published or sent or given to security holders. Copies of all statements, in the form in w hich such material is furnished to security holders and the Commission, shall be sent to the issuer not later than the date such material is first published or sent or given to any security holders. 2. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a "person" for purposes of this subsection. 3. In determining, for purposes of this subsection, any percentage of a class of any security, such class shall be deemed to consist of the amount of the outstanding securities of such class, exclusive of any securities of such class held by or for the account of the issuer or a subsidiary of the issuer. 4. Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request or invitation for tenders shall be made in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 5. Securities deposited pursuant to a tender offer or request or invitation for tenders may be withdrawn by or on behalf of the depositor at any time until the expiration of seven days after the time definitive copies of the offer or request or invitation are first published or sent or given to security holders, and at any time after sixty days from the date of the original tender offer or request or invitation, except as the Commission may otherwise prescribe by rules, regulations, or order as necessary or appropriate in the public interest or for the protection of investors. 6. Where any person makes a tender offer, or request or invitation for tenders, for less than all the outstanding equity securities of a class, and where a greater number of securities is deposited pursuant thereto within ten days after copies of the offer or request or invitation are first published or sent or given to security holders than such person is bound or willing to take up and pay for, the securities taken up shall be taken up as nearly as may be pro rata, disregarding fractions, according to the number of securities deposited by each depositor. The provisions of this subsection shall also apply to securities deposited within ten days after notice of an increase in the consideration offered to security holders, as described in paragraph (7), is first published or sent or given to security holders. 7. Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for pursuant to the tender offer or request or invitation for tenders whether or not such securities have been taken up by such person before the variation of the tender offer or request or invitation. 8. The provisions of this subsection shall not apply to any offer for, or request or invitation for tenders of, any security-A. if the acquisition of such security, together with all other acquisitions by the same person of securities of the same class during the preceding twelve months, would not exceed 2 per centum of that class; B. by the issuer of such security; or C. which the Commission, by rules or regulations or by order, shall exempt from the provisions of this subsection as not entered into for the purpose of, and not having the effect of, changing or influencing the control of the issuer or otherwise as not comprehended within the purposes of this subsection.

a. 14(e)
a. Untrue statement of material fact or omission of fact with respect to tender offer It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.
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b.
Exchange Act Rule 14d-4(d)(2)
14d-4Publication of changes and extension of the offer. 1. If a tender offer has been published or sent or given to security holders by one or more of the methods enumerated in paragraph (a) of this section, a material change in the information published or sent or given to security holders shall be promptly disseminated to security holders in a manner reasonably designed to inform security holders of such change; Provided, however,That if the bidder has elected pursuant to Rule 14d-5 (f)(1) of this section to require the subject company to disseminate amendments disclosing material changes to the tender offer materials pursuant to Rule 14d-5, the bidder shall disseminate material changes in the information published or sent or given to security holders at least pursuant to Rule 14d-5. 2. In a registered securities offer where the bidder disseminates the preliminary prospectus as permitted by paragraph (b) of this section, the offer must remain open from the date that material changes to the tender offer materials are disseminated to security holders, as follows: i. Five business days for a prospectus supplement containing a material change other

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i. ii. iii. iv.

than price or share levels; Ten business days for a prospectus supplement containing a change in price, the amount of securities sought, the dealer's soliciting fee, or other similarly significant change; Ten business days for a prospectus supplement included as part of a post-effective amendment; and Twenty business days for a revised prospectus when the initial prospectus was materially deficient.

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Problem Sets
Problem Set #3 A Corp and T Corp, both publicly traded Delaware corporations, have announced that they have entered into a merger agreement pursuant to which A Corp will acquire T Corp in a reverse subsidiary merger in exchange for A Corp stock. A Corp and T Corp have announced that the merger agreement will be submitted to their shareholders for approval. HB Corp would like to acquire A Corp but not T Corp. 1) As a first step toward its acquisition of A Corp, HB Corp plans to immediately acquire 8% of A Corps shares in open market purchases. Does HB Corp have to give the SEC prior notice of these purchases? i. No prior notice, but must give notice after acquirign by filing Sechudle 13D within 10 days of acquriing, b/c of 13(d) rqeuriemtn to file after crossing 5 percent threshold ii. Once cross 5% threhold must file scheudle 13D within 10 days 2) Suppose HB Corp wants to launch a cash tender offer for any and all of A Corps shares. Does HB Corp have to pre-clear the tender offer with the SEC? i. Don't need to clear, just need to file scheudle TO on day you start tender offer(they don't need to be made effective) 14(d) 3) Suppose instead of a cash tender offer, HB Corp wants to launch an exchange offer pursuant to which it offers its stock in exchange for A Corp stock. Does this exchange offer have to be pre-cleared with the SEC? i. Yes, have to register the distribution of shares under section 5 of '33 act A. S-4 for exchange offer ii. With tender offers can distirubte things to SEC and target sharheolder on he same day iii. But with exchange offer must remain open till SEC declares effective A. Thus can commence offer the same day you maek the filing B. But can't actually purcahse the shares till SEC declares registartion statement effective C. Would have to keep open if any deficines 4) HB Corp would like to announce publicly that it plans to launch a cash tender offer for A Corp at $85 per share even though it has not yet prepared all of the required tender offer filings. Can HB Corp make such an announcement? i. yes, 14(d)(2) - can make precommencemnt announcemtns A. Thus not prohbitied about telling public about your intetniosn to go hostile ii. However, the securiteis laws will go after you if you make fraudulent statemetns A. Thus must actually have intent to make tender offer iii. If communication in writing, must file and it must icnlcude legend isntructing sharheodlers to read Scheudle TO once avaialble 5) If HB Corp launches a cash tender offer, how long must it stay open? i. Must stay open for minimum of 20 days, ruel 14e-1 (a) ii. 14d-11 allows to stay open longer for subsequent offerigns 6) After HB Corp commences its tender offer for A Corp, another corporation makes a competing tender for A Corp. What effect does the competing offer have on the period during which HB Corps tender offer is required to stay open? i. No direct effect, ii. i.e. third party interloper wants to by A corp (like time warner case) A. No effect, no rule must keep open longer 7) May a shareholder who has previously tendered to HB Corp withdraw her shares and tender them to the other party? i. As long as offering period is open, may withdrawal - see 14d-7 (a) A. See also 14(d)(5) - withdrawal within 60 days of initial offering 8) Assume HB Corps tender offer is for 75% of A Corps outstanding common shares. What would happen if 90% of A Corps shares were tendered to HB Corp, but HB Corp was only prepared to purchase 75%? i. Securities broguth up por rata, according ot number of securities depsoited by each depositor during the time the offer was open (rule 14d-8) 9) While HB Corps tender offer is open (offer price of $85), HB Corp is approached by Big Investor, an A Corp shareholder, with an offer by Big Investor to sell to HB Corp all of Big Investors A Corp shares for $90 per share. Can HB Corp purchase Big Investors shares on these terms? i. No, 14e-5 prhobihibts prucahses outside of a tneder offer and must pay all security holders the highest consdieration paid to any other secuirty holder during such tender offer 10) After HB Corp launches its tender offer, does A Corps board have any obligations with respect to the tender offer? i. Target companies must file schedule 14d-9 within 10 business days of commencement of the tender offer ii. Well, actualy, requried to make disclsoures about this (I think) because of material change A. So will have to put this on proxy statement and shits B. 10b-5 iii. Also fiduciary duties of board members may require hat they consider whether or not to recommend this bid Problem Set #4 A Corp and T Corp, both publicly traded Delaware corporations, have entered into a merger agreement and are about to submit the agreement to their shareholders for a vote. HB Corp launches a hostile tender offer for all A Corp shares at a price of $85 per share, a substantial premium over the pre-tender offer market price of A Corps shares. HB Corp intends to follow the tender offer with a freezeout merger. 1) Are there any restrictions in Delaware corporate law on HB Corps ability to effectuate the freezeout merger? i. 203 blocks the merger between a corporation an an 'interested stockholder' for 3 years A. Unless i) board approved before becoming interested stockholder ii) Or Stockholder owns at least 85 percent of the stock One. Here- looks like trying to buy all the stock, so this should be okay iii) Business combination approved by board and 2/3 of voiting stock not owned by interested stockholder

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owned by interested stockholder B. ii. Short term merger issue? 2) Assume that, as a defensive reaction and with the consent of T Corps board, A Corp makes a tender offer for any and all T Corp shares, to be followed by a freezeout merger. Are there any Delaware corporate law restrictions on A Corps ability to effectuate the freezeout merger? i. 203 also blcoks this, again, unless exemptions above are met, so here, with board approval should be okay A. More likely here could effectuate a freezeout, because this is a friendly transaciton _ >just need T Corp board to approve transaction

The Williams Act (Regulation of Tender Offers)

Applies to publicly traded securities, which means an equity security that is part of a class that must be registered under the 1934 Act because the class is listed for trading on a national securities exchange or issued by a company with more than 500 shareholders of record and 10 million in assets. Policy The Williams Act hopes to give target shareholders more information and time to help them make a decision and to keep them from being coerced, but the flip side is that it increases Transaction Costs and possibly deters many value-creating transactions because acquirers do not want to incur the cost and hassle of a TO. Stock transactions bypass board of directors and do not require shareholder vote o Thus are particularly attractive in the hostile takeover context Williams Act slowed down tender offers by requiring more disclosure and regulating the form and manner of tender offers Amended Securities and Exchange Act of 1934 Acquirer usually makes a toehold purchase: make purchase under 5% before you commence your bid. Open market price usually cheaper. Acquirer company has rights to fiduciary duties w/ respect to lawsuits alleging breach of fiduciary duty for refusal of Target. Once cross 5% threshold will buy as much as can in the open market over the next 10 days before required to file Schedule D. 14(d) disclosure before the purchase, regulated terms of TO 13(d) disclosure w/i 10 days after purchase Williams Act TO Anti Fraud ALL TOs prohibits material misstatements, omissions, and fraudulent practices during tender offer, regardless of whether Target is a 34 reporting company Acquiring more than 5% - 13d and Regulation 13 Designed to provide an early warning that there is someone out there who has more than a passing interest in the company and has started to acquire significant amounts of stock Trigger Rule 13d-1 and filing of Schedule D Anyone who acquires more than 5% of voting stock is required to make disclosures w/I 10 days of the transaction that causes them to pass the 5% level. Identifies Schedule 13D as the required disclosure form. o Item 1 Security and Issuer; Item 2 Identity and Background; Item 3 Source and Amount of Funds or Other Consideration; Item 4 Purpose of Transaction; Item 5 Interest (percentage) in Securities of the Issuer; Item 6 Contracts, Arrangements, Understandings or Relationships w/r/t Securities of Issuer (target management). Recipients - SEC, Issuer of security, exchanges where security is traded. SHs can access disclosure through the SEC website Frequency Rule 13d-2 Statute not only applies to the first acquisition that takes place above the 5% threshold, but also to every material increase or decrease >1% thereafter until drop down below 5%. Must file an amendment. Exemptions no control intentions or creeping acquisitions (acquiring 2% per year) o Creeping acquisitions acquire less than 2% per year o No control intentions - 13d-1(b) (institutional investors) & 13d-(c) (non-institutional investors) can file on Schedule 13G (name & # of shares owned), provided they acquire the securities without any control purpose Rule 13d-3 Defines beneficial ownership broadly to be the person who has voting power or investment power w/r/t a security Rule 13d-5 Defines acquisitions broadly to include when someone is appointed to a position that has beneficial ownership of a security or when two or more such owners form a group. o Cant get around Rule 13d requirements by having group of affiliates purchasing less than 5% and pooling them Tender Offer Regulation under 14(d) & 14(e) & Regulation 14D Securities laws are concerned first and foremost w/ disclosure, but Williams Act also contains substantive regulation as to the form that Tender offers can take. Differences w/ 13(d) o 14(d) requires disclosure before any purchases are made 13(d) disclosures are made after the triggering event o 14(d) & 14(e) extend beyond disclosure to substantive regulation controlling the terms of the tender offer. Designed to ensure that target shareholders have the info necessary to respond to tender offers, and that target shareholders can consider this information, and make their decisions, free from undue time constraints and other pressures Disclosure Regulation of Third Party Tender Offers Purpose to make sure that the SEC and the issuer are made aware of all TOs made on the target cos securities. Definition of Tender Offer has been left to the courts going to assume that any public offer made to the shareholders of a public company in which the acquirer would like to buy a set percentage of targets shares. Consideration can be cash, stock, both. (cash tender offer or exchange offer) Commencement of offer 14(d)(1) triggered when tender offer is commenced for a class of securities registered under 1934 Act (public co.) if the acquirer will be the beneficial owner of more than 5% of the class of stock. o Timing - Disclosures must be made when the offer is sent to stockholders. If put in newspaper announcing your intention to commence a tender offer, this is not a commencement unless you give means by which security holders can tender their shares. Allows companies to announce their intentions before they have begun tender offer process Pre-Commencement Communications must be filed w/ SEC and have a legend that says more formal offer w/ means to tender is forthcoming o Reg 14 D - Rule 14d-2 commencement when first published, sent or given the means to tender to security holders. If TO is not commenced, there is no disclosure obligation

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 If TO is not commenced, there is no disclosure obligation Press conference, ad, etc. is not the commencement; must give instructions to target shareholders. If written pre commencement announcements are filed w/ SEC & contain legend that instructions and disclosures are forthcoming, they are OK Beneficial Owner - Cant evade by having various individuals purchase < 5% Information must file Schedule TO: Item #1: summary term sheet: easy to read doc tell typical security holder all the info he needs to make a decision. Items #2-12: more info about the bidder, background/history of bidder, terms of transaction, past transactions b/w target & bidder, history of negotiations, bidders plans for target, etc. o Reg 14 D - Rule 14d-3 filing once commenced, an acquirer is required to file a tender offer statement with the SEC using Schedule TO SEC thinks it is good to know about the bidder b/c stockholders who dont tender could be left w/ the bidder Schedule TO gives a lot of detailed info about the transaction and the bidder so that SHs can make a decision about whether or not to tender Recipients - Must also send a copy to the SEC and to the issuer whose securities are the subject of the tender offer (i.e. Target) o Reg 14D - Rule 14d-4, -5, -6 dissemination of information in the acquirers Schedule TO to target shareholders Most common method to distribute information is the summary publication method. Publish in newspaper of national circulation. Must identify (1) target & acquirer; (2) material terms of the TO; (3) whether purpose is to acquire control; (4) instructions on how to obtain acquirers TO materials. Targets Response (see below) 14(d)(4) target must disclose in accordance with SEC rules if going to recommend that shareholders accept, reject the tender offer, or have no opinion. Must file Schedule 14D-9 Exemptions - 14(d)(8) o Creeping Tender Offer: tender offers that are <= 2% of a class of equity securities within a 12-month period. *just like creeping acquisitions Cash TOs v. Exchange TOs o Exchange Tender offers must comply with disclosure under 1933 Act and 14(d) (because issuing securities) Information in Form S-4, and also in Schedule TO o Cash TO can be consummated as soon as 20 day offering period passes. The SEC may not be able to declare an Exchange TO effective faster than a cash TO can close. Modern rule is that dont have to wait until effective registration to commence Exchange TO, but cant close TO until it is declared effective. Disclosure Obligations of Targets in Third Party Tender Offers Target must make Recommendation - Rule 14e-2 requires the Target to make a recommendation to SH w/r/t the TO within 10 business days after the offer is commenced. If target changes its position, this must be promptly conveyed to SHs o Applies to all TOs, not just those covered by 14(d) (TO of publicly traded securities resulting in 5% ownership) Schedule 14D-9 - Rule 14d-9 target must disclose to the SEC, acquirer and targets shareholders the information required by Schedule 14D-9 (analogous to Schedule TO) o Potential conflicts (e.g. if managers have something to gain from transaction) o Recommendations w/ reasons o Disclosure of negotiations for alternatives to offer: merger, sale of assets, etc. *dont have to disclose terms until agreement in principle is reached Exemption Dont have to file unless acquirer has commenced its offer. This means that both target and acquirer can communicate freely about the offer w/o filing before the acquirer commences offer. Substantive Regulation of Third-Party Tender Offers Purpose is largely to ensure that target shareholders can consider the required disclosures of acquirers and targets free from time and other pressures. Withdrawal rights - 14(d)(5) - provides for, and refer to the ability of target shareholder to secure the return of shares previously tendered to the acquirer pursuant to the acquirers letter of transmittal or otherwise. o Statute gives option w/I first 7 days o Rule 14D-7 withdrawal rights run concurrently w/ the entire period of the TO o Gives target shareholders the chance to consider and reconsider the offer, and to prevent the acquirer from holding tendered securities for more than sixty days without purchasing them under the offer o Subsequent Offering Periods: Clean ups or Mop ups Rule 14d-11: Functions as an exception to withdrawal rights. An acquirer is allowed to provide for a subsequent offering period of three to twenty days following the expiration of an initial offering period of at least 20 days, without having to provide any withdrawal rights during the subsequent offering period, provided that: 1. The acquirer immediately accepts and pays for all shares tendered during the initial offering period; 2. The initial offer was for all the outstanding securities of the class sought; 3. And the acquirer offers the same consideration in the same consideration in the subsequent offering period as in the initial offering period and pays promptly for all securities as they are tendered. Acquirers can conduct mop up operations following a successful tender offer without having to afford those who tendered into the original offer the change to change their minds and withdraw their shares This allows shareholders who oppose the tender offer the chance to sell immediately after the offer instead of months later during a freeze out I.e., lowers the cost of shareholder resistance SEC requires that acquirer state whether it will provide a subsequent offering period in its Schedule TO, in the summary advertisement, and in the tender offer materials provided to shareholders. Proration rights - 14(d)(6) - w/I the first 10 days after TO materials have been sent to target shareholders or 10 days after a price increase, acquirer must purchase shares on a pro-rata, rather than a first-come, first-serve basis o Occurs when TO for less than 100% of outstanding shares. o Rule 14D-8 - proration rights remain open for the entire period the TO is open, not just the first 10 days. o Effect to prevent coercion of shareholders before they have had time to consider the

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o terms of the offer Best price rule - 14(d)(7) - acquirer is required to pay the same price to all security holders who tender their shares into the offer, regardless of the price of the bid at the time the security holder first tendered. o Rule 14D-10 doesnt substantially differ o Must pay the price that is paid to the marginal shareholder SEC has promulgated many regulations to extend these rules o All Holders Rule Rule 14d-10(a)(1) TO be open to all security holders of the class of security holders to which the TO was made. Cannot selective buy shares. o Minimum Offer Periods 20/10 Rule 14E-1 must remain open for a minimum of 20 business days. Rule 14E-1(b) requires a 10 day extension if any of the substantive terms of the TO are changed. (price or % ownership request of TO) o No Side Agreements Rule 14E-5 if you have TO open, you can only purchase shares through the tender offer. Leaks & Abnormal Stock Activity NYSE rules are similar to the SEC rule, need to give an explanation. If there is a leak of merger deal; fairness requires that the company make a disclosure as soon as the information is disclosed to outsiders SEC Rules say that if there is abnormal stock activity, you must give a public explanation as to what is going on Bottom Line: You have an affirmative disclosure requirement pursuant to the SEC and NYSE rules, so try to contain leaks by moving fast, like over the weekend. Also you may not be able to keep your merger secret even if you want to b/c of the SEC and NYSE rules if the news leaks into the market. If the news leaks, cant keep merger secret.

DGCL 203 Business Combinations w/ Interested Stockholders

Business Combination Statutes require a person to get permission from the board or shareholders in order to vote their shares Fair Price Statutes require company to pay the same price to shareholders if there are two separate tender offers. For the final, know what a fair value statute is, and know that Pennsylvania has one. See Conrail Case DGCL 203 Discourages Freeze Out mergers. Therefore, hostile TO are conditioned by a waiver of 203 protections by target BOD, or a judicial determination that 203 does not apply Subsection (a) purports to bar business combinations between a corporation and an interested shareholder for three years unless one of three conditions holds: 1. prior to the date that the interested stockholder becomes an interested stockholder, the board approves (1) the business combination that will occur w/i three years, or (2) the transaction in which the stockholder becomes an interested stockholder 2. upon consummation of the transaction that results in a stockholder becoming an interested stockholder, the stockholder owns at least 85 percent of the outstanding voting stock at the time the transaction commenced, excluding certain shares owned by directors and employee stock plans 3. the business combination is approved by the board and by two-thirds of the voting stock that is not owned by the interested stockholder a. this can be done after the shareholder becomes interested, dont need prior BOD approval Exemptions (b) 1. Opts out in Charter 2. Charter or Bylaw Amendment - Corporations shareholders that have opted out in their charter or through bylaw amendments a. If charter amendment, not effective until 12 months after amendment i. Does not apply to SH who became interested prior to the amendment (prevents SH from acquiring control and then amending Charter) b. If bylaw amendment, board cant further amend 3. Closely held corporations Not listed or stock held by fewer than 2000 people 4. Inadvertent - Stockholders who become interested by mistake and promptly take action to correct the mistake, i.e. divest shares will not count toward three year ban 5. Grandfathered stockholders Interested stockholder - (c)(5) includes any person who owns 15 % or more of the outstanding voting stock of the corporation; includes beneficial ownership, (i.e., the right to acquire, the right to vote, stock over which can exercise control due to an understanding w/ a third party, etc.) OR, was an affiliate or associate of the corporation and owner of 15% or more of the voting stock w/i three years prior to determination of whether or not interested Affiliates or Associates Person is deemed to own shares held by affiliates and associates sister firms, parent firms, subsidiary firms, and firms where person is director officer or partner o Associate also includes any companies with who you own 20% or more of stock; trusts in which you have 20% or more beneficial interest or where you serve as trustee; or any relative or spouse who shares the same residence. Imputed Ownership 15% also includes stock beneficially owned, has right to acquire, vote or has agreement or understanding regarding the acquiring, holding voting or dispensing of stock. Business combination (c)(3) (i) Freeze Outs - mergers or consolidations with any majority owned subsidiary. Prevents 2 step freeze out mergers (acquirer gains control then effectuates merger). However if you are able to get prior BOD approval, or get to 85%, which is hard, or 2/3 vote of non-interest SHs, but these people didnt tender in the first place (ii) Asset Deals Sales or transfers of assets to interested SHs unless the aggregate market value of assets is less than 10% of the aggregate market value of the corp (all corps assets), OR the transfer of assets is part of a pro-rata transfer of assets to all SH. (iii) Transfer of Stock to Interested Stockholder & (iv) Increasing proportionate share of Interested Stockholders stake Any transaction that results in the increase of the interested SHs stake in the Target. Sock issuances form the Corp. to the interested SH. Preclude the interested SH from engaging in a transaction that would increase its interest in the Corp. (v) Pledges or Guarantees - Subordinating the creditors claims to the Interested Stockholders The Corp. cannot enter into pledges or guarantees for the interested SHs benefit. Limit hostile bidder ability to secure financing by using target assets as collateral (better than claim on securities, b/c collateral interest is senior to stock interest) Ways around 203 Friendly transaction Ask the BOD to waive 203 before you become an interested SH

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 Friendly transaction Ask the BOD to waive 203 before you become an interested SH Before become 15% shareholder, launch a preemptive proxy fight to replace the BOD so that the new BOD will approve the business combination As a shareholder, derivative suit against the board claiming they breached their fiduciary duties by not waiving 203, get injunction forcing them to accept the bid o Not very likely 85% of shares hard to do b/c lots of SHs arent paying attention 2/3 of disinterested shareholders who didnt tender, and old management shareholders; thus, is not likely

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Conrail Case Study

Wednesday, February 08, 2012 4:04 PM

Facts Oct 15 1996 Conrail and csx enter merger agreement One week later, Norfolk souther makes unsolicited 9.1 million dollar offer for Conrail Thigns to look at Structure of offers/ deals Questions Why did CSX want to buy Conrail

1. Why did CSX want to buy Conrail?

Conrail has attractive mk position Conrail's access to northeast market Combined business would have largest railroad in Eastern part of the US Macro issues - broader economy On exam - look to synergies between companies and considerations in braoder economy when asking why 2 companies might want to merge Here - deregualtion allowed larger mergers in railroad industry Conrail vulnerable Mediocre performance Inefficnet But highest revneues per track mile One exam - look at exhibits and other materials to talk about how company is positioned int eh market See exhibit 1 Revnue per mile of track, carload, etc Conrail also projected to grow quickly Overall revenue growth (CAGR) (1992-1995) Exhibit 3 Conrail - revnues go from 3.3 billion in 92, to 3.7billion in 1995 Compare with CSX and Norfolk southern (exhibit 5) See that overall revenue grew Cionrail 3.3% CSX 6.3% NS .4% Revenue just from Railway Onrail 3.3% CSX 2.8% NS 2.0% So conrail is growing faster (on just railroad revneu) than CSX and NS Synergies
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 Synergies Efficiency Back office activities CSX estimating 550 mm in cost savings 35% tax rate 357.5 m m in after-tax savings Concerns Are these accurate number How will these synergies be shared How much to target company shareholders i.e. how much of this will the target sahrehodlers be compensated for this How much will be retaiend by bidder co. Can amortize the yearly savigns to determine how much the synergies are worth over life of the company Market Share How acquirign Conrail will improve CSX's market position Market share will increase Combined enitty will have long haul, contiguious, low cost service across east, connect southern ports to northeast and midwest Will put NS at disadvtange Preempt Norfolk from mergerign with Conrail

Summary of arguemtns for merger Market strategy Operating efficiencies Defensive move to keep business out of hands of Norfolk Souther Why this is important to laywers Important for laywers to be able to apprecaite the things people are tlakingabout Clients want to know how far to push Investment bankers will lead this But you'll want to chime in based on legal strategy 2. How was the CSX-Conrail deal structured? Why do you thik CSX offered both cash and stock as consideration? i. Structure 1) Two tier offer exectuted in 3 stages a) Front-end- cash offer i) 2 stages One. 19.7 @92.50 Two. 22.3 % after sharehodler vote opting out of antitakeover First. Also at 92.50 b) Back end - merger of Conrail and CSX at exchange of remaining shares for CSX stock to merge i) Fixed exchange ratio 1.85619:1 ii. Why 1) Need to vote of shareholders for more than 19.9% purchase of company a) Better influence by purchasing 19.7% 2) Rule 14d-10 best price rule for tender offers a) These will be two sperate tender offers formally b) But two formally sepearte offers can be integrated by SEC i) Factors One. Single acquisition Two. Same class of securities Three. Are the offers made at or about the same time c) So Lawyers said not to bother
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Three. Are the offers made at or about the same time c) So Lawyers said not to bother 3) Also regualtory approval a) So wait till after before exchange for other 60% 4) Financing a) Trying to limit amount of debt 5) Concerns of Acquirer a) Concerned about dilution i) Are you going to make enoguh more money to make up for sharing earnigns with more equity holders ii) This makes you cautious about share issuance b) Balance sheet, i) Try to find optimal capital structure ii) CSX has debt/total cap = 36% iii) Conrail ahs debt/total cap = 42% iv) If Conrail is purcahsed just through cash, and assume the price paid is 89.07 One. Conrail's debt = 2,094 Two. +Csx's Debt 2,765 Three. +Acquisition Cost (borrowed) 8, 061 Four. -(Substract) Conrail's cash 33 Five. -CSX's cash 515 Six. Total debt left = Seven. CSX equity 4,815 Eight. Total cap 17,187 Nine. D/Tc = 72% v) But because of mixed transaction One. d/tc after = 45% c) As a general propsotion i) Target shareholders prefer cash

3. The initial CSX offer had a blended value of $89.07 per share. [1] How was that number derived? i. .6(CSx price x conversion ratio = 46.75 * 1.85619=86.77688) + .4(offer per share 92.50) 1) .6*(46.75 * 1.85619)+.4*(92.50)=89.06613 2) 18.5million ii. Back end: 1.85619 *(46.75)=86.77688 iii. Front end = 92.50(.4) iv. Note - why doesn't best price rule requrie back nd set at same price 1) Because back-end merger not a tender offer subject to williams act v. Why the higher offer for front end than back end 1) Induces shareholders to tender into front-end of offer 2) Front-end loading prevents sahroelders form free-riding, waiting not to tender till back end vi. Why not a direct merger 1) Tender offer is faster a) Merger requires sharehodler approval 2) Why is speed important here: a) Worried about interloper b) More shares they can get their hands on early, the better the chance of consumation

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4. Based only on the precedent transaction analysis appearing in Exhibit 6 of the A case, does $89.07 per share appear to be a fair price for Conrails shares? i. Offer price per sahre as a muliple of EPS 1) Mean of 17.22 a) CSX-Conrail = 18.14 ii. In valuation you'd rather look at lots of different things 1) Dcf, predent transaction analysis 2) Look at projected synergies a) And how much of this is given to target co. shareholders iii. Notes 1) Usually look at 4 week price average (of 4 weeks prior to annoucnemtn) to measure premium a) b/c word will leak out right before the annoucnement 2) Investment bankers, talking about valuations will be throwing a lot of numbers around iv. Basically - yes this is within the range, but on the low side 5. Why did Norfolk Southern make a hostile bid for Conrail? i. All the same things that make it attractive to CSX ii. Block acquisition by CSX 1) Or at very list bid up CSX to weaken combined CSX-Conrail 6. Would you vote to opt out of the Pennsylvania antitakeover statute if you were a Conrail shareholder?
How the statute works Penn's anti-takeover statue Designed to make hostile-take overs harder to happen Shareholders being asked to op-out of the Fair Value Statute Funcitons like appraisal rights statutes, but acquiring corporation has got to pay the appraised/fair value 25E (or PA Corporations law) If you are a controlling person or group, will be subject to this appraisal like action Applies to all control transactions Acqusition of person or group of status of controlling person or group Controlling person or group is someone with 20% or more voting power in corporation After occurance of control transaction -> all the remaining shareholders in corporation have right to demand fair value of corporation's shares i.e. must pay value in cash equal to the value you paid to acquire the 20% stake What makes this complicated: Must pay this in cash So if a lot of shareholders tyr to exercise, need a lot of cash -> lots of debt Value you paid to acquire 20% is just the floor Judge has discretion to add control premium Or jduge can request an appraisal proceeding to determine the value This will blow your deal up + cash + uncertainty
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determine the value This will blow your deal up + cash + uncertainty But only way to opt out is to Have company opt out in origianl articles fo incorpaotion Have shareholders ammend articles of incorproation for opt out So need board approval and approval of majority of sharheolders So even though 25E intended to stop hostile bids, but the way this is written, even friendly transactions fall into this Because not just board approval required, still need shareholder vote Compare delaware provision
Alicia davis Shareholders are thining about value and the certainity of the value What if you end up empty handed This is why Merger Arbs come in Experience in these ssorts of events Look at whats going on Regulation Litigation Yes Lots of hurdles to Norfolk deal being completed Need to terminate merger agreement - suspend poison pill, sharholders need to tneder a majority of shares, Norfolk had to arrange financing Staggered board- one and onehalf hyears to elect conrail directors Need to be comfortable that all these hurdles will be overcome Not cashed out of potnetial updside Reason to Premium over CSX's offer Initially 100 per share- 14.1% premium Worry - vote to opt out of antitakeover statute, CSX deal fall aparts and Norfolk Southern bid fails Results:
Sharehodlers did not opt-out, wanted bidding war to continue But then not allowed to negoitate with NS because of no talk STB came in and negotiated the transation CSX bout conrail for 115 dollars a sahre But had to split asssets with NS down the middle.

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Tax Considerations
Tuesday, February 14, 2012 2:27 PM

See slides and other materials on Ctools

I. Principal Tax Concerns a. T Corp i. Will it have to pay tax? ii. If so, how much? b. TC-SH i. Pay tax now or later (unless tax exempt)? ii. How much c. A Corp i. Obtain favorable tax attributes from transaction d. Note: i. We'll talk about taxable and non-taxable transactions 1) But T sharehodlers will always have to pay taxes, now or later, depending on when they want to book the gains II. Opporutnities for Tax Reduction a. In some cases, M and A transaction sprovide Tax reduction opportuntiies i. Depreciation tax shields- step up in basis folloiwng a purcahse transaction 1) BASIS= the cost of something you've purchases a) Basis of property usually eqquals to its costs b) Cost of asset + cost of improvments - depcriation/amortiziation (of intangible assets) = adjusted basis c) From viewq of sharholder i) Basis'(cost of stock) +salescommisison/expenses - nonsales distirubtion = adjusted basis d) Basis lets you know, if you sell that asset, how much you owe 2) Step-up in basis: can increase the basis in an asset for purposes of taxes a) Hypo: bought asset purcahsed for 100 dollars by target corporation, you purchase it for 200 i) 200-20/4years = 45 dollars a year deprciation b) Higher basis results in higher deprciation resutls in lower taxes ii. Goodwill- may be amortized over 15-year period: reduces after-tax cost of caqusition 1) Goodwill: how much you're paying beyond fair value for assets a) i.e. the value of having business togethr as a going concenr b) For tax purposes: allowed to amortize good will over 15 year period i) Look at purchase price - net assets of business= good will amount iii. Transfer of tax aattributes (e..g, NOL - net operating losses) - Transfer from T corp to A corp through merger or acqusition 1) Creates additional value if T Corp not able to take advatnage of these attributes by itself 2) i.e. under income tax rules, can carry back losses for 2 years or carry forward for 20 years to offset income in those periods and reduce tax payments III. General Overview of Options a. Taxable Sales i. No restrictions on type or amount of property that may be sold or received ii. Seller's gain or loss recognized immeidately (subject to exceptions) iii. Buyer's basis in newly acquired proeprty is equal to the price paid for it ("cost basis") iv. Seller's basis in proeprty received in exchange therefor is equal to FMV (Fair Market Value)
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iv. Seller's basis in proeprty received in exchange therefor is equal to FMV (Fair Market Value) b. Tax-Free reorganizatiosn i. Not viewed as a sale, but continuation of old investment ii. No transaction has "closed," so taxation should wait until future taxable event iii. Restrictions on (i) type and amount of property that mayb e sold or received and (ii) activites of parties before and after transaction iv. Seller's gain or loss deferred until future taxable dispostion v. Buyer's basis in newly acquired proeprty is equal to seller's basis prior to reorganization ("carryover basis") vi. Seller's basis in proeprty received in exchange therefor is equal to basis in proeprty exchanged ("subsittuted basis")

Taxable Transactions Referred to as "taxable" methods because TC_SH will have a taxable gain from the trasnaciton Consdieration is sbustitally cash or debt securities Structure (asset or stock) can result in very different tax consequences) All things being equal, the prucahse price for an asset purchase generally should be higher than the purchase price in s tock transaction Asset acqusition If assets are sold, there are tow levels of tax: First, T Corp is taxed on the oridnary gain
On Exam Identify whether a particular transaction will be tax free or taxable See second column on top taxfeatures summary But keep in mind tax owed by TC-SH in regards to any boot Form of transaction most advantageous given a set of preferences A corp wants positve tax attributes (like NOLs Goodwill and step-up? Good for acquirerer Why are certain tax features advantages or diasdantages for A cop Ste up in basis Increased dperciation expense Carry over basis Less attractive - doesn't offer same oportunity for increased dperciaiton - lower tax wbill Record goodwill Allows you to amortize - lessen tax hit NOL's Offset future taxable income of acquirer Idnetify tax advantages and isadvatges of various deal structures for A corp, T Corp, and TC-SH Use tax summary chart Look to see whether or not Double taxation Like in asset deals More Describe the sitautions in which T Corp would be most willing to engage in an asset sale Slide 12 Assets sold - dobule tax SLIDE 13 POSITIVE FOR a CORP -step up in basis Slide 15 and 16 The circumstances under which parties are most apt to use an asset purcashe as the trasnasction
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trasnasction Want sharehodlers out Shareholders want cash Step-up in basis T corp has losses or NOL's that can be used to fofset the taxable gains from the tranasction, mitigating the effect of the double taxation Describe what 338 and 338(h)(10 elecatios are and why they might be used See slide 28 338 As a matter of state corparotin law, purchase of stock but viewed as asset purcahse At least 80% of the stock Msut make election (both boards Engage in same situaitons you'd engage in asset deal T has NLO"s that will offset gain from sale of assets Slide 30 338(h)(10) Part of consoldiated group Likely to engage i Single level of tax Expect to see when acquiring stock of subidisairy corpaotion or S corp

A word now on accounting Only one method of accounting for transactions: Prior to 2001: central question: how do we structure this sransaction to gt favorable financial accounting reatiment If engaging in acquisition, acquirer is actually purchasing another corporation as result of an arms length bargain The purchase price hsould be equal to fair market value of corparotion's assets And if not - then acquirer must record goodwill This was good for A corp -lower taxable income, lower tax laiblity Old fiancnial accoutning rules Upon recordign good will, forced to amortize goodwill expense(amortized over period not to exceed 40 years) Amortization expense would reduce net income This earnings penalty could be avoided if parties structured transaction as one that didn't require Purchase accounting (recording Goodwill), but inesated use Poolin-in-inteests accounting Pooling-of-interest accounting (no GW) If no gw, no earnings peanlty from amoartization expense Assume one company didn't buy the toehr, act as if they'd always been together as a single entity Put balance sheets together withotu recordign good will To qualify Consideration had to be voting stock Voting stock of acquirer had to be exchagned for at least 90% of the stock of the target So this rule led to lots of stock and stock mergers- qualifying for pooling -of intersts Made cash, and tender offers less attractive b/c very diffuclt o obtain 90% of stock in a single transaction
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 b/c very diffuclt o obtain 90% of stock in a single transaction Freezing out transaction wouldn't qualify for pooling-ofinterest treament June 2001- all business combinations had to be accounted for via purchase accounting method No pooling-of-interests Everyone must record good will But you don't have to have annual maortization of good will No longer mandaotry Does away with earnigns penalty But corps requried to conduct, once a year, atest for impariment, to see if they should write down the value by which they were carryign the acquired busienss ont eh balance sheet Change in busness climate Loss of key executive Adverse action by reuglar New compeitor Must write down the value of the business for the balue fo the impairment Still not as psotiive of pooling of inteststs (didn't have to worry about writing down gw at all)

Tax Considerations
For the Final Exam, you should be able to: o Identify whether a particular transaction will be tax-free or taxable If it is not an A, B, or C Reorganization, it is a taxable transaction o Discuss the form of the transaction that would be most advantageous given a set of preferences o Describe why certain tax features are advantages or disadvantages for A Corp (e.g. step up in basis, carryover basis, ability to record goodwill, NOLs) o Identify the tax advantages and disadvantages of various deal structures for A Corp, T Corp and TC SH See Appendix o Describe the situations in which T Corp would be most willing to engage in an asset sale If there are NOLs, these would allow T Corp to not take a hit on Double Taxation from Asset Sale o Describe what a 338 and 338(h)(10) elections are and why they might be used. Overview & Types of Transactions Tax Reduction Opportunities from M&A activity o Increase in deductible expenses Depreciation tax shields Step up in basis following a purchase transaction Increase in the cost for an asset, thus allows for an increase in the depreciation expense Goodwill may be amortized over 15-year period; reduces after-tax cost of acquisition o Transfer of tax attributes (e.g. NOLs) Transfer from T Corp to A Corp through merger or acquisition Creates additional value if T Corp not able to take advantage of these attributes by itself T Corps Net Income is negative; these losses can be used to offset gains from the acquirer
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 General Overview of Options o Keep in mind the following definitions in tax terminology: Realized refers to when the transaction takes place Recognized when the tax effects take place; whether you have to pay taxes now o Taxable Sales No restrictions on type or amount of property that may be sold or received Sellers gain or loss recognized immediately (subject to exceptions) Buyers basis in newly acquired property is equal to the price paid for it (cost basis) Sellers basis in property received in exchange therefore is equal to FMV o Tax-free Reorganizations (Tax Deferred Deals) Not viewed as a sale, but a continuation of old investment Just moving T-Corps shares around No transaction has closed, so taxation should wait until future taxable event Restrictions on (i) type and amount of property that may be sold or received and (ii) activities of parties before and after the transaction Sellers gain or loss deferred until future taxable disposition Buyers basis in newly acquired property is equal to sellers basis prior to reorganization (carryover basis) Sellers basis in property received in exchange therefore is equal to basis in property exchanged (substituted basis) o Tax Considerations What is Most Tax Efficient for A Corp May Not Be the Most Tax Efficient for T Corp or TC-SH o Taxable Transactions Referred to as taxable methods because TC-SH will have a taxable gain from the transaction Consideration is substantially cash or debt securities All stock deals are probably not taxable Structure (asset or stock) can result in very different tax consequences All things being equal, the purchase price for an asset purchase generally should be higher than the purchase price in a stock transaction. Asset purchase, Stock purchase, Statutory Merger / Consolidation, Triangular mergers (both forward & reverse subsidiary mergers) Taxable Asset Acquisition If assets are sold, there are two levels of tax: o First, T Corp is taxed on the (ordinary) gain from selling assets (based on the difference in the depreciated tax book value of the sold assets and the sum of the purchase price and the liabilities assumed) Corp Tax o Second, TC-SH are taxed on the gain from liquidating T Corp (based on the difference b/w the tax basis of the TC-SH stock and the amount of the liquidating distribution (i.e. cash)) Individual SH Tax Buying T Corp assets results in step-up in tax basis of the assets purchased to the sum of the purchase price and the assumed liabilities o Higher future depreciation/amortization deductions for A Corp o Less future income tax If T Corp has valuable tax attributes such as NOL carryforwards, these are lost if assets are purchased T Corp NOLs can be used to offset gain at T Corps level When are Parties Apt to Use a Taxable Asset Acquisition? o T Corp / TC-SH want cash A Corp wants TC-SH out of the continuing entity
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o A Corp wants TC-SH out of the continuing entity Will pay cash as opposed to stock to achieve this o Target is an unincorporated division of the seller o A Corp wants step-up in tax basis of acquired assets o T Corp has losses that can be used to offset taxable gain T Corp may have NOLs that can be used to shelter the gain on the sale of its assets T Corp may be a member of a consolidated group that has NOLs that can be used to shelter the gain on T Corps asset sale Taxable Purchase of Assets Example o T Corp has assets with a basis of $100 (inside basis) and FMV of $200 o A Corp pays T Corp $200 for the assets o TC-SH have a basis (outside bases) in T Corp stock = $80 o T Corp: Amt Realized = $200; Basis = $100; Gain (capital) = $100 Tax attributes are not affected (NOLs may be available to offset gain) o A Corp: Basis in assets equal to purchase price = $200 Stepped-up basis generates deductions (depreciation, amortization, etc.) o TC-SH Gain or loss upon T Corp liquidation or distribution Taxable Stock Acquisition Buying T Corp stock results in A Corp having a tax basis in the stock equal to the purchase price However, T Corp (a subsidiary of A Corp following the transaction) keeps its old (lower) tax basis in its assets No asset basis step up for A Corp A Corp gets no tax deductions (e.g., amortization) for the excess of the purchase price paid over the basis of T Corps assets) (goodwill) Single level of tax to TC-SH (no tax at T Corp level) o LTCG rates apply Tradeoffs b/w Stock Acquisition and Asset Acquisition o A Corp would have been willing to pay more if the transaction were structured as an asset purchase (due to asset basis step up) o But TC-SH would have incurred a double tax (at T Corp level and TC-SH level) o Survival of NOLs and Other Tax Attributes One of the reasons to purchase stock rather than assets is that tax attributes, like NOL carryforwards may survive and be utilized by T Corp in the future. To prevent people from simply purchasing net operating loss benefits, the tax law puts limitations on the use of NOLs in cases where there has been a change of ownership. Taxable Purchase of Stock Example o T Corp has assets with a basis of $100 (inside basis) and FMV of $200. o A Corp pays TC-SH $165 for their stock ($200) FMV of T Corp assets less built in tax liability of $35 [($200 - $100) x 35%] No step up in basis here, so when A Corp finally sells T Corps assets (presumably for at least as much as it paid), it will automatically have at least $100 of gain which to pay taxes later. TC-SH have a basis (outside basis) in T Corp stock = $80. o T Corp No gain or loss on the sale of its stock. T Corps basis in its assets remains the same ($100). Tax attributes generally not affected (but ability to use in the future may

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 be limited). o A Corp Basis in stock purchased $165. o TC-SH Amount realized $165; Basis $80; Gain (typically LTCG) $85. Section 338 Election & Section 338(h)(10) Section 338 Election (stock sale where we give the tax attributes of an asset deal) o If A Corp acquires at least 80% of T Corp stock, special tax rule ( 338) allows the parties to treat the stock sale as an asset sale for tax purposes. o This means A Corp can step up basis of T Corps assets to equal the purchase price A Corp paid for the stock. o Should 338 Election Be Made? In 338 Transaction, T Corp has to recognize gain as though assets had been sold. Issue: Will the present value of the future tax saving resulting from the step-up (that is, higher future depreciation and/or amortization) be more than the additional tax currently due on the additional gain? Usually only optimal when T Corp has NOLs that can offset gain generated by the deemed asset sale. Section 338(h)(10) Election o Acquisition of stock of a corporation that is a subsidiary corporation (member of a consolidated group). o With 338(h)(10) election, transaction is treated as an asset sale by T Corp with gain or loss being reported on the consolidated return of the selling parent corporation. o A Corp can step up basis of T Corps assets to equal the purchase price A Corp paid for the stock. o Subject to certain exceptions, only one level of tax applies on the deemed sale of the assets of T Corp (the subsidiary corporation) because the parent corporation has no tax upon receipt of the deemed liquidating proceeds. Taxable Mergers Taxable Statutory Mergers o For tax purposes, if the consideration is cash or debt instruments: A merger is treated as a sale of the assets of T Corp to A Corp, followed by a liquidation (the same as an asset sale transaction) Taxable Forward Subsidiary Merger o For tax purposes, if the consideration is cash or debt instruments: A forward subsidiary merger is treated as a sale of the assets of T Corp, followed by a liquidation (the same as an asset sale transaction) Taxation is the same as an asset sale: T Corp taxed; TC-SH taxed Taxable Reverse Subsidiary Merger o A reverse subsidiary merger is treated as a sale of T Corps stock (the same as a stock sale transaction) Capital gains treatment for TC-SH No step-up in tax basis of T Corps assets A Corp acquires all tax attributes of T Corp Taxable Transactions Summary Acquisition of T Corp (non-subsidiary corporation): o Generally structured as a stock acquisition without a 338 election B/c T Corp doesnt want the double level of taxation o Effectuated either as a direct stock purchase or a reverse subsidiary merger B/c treated as a stock deal Acquisition of T Corp (subsidiary corporation) o Generally structured as either: Asset acquisition
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 Asset acquisition b/c gets step up in basis of acquired assets Stock acquisition w/ a 338(h)(10) election b/c just have 1 level of tax if part of a consolidated group Taxable asset acquisition: o A Corp takes a cost basis for T Corps assets (step up) o None of T Corps tax attributes (e.g. NOLs) come over to A Corp. Taxable stock acquisition: o A Corp takes a cost basis for T Corps stock o No change in T Corps basis for its assets (carryover) o All of T Corps tax attributes (e.g. NOLs continue, subject to certain limitations) Basic Forms and Considerations of Tax-Free Transactions A Reorganization Merger/Consolidation B Reorganization Voting Stock-for-Stock Acquisition C Reorganization Voting Stock-for-Assets Acquisition Non-statutory Rules Applicable to Reorganizations o Boot any consideration received by TC-SH other than stock in acquiring corp. o Continuity of ownership interest Material part of the consideration received by TC-SH must consist of stock of A Corp Therefore, too much boot can cause a transaction to fail to qualify as a reorganization, resulting in all of the realized gain being taxable o Continuity of business enterprise Surviving corporation must continue a significant portion of T Corps business after the reorganization o Valid business purpose Some reason for the reorganization other than tax savings is required for the transaction to be respected by the IRS and the courts If A Corp and T Corp are dealing at arms length and are not owned by substantially the same shareholders, the business purpose requirement generally will not be an issue If the parties are related, however, business purpose will be a substantial concern, especially in the presence of tax attributes such as NOLs o Step transaction doctrine The reorganization cannot be part of a larger plan if taken in its entirety would be a taxable transaction. Reorganizations Goodwill/Basis Step Ups o Since reorganizations are not purchases for tax purposes, no goodwill is recorded o No basis step up o Therefore, there are no future tax deductions associated with the purchase price A Reorganization Statutory merger of T Corp into A Corp A statutory merger of T Corp into A Corp The TC-SH receive a substantial part of consideration for T Corps shares in the form of A Corp stock o Up to 50% of consideration can be boot o the test is in the aggregate, not by individual shareholders The A Corp stock received by the TC-SH can be voting or non-voting There is no immediate tax on the A Corp stock received by TC-SH The tax basis of the A Corp stock received by TC-SH is the same as the tax basis of the exchanged T Corp stock (substituted basis) A Corp inherits the tax basis of T Corp in its assets (i.e., no step-up) and all other tax attributes There is a tax (usually at LTCG rates) on the portion of consideration received by TC-SH that is not A Corp stock No requirement that substantially all assets of the target be acquired Unwanted assets of the target can be disposed of before transaction
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 Unwanted assets of the target can be disposed of before transaction A Reorganizations Subsidiary Mergers o Requirements for forward subsidiary merger and reverse subsidiary merger A Reorganizations are similar to those in a direct statutory merger A Reorganization, with some exceptions: A transfer of substantially all assets required for both forward and reverse subsidiary mergers Voting stock consideration is required in reverse subsidiary mergers No more than 20% of consideration in a reverse subsidiary merger may be boot Tax Consequences: T Corp and A Corp o T Corp No gain or loss is recognized by T Corp o A Corp A Corp does not recognize any gain or loss when it receives property (i.e., stock held by TC-SH) in exchange for stock or debt Basis of assets received from T Corp equal to T Corps old basis There is no step up in the basis of the acquired assets Tax Consequences TC-SH o TC-SH receive only A Corp stock o TC-SH receive A Corp stock and boot o Generally, any realized gain on an exchange that is part of a reorganization must be recognized up to the amount of boot received B Reorganization Voting Stock-for-Stock Acquisition A Corp exchanges solely its voting stock for stock of T Corp o No consideration other than voting stock is allowed (No Boot in B) T Corp becomes a subsidiary of A Corp A Corp must have control (80% or more voting power and 80% or more ownership of nonvoting stock) of T Corp as a result of transaction Tax Consequences o T Corp No gain or loss on the exchange o TC-SH Carryover tax basis in A Corps stock (i.e. Basis in A Corp stock = Basis in old T Corp stock) No gain or loss on the exchange of stock o A Corp Basis in T Corp stock = Basis that old TC-SH had in stock T Corps tax basis in its assets (i.e., no step up) remains Tax attributes of T Corp generally not affected (but ability to use in the future may be limited) C Reorganization Voting Stock-for-Assets Acquisition A Corp exchanges voting stock for substantially all of the assets of T Corp o Substantially all means At least 90% of the net assets (assets-liabilities) and 70% of the gross assets Measured by FMV on closing date T Corp is liquidated Stock of A Corp is distributed to TC-SH Up to 20% boot allowed as consideration An assumption of T Corps liabilities will generally be disregarded (i.e. not counted as giving consideration other than voting stock) But if boot is present, liabilities assumed will be counted in 20% boot limitation
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Accounting Considerations

o But if boot is present, liabilities assumed will be counted in 20% boot limitation T Corps liquidation as part of the plan of reorganization, with very limited exceptions is a requirement Tax Consequences o T Corp No gain or loss on the exchange o A Corp Carryover basis in T Corps assets (i.e., no step up) Acquires T Corps tax attributes (but ability to use in the future may be limited) o TC-SH No gain or loss on the exchange of stock Basis in A Corp stock = Basis in old T Corp stock Purchase method - A Corp. records the net assets acquired at the FMV of the consideration given. Any excess of the purchase price over the fair market value of the net identifiable assets is recorded as goodwill. o Goodwill stays on the balance sheet and is subject to an annual impairment test. o But the amortization of GW, in terms of financial reporting, does not affect Net Income. Can still amortize over 15 years for tax purposes. Pooling Method is no longer allowed

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Brazos Case
Wednesday, February 15, 2012 12:12 PM

Brazos Partners: the CoMark LBO Case Study Discussion Questions Middle market What is Brazos investment strategy? Target 25-250 million dollar firms Focus on texas- underserved by private equity firms Generation Transfer Transaction Address concerns of family business owners Often the elders have spent most of their working lives developing growign this business, Start to become risk adverse, because mostof their wealth is concentrated in this business Younger generation Wants nothgin to do with it Wants to get riskier Provides liqudiity to founders without compledtely removing them from business Ability to take chips off table- don't have to sell entire business- but we'll give you some more cash Founders entitled to maintain voting control of business Why is Brazos willing to give up that kind of control Want to provide incentives Control - One incentive - allowing familes to maintain control Revoking control or reducing ownerhsip in the case of poor performance Negative covenants Give them some contorl rights Positive covenants Reps on board of directors Rights to block fundamental changes Require super-majority rights- thus veto power Over come adverse selection Worried that reason sellers anxious to sell is that theyy know something is coming down the pipe to make the busienss less valuable than it is today A.D.: WHY, if trying to maintain control, would founders do a transaction with Brazos, or private equity and not just do a recapitalization? Managers risk averse (equity + know how of Brazos) Poor bank lending market Brazos has experience and relationships with bankers Brazos would be a repeat customer, more attractive for banks to lend to
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 for banks to lend to Secure some repeat business Aligns interests

Is CoMark an attractive investment opportunity? Why or why not? How attractive is the purchase price? Attractiveness Fits investment parameters Mfger, family, mid-market, texas Growing business Efficient production process Fragmented market (roll-up - make an initial acqusisiton and then roll-up other busiensses into that - synergies - use production process across the board) Good management Recession resistant Goodmatch with philosophy of management team Private equity firms now need to actually add value (can't just rely on finacniang maneuvers) So need to be on same page of managers - need to work together All thought made sense to make business more efficeint and have an exit in the near future Stable Cash-Flow Businesses with erratic cash flow are not good canidates for levaraged buy-outs or having a lot of debt on the balance sheet, because will be harder for you to pay your debts as they become due Risks Manger knowledge essential Optimistc projections 73% of business from government i.e. customer concentration Brazo changed this- pointed out lots of different agencies, with different contracts Purchase price 38mm purchase price/ 81 (2000 EBITDA) = EBITDA multiple of 4.7x What do we need to know about comporablecompaneis? Only have one public compnay That's not a good way to value the business But ModTech's EBTITDA multiple is 4.78x TEV= 96.8 +38.6 (Debt) / Ebitda (28.3) Note public trading mulitiple doesn't incldue control value Also note MOD TEC hmuch lower operating margin, gross profit margin

What transaction structure has Brazos proposed? Exhibit 11 TEV 38mm Fees 2 Purchase price = 40 Sources: Senior bank debt 16 Seller note 9
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 Seller note 9 Total debt 25 Brazos Equity 11 Manamgent equity 4 Total Equity 15 Total finanicng :40 Total Cash to Sellers 25 Milliob Why structured this way Want more debt and additioanl leverage to enhance their returns Senior bank debt But worry won't be able to secure a lot of bank debt Mezzanine debt Not attractive, didn't want to share returns with mezzanine lenders So this is expensive Seller note Cheaper to get this money from manager i.e. as opposted to us giving you 9 million in cash, you'll be a debt claimiant (furhter down capital structure) to get paid your 9 million later Keeps founders engaged If they have a 9 million note outstanding, they'll work hard Management equity Also designed to keep management motivated Senior Bank debt (16mm) Business has no debt now 16mm is a bit over 1x EBITDA *expecting 12 million EBITDA Can enhance tax treatment of sharheodlers in event of sale Seller note Why LBO firms like debt To your advantge to have more debt on the books More cash for equity investors if they have more debt Assuming everything goes well and enough cash to meet payments Brazos claims that structuring the transaction as an asset purchase (rather than as a stock purchase) is beneficial not just to Brazos, but also to the management team. Assess this claim. Net present value of .27(900,000 per year for 15 years) Is this greater than 700k Asset side Assuming 100% of assets sold And the they purcahse 4 million of stock (reinvest) Stokc purchase Would only buy 73% of stock Here: no seller wholeaves and won't care about A corps tax laiblity going forward Managers sellign 73% of their interst, holding onto 27% of itnerst So they do share in tax savings coming form being able to record good will See Founder Considerations spreadsheet Note that it's a positive Net Present Value for structurign the transaction as an asset deal
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 an asset deal Because they get 27% of the benefits going forward So Founders get 27% tax benefits of he asset purchase Spread shows that this is a positive NPV propisiton of 620k assuming 10% discount rate Worries Wrong about discount rate Cash flows don't materialize Bankruptcy risks AD: what happened Deal went through (2002) Structured as an asset deal Founders convinved this would be in their benefit But managers did bear cost of this structuer Btu brazo paid 200k of the tax bill So Mgmt only paid 500k In following year, company made acqusition, got 30 million government contract In 2006 CoMark sold to Carlyle Group Private transaction, not sure how much they sold it for But presumably made enough money Word that company had grown to 500 employees Brazo now has 1.4 billion under manamgnet CoMark- after sale to carlle, filed for bankruptcy in 2010 After founders got paid though, so that's good Take aways Difficult to value private companies Hard to compare to public companie Illiquid invesmtent Illiquidty disocunt Private companies often try to laod up lots of expenses on income statmetntto reduce taxes So hard to find comparable public companies Unique challenges facing family businesses And how Brazos tried to overcome these diffulties How private equity firms value and structure transactions How PE firms structure transactions to maintain management incentives How they have management participate in business going forward Tax issues Benefits of asset versus stock purcahses Tax savings on back end if continued owenrhsip interest and don't go bankrupt

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Antitrust
Monday, February 20, 2012 2:26 PM

On Monday, February 20, we will begin our discussion of Assignment #12 (antitrust considerations). The assigned "Antitrust Materials" are contained in three documents in the "Resources" section of CTools. Please review (1) the antitrust-related statutes and rules, (2) Sections I, II and V - X of Introductory Guide I to the Premerger Notification Program (pages 1 - 6, 9-15) and (3) the revised jurisdictional thresholds for Section 7A of the Clayton Act. There will be no cold calls in connection with this material.

Intro Disclaimer Responsibility of Antitrust deparment to assess HSR paperwork But we assigned this anyway Antittrsut class doesn't cover a lot of Hart Scott Rodino HSC waiting periods can have an effect on overall timing 98% of HSR filings had no additional information requests So in almost all cases, you'll be able to close without antitrsut issues But if you do have antitrust issues, they'll probably be serious Even if transaction isn't scuttled, often heavy civil penalties for failure to complywith HSR rules Sherman Act (18 Clayton Act (1914) + strengthed later Prohbits any merger or acquistion whose effect may be to substially lessen competioin or to tend to create a monopoly Reaches actual, realized anticomeptive effects, but also those that become probable as result of the merger Types of merger Horizontal Vertical conglomerate Hart-Scott-Rodina Act Certain transactions meeting certain criteria must get pre-clearnce from DOJ or FTC Submit HSR notification and wait for clearance Msut pay filing fee Cleared when agencies satisfied you answered all there questions regardign the effect of the transaciton on competition Acquisitono f voting securities Acqusition of asssets One more (missed this) Transactions subject o HSR under the following circumstacnes Commerce Test Looking to see wehther or not the parteis related to the transaction are engaged in US commerce or activities that effect US commerce So if they operate in the US, or make sales into the USE Size of Transaction Trying to figure if this is the sort of transaction is the sort that will raise anticompetivie concerns If suffiently large, automatically required If too small, not required In the middle -> go to size of person test Size of person tests Looks at size of parties in the trasnacsaction Worreid if parties sufficently large enough, worried about their ability to exercise monopoly power after transaciton If transaction meets the test, both the acquierer and the target are resposnbile for filing the appropraite forms with the agency HSR form Copy of merger/stock purchase agreement, or letter of intent Finacnail stamtetns Income statement Annual report Sales informaiton/revenue informaiton In various product lines List of controlled entities Entities related to the parties engaged int eh transaction List of holders of the securities in the trasnaction, and those holding 5% or more of securites int eh parties of the trasnaction Where you, as a particaiptn in the trasnaciton, might have a minority interest in other parties Must file and pay a filing fee Filing fee goes from 40k-280k As a matter of law, acquirer is responsbile for paying the filing fee, but by agreement, the parties can contract for a split of the filign fee 4c, 4d documents 4(c) Surveys, anlayses, reports, that evaluate or analzes this partiular transaciton in regards to market structure, competition, sales growth, expansion, in product and geographic markets i.e. if there were any studies undertaken by the particiaptings that gave any insight that they mgiht be enegaging in behavior that may be anticompetive, the

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DOJ and FTC are going to want to see this So tell your clients not to write about dominating the market post transactions 4(d) Offerign memoranda, sales materials (banker books, reports evaluating synergies) So bankers need to walk tight rope - conving people this is a good idea, but need to avoid using language that makes it seem like this deal is a good reason because of anticompetitive opporutntieis Waiting Periods After completing flings Usually 30 days Negotiated trasnactionBegins when both parties file separate HSR filings with DOJ and FTC Parties generally coordinate 30 days for open market purcahses and exchange offers Starts 30 days after acquiere submtis Acuried firm must file 15 days after acquirer Cash Tender offer- 15 day waiting period Begins same as open market prucashes, -> when acquiring person makes filing Target must file within 10 days of when acquiring person makes filing Can be terminated early If parties request it Usually granted If agencies think they can complete review, can get early termination within a couple of weeks Can't clsoe transaciton till after waiting period expires Jumping the gun has severe penalties After filing Members at PreMerger notifcation office (PNO) Looks at filing Is this difficult or easy? Do we need more info Should this go to the FTC or DOJ (if it is hard) Based on industry expertise If sent to the FTC or DOJ Proceudres for detemringi if they want to do a more extensive review, and what sort of info they need FTC or DOJ wants info Competitive overlaps Substitutes for products Info about sales of members in industyr, capcity in industry Customer lists Business plans Market studies Information from research analysi Press releases/ news clips talking about the industry Agency can also contact customers, competitors After the initial investigation If agencies satisfied, can let waiting period expire Parties free to consumate transaciton Or agency can issue second request for information Parties must comply with second request - may take a while (2-4 months, longer, depending on extent of info required by agency) So reviewing agency will ask parties to produce a lot of data, gie a lot of analysis about the transaction Wants documetns produced If there is a second requests that extends the waiting period, and the second waiting period begisn when the second request is fulfilled So the waiting period is extned after this Cash tender offers - period extended 10 days after compeltion of second requests Don't want to stand in way of tender offer, time is the enemy But if they need more info, can continue asking for it till satisfied Options if concerned about anticompetitive effect: discscusiosn, settlements, injucitons Consent degree Parties agree to concessions to make less anticomeptiive Divest certain assets License technlogy to competitors Circumstances where agency has substnatil cocnedrns that can't be satisfied with discussions or settlemnets, might seek an injunction Parties will get to argue their case Parties often just abandon transaction

Tests for determingif transaction is reportable Commerce tests Entities must be engaged in commerce Size of transaction tests Size thresholds for deal Adjusted annually See new 2012 numbers 50 million or less No filing - transaction suffiently small Not so concenred about transacitons this isze to make each transaction this size Over 200 million Filing, unless exemption

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Over 200 million Filing, unless exemption 50-200 million (including 200 million) Filing is requried if the size of person test is met Size of person Measured by assets or sales Looking to see if a party engaged in the trasnaction s of suffiently large size that we're worreid If you have at least 1, 100 million person, and the other person is 10 million person, you have to file So looking at parties to transaction, separate them by type of busienss they engage in i.e. manufacturing vs. serving Determined by NAICS Codes for various types of business If the target is a manufcaturer, has assets or sales of 10 million or more and the acquirer has assets or sales of 100 million or more, you've met the size o fperosn test And if in the 50-200 million transaction range, will have If target is non-manufactureing has assets (sales don't count) of 10 million or more and acqaurie has assets or sales of 100 million or more So look only at assets for service companeis For any target, has assets or sales of 100 million or more, and the acquirer has assets or sales of 10 million or more, have to file So looking for 100 million as acuqirer or target Terms to explore regarding size of person tests Acquiring person Acquired person Ultimate Parent Entity Entity not controlled by anything else, no other entity with contorl over the business May be a natural person If they own a controlling interest in a corporation When you have a natural person, for size of person rule,s aggregate the natural person's assets or sales with sposue and any minor children Consider assets of natural persons tobe their investment assets (excluding primary residence) Sales for natural persons = sales by entities controlled by the person and income from investments "person" = UPE of buyer or seller UPE must be 50%+ sharheolder A corp with A -sub acquring T corp to roll into A sub - A corp is the acquriing person, If T Corp has no shareholders with controlling interest, then T corp is the acquired person (its its own UPE) Would be both the acquried person and the acquired entity Acquired entity The specific entity whose assets or stock is being acquired So acquired entity could be an entity within the acquired person If the acquried entity isn't its own UPE But if T corp sub is a subsidiary of T Corp, T corp sub is acquire dnetity, T Corp is acquried person Random question Do you aggregate multiple bueyrs together if more than one buyer No, not for size of person transaction

Notification thresholds Act as exemptions to relieve parties of contiually doing HSR forms when doing add ons of stock Might have someone who wants to buy 15% now, 20% later, do they need to do a new filing every time Not in all situations, but sometimes Applies only to stock purcahses No similar exemption for follow-on asset prucahses Person who made filing is allowed to cross threhosld in filing up to 1 year after filing i.e. if you file and say will purchase 1 million share, have up to 1 year to do that If acquiring person reaches threshold, can continue to buy more shares intill you reach the next threshold Five Notification Thresholds Acqusition resulting in the buyer holding more than 50 Million dollars in stock of the target Buyer crosses first threshold $100 million or more - less than 500 million 500 million or greater 25% of stock if valued at greater than $1 Billion Applies only to voting securites (same with below) 50% of stock if valued at greater than 50 Million So if you can continue acquirign up to 5 years after intiail filing assuming you don't reach 500 million or 50% of company Once you get that much, additional filing required Once you icnrmentaly increase ownerhsip stake, will require more filings once you reach next threhsold Exemptions Ordinary course sales i.e. if you buy jets, that's not a busienss combinations that effects compeitoin Buy inventory in bulk i.e. buy 50mm + in invetory Acquistions of real property (some of them

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 Acquistions of real property (some of them Acquisitions of foreign assets as long as they don't have US sales of 50 million or more Some exemptions for companies in regulated industries if other review process for antitrust See ConRail/CSX merger

Hypo A Corp has 545 mm in revnue, pbulic, no controlling shareholder 100% ownership of A Sub A Sub buys 100% of the stock in T Corp for 90 million dollars T Corp has 13 mm in sales, privately held manufcaturer Sharhoelder A (natural persion) holds 51% of T Corp, Sahrholder B onws 24% of T Corp SH C owns 25% of T Corp Are these parties engaged in comemrce Yes Us company, mfr Size of transaction 90 million Middle spot between 50-200mm So don't know automatically Size of Person Tests A Corp b/c A corp UPE of A Sub 545 Mm in revnue T Corp If had no UPE, would be acquired perosn and acquired entity But has UPE, so T corp is acquired entity SH- A is UPE Personal inv. Assets = 48mm Controls only T Corp Sales = sales of any corporaiton she controls Here only controls T Corps Sales = 13 mm For size of person test for mfr company Acquired person has sales of 10 million or more So here she meets size of person tests, Filing requirement unless another exemption

Substance of the Antitrust Review See horizontal merger guidelines Doesn't effect arguments DOJ or FTC have to make in court Whether transaction will signficantly icnrease cocnentration in particular market Issue: product market and geogrpahic market Parties want to make these look as broad as possible Agencies looking for narrow construction of product and beogrpahic market How to figure out if in the same market Substitute? SSNIP test - small, signifanct, non-transitory increase in price If product price increased by 5%, what would consumers do Switch to substitue? If yes- that second product is part of the overall market Geographic If consuemrs could switch geogrpahical soruce upon incerase, that should be part of the overall market Concerned with how market share concentrations will change over time HHI index Looks out current constrcution of market and looks at how the business combination will change that market Sum the saures of the market shares of all the compeitor in the market That is pre-deal HHINow calculate post-deal HHI - by doing the same analysis but by using combined coampnies amrket share This is post-dela HHI Post deal HHI - pre-deal HHI = change in HHI If post merger increase in HHHI is Less than 100 points _> no further action/analysis If post merger industyr HHI below 15000 -> no furhter action/ analysis If post post merger HHI between 1500 and 2500 AND increase in HHI of over 100 points -> agencies consider industry to be moderatly concetrated Potentially raise significant competitive concerns These transactions warrant scrutiny If post mer HHI in industry is over 2500 and increase in HHI between between 100 and 200 points-> market is highly concentrated Potentially raises signfiacnt competitive concenrts Warrants scrutiny If post merger HHI in industry is over 2500 and increase in HHI of over 200 points -> Rebuttable presumption that the merer is likely to enhance market power After break We'll get problem sets about transaction form Tax considerations HSR filings Accounting rules

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HSR filings Accounting rules Only one that's relevant

Anti-Trust Considerations
Question is whether will have to make a filing, and if so, how that affects the timing of the transaction Section 7A of the Clayton Act (Hart-Scott-Rodino) No Person engaged in Commerce, or in an activity affecting commerce shall acquire . . . stock or other share capital and . . . assets of another person engaged also in commerce or in any activity affecting commerce . . . the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly. Section 7 o we are not worried about non-profits o Talking about all mergers: Conglomerate mergers; Vertical Mergers (acquiring supplier or customer); Horizontal Mergers (acquiring competition) Except as exempted pursuant to subsection (c) of this section, no person shall acquire, directly or indirectly, any voting securities or assets of any other person, unless both persons (or in the case of a tender offer, the acquiring person) file notification . . . Section 7A. Must file notification and satisfy the waiting period File with FTC & DOJ; one will pursue the case Must file as soon as possible after making the agreement to merge; cannot consummate the transaction without approval Purpose: Allow the agencies to try and figure out if there will be any anti-competitive effects before the merger. Although agencies can always come back later if there turn out to be anti-competitive effects that they missed. When will an Anti-Trust (HSR) filing be required? Step 1 Trigger - Start by looking at the transaction and the persons involved in the transaction, and reference the higher of the public market price, or the transaction price, which will typically be larger than the market price (For Final = Transaction Price) o 50 million or less NO FILING REQUIRED o 200 million or more FILING REQUIRED unless qualify for exemption o 50 million to 200 million (up to and including) DEPENDS ON SIZE OF THE PERSONS in the transaction Acquirer & Target Acquiring Person; Acquired Person Person Except as provided in paragraphs (a) and (b) of 801.12, the term person means an ultimate parent entity (UPE) and all entities which it controls directly or indirectly Entity any natural person, corporation, company, partnership, joint venture, association Ultimate Parent Entity an entity which is not controlled by any other entity. o Could differ from the Acquired / Acquiring Entity Control Either (i) Holding 50% or more of the outstanding voting securities of an issuer or contractual right to elect 50% or more of the directors; or (ii) in the case of an unincorporated entity, having the right to 50% or more of the profits of the entity Size of Person Test Look to the Sales or Assets of the acquiring and acquired persons (look to UPEs) Natural Person - assets are equal to investment assets, not including their homes. Sales are equal to sale of any entity controlled by the person, plus income from their investments If have at least one 100 mm person and at least one 10 mm person, going to have to file o Ex. Mfg Corp (acqd person) Assets or Sales of 10mm or more and acquiring person has Assets or Sales of 100 mm or more o Ex. Service Co. (acqd person) Assets of 10 mm or more and acquiring has assets of 100mm or more o Ex. Service or Mfg (acqd person) Sales or Assets equal or greater than 100 mm and acquiring co has sales or assets of 10 mm or more Notification Thresholds (1) Once a filing is made w/r/t first transaction, acquiring person has 1 year from the expiration of the waiting period to cross the transaction threshold stated in the filing. (2) If w/i 1 year, the threshold is crossed, acquirer than has 5 years from date of the expiration of the waiting period to cross the next one. o Must file again if cross threshold w/i 5 years. o After 5 years, must file again if continue to acquire Aggregate Amount of Voting Securities Valued At: 1. More than 50 mm, but less than 100mm 2. 100mm or greater, but less than 500mm 3. 500mm or greater 4. 25% of outstanding voting securities valued at greater than 1 billion (250 mm min) 5. 50% of the outstanding voting securities of an issuer if valued at greater than 50 million (25mm min) (*highest threshold regardless of dollar value. Dont have to file again after crossing threshold, but must file when you first cross it.) Ex: For example, if you file to acquire 100 million of the voting securities of Company B and cross that threshold
within one year, you would be able to continue to acquire voting securities of Company B for a total of five years without having to file again so long as your total holding of Company Bs voting securities did not exceed either $500 million or 50 percent, i.e., additional notification thresholds.

Exempted Transactions Transactions that are exempt from HSR notification o Acquisitions of goods or realty transferred in the ordinary course of business o Acquisitions of bonds, mortgages, deeds of trust, or other obligations which are not voting securities

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o voting securities o Acquisitions of voting securities of an issuer at least 50 per centum of the voting securities of which are owned by the acquiring person prior to such acquisition o Acquisitions, solely for the purpose of investment, of voting securities, if, as a result of such acquisition, the securities acquired or held do not exceed 10 per centum of the outstanding voting securities of the issuer (e.g. mutual funds) 5-part Analysis by the Agency for Approval of Transaction (FTC or DOJ) Will the transaction significantly increase the concentration and result in a concentrated market? (see Herfindahl-Hirschman Index below) a. Problem is determining what the relevant market is. Should it be broad or narrow? Will there be anti-competitive effects from the transaction? Within a reasonable period of time, will there be entry into the market that will lessen the anticompetitive effects? Are there gains in efficiency that will only be possible as result of the merger? Conrail Case (HBS). Are there other ways to achieve efficiency gains outside of the merger? Business Failure W/o the merger, will this lead to one of the businesses failing? Herfindahl-Hirschman Index (HHI) measure of the degree of concentration in an industry / market o Add the squares of each mkt participants mkt share w/i the regional mkt o Compare before transaction and after transaction o Product Market what are the substitutes and how close are they? o Geographic Market where else can consumers buy the product? o HHI Market Look at pro-forma results post-merger Unconcentrated (HHI < 1000) No further analysis required Moderately Concentrated (1000<=HHI<=1800) If increase less than 100, no further analysis; more than 100 raises red flag, may be worried about anti-comp. effects Highly Concentrated (1800 < HHI) If increase is less than 50, no further analysis If increase is between 50 and 100, raises red flag If increase is greater than 100, likely to be enjoined Agencies dont have to stick with these HHI guidelines, ex if you have HHI 1001, doesnt mean that you are automatically Moderately Concentrated, you are allowed to use some discretion Waiting Period 15/30 Both parties must observe a waiting period before consummating the transaction; must wait a certain period of time, and wait more if there is a second request. o Begins the date of receipt by the FTC and the DOJ of the notification from both parties (or from the acquiring party in the case of a cash tender offer) o 15 days for cash tender offers o 30 days for all other transactions o If obvious that there are no anti-competitive effects, can request early termination of the waiting period o Agencies can also make second requests for info if they want to. Can extend waiting period by 10 days for TO or 30 days for all other transactions.
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Air Products and AirGas Case

Tuesday, February 21, 2012 2:27 PM

On Tuesday, February 21, we will depart from our syllabus and begin our discussion of the Airgas Hostile Takeover Battle. Please read the materials in Assignment #14 (Introduction to Takeover Defenses); pp. 5-12 and 21-30 of the Air Products Schedule TO (available in the "Resources" section of CTools); pp. 18-29 of the Airgas Schedule 14D-9 (available in the "Resources" section of CTools); and pp. 58-91 of Air Products and Chemicals v. Airgas (available in the "Resources" section of CTools). You should be prepared to answer the following questions about the reading: AirGas facts Takeover battle lasting 16 onths How the tranasaction was initiated How negoitions took place What kind of advisors Air Products not successful in acquistion Strategy From tactical point of view How the law, various pieces of litigation, effected the ultimate outocme in this case Factsy facts Ceo of Air Products suggested business comboniation with AirGas Had relationship before, AirG

1. Why did Air Products want to acquire Airgas? Page 26 of schedule TO Page 29 of schedule TO Look to filings to find out why compnaies are doing trasnaction Here: Growth, returns, cash generation Substnatil cost synergies Leverage Airgas' us sales force Reduce overhead Reduce public company costs Supply chain efficincies Better utlize infastructure SAP Computer sfotware for invesotry, supply chain management Air Products had already implemented this earleir Integrated platofrom -cpautre economcies of scale Air Products prsense in world's markets will allowAir gas to achieve internaitonal expansion faster and cheaper than on its own Why do the companies put this info in the filings, i.e. do Airgas's shareholders have interest in knowing these things? Besides legal requirements to disclose reasons AirGas sharehodlers are going to be cashed ou If this was a stock for stock deal, you'd have to/ want to show a lot more about the upside Fear that if you say too much about why the deal is great, the sharehodlers will demansd higher price Could also fear that this might lead to a biddign war (if there are other potential acquireres

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potential acquireres

2. Why did Airgas resist Air Products' advances? 14d-9 is place where target copnay Gives reccomendation in regard sto tender offer And must give reaosns for reccomendation See page 14 of 14d AirGas thought the price undervalued the company Undervaluation 2 (eventually 3) investment banks hired by AirGas to value company Inadequacy of opinions Question: market price is way below the 60-70 Air Products offered In Delware - market price does not equal intrinsic value Possible forms of analysis Comporable company analysis DCF analysis Precedent Transactions In this case: Internal Analysis - compares company stock price over time, looking at meterics beyond what we've talked about EBITDA Earnings growth (bottom line) Stock performance over time Stock price projections into the future based on earnings per share Thinks can do better on their onw, get higher stock price in long term that is higher than the offer Timing of offer seems opportunistic Air Products trying to swoop in while share price is unusually low Court: nothing wrong with this stragey form Air Products But Airgas is just saying don't be fooled by this, in its repsonse Share price low as multiple of EBITDA InAdequacy opinions Offer's conditions are too tenous- uncerntainy and risk Unlikely to go thorugh Antitrsut review See Air Products failed attempt to acquire a compeitor But note: sharheodlers no better Air Products tactics intended to divert/ district from opportunistic nature of its offer Acquistion would reduce rather than enhance stockholder value AD - do sharehodlers even care? Here, they explain air products is not the company to bring Air Gas to the next level Saying they'll mismanage the compnay Check their track record - i.e. their packaged gas business

3. How was Air Products' proposed deal structured? Was the offer subject to any conditions or contingencies? Was the transaction, as proposed, a taxable transaction for U.S. Airgas shareholders? Could Airgas shareholders who did not think it was a good idea for Air Products to acquire Airgas be forced to sell their shares to Air Products? What if a majority of Airgas shareholders were in favor of the transaction? If so, would such a dissenting shareholder have appraisal rights? Structure Tender offer followed by back-end merger Set-up acquisition sub (Air Products Distribution, Inc) Shield from liability If Air Products could just buy 100% of the shares righ tout of the gate, they
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Shield from liability If Air Products could just buy 100% of the shares righ tout of the gate, they would -> and then they'd have Air Gas a wholly owned subsidiary But via public tender offer, never getting 100% of the shares Some sharholders just asleep Managmetn objects (they own shares) So to get rid of other shareholders, need a merger - short form or long form Short form if over 85% owned So acquistion subisdiary will own a cotnrolling stake in air gas Then back end merger, leaving air gas as a subsidiary of air products Note: financing may be contingetn on pulling off back end merger Don't want the residual claimants of sharehodlers Tender offer followed by merger Unless all shares tendered

Conditions/contigencies Page 6 of Schedule TO Validly tnedered and not withdrawn before the expieration of the offer a nnumber of sahres, which together with the shares then owned by Air Products and its subs rpresetns at least a majroity of the total number of shares otustanding Redemption of the poison pill Bd (AirGas) approval (so 203's prohbition on business combiatinos is inapplicable) Air Gas board of approval under Article 6 of Airgas Certificate of Incorproation won't apply This is also a ban on business combinations unless stockholder vote of 67% in favor or fair price requriemtns met Antitrust clearance No other Airgas business transactions that would make it worth less Note: no financing contigency

Pg 69 of case
Taxable transaction for Air Gas shareholders? Yes page 9 (11 of print out) Taxable to sharehodlers Forced to sell shares? Tender offer No - > can't be forced to tender against your will But second step - merger Sharholders can be forced to gie up shares if majority of sahroelders vote to give up shares And with majroity control, air products would have enough votes to vote for merger Appraisal rights? yes 4. What antitakeover mechanisms did Airgas have in place? How would these mechanisms make it more difficult for a hostile takeover to succeed? Schedule 10 page 11 (printout pg 14) Pg 21 of TO Page 62 of case Poison pill
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 Poison pill Designed to be poisionous to hostile bidders Can be disaremd/redeemd by board of directors if friendly transaction they want to pursue But can keep in place to thwart hostile take over Opeartion Imposes substnatila econoimc and voting solution on anyone who acquires a predetermined percentage of a stock withotu consent of the corporaitons management team Does not prevent a hostile transaction Can trigger pill and suffer dilution But if they're looking to make money, they won't want to do this Page 21 of TO Each sharh3eodler of certaindate received dividend of the Rights Rights exercisable in face of hostile bid Structured as prefered stock Like an option Holder has right ot purchase 1/10,00th sahre of serices C junior particiapting preferred stock at peurchase pirce of 230 dollars One right attacehs to each additioanl share Airgas issues in the future Rights become exercisable upon earlier of 10 claendar days following public annoucnemtn or disclorue that aperosn or group of affilaited or associated perosns ahs acquried benfitial owenrhsip of 15% Or 10 days after first public annoucnemtn (or commencemtn) of a tneder offer that would resutl in a group beneficially owning 15% Exercise price is set at $230 May 2007 - airgas prie is 43.75 So exercsie price set at 5.25x trading price In exercise of board's discretion, can defer exercsie of rights Thus the board could have isntiuted the pill upon annoucnemtn of tender offer But board does not have ability to defer exercise upon crossign of 15% threshold Rights aren't exercisable until the distribuiton date (see above, and expire on may , 2017 i.e. have a 10 year life In event (exercising) get stock having value equal to two times the pruchase price of the right? i.e. pay 230 get stock worth $460 This excludes, however, the acquiring person Those rights are null and void This si the Flip-in Everyone but the hostile bidder can buy shares below market rate By excludign the hostile bidder, impsoe economic dillution on hostile bidder Flip-over portion After stock acqusition date, airgas conslidates or merges withoanother person and airgas is not the suriving corpaiton, Or person Must be otustanding rights (i.e. not exercised before) See page 22 Exach holder has right to receive stock of acquiring person in value
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Exach holder has right to receive stock of acquiring person in value of twice the exercise price How can you give Airgas sharehodlers the right to buy sahres in another country Moran case: any security with subscription rights, you take all heo companies liablities, if they have these securities in palce, they prserve So flip over pill just like any other preservation rights clause Airgas may redeem the rights at a price of .00001 per riht at anytime before the Clsoe of busienss day a person becoems acquring perosn Clsoe of busienss of the expiration date of the rights Would cost 8k to reedeem all these rights Exchange procedure Any time after a person becomes an acquiring person (But before acquriing perosn owns 50%) airgas board may exchange outstanding and exercisable rights (toher than those by acquriing person) for shares, each right being exchagneable f Boards can put rights agreemetns in place uniliaterally without sharhoelder approval Can put it in place ina signel afternoon So can wait till hostile bidder shows up before putting onein On the shelf posion pill - allways there, can be put in palce very quickly But some places like to keep them in palce to signal to the market not to bother But small companeis worreid won't know till too late that someone has crossed threwhodl Get notified 10 days after 5% ownerhsip So easy for them to purcashe a lot of shares without getting to lower boudnary From Blank Check Preffered Stock provisions/ authorizations And do this fraction of preferred shares so they don't run out f authorized shares See poison pill example sheet (no such math on exam though) Distinciton 'real money' poison pill Sharheolders have to actually pay to exercise this Oppoennets of poison pill say that if you're going to have this, at least make it a real money posion pill so that at least some sharehodlers won't particiapte (those asleep at the switch) Other option: Exchange - see exchange paragraph Ie. For every right you have we'll give you a share Benefits Shareholders don't have to actually pay any money Guarantees dilution Problem Not as much dilutionif you go with the flip in Here- additional 10.57 sahres for each right Here- if this was an exchange instead of flip in, raiders votign rights only goes down to 8%, instead of 1.5% in flip-in Note- so much dillution Once triggered accidnetally Once triggered purpsoefullyt o challenge So as you can see, pretty good deterrent No one has a good work around
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 No one has a good work around Delwarware supreme court has never, under Unocal, said a posion pill had to be redeemed Couts of chancecry have, but a lot of those have been overturned Scholarship on poison pills - mostly from opponents of posion pills- say if you're going to have it should be like this - i.e. recommendations from instiutional sharheodlers Triggers 20% Harder to trip Give hostile bidder ability to acquire more shares More typical formulation is 15% Flip-in Shares As small as possible In practice- we see 1:1 In airgas with flip in- variable amoutn based on stock price But exchange 1:1 Most likely to happen if ou don't want sahrehodlers to epxend money :Fipover They hat ethem, don't' want them, thenk they're over kill TIDE (Three-year independnet director evaltuion) Every 3 year, idnpendent directors should review company and pill and make determiation whether or not to keep pill in place Yes - oppoennts want to see this In practice- see these often Sunset 10 years or less This is typical in pracice as well Real Money ( Yes - reocmmended In practice- not that common - see exchange, or real money lip in with right to use exchange Governacne protection If poisonpills eased up on defintion of benficial ownership, so sharehodlers having a conversation, talking aobut deals, wo b/c defintion of beneficail ownerhsip includes acting in concert Worry about inadvertanlty becoming acquiring person Yes- recommended In practice- not often used Sharheodler Approval Yes recommended But these aren't the majroity practice Dead, Slow, no Hand Dead hand Provision says only way poison pill can be redeemed is by origianl board of directors who put it n place or their chosen successors So even a proxy contest wouldn't allow you to get around poison pill Invalid in delawre Go too far Did not find this under

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Did not find this under Slow hand If you do repalce board directors, new directors must wait 6 months to redeem Also invalid in delwara No hand No one can redeem till expiration date Invalid in delaware Reccomended not to be icnldued Redemption Vote by sharheodlers Yes, recommended Changes to poison pill by board, unilaterally Not recommended Wish if you had pills, hsould have fixed rules everyoen honrs Chewable pills A pill that can nly be invoked by shareohlders If someone makes an offer sharoelders don't like they can stop it But if they do like it This is basically the same power to or not to tender,but maybe allows them to coridane their options Yes- recommended In practice, more likely to see Jawbreakers Most pills say they have chewable features, but they're really more like jawbreakers b/c to get to sharheodler vote, ltos of requreimetnets for offer Like requiremnt for acquirer to have 80% of fiancning in palce Fairness equipment But all non-tendered shares at same price

Not opting out of 203 - by board approval DGCL makes hostile tender offers difficult to succeed if the hostile bidder plans on doing a two-step merger Unless board approves transaction by which the sharehodler became an interested transaciton or if the distinterested board members approve the merger tansactio Or if you have 85% of outstanding sahres Or if you get 2/3 vote for bizz combination not including shares of interested stockholder Air Products wants to force board to do this Super majority merger approval provision in Airgas article of incorporation Rsuper majority voting requiremetn See copy of Article VI on Ctools Type of business combination prohbition Serves same funciton as 203 Can't do business combination with interested stockholder without 67% vote 20% threhoslder here (versus 15% udner 203) to be itnersted Requriemtns Consideration in second step trasnction is cash, at a price at least as high as what the interested stockholder paid for the shares over
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high as what the interested stockholder paid for the shares over prior 2 years Various procedures that have to be ocnsumeated in connection with the particular transaction Describe the transaciton ad give them info on fair value Air products Easy for them to confoorm to requrietns Cash consideration for second step (that's their paln anyway) Price at least as high as what air products paid for any of the shares over two year period Purchases here made in 40's, plannign to pay 70 in first and second stage So this isn't hard So why are they concerned Second stage more difficult but not impossible And not all that difficult 5. How did Air Products conduct this takeover battle? Assess its strategy. Conduct First became intersted in 2007 Decline dto take any action - stock price too high Friendly Overture: In 2009 - def. interested - Air Products made frienldy overture to Airgas $60, Stock Airgas- "not intersted" Price too low Stock not attractive currency Revised to 62, cash and stock Rejected on same gorunds Jan 2010 - AP sent letter to AG board annoucnign intention to proceed with ostile bid of 60 in Cash Board not interested Timed to take advantage of temporary dip in AG price Unanimously determeind bid too low Feb. 2010 - AP publicly announced intention to do Tender Offer Feb 11 - formal commecnemtn of tender offer March 2010 AP nominated own slate of 3 directors to AG board Bylaw proposals - page 72 of case - all passed at sept meeting with 51% of vote Move 2011 meeting up to january Limit ability of board of directors to appoint any new directors other than Peter McCausland if they're succesful with nomination Repeal any by-law amendments put in place by board before april July 8 2010 AP raises bid to 63.50 Sept 2010 AP raises bid to 65.50 Nominees were setaed But Peter McCausland reseated So added seat Board expanded to make room for him Oct 2010 Delware looks at bylaw ammendments - challenged by board of directos of AG
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Oct 2010 Delware looks at bylaw ammendments - challenged by board of directos of AG Supreme Corut finds these invalid Moving meeting up to january because members of staggered board elected to 3 year terms So must have full 3 years between terms Dec 2010 AP raises bid to $70 - "Best and Final" offer Evaluation Critiques Starting low and then moving incrmentatlly high Did this casue AG to dig heals in? Or did it take them a while to see AG was worth more Or were they just trying to get hem on the cheap, didn't wasn tot pay more than they had to Court AG doesn't have an effective staggered board AP made tactical decision not to try to take advantage of provision in harter that they could repalce all of board with 67% of sharheodlers Special meeting called with approval of 33% of sharoedlers Why didn't they calll the special meeting above to unseat whole board Highly unlikely they'd be able to get to 67% of the vote of outstanding shares Only get 45.8% of outstanding shares to vote for bylaws AP's choice of nominees Ran the noninees as indpendent directors, who would look at transaction with fresh eyes Could have run noninees promising to redeem poison pill Note - Judge hear thought it would be fine to have director come in on platform of Sharholder choice But not clear all Delware courts would find that Maybe duty of care violation for not being ifnormed/ open to possibilitiy Also, only got 51% of voters- so maybe needed to run as platform as idnepnednets How could the AP and AG be so different on value? Assumptions you use will change value estiamtes greatly Optimisims of ceconomy Ability to emerge fromrecession Growth rate Speed of SAP implementation AP AG isn't consideiring the downside AP being more negative, but that's to their advantage If AP had convinced court to redeem pill, would they have gotten the shareholders to tender? MERGER ARBs Upon announcmetn of m and a transction, swoop in and buy shares Bet on chances of consumation Short term focus All parties agree that the arbs in the stockholder base 46% of sharoelder in dec 2010, 41% a few months later So more short term ivnestors than long term investors Interested in flipping stock ARBS will tender shares
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Interested in flipping stock ARBS will tender shares So as far as their stragey goes Thought delawre courts would be shared into forcing rmeoving pill Already won a proxy contest Non coercie offer Though that b/c of arbs could force redemption And the arbs would take less than full value b/c arbs certaint o tender

On Wednesday, February 22, we will continue our discussion of the Airgas Hostile Takeover Battle. Please read pp. 54-58 (Preamble and Introduction) and pp. 91-129 (Legal Analysis) of Air Products and Chemicals v. Airgas . You should be prepared to answer the following questions about the reading: 1. What standard of review was applied to the Airgas board's decision not to remove its antitakeover devices? Why? Page 54 - unocal scrutiny Page 58 - heightened unocal scrutiny Why Pg 57 - substantive coercion'= Real answer Pg 91 Unocal Standard/ Test (aka Unocal/Unitrin Test) BJR - presumption in decisions for courts to be hands off as long as disitnerested directors, acting in good faith, informed, etc But for decisions to leave Poison pill in place - BJR does not apply ENHANCED / Intermediate SCRUTINY instead of BJR To justify definsive measures, target board must show That it had reaosnble grounds for belieivng a danger to corpaote policy and effectiveness exited (i.e. must articularte a legally cognziable threat, and Must do investigation This is mateially enahnaced by approval of a boARD COMPRISED OF A MAJROITY OF OUTSIDE INDPENDNET DIRECTORS Worry about entrenchment motives of board Don't want decision made by people who don't rely on job for entirely livelyhood d's have burden of showing reaonbleness of investigation, reasonablness of process, and reasobnlness of result reached That any board action taken in resposne to that threat is reaonble in relation to the threat posed If sastisfy above test, then BJR analysis Part 1 What kinds of threats? Coercion threat i.e. worried about getting considreation on the backend worse than back end Not here Subsequent offering period
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Not here Subsequent offering period Subsatnive coercion Sharheodlers will tener in mistaken belief Issue: don't sharhoelders hav eall the information they need to make this decision Court here says this is true But AG: minoirty sharhoelders coerced by A arbs, not the arbs will tender because allt hey care about is short term Thus AG arguing that long term investors need to protect from arbs Court: they bought those ahres form lont term investors, for pirices less thant whats on the table now So he's supsicious of this idea of protecting sharehodlers But nonetheless says the court is satisfied that inadequate value is a legimate threat Opporutnity loss Why -92 - fear that even when acting in good faith, court must review use of rights plan objectively as well for fear that directors might still be using plan improperly Theoretical specter of sisloyalty i.e. directors may be acting in own interest rahter tan interst of its sahrehodlers See example on page 98 Only protecting 2 dollar difference in mgmetn protejected value, more uncenrtain than all cash offer, no other form of coercion (just in adequate price) - managers acting in good faith but butthreat posed does not justify boards decision to keep pill in place Pg 97 - effective proportiatliyt test could properly incentive management, protect stockholders and increase value for stockholders 2. What threats did the Airgas board identify as stemming from the Air Products offer? Did you find the board's arguments persuasive? Page 103 Coercive Opprotustinc timing Prisoner's dilements But really Inadewaute offer And merger aritraguers owning a lot of the sahres, more likely to accet inadewaute offer Substantive coercion Inadequate rpice Structural coercion Not structurally coercive Get 67% of the shareholders to vote remove board at a special meeting Pg 120 Run a second proxy contest 3. Describe Airgas' shareholder profile (i.e., the breakdown among different types of shareholders).
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shareholders). Short-term base : merger arbs Almost half of stockholders Page 108, 109 Arbs - 46% see page 118 4. What role did the arbitrageurs play in this takeover battle? In the outcome of this litigation? Page 105 Majoruity of stock owned by merger arbs Willing to tneder into such an inadewaute offer With out the presence of these arbs, could argue that the length of the battle was so long that all the sharehodlershad time to evaluate and determien the value of the shares - but b/c arbs own so much, they're more liekly to take short term profits over logn term value 5. Can a board simply refuse to remove antitakeover devices if it believes such an action would be in the best interests of shareholders? No, the decision not to remove, (i.e. the decision to keep in place) subject to proportiality/ threat requirements just as deciion to keep in place But can just say "wait a very long time" with staggered board i.e. not disporitionate to have posion pill in place with staggered board Note: no one has ever waited out two election cycles 6. What effect do you think the Airgas decision will have on M&A practice going forward? Page 129 - make all companies with staggered boards and poison pills takeover proof Court: do not endorse just say never Court: directors of a corpaotion owe difuciary duties to tall stockholder- includes hsort-term as well as long term But coard cannot be foreced into revlon mode any time a hostiel bidder makes a tender offer that is at a premium to market value But the mechansims to get around - even when in combination with a staggerd board, have been around since 85 when Delware first decided to uphold pill Class: Court: can't just say no Process Intermediate scrutiy/ unocal two step inquiry Reasonable invesitgation Objective review of defensive resposne to see if reasonble in relation to threat posed Range of reaosnableness Preclusive Coercive Marty Lipton: thinks the right to implement posiion pill should be absolute But it's not, the law says you have this itnermediate scrutiny Prong 1 - reasoanble investigation in good faith Prong 2 - proportionate AD: Is the company take over proof? Can't just say never, we don't want to be acquired under any circumstacnes And we know dead hand, slow hand posion pills aren't permissive So there are limits But we know that a poison pill and staggered board is okay If the bidder has to offer much more to get the board obligated to take it, is it still jdugment proof? Tends to be some room, Here - problem if offer was 75, would the board have needed to accept it
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 Here - problem if offer was 75, would the board have needed to accept it or engage Shareholders will be very upset Shopping for fairness opinions Ad: generally, bankers have reputational constraints, and people do talk, everyone uses similar mehtodologies. And there aren't just one invesmtnet banker there, also the acquierers and usually additional outside expert valuations And court can question them on their anlaysis, etc Poison Pills are realtively rare- 17.7% of public companies have poison pills Even fewer for larger companies But every company has a shadow pill Within an afternoon, they can have a poison pill put in place i.e. board has settled on terms, lawyers have drafted rights plan, just need to pull trigger Or just quickly settle on the terms in repsonse ot takeover bid Since 2007. 45% of companeis not having a posion pill in palce prior to acquisiton offer, adopted one in resposne

Wrap-up AP's strategy Air product lost the battle, but maybe they won by not overpaying At time they put forward their bid, everyone thought their strategy was masterful Offers- spaced out, mulitple, incremental increases Maximize the number of arbs int eh transaction in hopes of paying the lowest price they could Higher annualized return requires quickest possible turn around Often better to get less gain quicker for arbs b/c they roll over fudns Cravath's legal stragety for ammending the by laws to move companies annual meeting up Air Products but forward by law movign board meeting up to january form september, AirGas sued and Delaware said this was impermissible by cutting directors terms short 3 nominees elected to AirGas Board But this didn't relay work out because their nominees sided with the rest of the AG board AG's Strategy Deserve credit for not just saying no Said inadequate value n/d good faith investigation, credible threat Court doesn't really by the inadequate price, thinks best for just buyign btiem for baord to tell their side, but then must remove But delaware law says inadequate value is a credible threat Persuaded AP nominees they were right about value Criticisms of AP's strategy Didn't increase bid But could have overpayed Didn't call special meeting They were skeptical of getting the 67% of outstanding shares out Could have waited till sept 2011 for next annual meeting But now one slate of directors has already sided with the old board So this doesn't guarantee So after failure - they litigate No one in academy was terribly surprised by this decision, De Courts deferential to baords
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No one in academy was terribly surprised by this decision, De Courts deferential to baords fo rkeepign posion pills in palce But maybe, bid in place for a long time, all the informaiton out there, sophisticated sharehodler base, hoed DE court would say that here the pill had to be removed AG had helpful set of facts Nominees o fAP sided with them And actually did do extensive work to make their case Lots of meetings Lots of experts Credible long term business plan Big difference between air products offer and the 78 dollar number the AG board pointed to If that nubmer is credible Air Products spent 100 million in fees to pursue this transaction In that sense AP certainly loss Arbs loss Counted as this transaction to be consumated But here, air gas stock price fell only very little upon announcment of this decision What will parties do going forward? Bidders will do what AP did to encourage arbs to get in Target companeis will try to do what AG will do Credible business plan Credible valuation Instiutional sharheolders will put more pressure on boards to "de-stagger" and have yearly elections

Outcome with Airgas and its stock price When opinion was handed down 63 dolalrs Now 82 dollars AG has outperformed s&p 500 since decision was handed down Appears the projections of management were correct AP has performed in line with the market

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Guest Speaker: Mark Director

Tuesday, March 06, 2012 2:27 PM

Excerpt is from Proxy Statement for voting for Merger This is the docuemtn that tells the story of the merger F of deal Company - PRePAid Legal Services Sells insurance for legal services Going Private Transaction Publicly traded company to be acquired to cease to be public Now privatley owned 13(e)(3), 13(e)(4) - type so going private transaciton 3 - person related to compnay takes company private Lots more disclosure required 4 - non-related perosn taking private Why a Public company may want to go private Avoid disclosure, other costs Consolidate control Avoid scrutiny of pulic company Sometime the public markets might not be valuing the company properly Two ways for a company to go private Tender offer Merger Or combination of the both Tender for most of the shares, clean it up with a merger 2009-2010 - founder- Stonecipher - getting old Background of merger Provide rationale This is part brief Need to explain to sokcholders why they should vote for deal Must present this argument factually Construct the facts so you're telling a story that mkes sense The story here: the Time has come Future value of company uncertain Stonecipehr getting old Sales have been flat Board is asssessing its strategic options Start background of merger by saying: we didn't pursue this transaction because we had nothing better to do, we did it for a reason Although sometimes it'll say "we were minding our own business when someone gave us an offer and we decidded to consider it" Note: these types of situations rarely lead to a sale tranaction Something else will happen Leadership succession Or a deal won't be feasible 3 elements of the sale process Motivation- Why do companies puruse sales? Sale Process and how it works The decsiion - do we sell, to whom, when? The Sale Process Special Committee
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 The Sale Process Special Committee Speically formed committee Impartiality Compsoed of independent and disinterested directors with respect to the offer from cCerberus and a potential transaction generally Note: this will put the burden on P to show the entire transaaction wasn't fair worry about management team shiiftign allegiences b/c will employed by buyer (or would like to) Managers likely to do anything to make new owners happy Son any managmetn on the board is usually walled off This is what happens to Stonecipher Problem: argument to be made that every single director has some kind of interest i.e. Try to keep being director So can't completely get away form potential interests But mere fact of director does not disqualify Look to buisness realtionships, co-investing with buyer, currenlty, earleir, etc Why clarify Special Committee's pwoers- making clear board delegated to SC the exclsuive power and authority to make deicsions and take actions with respect to a potential strategic transaction involving the company? To shift burden - need Disinterested committee Actually empowered Make sure indpendendt, disitnerested and have authority/power Shopping process Can take first offer If include "go-shop" provision Can shop company around for set amount of time and can take any better ofer Why take first offer Worried bidder won't stick around Worry public sale process won't come up with a deal - that'll hurt company and stock price Here: not convicned first offer is best, so they go out and hop around Issue: buyers want to get manament on their side Seller side-lawyers/ indpendent directors chaperone managers in due dileigence enocunters Buyer side- hard to restrain the buying comps, but at least tiell them not to have offer sheets, etc A well advised special committee will not ermit the actual negotiation of term sheets with any management till after the deal is struct That's what happened here Q: should views of stockholders on deal be taken into account by special committee MidOCean had decided agaisnt exclsuivelty agreement with Prescott Worried Special Committee would view that negatively So when cerberus does this, SC starts to see MidOcean as the good guy Strategy Be honest broker - trying to get a good deal done Summary Delicate balance Lots of players thying to pull process in their own direction Lots of unexpected stuff happens Lawyers thinking about how the deal will sound on paper afterwards as it's going down - adjust things to sound better Closing the sale What's mportnat in the bid
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 What's mportnat in the bid Share price Financing Termination fee Fail to finance Other failure Conditions

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Combination Problem Set

Wednesday, March 07, 2012 3:29 PM

Mergers & Acquisitions Combined Problem Set Hypothetical: A Corp, an NYSE-listed publicly-held corporation with a widely dispersed group of shareholders, manufacturers helicopter engines. T Corp, a closely held bicycle manufacturing firm, has five shareholders, each of whom owns 20% of the stock. No T Corp shareholder has any specially negotiated control rights. A Corp and T Corp have agreed to a transaction in which A Corp will acquire 100% of T Corp. Both A Corp and T Corp are Delaware C corporations. Financial information for A Corp and T Corp appears below: A Corp 2010 Sales $300 million T Corp 2010 Sales $90 million A Corp Assets as of 12/31/10 $150 million T Corp Assets as of 12/31/10 $40 million T Corps most recent balance sheet shows $25 million of liabilities. Question 1: What are the tax (i.e., taxable to TC-SH, NOLs transferable, taxable to T Corp, goodwill recorded, step up in basis), corporate (i.e., board approval, shareholder voting rights and appraisal rights), accounting (i.e., purchase or pooling, recording of goodwill), securities law (i.e., registration required, proxy statement required) and HartScott-Rodino consequences (i.e., HSR filing requirement) of each of the following types of transactions? Transaction #1 Reverse subsidiary merger in which A Corp will acquire 100% of T Corp in exchange for $120 million in A Corp voting common stock, which amounts to 30% of A Corp's outstanding stock
Tax

o TC-SH Nope - tax free reoganization o NOLs Transfereble yes o Taxable to T Corp No No double taxation on reverse subsidiary merger o Good will recorded? no o Step up in basis No

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 This qualifes for an A- Reorganization - tax free o No boot o A corp will cointiue o Valid business purpose o Probably doesn't violate the step transaction doctrine See tax summary chart on A -Reorg for reverse subsidiary merger o No more than 20% boot o Substnailly all assets must be transfered Corporate o Board approval Yes, both A corp 161 - issuance of stock 141(a) - Board managers busienss and affiars of corpoation A is not an consitutent coroation T corp 251(b) T corp must approve as constituent coproation
o Shareholder voting rights A corp has votign rights under NY stock exchange rules b/c more than 20% of outsntaind stock beign issued But no voting rights under Delware law because not a constiuent merger because a reverse subsidiary merger T corp has voting rights 251(c) o Appraisal rights No appraisal rights for A corps T corp has appraisal rights under 252(c) And market out exception not in effect because T corp is a private company Accounting o Purchase or pooling Purcahse accounting - pooling accounting no longer an option o Recording of goodwill

Securities law o Registration required? A corp must file 1 o Proxy Statemtn Required Schedule 14a for A corp because shareholder vote is required (under NYSE rules) No S-4 because exempt from registration Selling to less than 35 investors under rule 506 safe harbor See dislcoure duties for non accredited investors Will also need form D for this private placemnt usign 506 HSR o Filing requirement? Yes Commerce test
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 Commerce test Parties are engaged in commerce Transaction test If 50 mm or less, no filing 200 mm or more yes filing In between - look to size of person Here- in between Size of person test If one 100mm and 1 10mm person, filing required Here- 300mm acuquirng 90 mm - so Transaction #2 Stock purchase in which A Corp will acquire 100% of the stock of T Corp for $120 million in cash Tax This is taxable trasnaction for sharehodlers Not a tax free reorgainaation if 100% cash o TC-SH Taxable immediately o NOLs Transfereble yes o Taxable to T Corp nope o Good will recorded? no o Step up in basis No asset basis step up Corproate o Board approval A must approve under 141 (a) T corp board need not approve b/c tender offer T Crop sharehodlers are the parties o Shareholder voting rights A corp shareholders hav eno voting rights No provision under DE statue for A shareolders to vote NYSE does not apply because not issuing any stock T corp has not voting rights, just deciding whether or not to sell shares o Appraisal rights A corp shareodlers have no appraisal rights, b/c no voting rights T corp sharohelders have not appraisal rights Accounting o Purchase or pooling Always purchasing o Recording of goodwill Securities law o Registration required? No need to worry under 33 act, no stock beign issued, cash transaction
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 transaction o Proxy Statemtn Required No need to worry about 34 act b/c no voting rights for A corp (the only public ocmpnay) o Filing requirement? Yes required here Commerce test met Intermediate transaciton size test Size of person test met ehre to require filing

HSR

Transaction #3 Purchase of 100% of assets and assumption of 100% of liabilities of T Corp in exchange for $100 million in A Corp voting common stock, which amounts to 25% of A Corp's outstanding stock, plus $20 million in cash Tax Is this a C-Reorg? - no T--Crop has 25mm liablityies Purcahse price is 20mm cash and 100 mm in stock 31% boot 45 mm boot 20 mm cash + 25 in liablities assumed If any boot at all, must add in liabliteis assuemd as boot 31% of consideration 45/145 100 mm stock 69% of consideration Instead, this is not a reorg, treated as a cash transaction o TC-SH Yes, immedaitely taxable to t-corp sahrehodlers o NOLs Transfereble nope o Taxable to T Corp Yes Double taxation First row of tax feature summary o Good will recorded? yes o Step up in basis Yes, step up in basis Corproate o Board approval A corp must approve under 141(a) and 161 (for issuance of stock T corps board must approve sale of assets under 271 o Shareholder voting rights A corp gets voting rights under NYSE b/c issuacne of more than 20% of shares No voitng rights under De
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than 20% of shares No voitng rights under De T corp voting rights under 271 o Appraisal rights No appraisal rights for A corp No appraisal rights in asset deals Note - no appraisal rights if buyign stock either Accounting o Purchase or pooling o Recording of goodwill Securities law o Registration required? Can argue 4(2) private palcemnt, or 506 safe harbor Could argue tehse are accredited investors Because own 20% of the compnay, assets over 1 million minimum So just form D o Proxy Statemtn Required A corp shareodlers get voting rights, so scheduel 14A filed T corp private so no proxy statemtn requried HSR o Filing requirement? o Yes 100 mm + 10 mm person, size of person test met

Transaction #4 Purchase of 100% of assets and assumption of 100% of liabilities of T Corp for $120 million in cash Tax Because this is all cash, not a tax-free reoganization -so look at Cash for assets line o TC-SH Yes immedaitely taxable because a taxable transaction o NOLs Transfereble NOL's will not transfer to A corp But if T Corp has some NOL's can used to offset gain T Corp will see at corpaote level o Taxable to T Corp Yes b/c gain at t corp level o Good will recorded? yes o Step up in basis yes Corproate o Board approval Yes A corp -141 Yes T Corp - yes 271 o Shareholder voting rights T -corp because sale of substailly all assets 271 A corp sharehodlers No voting rights- cash deal
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 No voting rights- cash deal o Appraisal rights No for A corp, no voting rights No appraisal rights for T corp because asset trasnaciton Accounting o Purchase or pooling Purachse accoutning o Recording of goodwill Securities law o Registration required? 33 act is not implicated because no shares being issued o Proxy Statemtn Required A corp shareodlers aren't voting, no proxy statement T corp will need a proxy statement because sahroelders voitng HSR o Filing requirement? Yes, see above Question 2: For this question only, assume T Corp is a publicly traded company with a widely dispersed group of shareholders and is listed on the New York Stock Exchange. How would your answers to Question 1 change, if at all? If T-Crp was public Would need S-4, lose 506 exemption Because T corp would have widely held stock s-4 would cover proxy statement for A corp shareodlers and reigstration of securiteis o Would be proxy statement for A corp, T corp and registration all in one package T Corps shareholders would have appraisal rights, but market out exception b/c public company, but appraisal rights not restored b/c gettign stock in public compnay i.e. a cash out merger will undo the market out exception, but that's not happeing here, it's a stock deal Question 3: For this question only, assume A Corp acquires T Corp for $45 million (instead of $120 million). Assume further that T Corp had sales of $150 million in 2010 (instead of $90 million) and has one controlling shareholder, Mary Rodriguez, who holds 60% of T Corps stock. Ms. Rodriguez has personal investment assets of $30 million and holds a controlling interest in no firm other than T Corp. How would your answers to Question 1 change, if at all, with respect to Hart-Scott-Rodino consequences only? If buying stock from a public company - Tender offer - need ScheduleTO, and need to comply with requirements fo the williams act Because transaction size is 45 million, it's 50 million or less, not subject to HSR filing requiremtns If it was over 50 million HSR filing requirements if o Comemrce test Met here - 2 manufacturers o Size of transaction test Met if over 50m o Now size of person test
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o Here: Acquiring person - A- Corp A corp has no controlling parent aCquried person - Mary Rodriquez Ultimate parent Entity So she's considered the Acquired Person Acquired entity - T - Corp Test applied A corp is more than 100 mmm dollar person (they have 300 mm sales) Acquired Person (Rodriquez) has 30mm And told to assume T corp has sales of 150 mm b/c she controls it, all of their sales are attributabletoyou For HSR purpsoes - only majority control counts as control So here, size of person test is met if the deal was large enough And she'd be requried to file Question 4: Of the four transaction options presented in Question 1, which transactional form would you be most likely to recommend if you represented A Corp? Which would you be most likely to recommend if you represented T Corp? Why?Note: If you need more facts to answer any of the above questions, please state what those facts are and how they would affect your analysis. The 4 types of transactions Reverse subsidiary merger Cash-for-Stock Stock+Cash for Assets Cash for Assets Considerations: Tax implications Timing Consumation of transaction Liability shield Cash vs. stock Debt - balance sheet concerns Stock - worry about dillution Run down RSM Cashforstock Stock +Cash for Cash for assets (here- too assets much boot treated same as cash for assets deal)

Tax
Tasxable tc-Sh no (A-Corp not terribly concerned, only in so much as
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Yes

Yes

yes

concerned, only in so much as luring T corp into it) NOLtransfer (A-Corp wants yes these, NOL offset own taxable liablities) Taxable to T corp (same as no taxable to T-corp sharholders, no A corp's problem, but has to do with whether T corp will agree to it) Goodwill recorded (A corp wants this, can reduce tax liability by amortizing good will) Step up in basis no Yes no no

No

Yesyes

yes

No

yes

yes

no

No

yes

tes

Unless NOL's are more valuable than a ibility to record good willa nd step-up basis, you'll want stock+cash for asses deal or the cash deal for assets o From T corps perspective, don't want to pay tax So transactions 1 and two more attractive b/c no double tax RSm hnot taxable to TC -sh But maybe prefer cash deal to get cashed out Rsm

Cash-forstock

Stock +Cash for assets (here- too much boot - treated same as cash for assets deal)

Cash for assets

Corporate Board Approval Yes (A and T) A-Corp, T-Corp Votign Rights (A Yes (a (NYSE) corp, T corp) Yes (this process takes time) Appraisal rights No A corp yes T corp
33 Act No (4(2)
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Yes No

Yes yes

Yes Yes

No no

Yes (NYSE) YEs

No Yes

No No
No

No No

No No

No (private placment No

33 Act Registration

No (4(2) ( private placement form D) Yes (for acquierer sharheodler, but not Target)

No

No (private placment No exemption - form D)

34 Act Proxy Statmetn

No (no Yes (a Corp No sharhoelder sharolders voitng on s have transaction) voting rights)

o Here - note that T corp is a private company, less wory about voting rights o Want to avoid appraisal rights Takes a while Judment must be paid in cash Msut raise this cash And uncertaintiy related to valuation - judge determiens it Could be more than what you paid other shareholders o Here- because T only has 5 shareholders- if one dissents and demnads appraisal rights - will end up paying 20% of consideration in cash o Timing considerations Where no voting, faster (and no proxy statements) Cash for stock faster than asset deal Asset deal , need to list all the assets, indivudal bilsl of sale Avoid SEC Purcahse accounting all the way across ehre Liability considerations o Liability shield Rsm, cash for stock T corp remains own corpoate entity Cash for assets, stock+cash for asssets All those assets roleld into A Corp Cash vs. Stock consdierations o RSM, Stock +Cash deal Dilutecurrent stockholders o Cash, Stock+ccahs, Cash for Stock Add debt to balance sheet Even with additioanl earnings from target corp, probably with greater number of shares earning pers share number is lower than what acquierer had before transaction Target company sharolder preferences o Cash vs. stock Depends on profile of sharolders Do they want to share in the upside Here- small private company - maybe they do dcare For managemtn A corp Maybe don't want to cash out management of T corp- keep some skin in the game o Timing Most people want to clsoe it quickly In public company, pressure to consumate quickly to avoid another bidder stealing deal o Liabily shield If they're sharhoedlers going forward, prefer liablity shield, if not, prbobably indifferent
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prbobably indifferent But probably not dominate concern Best for A corp o Cash for assets? Best for T corp o Rsm or cash-for-stock Dependign on wehther they want cash or to have How to decide o Persuasion? Timing of consumation - Cash for stock (favors T corp) o Pay higher (or take discount, to get deal you want) o One issue: Recording goodwill For tax purposes- it's a good thing Amoratization expense For financial statement purposes Shows up as an expense, will show earnings being lower Even though in theory, sophisticated investors will no this is a non-cash expense, not going to the underlying value of the business Purchase acconting Only have to record this is fhtere's an impairment Need to check annually for an impairment Or if something out of the oridnary happens that makes you look at assets i.e. must keep looking at business you bought and see if its still worth that amount Not as good as pooling accounting Would never have to write down these assets even if impairment o Going to have to negotiate Value things Value of NOL's Value of double tax If target corp doesn't have NOLs to offset this first level of tax at T-Corp level, this is a problem What generally happens, dpends on partiucalr transaction, unusual to find asset deals, because generally difficult to parties to wrap head around double taxation If T corp doesn't have NOL's, don't want to pay double tax So most common is the RSM or cash for stock deal If parties really want to shield themselves form laibilties and only want to take on assets you desire, then aset deal might make sens But need to take into account successor liability Cash vs. stock Timing considerations Company's financial accounting statements o So no one answer Talk to clients What are their concerns o On exam Typically will be given preferences of parties as it relates to cash vs. stock, liablities, but if other assumptions, or questions to be answered, talk about what those factors are.
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about what those factors are.

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Enhanced Scrutiny
Saturday, March 10, 2012 7:25 PM

On Monday, March 12, we will conclude our discussion of the combined problem set and begin our discussion of Assignments #15 and #17. You should read the cases in Assignment #15 (you may ignore the CMCMA materials) and, from Assignment #17, pages 1, 22 (first paragraph only), and 25-40 ONLY of In re Smurfit-Stone Container Corp. Shareholder Litigation. You should be prepared to describe what Revlon duties are and the circumstances under which such duties are triggered.
Enhanced Scrutiny (cont.) 15 CB: 550-563; 575-604 CMCMA: 567-570 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. Paramount Communications, Inc. v. Time Inc. Paramount Communications, Inc. v. QVC Network, Inc.

Enhanced Scrutiny (cont.)

17

CB: 604 (introduction to Section F); In re Smurfit-Stone Container Corp. 618 (beginning with Note 1) - 620 Shareholder Litigation (available on CTools) In re: Netsmart Technologies, Inc. Sholders Litigation (available on CTools)
CB: 651-667 In re The Topps Company Shareholder Litigation In re: Lear Corp. Sholder Litigation (available on CTools)

Enhanced Scrutiny (cont.)

18

On Tuesday, March 13, we will conclude our discussion of Assignment #17 (Netsmart) and begin our discussion of Assignment #18 (Topps and Lear). For each case, you should be prepared to describe the sale process employed, describe the types of deal protection devices used, discuss why Revlon applies, and describe the court's rationale with respect to whether the board satisfied its Revlon duties. On Wednesday, March 14, we will conclude our discussion of Assignments #17 and #18. Reminder: Simulation group lists are due on Monday by noon. Have a great weekend.
Pasted from <https://ctools.umich.edu/portal/tool/ab3f7ecd-5934-4476-aefe-2c8e345e9cc7?panel=Main>

Ch. 7 Fiduciary Duty Law AD's summary Purpose Earlier cases have all sorts of discsusions l-t Smurfit makes it seems like this comes down to Cash vs. Stock AD: what matters Facts and circumstances Looking to see if a control premium will be available in the future A few absolutes If you sell your company for 100% cash, Revlon triggered Lose control premium If transaction is a 100% stock transaction, with widely disperesed of fluid sharheolders, in acquierer, this does not trigger Can still get control premium Question Does active bidding rocess matter at all? Transasctions, folowign transaciton, have a cotnroling sharheolder Whether the company as a defensive response, triggers a recapitalization - can this put company
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Transasctions, folowign transaciton, have a cotnroling sharheolder Whether the company as a defensive response, triggers a recapitalization - can this put company in revlon mode

The Board's decision to Sell the Company Revlon, inc. v. MacAndres & Forbes Holdings (Del. 1985) When board recognizes company is for sale, duty of board changes from preservation of the company as ac orporate entity to the maximization of the company's vlaue at a sale of thefor the stockholders bneefit Trigger: Board's authorization permitting managmetn to negoitate merer or buyout with a 3rd party was a that he company was for sale F: Company tryign to fend off hostile bid - seeks white knight Responsibliteis of board in this circumstance As price in auction got higher- became clear break-up of company was inevitable Board's authorization permittign managmetn to negoitate a merger or buyout with a thrid party was arecognzition the company was for sale Duty of board changed from preservation of revlon as copraote entity to maximization of the company's value at a sale for the stockholders' benefit Altered baords repsosnbilties under Unocal AD: Break-up invetiable? Does this mean if high enough bids are out there, company is in revlon mode Without action by board Auctioneers charged with getting best price for company Must the board always Revlon Triggers: Revlon duties triggered for deals that:: Mgm seeks to consumate a transaction where there is a chagne of control Consideration is 50 (smurfit)-60% (in Re. Lukens) Less than 33% non-stock okay (in Re Santa fe Pac Corp) Or, stock deal where the target is marjoeity owned by unaffiliated, disaggregated group of minoirty SHs and after consumation there will be a controlling SH or a coehsive group actign together as a controling SH (see QVC) Whenever there is a breakup of the compny Duties begin when Company embarks on the transaction Or resposnds to an unsolicited offer Paramount Communciations, Inc. v. Time, Inc (Del. 1989) Revon duties triggered when (without excluding other possibilities) coproation is in an active bidding process sekeign to sell itself or to effect a break up ((See Macmillan) Or in resposne to a bidder's offer, target seeks an alterntaive transaction invovling the break up of the compnay (see Revlon) Here: no change of control b/c bfefore and after merger, control of Time will exit in a fluid aggregation of unaffiliated sharehodler representing a voting marjoity Class F: Restructing of time warner transaction was defensive resposne to paramoutns hostile bid So acitons by Times board looked at under Unocal Revlon duties did not apply in this context Proposed merger between Time and warner did not trigger revlon b/c control of Time remained in the market - mass of shareholders 2 times revlon may appy (see above) Court rejects P's assertion that entering transaction in the first place put time into play, tirggering Revlon duties Revlon duties not triggered merely by entering initial merger agreement Market seeign you as being put into play is not relevant
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Revlon duties not triggered merely by entering initial merger agreement Market seeign you as being put into play is not relevant Court rejects that b/c Time sharolders would have minority of Mergerd company stock that this was a sale of cotnrol Questions after Time Does Revlon hinge on abandonment of corporation's continued existence Is the break-up meachansims for selling company that improtnat Did court abandon the 'change of control test? Not mentioned in list from Time Paramount Communications, Inc. v. QVC Netwrok, Inc. (Del. 1994) Revlon duties tirggered when A corp undertakes a transaction that will casue a change in corporate contorl; Or a break-up of the corproate entity i.e. even sale of corporate control without breaking up the corporate entity triggers Revlon i.e. break-up is not necessary when sale of control Obligations on the board in Revlon mode Under facts of this case, Paramound directors had obligation : To be diligent and vigilant in examinig crticially the Paramount-Viacom transactiona dn the QVC tender offers To act in good faith To obtain and act with due care on, all material infomraiton reaonably available, inlcudign info necessary to compare the two offers to determien which of these transacitons or an alternative course of aciton, would provide the best value reaosnably available to the stockholders; and To negotiate actively and in good faith with both Viacom and QVC to that end Class Delware court resolved questions above After this case: Clarifies circumstances under whc Revlon can be triggered Any transaction in which corporate contorl passes to 3rd party Sale or merger for cash/debt securities Merger for securities, even a strategic merger, that transfers control to a private company or a public company with a controlign SH(s) When a company determines to sell self for cash or active bidding process that will clearly cause break-up of company In Re Smurfit-Stone (Ctools) (2011) 50/50 cash-stock deal is a change of control (preliminary injunciton stage) Procedural posture: dimissal of preliminary injunciton Thus the conclusions aren't binding precedent - caged in language like 'likely to succeed on their argument' Board might find faced with Revlon duites in at least three scenerios (below is the updates to these rules attached to the language used in this case) When a corporation initiates an active biddign process seeking to sell itself or 1994(Arnold vs. Society for Savings) Active biddign process is enough to trigger revlon duties But to fall within thi scategory, target must initiae the active bidding process 1995 (santa Fe Pacific) P's rest claim on Revlon duties on allegations board intiated active bidding process But this method of invoking duty requires board to seek o sell control of company o effect break-up of company No sale of control here - board was committed to stock for stock i.e. sell itself means "sale of control" So auction isn't just to sell yoruself, must be selling cotnrol In re NCS Healthcare (Chancery court) Revlon analyis not implicated soley by seeking to conduct an auction that if

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successful might end in a change of control Merely seeking an auction that could possibly lead to a change of control will not be enough for Revlon duties to be triggered Merely engaging in auction not enough Especially if you don't know what the tranaction will look like by the end of the day to effect a business reorganziation involving a clear break-p of the compnay Business reorganization Change structure i.e. capital structure Selling off pieces, buyign pieces Can do this as a matter of course, or as a repsone to a hostile takeover Make company lessattractive Try to convicne white night to want to engage in a transaciton by initaiting an asset-lock-up Selling assets at below market price Interco case (late 80's, cahcnery court) If it's ordianry course- and just decidign wheter or not o restructure- BJR applies Only duty to be informed, but don't need to shop the pieces But once we go into circumstacne below- reorganization is in repsone to bidder's offer and seeks an alternative transaction ivnovlign break up of company UNOCAl applies, not revlon Where, in resposne to a bidder's offer, a target abadnons its long-term strategy and seeks an alternative transaction ivnolign the break-up of the company Liondel v. Ryan If you merely respond to an offer from a hostiel bidder by saying not interested, don't want to go forward, we're going to be steady state, Revlon isn't inmplciated Revlon only implicated when you abandon long term stragetgy and start negotating with hostile bidder or other parties for an alternative transaction Revlon duties do not arise simply because 'in play' Only when embarks on own itiative or unsolicted offer if chagne of control Time for action under Revlon didn't begin intill started negoating the sale When approval of a transaction reults in a sale or cahgne of control Read about why cash transactions trigger Revlon duties No long run for shareholders, last opporutntiy to get value out of business Control premium will be gone and never available again Sale of control means A sale for cash/debt securiteis (i.e. non-stock consideration) 100% cash is a Revlon Transaction Smurfit stone Even if less than 100% can still be change of control No bright line rule for what percentage Santafe- 33% cash did not trigger Lucas - 62% cash would trigger Smurfit- 50/50 Chancery court said, although ot free from doubt, said 50/50 was change of control b/c from perspective of target compnay sharehodler, no tomorrow for half of investment Time warner/ Qvc Stock deals do not trigger revlon duties 100% stock, or at least mostly stock will not trigger revlon duties if Shareholders in target corp are unaffialited sharehodlers in aggregation, a widely disperesed group And the same thing on acquieres end But, Qvc - if following consumation, there will be a controlling sharehodler who can set course of company, make decisions for target company,
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who can set course of company, make decisions for target company, you're relegating target sharehodlers to minority status, at mercy of controller Here- Revlon Duteis will apply Here- what is contorl Can be less than a marority -if enough to effect policy Footneote in QVC says could mitigate contorl with minority protections like supermajority voting requirement But if 30% shareholder- supermajority would favor this controller - veto power over everything But if he owns 50+%, then supermajority might be only way for minoirty shareodlers to stop him Or could have ruel where need majority of non-controlling shreholders to approve Summary/ Wrap-up Basically - selling company for cash triggers Revlon At the end of the day, won't know if revlon triggered till you know what the consideration is What's most important is what the consideration is All that really matters is wehther this is a cash or stock deal In practice- if we're doing an auction, just act like Revlon is going to apply b/c if ultiamte deal is mostly cash, then you need to show you complied with Revlon duties the whole time One circumstnace: Controlled subsidiaries MacMullen v. Bearing f: Sale of Argo Chemical 80% owned by Arco Sold for cash to Lyondell Did Revlon duties apply? Do revlon duties apply to sale of cash for corpoation that has an 80% stockholder Knowing what we know about the goals of revlon should revlon apply Already no opportunity for control premium But not sharing in future upside But neither is Arco So we don't need to worry about directors not maximizing sharheodler values - Arco is going to exercise monitoring role as sharheolder Arco not like managers with conflicted itnerst- should have same economic interst as minoirty sharehodlers Will get same price Chancery Court: Revlon duties do not apply here Should not apply in situations where control of company rests with conrolling sharheolders instead of public Public sharehodlers have no control premium No opprotunity to lose No expecatations of receiving control premium This is not the sort of change of cotnrol intended in a revlon court Supereme court: Revlon duties are going to apply despite there being no change of control in the classic sense Agreed no real change of control But because entire busienss is being sold, SH's being cashed out,board obliged to see to it that cashed out at higherst amount psosible Arco Could have sold 80% stake for wathever amount they wanted i.e. they could sell control But Arco Chemcial board has duty to act with informed judment, msut maximize balue for minority shareolders So this points ot being cashed out, no long run is more important than losing control

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premium But how does this mesh with concern about stock-for stock deals versus cash deals So maybe cares about both, but cocnern of being cashed out more improtant AirGas case Chancerlor: What if majority of shareholders want to tender shares to hostile bidder, is the boad then thrust into Revlon? - as fiduciary of sharheolders, must you fulfill their desires Court: no Controlling sharhoedlers cashing out minority i..e just froze out minority to make subsidiary wholly owned No revlon, anlayzed udner Entire Fairness Recapitilzations that can trigger Revlon Black and Decker Case Target boards recapitalization plan consituted shift of control triggering revln duties Took majority control out of hands of shareolders and put in hands of management team and the employee stock ownerhsip plan Changed control from public market place, to insider -> thus Revlon applies Thus under duty to see if altenrative transactions giving higher vlaue to sharhoelders On language Of the 3 factors accumluated - only th 3rd - on approval of a transaction., is what carries Maybe 1 is making it clear role must take some role, bea active Doesn't think 2 does any work Because these are evaluated under Unocal It's ony once approval of trasnaciton do they look at the rest of the process ot see fi ti complied Note AD would get rid of Revlon Duty of care and loyalty should cover these We should beef them up

Ch. 7 Fiduciary law Board Approval of Acquisiton Agreements and the Use of "Deal Protection Devices" Notes Use of "termination" Fees Use of "Break-Up" fees Use of "no-shop" clasues Use of "fiduciary Out" clauses Thing Netsmart Lear Topps Why does revlon apply? Sale of control - 100% cash transaction

Questions for this section Why revlon applies How deal initiated Process- formal auction? Who controleld the process? Who managed the contacts with the potential buyers throughout the transaction Conditions under which the definitive agreeement was signed Deal protection devices given to chosen buyer In the courts view, what process features/ deal protection devices
In re: Netsmart Technologies, Inc. Sholders Litigation (available on CTools)Violated Revlon (J. Strine)

Summary 100% cash - rEvlon triggered

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Summary 100% cash - rEvlon triggered Targeted private equity No strategic buyers, gives good idea this will be cash at outset and Revlon duties will apply Why revlon applies Because cash transaction

How deal initiated After acquisition - attention from private equity firms Overtures form private equtiy firm Had histoyr of makign sublte overtures to strategic buyers- but to no avial Process- formal auction? Limited formal auction Approach 7 private equity firms 4 responded
Who controleld the process? Who managed the contacts with the potential buyers throughout the transaction Conway (management)- > Even though had a special committee Appeared to be lax, didn't take mintutes, couldn't remember whether or not they actually met Conditions under which the definitive agreeement was signed Picked highest bidder Deal protection devices given to chosen buyer Window-shop provision - post signing market check Allowed to consdier unsolicted bids Can't solicit bids Contrast with go-shop provisoin Can actively solicited bids Termination/ Break-up fee 3% Not triggered on naked "no" vote Note: termination fees triggered on naked no vote seend by courts as coercive Shareholders worried about costing company large amount of cash Approapirate break-up fee is payable if sahreodlers say no and company engages in transaction with another bidder in 1 year or 18 months courts are worried about break-up fee, termiantion fee from being so that other bidders are discouraged from making another offer So try to balance need to protect bidders investment in time and captial Fiduciary out Fiducairy duties don't' stop upon signing merger agreemnt Continue in till company is sold So if a superior proposal comes along, still duty to look at best interest of sharheolder So rserve right to terminate agreement if sueprior prospal forsharheolders comes alogn Will still have to pay break-up fee (as long as reasonable) In the courts view, what process features/ deal protection devices Questionable dind't look at strategic buyers Relying on post-market check, espeically only with unsolicited bids, is inadequate Even though this has been approved for large caps This is a micro cap company - > not as closely followed Unlikely to see bidding wars, hostile take over attempts, etc Generally believed that Revlon does not require pre-market check But if not going to have one before hand or after signing -> not good enough Even if fidiucary out, reaosnable break-up fee If you're not actively solciitng bids form all potnetial bueyr types, you have not met your

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duties describe the sale process employed, Rapid auction process - page 1 Only pirvate equity firms (no strategic buyers) Solictited 7, received bids from 4 More detail See page 11 Targeted private equity Why exclude strategic buyers? One reason - agency cost / conflict of itnerest Managmetn wanted to stay invovled, keep jobs, particpate in upside, get perks of office Stategic buyers would probably replace managers Claimed that they had tried and failed to find strategic buyer earlier Only wanted to focus on buyers they thought most likely to be successful q describe the types of deal protection devices used, No-shop 3% termination fee Fiduciary out Window shop provison Allowed board to entertain unsolicited bids by other firms If were superior 3% break-up fee 1% reverse break-up[ fee (page 13) discuss why Revlon applies, Auctioning off company Seeking to sell it all off Take it private and describe the court's rationale with respect to whether the board satisfied its Revlon duties. Did not seriously investigate strategic buyers Or atleast did not document decision delibration enough Company changed since last shopped to strategic buyers And the shopping process was inadequate Flaws in the sale process Page 15 Says process taken with 7 PE firms passes muster under revlon

In re The Topps Company Shareholder Litigation did not vioalte revlon duties in one repsect, but did in regards to treament of Upperdeck in others (Vice Chancellor Strine)

Why revlon applies Cash transaction How deal initiated Company has been underperforming Insurgent shareholders launch proxy contest- > just before defeat occurs, Shorin (CEO) cuts deal to expand board so he can keep seat, while sitting 3 dissident board members Dissident members wants to auction company off Eisner saw trouble > called and offered to be helpful Essentially offering to take private

Process- formal auction? Didn't want to do an auction -> didn't believe there would be a buyer at auction Failed to auction off confectionary business Failed auctions considered disruptive for management SO NEGOTIATE WITH Eisner Got up from 9.25 to 9.75 Enter agreement with Eisenr Bird-in-hand Go-shop provison and fidicuary out
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 Go-shop provison and fidicuary out 40 day go-shop Authorized to seek out potnetial buyers Basically an auciton done after signing Durign go -shop8 million termination fee + 3 million = 3.2% Post go-shop 4.6% Why two-tierred termination fee? Compensated for time contiued to invest in transaction But also for court apperances purposes If go shop is going to be valid -> (non-bid chilling) want it to be as bidder friendly as you can stomcache Note: judge shrine says you can't get a deal done in 40 days A better go-shop period is to only require that bidder comes on scene in 40 days and then can get lower termination fee in the long run
Ended getting offer right before end of go-shop - got 10.75 unconditioned offer from upperdeck Who controleld the process? Who managed the contacts with the potential buyers throughout the transaction Conditions under which the definitive agreement was signed Deal protection devices given to chosen buyer Matching rights If target fidns superior propsoal, bidder can match Some argue matching rights are chilling Would have to cathc-up do due diligence, and then Eisner can just match it Courts allow matching rights, as long as limited So normally, we want to see limited matching right One matching right Must match in limited amount of time Go -shop for limited amount of time Upper Deck in a Stand Still Agreement Strine: negootaitons between Topp and Upper Deck were strained Topp worried Upper Deck tryign to get proprietary info, without being serious Question if Topp acted like enthusiastic seller, UD as an enthusiastic buyer In the courts view, what process features/ deal protection devices
Court said signign the agreement with Eisner was okay But the Standstill Agreement, and refusign to release Upper Deck Standstill: by letting you do your due diligence, need to promise won't go hostile for some period of time Or else won't share due dilligence Issue: when under stand still, Upper deck couldn't go hostile and couldn't' tell their story to the public, epxlainign why they'd be a suepriro offer So Topps was giving UD the stiff arm Court- only reaonable to realse from standstill Continuing to hold upper deck to the terms of the standstill was a problem Not delcaring them an excluded party and how they treated upper deck was een as a problem

describe the sale process employed, 2005- Topps threatened with proxy contest Promised to explore strategic options Tried selling confectionary business, but no serious buyers 2006- Insurgents cut deal with CEO - epxand board to ten, and election of insurgent nominees 1) Right before - Eisner - private equity investor called Shorin and offered to be helpful 2) Once insurgnets seated-ad hoc committee formed of two insurgent directos, two incumbent directors to evalaute strategic position a) Dissidents wanted public auction process 3) 2 other firms expressed interest but then dropped out 4) Eisenr told board might embrace 10 dolar bid a) He bids 9.24 b) 2-2 split of adhoc board whether to negotiate c) Incumben director (indpendnet) took up negioating and reached agreement at 9.75 per sahre Go shop provison for 40 days - right to accept a superior proposal
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sahre Go shop provison for 40 days - right to accept a superior proposal After MA signed with Eisner, Upper deck expressed williness to make a bid Expressed wilingness to pay 10.75 per share, subject ot conditions Topps board, voted this was not a sueprior offer At end of go -shop period, made 10.75 offer withotu financing contingency and with come hell or ohgih water promise to deal with santitrust issues Topps refused to Treqat this as a sueprior prosal as well describe the types of deal protection devices used, Termiantion fee Two-tier 8 mil (3%) if terminated to accept superior prosal during go shop If termianted after go- shop, 4.6% fee Reverse back-up fee- 12 million Go-shop And right to accept a superior propsal Standstill agreemnt Required of upperdeck prhobiting UD form kmaking public any infomraiotn about tis discussion with Topps or proceedign with a tender offer for Topps without permission of Topps board Bord refused to relive and allow UD to make a tneder offer discuss why Revlon applies, When directors have made the decision to sell the company, any favoritsim they display toward a partiuclar bidders msut be justified soley by refernece to the objective of maximizing the price the stockhodler receive for their shares Revlon applies b/c taking company private, sale for cash, loss of control and describe the court's rationale with respect to whether the board satisfied its Revlon duties. Here- P's argue Topps board motivated by desire to ensrue Topps remain under the control Here- no pre agreement public auction This is okay No posion pill, people knew pressure on company to sell after insurgents put on board Merger agreemnt Okay Go-shop 42 cent a share termination fee - not of mangitude likely ot have deterred a bidder with an interest in amterially outbididng Eisner Problem: Unconditioned bid at 10.75 Here- fiduciary obligatoion to consider bid in good faith and determine whether ti was a superior propsoal or reaonably likely to lead to one Problem - missuse of standstill Not using for any legimate purpsoe, refusal to relase upper deck jsutifies injunciton
In re: Lear Corp. Sholder Litigation (available on CTools) didn't violate revlon(Vice Chancellor Strine)

Why revlon applies Cash-out merger - for sale of control How deal initiated Icahn startged buildign psoion in Lear stock - up to 24% Icahn suggest to Lear's Ceo that a groing private transction might be in Lear's best interest Icanhn offers 35- haggled up to 36 CEO handled negotiations Said would pull offer if pre-signing auciton But would allow go-shop period as long as termiantion fee of 3% No toopping bids during go-shop perio Aggressivley shopped Lear has been free post-go-shop to enterattain an unsolicted superior bid, but none has been made Process- formal auction? Offer from Icahn - insisted on conditions for intiial agreemnt Who controleld the process? Who managed the contacts with the potential buyers throughout the transaction
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Who controleld the process? Who managed the contacts with the potential buyers throughout the transaction Here: Rossieter the CEO b/c salesman Conditions under which the definitive agreeement was signed Issue: rossieter had concerns of his own - so much walth tied in with Lear Didn't want to sell stock- would make market worry If he tried to accelearte some of the benefits under retiremtn plan would also look bad to market P: Rossieter wanted to do deal with private equity firm to get more fiancial security, take some of his chips off the table, so he shouldn't have had so much contorl over the process Contra Netsmart- didn't pass smell test Here- strine - this isn't perfect, but its okay

Deal protection devices given to chosen buyer 45 day go-shop 3% termination/break-up fee Fiduciary out for board In the courts view, what process features/ deal protection devices Court says this was all okay

describe the sale process employed, describe the types of deal protection devices used, Page 11 Termination fee
Matching rights If superior prospal prsented Go-shop 45 days Fiduciary out Board can accept unsolicted usperior third-party bid after go shop ended Reveerse temriantion fee Votign agreement requirng Icahnt to vote shares in favor of any superior prosal that AREP did not match discuss why Revlon applies, Taking company private- change of control and describe the court's rationale with respect to whether the board satisfied its Revlon duties. P's claims Did not take reaosnable efforts to secure highest price reasoanbly avaialbe for Lear sahrehodlers Corut- negotation process less than ideal but does not warrant an injunciton Less than ideal: Rossiter (CEO) had economic interst not shared by Lear's public stockholders Seems to favor icahn No pre-agreement auction Okay though Icahn could walk Huge impact on stock price Wrap up of these three cases All Revlon cases All by same judge No single blue print for how to maximize sahroelder value consistent with Barnkap (sp?) - no single blue print for gettitng to maximaition of shaorelder value What is required: the BOD has raeosanble basis for what it does Must know enough about the market and the business you're trying to sell to be able to say you maximized balue Circumstacnes where the only way to have that infomraiotn is to go thorugh a formal auction

Other cirucmstnaces, hwere you have more infomraiton, and don't need to full market check
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 market check Or maybe just need a limited amount of partipants for If you have a great deal of knowledge of market and busienss itself can you just go and sign up a party without any formal auction or canvas of the marketpalce This situation is extremely rare Openalnd will show us the cirucmstances where that is okay Deal protection devices Get a sense of what type of devices are used in these transactions Break-up fees Makes target less attractive First bidder matching rights What kind of process is likely to pass muster This is about infomraiotn Netsmart: small, microcap company with limited anlayst coverage and low trading volume must do pre signign market check Can't rely post market go-shopping Lear: large companies more likely to have a post-signign market check approved Large companies, upon annoucning transaciton, other companeis will step forward AD: but still, if you're a advising a company, tell them to aonly do this with good reason i.e. bankruptcy, or something else Need some reason to say its better to take the bird Netsmart: problems only looking to finacnial bueyrs instead of strategic buyers Netsmart: check before busienss has signifacnlty changed doesn't count Topps: must treat bidders fairly In dealign with competing bids, should be even handed except as necessary to maximize price
If you have reasosn to think one bidder if more serious, you can give them some preferential treatment if you don't think anyone else is being serious Should not rely on the presence of a modest break-up fee Break-up fees Provide compensation to first bidder on the scene incase they lose transaciton See also reverse break-up fee If break-up fee is triggered by a naked no-vote, that's coercive But more traditonal break-up fees, paid upon corporation entering alterantive transaciton in some period of time, those aren't coercive Must make sure tail is not too long i.e. is it in effect for 12 months, 18 months? Amount? 3% is considered reaosnble But courts have authorized higher break-up fees depending on the circumstances 3% of what? Leer: should be 3% of total enterprise value TEV = market vlaue of the equity plus any debt that is assumed in the trasnction minus any excess cash Mkt value +debt - cash In Re Cogent (2010) V.C. hasen: instead of saying TEV should always be the basis for caclulating break up fee - some circumstnaces where equity value makes more sense F: T corp had singifacnt excess cash and very little debt So enterprise value 436 million, but equity value was 943 Usually, equity value is lower than enterprise value Termination fee here 3% of Equity value, but 6% of TEV Court: should look at particular facts and circusmtances of company at issue when deicding to use TEV or equtiy value Use TEV where Buyer assuems signaifacnt amount of targets debt as part of acqusition See Lear
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acqusition See Lear Use Equity Value Where target has signfiacnt excss cash and little or no debt, equtiy value is approaptiea measure Here: even if sizable part of targets assets are liquid, bueyr still must coem up with cash to purchase assets, transaciton is about the amount of money flowing into stockholders pockets, not (missed this) Don't want it to provide too much determination Lyondell Chemical co v. Ryan What does it mean to not fulfill your Revlon duties Perivosuly, we've looked at cases where stockhodlers are trying to get an injunciton agaisnt a trasnaction But sometimes sharehodlers want monetary damages Directors briefed their fiducairy duteis, shareodlers want cash for tha In indivual capacities if shareholders had something at stake But can also sue as a derivative If company has 102(b)(7) provison- duty of care vioaltions arent' soemthing directors can be liable for So this prevents payment of monetary damages for breaches of duty of care So if you want to get cash for breach of a duty -left with breach of duty of loyalty Includes bad faith F: Delaware superem court asked to look over a chacnery court opinion that suggest a failure to adhere to Revlon duteis as the Chacnery court thoguht possible here could be a breach of duty of lotyalty because of bad faith and failure to adhere to fiduciary duties Decision of lyondell to enter all-cash transaction with Basel Basel filed notifying 8% interst in Lyondel - expresse ditnerest in acquiring them Lyondell met- discussed this - adopted wait and see appraoch to see if any ptoential suitors would epxress itnerst Basically did nothing after notifyign Later- Basel met with Ceo to discuss prices Next day - 1 hour meeting to disucss offer But also othr meeting to discuss this transction Ended up signing up fo rthis transaciton with basel - asll cash- submitted to stockholderstockholders approved Questions When is revlon triggered Being 'put into play' does not trigger revlon duties So 13d notifying of 8% ownerhsip of stock, did not trigger revlon, alslowed to take wait and see Can't be involuntarily thrusted into revlon mode But on july 10 - board authorized negootaiton of sale of control of Lyondel Note: chancery court wanted to measure from may 2010, sayign from may-july, board should have carried forward revlon duties, but Supreme court said this is the wrong way to look at it Did board members adhere to revlon duties Can breaches of revlon duty constitute bad faith Chacnery court seems to think there are preodrained steps a board is reuqried to take when revlon duties attach Superme court: no set of duties- only one duty - get highest price reaosnably attainbalbe for sharehodlers in sale of control Court: for their to be bad faith, have to see the driectors utterly fail to get best value for sahrehodlers Here- not the case Sought advice of fiancial advisors Attempted to negotiate or higher offers Continued to meet and talk about provsions and tryign to figure out what is best itnerst of stockholders
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itnerst of stockholders At most: a vioaltion of duty of care here But no moentary damages (Assumign exculpted in charter) AD: an issue that made made practicioners made people nervours No standards for revlon But failure to do it can be an act of bad faith And there is some liablity So here- this case sayign most we're talking about is a duty of care breach unless you didd nothing, made practicioners chill out So mostly from lyondal case Not going to get monetary dmages for looking to failure to fulfill revlon duties Ominicare f; NCS insolvent- threat of bankruptcy When company is insolent - board has ficusiry duties to company as a whole, not just ahroelders Board isnructed angemtn to look for offer NCS received offers from Omnicare and Gensises NCS rejected first overtures of ominicare b/c only interested in buyign assets in bankruptcy situation This would have protected Omnicare from NCS's creditors Genesis transaction more attractive 24 million to stockholders Would have also paid creditors off in full NCS board authorized managmetn to negotiate with genesis Genesis ahd previsuly lost bidding war to omnicare (hurt feelings) So Genesis worried about being stalking horse - wanted gurantees Exclusivety - right to negoiate exclusively Lock-up Basically Genesis was seeking a way to make this transaction bullet -proof Structure of transcation with Genesis Standard merger agreement stuff Force the vote procevision Authorized (at that time) in 251(c), Now 146 Says board of directors can agree to submitting transaction to sharoelder vote even in managmetn no longer approves the trasncation So here- sharoedlers given right to vote even if board no logner approves No fidicuary out No way for board of NCS to termiante the merger agreement if it withdrew it's reccomendation for the merger Voting Agreemetns with 2 major stockholders Held 65% of voitng power Required by geneiss to enter into transaciton Questions: 1. Was NCS in Revlon mode? Why or why not? Chancery: No, stock-for-stock merger, no sale of control Chancery: Alternatively: here didn't engage active biddign process, or fi they did, they abanonded it upon enterign agreement with genesis: AD: getting to, what we talked about last week, the active bidding process doesn't mean anything unless you enter into a change of control transaction Why is the court hesistant to say wehther or not Revlon is triggered in these sorts of sitautions? AD: I don't know, maybe the supreme court feels like they don't want to give definitive guidance on Revlon They ,some day in antoher case, want to say Revlon was triggered

2. What were the terms of the voting agreements between each of Outcalt and Shaw and Genesis? Why was NCS a party to the voting agreements? (Hint: Consider the provisions of DGCL
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Genesis? Why was NCS a party to the voting agreements? (Hint: Consider the provisions of DGCL Section 203.) The agreement is structed to Outcalt and Shaw have to vote in favor of the merger agreement Working in combination with the force the vote provision and the lack of fiduciary out made transaction a Complete Lock-up So even with a sueprior proposal, and the board withdraws recommednation, still fored to give trsanction up for vote And with 65% of the votes commited to transction no matter what Bam - lcoked up Exceprts from voting agreements Section 8(b) - sharhoedler irrevocably and unequviocalby agrees to vote allt hes ahreos at the stockholder meeting wehre any such prosal is submitted in favor tof the prosed transction and agaisnt any transaction competitng i.e. "you irrevocably give us a promise you'll vote yoru shares in favor of this transaciton" Also granted Genesis irrevocable proxy to vote shares on behalf of the transaction No way for transaction to fail AD: this isn't the only way they had to do this Could have bought the sahres form Outlaw and Sahw directly and gotten 60% of voting power But probably didn't that b/c didn't want to have a 2 step transaction Would have to deal with fidcuairy duty of squeeze out transaction Why is NCS a party to the voting agreements? Section 203 - interested stockholder? Imposes 3 year ban on indivduals becoming nterested stockholder Can get out if Board of directors approves Get 85% of shares in transction where you became interested stockholder Approved by 2/3 vote of non-interested stokcholders Intersted stockholder includes not just owning the stock, but also those who control shares, have option to acquire, or right to vote such stock pursuant to any arraingment unless the arraignmetn to vote such stock arises pursuant to a proxy solication, See more in 203 Trip 203(c)(9) - runs afould of defintion of owner Granting proxy to geneiss makes geneiss a 65% owner of NCS And without board approval to beocme interested stockholder, could be subject to ban on interested stockholder transactions And this would bmake it diffuclt to engae in trasctions dispsoing of assets, securing assets, merge etc So without NCS's approval of purchasing this stocks, any subsequent transactions with NCS would be a banned business combination AD: possible they could have relied on exemption from 203(a)(1) If business combination is approved by board of directors, and that is the trasnction they became an interested stockholder, won't be an interseted sharehodler But to do that, transction would have to take place under same terms as merger agreement at time of voting agreement So NCS beign a party to agreement- that is board approval At time became intersted stockholder- board can approve the busines combination or the transaction by which the perosn became an interested stockholder 3. What test did the Delaware Supreme Court apply to determine the validity of the deal protection devices used in the NCS/Genesis merger agreement? Were the devices deemed valid? Why or why not? Unocal Tests b/c board is putting protective measures in place to protect deal Note: unocal rquired previosuly b/c ominprDirector entrenchment worry with fending off transactions Here- board is losing their job - selling to genesis Rationale here: both board and shareolders have a roel in approving these trasnctions By putting these protections in place, shift balance of powers more
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 By putting these protections in place, shift balance of powers more towards directors, makes it less likey sharehodlers will have a protective vote So by subjecting these kinds of transcitons to enhanced scrutiny - protect sharehodlers The test Need reasonable groudns for threat to coproariton and stockhodlers if the prefered transaciton is not consumated Good faith and reaosnble investigation Enhanced if approved by a baord comprised of a marjroity fo outside directos or by and indpendent commmittee Need proprotaitane repsonse to threat Coercive? Yes- Draconian -> invalid Preclusive? Yes -> draconian -> invalid Range of reaonablness? Look at the deal protection mechnaisms as a whole So even though each of these indially is okay, together, not oaky i.e. force the vote provison allowed by 145, voting agreements allowed Applied Yes coercive Forces upon stockholders a managmetn-sponsed transaction here: predetemriend outcome Taking out of shareodlers hands Yes preclusive Deprives stochkholders of the right to receive all tneder offers or prelcusdes a bidder form seeking controlb y fundamentally restricint proxy contests or toehrwise Here: No alternative, no opportuntiy for supeirro propsal to succeed Unlike poison pill +staggered board- can just wait out 2 elections, this can't be undone ever Catchign back-up Does the board of directors hav ethe authority to lock-up a transaction before beign submitted to sharoedlers Unocal test applied in this context Does this transaction demonstrate a reasonble basis for threat to stockholders if merger not consumated Reasonable investigation Enhanced if approved by majority disitnerested directors Here- court says this isn't a problem -yes reaosnable investigation, etc to actual threat Was deal protection debice reasoanble Here- this is the problem As of the date the vote is taken -already a predetermined outocme There was enough time for things to chagne between signign agreement and the sharoelder vote And this mamtered here- superior prosal came but sharelders not free to accept it Coercive Preclusive Range of reaosnableness Altenative basis Lack of a fiduciary out makes the contract void as amatter of pbulci policy Footnote 88 Other cotnracts don't rquire a fidcuary out because invovle judments wihn exclusive province of the board of directors power to manage the affairs of the corproation 3 devices here Force the vote provision (146)
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3 devices here Force the vote provision (146) Voting agreements with amjority stockholders with NCS as aprty Merger agreement lacked fiduciary out Dissents Rare 3-2 decision Usualy try for consensus Following omnicare - concerns about what this meant Basically, publicy traded compnay where 2 sahrehodlers of 65% of voting power (although only 20% of economic interest Misalignment of economic interst and voting interests Had entered into exclsuive negotiation agreemnt with genesis despite knowing that omnicare was on the horizon J. Steele( dissenter) Given retirment of majoirty justice, has suggested that decision has limited life expectancy Ominicare was controversial Practioners debated ability of corp to lock-up merger transaction without violating omnicare One method Sign and consent transactions (see Openlane) Stockholder approval of merger agreement obtained by shareodler consent almost immediately after entering merger agreement entered As opposed to waiting till shareholder meeting to vote This is different than voting agreement in omnicare- where the votes would locked up going into the sharheodler meeting But sign and consent- just get majroity shaorelders cosnent required within 24 hours of entering into agreemetn, or both sides can walk away with no penalty

In Re Openlane (2011) F: Stockholder challenge to merger with KAR auciton Services Directors and afifliated firms, and officers and employees hold 68.4% of openlane i.e. company is controlled by board members (affilaites) and employees Openalen expected decline in revenue b/c fewer vehicles coming off lease Hires Montgomery to help sell and value company Mont puruses several strategic buyers Eventually settled on cash-out transaciton with KAR Signed merger agreement Required majority of sharolder cosnent within 24 hours Got majority consent P's claims (Treadway) Revlon breaches Cash-out transaction - so Revlon triggered Board duty to botain highest price reasonably obtainable for sharelders P's issues No soliciation provision Process Looked at 3 strategic purchasers Netsmart Had investment bankers aucitiong off to financail buyers, but did not prusue strategic buyers Said had talked to strategic bueyrs for lyears, no interest Can't focus on only one set of purcahsers, you're a different company now then ou were when looking at stategic bueyrs Here- only 1 type of buyer- only stategic, no-finacial bueyrs Reconciliation: 2 directors on board had worked for PE firms, had intimate knowledge of that market place, knew Openlane wouldn't be attractive to finacial bueyrs because no growth story Board of directors had impeccable knowledge of business Hands on working board
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 Hands on working board Know a lot about companies business Problem with just calling up a few private equtiy firms? i.e. want not just cal some even though you think they wouldn't be interested Board: worried about leaks Court- bullshit- PE firms do deals all the time, they know shit should be confidential, and you know you'll be a party to confidnetiality agreement Court- more to worryabout from strategic buyers (compeitotrs) because they work with your suppliers, etc Erik: your reputation will be hurt if you're calling around with a shitty deal If revlon is a felxible standard- no signle blue print, reaosnable for board of directors sayign its not woth the time, resources to do something like this AD: but this doesn't relaly cost that much No fairness opinion Court - not a problem Alhtough smith v. Van Gorkham hints that eveyrone needs a fairness opinion b/c said internal analsyis done by board not adequate Other form of valuation here - by Montgomery, even though no officail fiarness opinion Even though the numbers were 'stale' May be reaonble for small-cap company to assume its not worth the money to get a fairness opinion Why is the above okay? Board has impeccable knowledge of business operations So don't need the process to get the knolwege, if you already have it Alignment of interest b/c board and officers held majority of company This gives more comfort, in additional to impeccable knoweldge These people have own money on line But don't most executives? Unlike other cases- this management group wasn't going to get the bulk of their pay from salary/options from purchaser So more alignemtn here than in typical situation Barkan case: no signle blue print for Revlon Type of infomaiton revlon requries board of directors to have depends on the circumstnaces If in middle of ongoing auction and don't have good informaiton about market place, directors can't actually take defensive measures or take other steps thwarting auction orfavoring one bidder over another If you have a single offer, no reliable grounds for determining the adequacy of price, must have active survey of the market Singlew offer by relaible evidence to asses fiarness of transaction, direcotrs are permitted to approve a transaciton consistent with their revlon duties without condtucting an avtice survey of the market But this circusmtnaces are rare Here Impeccable kneolegdge, and did conduct at least some limtied check, so this is like the second category above. Violate tenets of Omnicare p's complaint: this deal is an absolute lock-up Need board vote and sharehodler vote Ominicare - voard vote and locked up decision before sharoelder vote could take place Here- board voted, but shareodlers immedaitely consente Here:
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Here- board voted, but shareodlers immedaitely consente Here: No voting agreement In fact, not even going to minority sharoelders - just cosnent solication with insiders Distinction: In omnicare- lag time before signing of agreement and voting Here- voting 24 hours after signign agreement Unlikely topping bid could emerrge in this period But if it did, shareholders didn't have to sign it Thus sharolder vote not a predetermiend otuocme DGCL authorizes voting by shraoelder consent And no rule about how long to have between signign of merger agreement and shareholder vote Ominicare - actual superior bid on the scene Here- no one else has appeared on the scene But really, no one was going to show up Unlikely there'd be a hostile bid for a micrcap company (see Netsmart) On lack of fidcuairy out: "page 27 footnoe 53: "ominicare may be read to say that ther emust be a ficuiary out in every merger agreemtn" "nevertheless, when a board enteres into a merger agremetn that fails to contain a ficuiary out it is not ata ll clear that the court should automatically enjoin the merger with no sueprior offer. Hostile bidders sholuld be on notice that an agreement without a ficuiary out may be unenfocrable. AD: can't consider an offer that hsn't been made, and it's not going to be made if deal will be approved by sharehodlers within 2 days So you have to be the kind of 3rd party bidder that wansts openlane so badly you'll try to enjoin this transaciton so you can make a hostile run at the company Here: no other bidder was going to materialize, market check adequate here, probably the best deal they could have gotten But it's hard to reocnicel with Omnicare b/c lack of ficiaruy out Why is the no-shop/ no socliation clause okay? Court: doesn't even matter here Court Transaction could be termianted in 24 hours if shareholders didn't approve AD: the court is saying they can get out of this deal if sharehodler don't like it, so no -shop doesn't really matter here AD: would you recommend to clients that they do something like what Openlane did here WCCI Steel If stransaction is one for which consent must be obtained within 24 hours and target board can temriante trsanction if no conent received, that you don't have ago -shop rpvosion, doesn't' matter b/c it would be like the agreement never signed Ad: A COUPLE OF words on this ficuairy out concept and what courts mean when they say they want to see a ficuairy out HP-Compact merger agremeent: No-solicaiton (aka no shop) But unsolicted superior proposals can be considered if failure to do so would be breach of fidciaury dutey Can furnish infomraiotn Engage in negotation i.e. if you hear from outside leaga conusel that fairlure to engage woud breach fiducairy duteis If it turns out as a result of that negoitation process you want to change reccommendation, you have a right to terminate this agreement In NCS/ genesis - effective fidcuariy out would have said If NCS receives a proposal likely to result in superior offer, NCS can termiante the merger agreement with NCS and the voting agreemtn with outside directors Can you reconcile this opinion with Netsmart?
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 Can you reconcile this opinion with Netsmart? Problem: initially targeted only strategic buyers Small company, OTC, etc -> must it be put up for auction Here- active solication with a variety of potnetial purchasers Court says failrue to pursue any fiancial buyers understnadble in light of the Board's impeccable knowledge - page 18 Problem - market check 8 months before merger agremeent executed - was this too long ago like strategic buyer check over years in Nesmart? Here- business outlook had not improved in that time 2. Can you reconcile this opinion with Omnicare? Problem here: shareolder voting agreements? Here- just having shareodlers adopt the and approve the merger agrement (page 6) Also here- after longer deliuberation In omnicare - ther actually was a superior offer between the board approvalof the merger agreement and the sharolder vote - here- sharelders just straight up approved it,

Fiduciary Duties Related to Takeover Defenses

Takeover Defenses

It is possible for a hostile acquirer to go directly to the stockholders, bypassing the board, in the form of a Tender Offer Because management doesnt have any say in these transactions, they are forced to put in mechanisms to make it difficult for a hostile acquirer to succeed. Typically, a classified board w/ a poison pill, will deter a hostile acquirer; these defenses are considered impenetrable. Shark Repellant Charter Amendments o In Delaware requires the vote of the majority of the outstanding shares to modify the charter; to submit to shareholders, must put in a proxy statement o If Target has a poison pill, Hostile Acquirer will have to negotiate w/ board to remove pill, become shareholder & sue for breach of fiduciary duty for not removing pill & considering offer; or can launch a proxy fight to take control of the board o These amendments are typically designed to make it harder for a hostile acquirer to replace the board of directors. Waive SH written consent / special meeting power DGCL gives SHs the power to act by written consent w/o a meeting; however, this can be eliminated by provision in the Charter Makes sure that SHs dont have the power to remove directors w/o cause and dont have the power to call special meetings. Under DGCL, these powers arent given by default, so usually dont worry about this Classify/stagger the board of directors - thus have to wait 2 full election cycles to stack board with your cronies. OK pursuant to DGCL 141(d) Effective Staggered Board ESB curtails the following: o Removal of Board - 141(k) can only remove BOD members for cause (being against the merger or refusing to redeem pill not cause) o Packing 223 - only board can propose new directors and appoint them Dont want stockholders (hostile acquirer) to be able to change the bylaws to fill new vacancies on the BOD. o SHs cant act by written consent and cant call special meetings Fair Price Amendments : Requires a hostile acquirer to pay the same price in a twostep freeze out merger. Sec Reg requires fair price for only TO, but fair price amendment can require same price for entire transaction. (Pennsylvania has a Fair Price Statute) o Pro/Con of Shark Repellant: If dont already have them in Charter, can take a long time to implement b/c of required SH vote. This is b/c proxy stmnts must be distributed, etc Fair price amendments wont work if someone willing to pay same price on both stages SH may not support amendments to charter, especially Inst. Investors. Poison Pills Highly effective and virtually impossible for a hostile acquirer to overcome.
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 o Highly effective and virtually impossible for a hostile acquirer to overcome. o Effect of precluding any takeover activity unless it can be removed o Gives Target SH the right to acquire shares of the target (flip in) or the acquirer (flip over) at a substantially discounted price in the event a shareholder or group of shareholders acquire a certain threshold of shares (10%, 15%, 20%). Target shareholders will have a large stake in the target (if flip over) or large stake in the acquirer (if flip in diluting acquirer stake). o Makes a hostile takeover much more expensive o Can be instituted via board action; shareholder vote not required. Charter can specify shareholder vote to install, or can install via charter amendment, but Board can do it on their own. Can be implemented very fast DGCL 157 & 170 give the BOD rights to issue shares and declare dividends w/o shareholder approval. This is what give the BOD unilateral power to implement the poison pill o After the distribution date, the Right is essentially an out of the money option. When Acquiring Person crosses the threshold, it becomes a flip- in or flip-out option that is substantially in the money. o Must have sufficient unissued / authorized shares: If not enough unissued / authorized shares, a SH vote will be required to amend the charter. o Dead-hand, No-hand, and slow-hand provisions have been invalidated in Delaware o Shadow Pill All companies have a shadow pill anyway b/c the can be put into place in about an afternoon. Law firms have various templates, can design them fast, and Board can enact them. o Typical features: (1) Redemption: gives BOD the power to cancel poison pill before it is triggered; (2) Exchange Provision: BOD can reduce effect or cancel poison pill sometime after it is triggered but before acquirer controls; (3) Expiration: typically poison pills expire after a certain number of years. o Large, Institutional Investors Prefer the Following Provisions (dont like poison pills) Trigger - % of stock that has to be acquired before the poison pill becomes effective. Delaware Cts say at least 10% for a trigger is the smallest you can have. Recommended 20% - Lower the trigger, the more restrictive the pill, and the more potential shareholders it will capture. Want some activist shareholders Practice 15% - About 80% of pills have this level. The lower the trigger, more economic dilution to acquirer Flip-In Amount # of shares of target issued for each old share of target (each right) Recommended As small as possible Practice 1 to 1 Flip-Over Provision target shareholders have the option to purchase discounted stock after the potential takeover Recommended not to have one Practice Dont have them TIDE Provision Three-Year Independent Director Evaluation means that every three years, the independent directors look at the poison pill and say whether the company needs it. Resolution is not binding, but it could exert pressure on management. Recommended - Yes Practice - Yes Sunset Provision pill goes away on after a specified period of time. Recommended 10 or less Practice 10 to 15 years Chewable / Jawbreaker Chewable means shareholders make decision to invoke the pill or rescind it once an offer has been made. Jawbreaker means that shareholder votes to invoke pill or rescind it, but there are restrictions make it hard for shareholder to make the decision. Recommended Chewable w/ following types of restrictions: want shareholder vote w/I 20 days. Proof of financing should be limited to proof of 50%. Dissolvable in face of certain premium over mkt value Practice Jawbreaker Real Money SHs have to spend their own money to exercise Rights Recommended Yes
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Legal Standards Related to Takeover Defenses

Recommended Yes Practice No Governance Protection Basically, do the shareholders have any kind of rights to say or influence how the BOD implements the poison pill. Perhaps a Special Committee decides to implement. Recommended Yes Practice No Shareholder Approval for implementing the pill in the first place Recommended Yes Practice No (few) Dead Hand - Dead hand poison pills are pills that only continuing directors can redeem, until (if) they expire many years after the transaction Recommended No Practice No Redemption Vote Does the board have unilateral authority to redeem the pill. Corp. governance experts like to see shareholders have the vote so that Board doesnt act in pure self-interest. Recommended Yes Practice No Changes Discretion to amend the poison pill typically stays with the board. Like for the board to tie its hands and not be able to change the pill whenever they feel like it, but in practice, board has the ability to change whenever it wants Recommended No Practice Yes

Business Judgment Rule Court will defer to a boards business decision unless the plaintiff can show that board is not (1) disinterested, nor (2) independent, not acting with (3) due care or in good faith, and not acting in an (4) informed manner. Any rational business purpose. Hard for Plaintiff to overcome. o Disinterested Directors should not have any financial or personal interest in the decision that is not shared by the SHs. A majority of people making the decision must be disinterested to get BJR protection. If Dir has a COI, best if leave room o Independent Being controlled by or economically beholden to another director who is interest in the transaction o Due Care / Good Faith Cannot make a conscious decision to lie or withhold information from SHs or other directors. Also bad faith if outside the bounds of what is reasonable o Informed Reasonable Effort under the circumstances to acquire all relevant material information. OK to reasonably rely on corporate records or experts. Liable for inaction. Figurehead director not protected: worst case scenario for uninformed judgment. Not protected by BJR If director doesnt even read the report or doesnt come to the meeting, less likely to get BJR protection. Entire Fairness Analysis Applies if (1) BJR Rebutted, or (2) there is a transaction that is conflicted, that the board has approved, and the transaction has not been sanitized by shareholder vote or approval of disinterested investors, then BOD must show entire fairness. Entire Fairness is a holistic review entailing (1) fair price; (2) fair dealing/process (1) Fair price is the dominant consideration, even if not procedurally fair, if price is fair then transaction is probably OK (2) Fair Dealing/Procedurally fair: how was the transaction initiated, timed, negotiated, structured, disclosed, approved o Fairness judged at the time the transaction took place, not in hindsight. o Look at (1) & (2) together in the same analysis neither factor is dispositive. Implementation of Takeover Decisions are somewhere in the middle. Is it more like a business decision or is it more like a conflicted transaction? Board should be able to have a say in who buys and for how much, but they also have an interest in keeping themselves in office. If the measure is within the boards 141(a) duties to manage the business and affairs of the corporation, then follow the Unocal, Unitrin, Time line of cases If the measure affects the shareholders ability to choose their agents, or would make their right

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 to vote pointless, follow Blasius cases. Prologue Moran OK to put defensive measure in place Bid Materializes Unocal, Time, Unitrin (1) threat (2) proportionality Epilogue Revlon Takeover Defenses: The Unocal-Time- Unitrin Rule Unocal Corp. v. Mesa Petroleum Co. (if there is a (1) reasonable ground for believing threat to corp policy & effectiveness exists, and (2) defensive measure is reasonable in relation (i.e. proportional) to the threat posed, defensive measure is valid & gets BJR) Mesa owns 13% of Unocal; Proposes a 2-step tender offer o (1) 37% of Unocal @ 54$ / share o (2) 50% @ $54 / share in junk bonds Unocal responds w/ $72 per share self-tender that excludes Mesa Issue: Validity of a corporations self-tender in which it excludes hostile acquirer Questions: o Did Unocal have the power and duty to oppose a takeover threat it reasonably perceived to be harmful to the corporate enterprise? Yes, 141 pursuant to power to manage business and affairs of the corporation; 160(a) conferring board authority upon a corporation to deal in its own stock.; fundamental duty and obligation to protect the corporate enterprise, which includes stockholders, from harm reasonably perceived, irrespective of source. o [I]f so, is its action here entitled to the protection of the BJR? Yes (Unocal Test) Reasonable ground for believing threat to corporate policy and effectiveness exists (no entrenchment motive) o Approval by majority of independent directors. o Good faith / reasonable investigation Structural Coercion - There is a coercive threat, such a twotier tender offer where the back-end is worth less than the front; threat to shareholders & corp. Greenmail Inadequate price Defensive measure is reasonable in relation (proportional) to the threat posed. Unless it is shown by a preponderance of the evidence that the directors decisions where primarily based on perpetuating themselves in office, or some breach of fiduciary duty such as fraud, overreaching, lack of good faith, or being uninformed, a Court will not substitute its judgment for that of the board. Selective exchange offers, like that employed by Unocal, are now illegal. Under Rules 14d-10 and 13e-4(f)(8) require that tender offers be made to all security holders of the class of securities subject to the tender offer. Note: Corporation may deal selectively with SHs if not acting primarily out of entrenchment. This why we allow Poison Pills.

Moran v. Household Intl, Inc. (Del. 1985) (adoption of poison pills as a preventive measure is w/i authority of BOD, and are a legitimate exercise of business judgment, provided BOD passes Unocal test) Moran implemented a flip-over poison pill as a preventative measure Issue: Is the adoption of such a plan w/i the authority of BOD? If so, have they met their burden under the BJR; Unocal Test? o Yes, is w/i the authority of the BOD b/c 157 gives BOD the authority to create rights to purchase the companys shares o Yes, met their burden - Unocal Test Reasonable grounds for believing threat to Corp policy & effectiveness danger of bust up takeovers in the form of two-tier tender offers, thus: not for purposes of entrenchment Reasonable response in relation to the threat posed according to court, poison pills counter two tier tender offers; can redeem them later Dicta: Plans are not absolute Boards still held to fiduciary duties in choosing to exercise Rts not for purposes of entrenchment
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o not for purposes of entrenchment o BJR to use of poison pill will apply if Bd satisfies the Unocal test Policy: Implementing a pill might deter some bids. Question is then, do you think it is best for shareholders and the corporation for all possible bids to come to light, or is it better to deter some bids that may be low premium / coercive at the risk of board entrenchment Hostile Bidders Best Strategy Most hostile bidders are already owner of shares, so their best route is to challenge the BODs Unocal analysis. There are other methods, but they are not that effective for getting around the pill. Paramount Communications, Inc. v. Time Inc. (Del. 1985) (Under Unocal, when implementing defensive measures, Target BOD has broad discretion in the analysis of potential threats (e.g. shareholder confusion); to be proportionate, response must not be coercive (cramming down one option to SHs) or preclusive (impossible for acquirer to obtain target).) Issue: Did Times BODs actions pass the Unocal test? o (1) Did they have reasonable grounds to believe that there was a threat to Times shareholders and Times corporate policy & effectiveness? Yes Directors satisfy the first part of the Unocal test by demonstrating good faith and reasonable investigation Shareholder Confusion - Threats included Time shareholders (1) SH sophistication - accepting Paramounts cash tender b/c misconstrue the strategic benefit to the merger w/ Warner; (2) conditionality - wouldnt understand the conditions attached to Paramounts bid; (3) timing - wouldnt understand what is going on b/c Times proxy has already been sent out, Paramounts offer came in 11th hour Notion of threat has been expanded o (2) Was Times response reasonable? Yes - 141(a); Directors are not obliged to abandon a deliberately conceived corporate plan for short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy. Response was not preclusive b/c Paramount still had other options to acquire Time or Time-Warner; Paramount not precluded from making an offer for the combined Time-Warner company or from changing the conditions of its offer so as not to make the offer dependent upon the nullification of the Time-Warner agreement. Not coercive b/c not aimed at cramming down on it shareholders a management-sponsored alternative, but rather had as its goal the carrying forward of a pre-existing transaction in an altered form. Policy Just Say No to tender offers; Time could be construed to permit targets to adopt showstopper defenses in response to even the most attractive bids, but couldnt this be coercive to shareholders by cramming down the option of independence on its shareholders? On the other hand, Time may stand for nothing more than the ability of targets to protect preexisting business plans from acquirer disruption even if the consummation of these plans makes the target less attractive (or even repulsive) to the particular acquirer; use of poison pills, thus, is still subject to review. Unitrin Inc. v. American General Corp. (defensive measure is not disproportionate (i.e. draconian) if not coercive or preclusive; must be within the range of reasonableness) CURRENT STATUS OF TEST Reasonable ground for believing threat to corporate policy and effectiveness exists (no entrenchment motive) o Must show good faith and reasonable investigation, thus have reasonable grounds for believing that there is a threat e.g. Investment banker fairness opinion that offer not fair o Enhanced if the investigation / decision made by a committee of outside & independent directors Non-Draconian Reasonable Response (proportionate) o coercive (shareholders forced to take managements alternative or forced to vote for a transaction that is not in their best interests; cramming down on shareholders; discriminatory effect on shareholders) or o preclusive (mathematically impossible for hostile bidder to acquire company; realistically unobtainable; not preclusive so long as a proxy contest remains a viable alternative for attaining the acquirers goals); then defensive measures simply must be in the range of reasonableness.
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o then defensive measures simply must be in the range of reasonableness. If so, a court must not substitute its judgment for the BODs. Decision gets BJR.
Moore Corporation Ltd. v. Wallace Computer Svcs., Inc. (D. Del. 1995) (illustrates the ease with which a target can satisfy Unocal to implement a defensive measure (1) show a threat (e.g. uninformed shareholders); (2) that defensive measure is not coercive or preclusive (given the availability of proxy contest), and in the circumstances, defensive measure falls within the range of reasonableness) Moore announced a tender offer for 100% of Wallace common stock at $56 per share; sent proxy materials to shareholders to nominate three individuals to the BOD. Wallaces recent strategy was beginning to show returns; its investment banker felt its recap plan would bring $60 per share; had anti-takeover devices in place. Filed suit for an injunction against Wallace b/c they refused to redeem their poison pill Unocal Test o (1) Threat - Moores tender offer poses a threat to Wallace that shareholders, because they are uninformed, will cash out before realizing the fruits of the substantial technological innovations. o (2) Coercive or Preclusive - Not coercive because retention of the pill will have no discriminatory effect on shareholders, as is generally the result in any situation involving a coercive offer; not preclusive because will have no effect on the success of the proxy contest, thus Moore can still take over Wallace. o (3) Range of Reasonableness Shareholders did not have info on the upward trend in Wallaces earnings, retention of pill falls within range of reasonableness for them to appreciate that trend. Policy if proxy contest is adequate alternative for hostile acquirer, is there any circumstance in which a board might be legally required to redeem a poison pill? Case seems to stand for the just say no strategy. Chesapeake Corp. v. Shore (Chancery Court) (If BOD passes bylaw in the context of a hostile takeover, it will be evaluated under Unocal; if threat is mild, bylaw not likely w/I range of reasonableness). Shorewood had a classified board provision in their bylaws, and the directors amended the bylaws to add a 2/3 supermajority vote of shareholders to remove the classified board provision. Court found the supermajority provision to be preclusive under Unocal/Unitrin because management had control of 24% of the shares, thus an acquirer would need to convince 88% of non-management shares to repeal the classified board provision In the alternative, Court found that the amendment was not within the range of reasonableness b/c the threat was mild b/c Chesapeake had indicated that it was willing to negotiate, Shore had another option, unlikely that shareholders would be confused b/c mostly Institutional Investors. NOTE Not clear that Delaware Sup Ct would uphold this decision. Might not be preclusive b/c still possible repeal. Ct seemed to substitute its judgment in judging the threat mild for the BODs judgment.

Omnicare: Complete lockup violates Unocal (251 Force the Vote + Voting Agreement by controlling or influential SH ) even though reasonable grounds to believe there was a valid threat, preclusive (mathematically impossible to get around this) and coercive (forces down minority SHs throats). Ex if Voting agreement was not made by a controlling SH (ex 30%), could still argue coercive if that SH had lots of
power and minority SHs feel that there will be retribution from the 30% SH.

Interco: (Good case to use when challenging poison pill, but perhaps abrogated by Time. 100% TO or 2stage TO at same price may not be coercive; Ct ordered Interco BOD to redeem pill. Court further said that Interco could use non-preclusive defenses, specifically, the contemplated sale of its Ethan Allen subsidiary. Holding: Company may use non-preclusive defenses, e.g. selling off key assets. Dont have to maintain the status quo Interference with Voting Rights: The Blasius Rule Cases such as Unitrin and Moore suggest that a defensive response, including a refusal to redeem a poison pill, will not be deemed preclusive under Unocal if a proxy contest remains a viable alternative. Some devices make proxy contests difficult or less effective (e.g. dead-hand, slow-hand, and no-hand provisions in poison pills). Apply Blasius - Courts are very reluctant to allow the BOD to block a shareholder voting transaction by changing the makeup of the BOD. Apply Unocal to takeover defenses more generally Blasius Industries, Inc. v. Atlas Corporation (Good faith defensive actions of BOD in the context of a hostile

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offer that are designed for the primary purpose of interfering with shareholder voting rights/disenfranchising shareholders are subject to a compelling justification test). Blasius acquires a 9% stake in Atlas and proposed a leveraged recap or sale, that the Atlas BOD rejected Blasius then delivered to the Atlas board a signed written consent recommending that the BOD (1) adopt a precatory resolution recommending a restructuring proposal, (2) amend the bylaws to expand the size of the board from 7 to 15, (3) elect 8 named person to fill the new directorships BOD of Atlas responded by amending the bylaws to allow for 9 members, and they appointed both of them. Rule if BOD acts are done for the primary purpose of impeding the exercise of stockholder voting power, BOD must demonstrate compelling justification for such action. o Franchise of Shareholder Voting Approval of Merger (Time Unocal Std.; ok to restructure transaction to takeaway right to vote) Contested Director Election (proxy contest) (more exacting std) Shareholders are the principals; BOD members are the agents. Here the Agents are trying to choose themselves, and this conflicts with the principals power to choose its own agents Having a classified board comes as the result of explicit or tacit SH approval, but when the BOD takes affirmative steps to thwart the SH franchise, should be disallowed o What would constitute compelling justification? (1) Not satisfied by SH ignorance, inability to appreciate true value, or management knows better; (2) Only satisfied to thwart an extremely structurally coercive bid when a better alternative is available If there is a coercive offer on the table, hostile acquirer has 25% in open market, does TO for 26%, and announces second step at price BOD thinks is inadequate. Mgmnt currently has something it thinks is better, and no other defenses such as Poison Pill or DGCL 203 are available, then maybe will be allowed to impede SH vote. fn 5 BOD will often know what is in the Corps best interest, but is irrelevant when the question is who should comprise the BOD. Stroud v. Grace (when actions interfering with the exercise of shareholder voting arise during a hostile contest for control (e.g. proxy fight / tender offer), apply Blasius to the second prong of the Unocal test; b/c the action interfering with voting rights is a defensive measure) If the board action interfering with franchise, shareholder voting rights and the ability to choose the members of the board, arises during a hostile contest for control, such action invokes both Unocal and Blasius. o Reasonable grounds for a threat the hostile tender offer o Defensive measure reasonable in relation to threat (proportional) defensive measure touching upon issues of control that purposefully disenfranchises its shareholders is strongly suspect under Unocal, and cannot be sustained without compelling justification, Blasius. Note: Since this case, courts generally have limited Blasius to board action that has the effect of either completely precluding effective shareholder action (see Blasius) or snatching victory from an insurgent at the last moment. o Snatching victory from the jaws of defeat: State of Wisconsin Investment Board v. Peerless Systems Corp Chancery Ct applied Blasius in which BOD sought to adjourn an annual meeting of the shareholders after it became clear that the BODs proposal would fail if the polls were allowed to close o Doesnt have to be a majority: MM Companies, Inc. v. Liquid Audio, Inc. Del. Sup. Ct. applied Blasius to a BODs decision to expand the BOD from five members to seven members and to appoint two additional directors, all in response to a dissident shareholders effort to obtain two seats on the corporations BOD. This eliminated the possibility of deadlock or changing one of the members to a dissident. Blasius applied b/c defensive action . . . [that] compromised the essential role of corporate democracy in maintaining the proper allocation of power b/w the shareholders and the board . . . was taken in the context of a contested election for successor directors. o Golden Cycle, L.L.C. v. Allan Chancery Ct refused to apply Blasius to the BODs hasty designation of a early record date for a shareholders meeting (which the Pl argued would effectively disenfranchise those shareholders who purchased stock following the announcement
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effectively disenfranchise those shareholders who purchased stock following the announcement of Pls bid for control) b/c SHs could still remove and replace the entire BOD, should they choose to do so. o In re The Mony Group Shareholder Litigation [W]hen the matter to be voted on does not touch on issues of directorial control, courts will apply the exacting Blasius standard sparingly, and only in circumstances in which self-interested or faithless fiduciaries act to deprive stockholder of a full and fair opportunity to participate in the matter and to thwart what appears to be the will of a majority of the stockholders, as in State of Wisconsin Investment Board v. Peerless Systems Corporation. Where such circumstances are not present, the BJR will ordinarily apply in recognition of the fact that directors must continue to manage the business and affairs of the corporation, even with respect to matters that they have placed before the stockholders for a vote. Dead hand and Slow Hand Pills Camody v. Toll Brothers, Inc. (Chancery 1998) (dead hand provisions in shareholders rights plans are invalid under Delaware law; if some directors have greater powers than others, must be in charter (141(d)); also possibly violates Blasius and Unocal) Dead hand provisions operate[] to prevent any directors of [the target], except those who were in office as of the date of the Rights Plans adoption . . . or their designated successors, from redeeming the Rights until they expire . . . . o Dead hand poison pills are pills that only continuing directors can redeem, until (if) they expire many years after the transaction. Issue: Is a dead hand provision invalid as ultra vires, or as a breach of fiduciary duty, or both Statutory Invalidity: Under 141(d), (1) if one group of directors has greater voting power, must be stated in charter; (2) right to elect such directors is reserved to stockholders, not the directors themselves; (3) and under 141(a), dead hand would impede the ability of the new directors to manage the business and affairs of the corporation Fiduciary Duty Claims; o Blasius dead hand would create a structure in which shareholder voting is either impotent or self-defeating. Precludes hostile acquirer from waging proxy contest or coerces them to vote for incumbents b/c new directors will not be able to redeem pill o Unocal dead hand is coercive b/c it disenfranchises shareholders by forcing them to vote for the incumbent directors or their designees if shareholders want to be represented by a board entitled to exercise its full statutory prerogatives, and is preclusive b/c eliminates proxy contest as a means to gain control b/c directors elected in such a contest will be unable to redeem the pill. Thus, makes a proxy contest realistically unattainable, therefore is disproportionate and unreasonable under Unocal. Note Under 141 c, we do allow BOD to delegate management authority to committee, but court will not allow BOD to delegate the decision to redeem the pill to a committee Note Dead hand pill in the original charter might be OK? Would conflict with 141 (a).

Quickturn Design Systems, Inc. v. Shapiro (Del. Sup. Ct. 1998) (slow hand pills violate 141(a) b/c limit the BODs ability to negotiate the sale of the corp.) Mentor made a hostile tender offer / proxy contest to acquire Quickturn, which the BOD of Quickturn rejected, and the subsequently implemented no hand pill under which no new director could redeem the pill for 6 months after taking office if the purpose of the redemption would be to facilitate the transaction with an interested person. Issue: Is the no hand or slow hand pill invalid as a matter of Delaware Law? Holding: [W]e hold that the Delayed Redemption Provision is invalid under Section 141(a), which confers upon any newly elected board of directors full power to manage and direct the business and affairs of a Delaware corporation. o Such provisions limit[] the board of directors authority in only one respect, the suspension of the Rights Plan, it nonetheless restricts the boards power in an area of fundamental importance to the shareholders negotiating a possible sale of the corporation. Dicta: Under Revlon no defensive measure is permissible if it represents a breach of directors fiduciary duty; likewise, no measure can be sustained if it would require a new BOD to breach its fiduciary duty. Note: 141(a); 109; 151 seem to be in conflict. But Delaware courts generally interpret 141(a) to have priority over other sections. Board must be able to manage the business and affairs of the corporation.

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Circon Case (an extreme example of a BOD and a hostile acquirer that prolonged a hostile take over battle) US Surgical makes a hostile tender offer for 100% of Circons shares, along with a proxy contest to elect alternative directors. Circon CEO Richard Auhll has 11%, insiders have 14%. Circons defenses for the Tender offer include (1) Poison Pill; (2) DGCL 203 o Poison Pill is OK. 151, Unocal; Moran Circons defenses for the Proxy Contest include (1) Effective Staggered board; (2) SH consent not allowed, no special shareholder meetings o Staggered boards are OK under 141(d) o Prohibition on shareholder consent OK b/c they voted on it and approved it Circon: show that court might gloss over entrenchment or be very hesitant to find that management is acting primarily out of entrenchment motive. In Circon it looked like management was acting primarily out of entrenchment, but court kept siding w/ Circon Video: Chancery Court judge said Unocal Test allows you to retain PP to (1) Buy more time to find a better deal (2) Say status quo will generate more value (3) But not entrench yourself b/c you dont want to leave

Fiduciary Duties Related to Sales of Control

Previous section deals with actions that impede the transfer of control This section deals with standards that apply when corporations are sold Business Judgment Rule Ct is not going to invalidate a business decision if it was made in good faith and acting w/ informed judgment by a committee of distinct and independent directors (see Lyondell) When BJR is rebutted by overcoming the presumption of good faith and informed judgment, Entire Fairness becomes the standard; Cts going to look at the circumstances under which they entered into the transaction. When controlling shareholder, there is automatically Entire Fairness These contractual provisions are designed to balance the acquirers desire to protect its investment in the as yet uncompleted transaction with the targets directors judicially imposed fiduciary duty to retain the ability to consider (and perhaps recommend or accept) superior proposals. No Shops target agrees, among other things, that neither it nor any of its officers or directors will solicit, or engage in any discussions or negotiations or other activities that might lead to an acquisition proposal by a third party o Drafters goal is to minimize the likelihood of a competing acquisition proposal for the target. Typically bars active solicitation of competing proposals and preliminary discussions or negotiations that could lead to such proposals o Generally, exceptions to No-Shops are shaped by the target directors fiduciary duty to retain the ability to consider competing proposals that could provide superior value to the target shareholders o Sometimes contain provisions whereby the directors commit to submitting the original transaction to a shareholder vote even if the BOD withdraws their recommendation of the original transaction. Permissible under DGCL 146 Termination Fees target agrees to pay the acquirer a specified sum if the agreement is terminated under specified circumstances, including the targets directors abandonment, or the target shareholders rejection, of the transaction. o Typically set at 3% of the transaction value b/c not believed that courts would uphold higher fees. o Triggers Typically become payable if (1) the agreement is terminated b/c of the failure of the targets shareholders to support the transaction after a competing acquisition proposal and the target is subsequently acquired by a competing acquirer; or (2) the agreement is terminated b/c the targets BOD effectively abandons the transaction. o Purpose of termination fees is to make it more difficult for competing acquirers to top the initial acquirers offer if the competing acquirers value the target the same as the initial acquirer. Make competing bids more expensive Lock-Ups o Stock Lock-Ups In general, stock options are granted by the target to the acquirer; sometimes if merger of equals, will grant reciprocal options Option Price approximate price being offered by the acquirer under the agreement.

No-Shops, Termination Fees, & Lock-Ups

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 Value of option depends on the value of the competing bid Triggers typically the same as with a termination fee. Cash Option grantee is given the option to receive a cash payment from the grantor in lieu of exercising the option; this eases the burden on the option holder from having to raise large amounts cash necessary to exercise the option Limits on Total Profit b/c stock options are close substitutes for termination fees, care is taken to ensure that the two devices used together do not exceed the value permitted for termination fees alone ~ 3% of transaction value. Purpose is the same as termination fees. For any assumed value of the target, the initial acquirer can afford to offer shareholders a higher price b/c competing acquirer will have to pay the value of the stock option o Asset Lock-Ups Crown jewel option is the most popular form; the acquirer receives an option to buy certain core assets of the target, generally at a price set to reflect the fair market value of those assets, if the target is subsequently acquired by a competing acquirer before the purchase option expires in accordance with its terms. Makes the target less attractive to competing bidders because the target would be stripped of its most significant assets. o Voting Rights Lock-Ups shareholder agrees (1) not to transfer their shares prior to the vote; (2) to vote their shares in favor of the merger and against any action that might impede or interfere with the merger; (3) to subject any additional NCS shares they might acquire to these same restrictions Effective when negotiating with a majority shareholder or a small group of shareholders that has majority control Director approval of voting agreements If Delaware corp, should include the BOD of the target in the agreement b/c if the directors do not approve the voting agreements, the acquirer will be subject to the special restrictions on voting combinations of 203 since acquirer will become an interested shareholder w/ beneficial ownership of more than 15% of the targets shares Voting agreement could also have a No-shop but will not have the Superior Offers clause b/c shareholders do not owe fiduciary duties to each other.

Director Duties (Van Gorkom & Revlon) Get Informed, Get Best Value

Adequately Informed: (1) Must have internal/external valuation OR (2) Market Test auction sale OR (3) Reasonable Reliance / good faith on experts report [no red flags] (4) reasonably deliberate / ask questions (5) on what the highest price is that can be obtained for SHs (6) under the circumstances Smith v. Van Gorkom (Prior to a business decision, pursuant to its Duty of Care, BOD must inform themselves of all material information reasonably available to them.) Van Gorkom, Chairman and CEO of Trans Union, secretly determined he would be willing to take $55 per share for his shares. Alone w/o BOD, he secretly negotiated a merger b/w Trans Union and Pritzker based on this share price, and without any analysis of the intrinsic value of Trans Union. Management was against the merger, but BOD approved it in two hours without a fairness opinion from an investment banker, and after a twenty minute oral presentation. Rule: To overcome the business judgment rule in attacking BOD decision, must rebut the presumption that the decision was an informed one Holding: Directors of Trans Union breached their fiduciary duty to their stockholders (1) by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the Pritzker merger; and (2) by their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer. o Directors (1) did not adequately inform themselves as to Van Gorkoms role in forcing the sale of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; (3) given the circumstances, at a minimum, were grossly negligent in approving the sale of the Company upon two hours consideration, without prior notice, and without the exigency of a crisis or emergency. o Premium alone w/o other sound valuation information is not an adequate basis upon which to judge an offering price. To conduct an adequate market test, the financial community must understand that the company is for sale: (1) has right to accept better offer; (2) will distribute proprietary info on company to alternate bidders.

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (In a hostile acquisition, when the BOD recognizes that the company is for sale, the duty of the board changes from the preservation of the company as a corporate entity to the maximization of the companys value at a sale for the stockholders benefit; cant
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corporate entity to the maximization of the companys value at a sale for the stockholders benefit; cant favor one acquirer over another unless it increase SH value) After a long hostile takeover battler against Pantry Pride, Revlon sought out a White Knight (Frostman). As part of the lock-up deal that Revlon gave Frostman, Frostman agreed to support senior subordinated notes that the Revlon BOD had issued to repurchase stock. This saved the Revlon BOD from personal liability that would have resulted from breaking some of the notes covenants to secure the deal with Frostman. Issue: Should court enjoin the asset Lock-Up, Termination Fee, and No Shop so that Pantry Pride can compete on a level playing field with Frostman for control of Revlon? Rule: Under Unocal, reasonable grounds for believing there was a danger to corporate policy and effectiveness must show good faith and reasonable investigation and that the responsive action taken is reasonable in relation to the threat posed Holding: o The def measures/deal protection devices are per se permissible under Unocal o BOD breached fid. duty in using defensive measures as a deterrent to outside bidders, thus favoring one acquirer over another in an auction for sale the co. Reasoning: The Revlon boards authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the companys value at a sale for stockholders benefit. o Boards responsibilities under Unocal changed. It no longer faced a threat from a grossly inadequate bid; thus defensive measures became moot. o The directors role changed from defenders for the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company. Barkan: Exception: If there is only a single offer + adequate information to support good faith belief that SH are getting best price under the circumstances, dont need to have an auction. When directors possess a body of reliable evidence with which to evaluate the fairness of a transaction, they may approve that transaction without conducting an active survey of the market. Distinguish from Revlon: in Revlon several suitors were actively bidding for control and board had a duty to act in a neutral matter to get highest possible bid which it failed to do. This case faced with single offer. Single offer but no information auction is required. When a board is considering a single offer and has no reliable grounds on which to judge its adequacythen you need to canvas the market. Adequate Information: Salomon Brothers gave board fairness opinion -offer was a very fair price, thus board had good reason to accept their opinion and also believe that no alternative deal could give SH a better price. The crucial element in supporting finding of good faith is sufficient knowledge form the basis for belief that it
acted in the best interest of SHs.

Circumstances: Publicity, tax advantages, and Amsteds declining performance, as well as Salomons fairness opinion point to directors good faith belief that SHs were getting the best price. Market Test Always Preferable: A market survey would have made it clear beyond question to protect the SHs interests, however this is not necessary. Revlon Triggers (Time, QVC) Revlon duties triggered when: mgmt seeks to consummate a transaction where there is a change in control: (1) Consideration is [>60%] Cash/Debt OR (2) Stock deal where the target is majority owned by unaffiliated, disaggregated group of minority SHs and after consummation there will be a controlling SG or a cohesive group acting together as a controlling SH (3) Whenever there is a break up of the company One controller to another controller cash deal does trigger Revlon One controller to another controller stock deal does not trigger Revlon Revlon duties begin when: (1) The company embarks on a transaction or (2) responds to an unsolicited offer Ryan v. Lyondell Wait and see attitude did not trigger Revlon duties even though the BOD knew the bid was coming, and is a valid exercise of business judgment. Revlon triggered when board began negotiating sale of control Paramount Communications, Inc. v. Time Inc. (Revlon duties triggered when corporation is in an active bidding process seeking to sell itself or to effect a break up; OR in response to a bidders offer, target seeks an alternative transaction involving the break up of the company) Issue: Did Time, by entering in the proposed merger with Warner, put itself up for sale?
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 Issue: Did Time, by entering in the proposed merger with Warner, put itself up for sale? Rule: Revlon Holding: Times BOD did not come under a Revlon duty either to auction the company or to maximize short-term shareholder value when it entered into its initial merger agreement with Warner. o Agreement w/ Warner did not constitute a change in control b/c before the merger agreement control of Time existed in a fluid aggregation of unaffiliated shareholders representing a voting majority. o Times BOD, in negotiating with Warner, did not make the dissolution or break up of the corporate entity inevitable. Without excluding other possibilities, two circumstances may implicate Revlon duties 1. [W]hen a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company. See Macmillan 2. In response to a bidders offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break up of the company. See Revlon Note: Time created confusion regarding the traditional sale of any control test. More popular interpretation of the holding was that a sale of control would only trigger Revlon if the sale also involved the dissolution or break-up of the corporate entity.

Paramount Communications Inc. v. QVC Network, Inc. (Revlon applies when a corp. undertakes a transaction that will cause a change in corporate control; OR a break-up of the corporate entity. Directors obligation is to get the best value available for the stockholders) Paramount, run by Martin Davis, entered into merger negotiation with Viacom, run and largely owned by Sumner Redstone. The parties sought to preclude competing bids with defensive measures including: (1) No Shop, (2) Termination Fee, (3) Stock lock-up option, which if the deal feel though for any reason that triggered the termination fee, Viacom would have the option to buy 24 million shares of outstanding Paramount stock for $69 per share. QVC entered and made a hostile bid for Paramount. This triggered a bidding war b/w Viacom and QVC. Paramount eventually voted to accept Viacom offer, even though QVC offer was higher. QVC and Paramount stockholders sued to enjoin the sale. Issues: Does Revlon apply to a sale of control? Did the directors breach their fiduciary duties in negotiating these defensive measures? Holding: When a corporation undertakes a transaction which will cause: (a) a change in corporate control; or (b) a break-up of the corporate entity, the directors obligation is to seek the best value reasonably available to the stockholders. o This obligation arises because the effect of the Viacom-Paramount transaction, if consummated, is to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom. o Once control shifts, the current Paramount stockholders will have no leverage in the future to demand another control premium, so BOD must negotiate for this premium, i.e., the highest value possible. o BOD action in a sale of control is subject to enhanced scrutiny b/c: (a) threatened diminution of the current stockholders voting power; (b) the control premium may never be available to the stockholders again; (c) traditional concern in Del. Cts for actions which impair or impede stockholder voting rights Directors have burden of proving that they were adequately informed and acted reasonably. Holding: Paramount BODs process was not reasonable and the result achieved for the stockholders was not reasonable under the circumstances o Paramount BOD had the obligation: (a) to be diligent and vigilant in examining critically the Paramount-Viacom transaction and the QVC tender offers; (b) to act in good faith; (c) to obtain, and act with due care on, all material information reasonably available, including information necessary to compare the two offers and determine which of these transactions, or alternative course of action, would provide the best value reasonably available to stockholders; (d) to negotiate actively and in good faith with Viacom and QVC to that end. o Deal protection devices, even if valid in the abstract, are invalid and unenforceable if they are inconsistent with those duties. o Paramount BOD hid behind these devices, refused to negotiate with QVC, believed the QVC offer was illusory, and squandered opportunities to negotiate on shareholders behalf and fulfill obligation to seek best value reasonably available.

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Requirements Under Revlon (Barkan, MacMillan) Barkan v. Amsted Industries, Inc. (No single blueprint for performing Revlon duties, i.e. auction not required. In the sale of control, if there are no competing bids, it must be clear that the BOD was informed, i.e. had sufficient knowledge of relevant mkts to form the basis for its belief that it acted in the best interests of its shhldrs (1) Gather all relevant and necessary information that is reasonable under the circumstances. The BOD must weigh the advantages and disadvantages in seeking alternatives. (2) If subject bidders to disparate treatment, must be for the purpose of obtaining a higher price, not to favor a particular bidder) Management sponsored a leveraged buy-out of Amsted in response to share purchases from a known corporate raider. In response to the MBO proposal, several shareholders filed suit. Most of the shareholders settled their class action suit, but Barkan challenged the adequacy of the settlement Scenarios: No single blueprint for performing Revlon duties. No duty to auction. Court lays out three possibilities: o Ongoing auction BOD must act in an evenhanded manner; cant favor one bidder over the other o Single offer no reliable ground for determining price adequacy. Must canvas the market; hire investment banker; get informed o Single offer reliable evidence to asses the price (Barkan) Issue: Whether the directors of Amsted breached their fiduciary duties under the Revlon auction standard. Rule: No duty to auction; BOD must be informed Holding: The Amsted BOD met its burden and the Chancery court acted w/i its discretion in upholding the settlement o The need for adequate information is central to the enlightened evaluation of a transaction that a board must make. Nevertheless, there is no single method that a board must employ to acquire such information. o Special Committee consulted with investment bankers o Special Committee had a no shop mandate. This could indicate that a BOD wishes to forestall competing bids when there is a no shop provision and BOD has no reasonable basis on which to judge the adequacy of a contemplated transaction market survey shows good faith Here, timing (10 mos), publicity of the change in control, tax advantages to MBO (specific offeror), and Amsteds declining performance, all point to directors good faith belief that shareholders were getting the best price. o Crucial element of a finding of good faith is knowledge. It must be clear that the BOD had sufficient knowledge of relevant markets to form the basis for its belief that it acted in the best interests of its shareholders. Note: Is always best to have some limited means of canvassing the market. Dont necessarily have to conduct an auction, but do have to canvass the market to see if another offeror would have interest in the target and would pay more. BODs charge is to get the highest price reasonably attainable. MacMillan Still OK to subject competing bidders to disparate treatment during an ongoing auction. But if you decide want to use devices to subject bidders to disparate treatment, those devices will be subject to enhanced scrutiny. Must show that the disparate treatment got more value for the shareholders Use of such devices will be protected by the BJR if: (Like Unocal test) o Directors properly perceived that challenged device would enhance shareholder interests; AND o If the BODs actions are reasonable in relation to the advantage sought to be achieved or to the threat that a particular bid allegedly poses to the shareholders. Trying to find out if the directors are acting in a way that results in the highest price for the shareholders. (1) Disparate Treatment of Bidders only to get higher price Disparate Treatment of bidders during an auction: ok to treat bidders differently if you think this will enhance SH value, for example if you think a particular bidder is not serious or is just trying to hinder the transaction. But this has to be reasonable. Basically we are trying to see if directors are acting in a way that is getting the highest price reasonably attainable and not have a preference for conflict of interest reasons such as offering managers better jobs post consummation. Topps: see above Topps did not make a good faith reasonable effort to bargain w/Upperdeck. (2) Always Need Fiduciary Out Ability to Recv Superior Offers Fiduciary Out?: You should have a fiduciary out regardless of what standard applies (Unocal, Revlon) b/c without a fiduciary out it is likely that the defense is preclusive (Unocal) and it
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 Revlon) b/c without a fiduciary out it is likely that the defense is preclusive (Unocal) and it prevented you from getting the best price attainable (Revlon). Omnicare Complete Lockup not ok (Force the vote + voting agmt) Van Gorkom: Merger agreement did not authorize board to receive superior bids. In press release, Transunion did not disclose its right to receive and accept higher offers. = no market test Take deal protection measures as a package and determine how they work. need Fiduciary Out (3) Formal Auction Reqd? - No Do you need a formal Auction?: NO. Canvassing the market should be sufficient to show you were relying on enough information. However if lots of people show interest and offers are very competitive then maybe you need an auction. (4) Pre-signing Mkt Check Only if Small Cap, else Go Shop OK if reason Pre-Signing Market Check: Generally: There is no absolute duty to seek out potential acquirers or hold an auction Barkan. However must act with informed judgment which required BOD to gather all necessary and relevant information. In some circumstances this requires seeking out alternatives. [Prof]: Best Practice: should always perform at least a limited canvas of the market at least make some phone calls. Small Cap: Need some kind of pre-signing market check, at least canvass the market by placing some phone calls. Netsmart had window shop period, which it publicized through press release, but no presigning market check. Also did not consider strategic buyers b/c none were interested a few years ago. Ct said this violated BODs Revlon duties under the circumstances, mainly b/c small-cap company should canvas the market, cant rely on implicit market check like bigger companies. Larger: No pre-signing market check ok if there is a go shop AND you have some kind of reason for not doing a pre-singing mkt check. Topps: recently went through an auction for its confectionary business which did not go well didnt want to go through it again. Lear: Ichan said he would walk away if there was an auction, so board had reason not to do pre-signing market check. o **If you are a bidder, it is good to say you are going to walk if you dont do an auction, this will give the board legal cover not to have an auction. Barkan: The company was in play for 10 months, and no bidder emerged, also Salomon Bros opined that it was a really good price. Board had good reason to believe that cannot get a better price. Restated: (1) If single offer and have reasonable grounds for determining adequacy of price dont have to canvas market (2) if single offer but no information to judge price need to canvas. (5) Breakup/Termination Fees: <= 3% Breakup/Termination Fees: 3% of TEV rule of thumb. The idea is termination fees are supposed to incent people to make in offer that is materially better than the one you have in hand. When it goes beyond 3% looks less like an incentive and more like a lockup. Topps: Termination fee w/Eisner of 4.3% was okay b/c it included Eisners expenses and was explained by relatively small size of deal. (6) Mgmt Involvement in Sale Process Not Recommended, but maybe OK Mgmt vs. Board Involvement in Sale Process: Board needs to assume ultimate control, cant just let management run the entire auction The CEO should not be authorized to accept any bid without board approval. Worried about COI - example compensation packages, best practice is to start negotiating compensation after term sheet. Want to make sure that COI does not effect the price received. More Problematic in Private Equity/LBOs: Because private equity transactions are more likely to retain management, where as acquisitions by large companies have higher tendency to replace management with their own managers. Lear: the court did not like the fact that CEO was leading the negotiations, but there was no evidence this effected the price received. But to be safe, dont want to involve the CEO If you let the CEO run the process, the BOD or special committee needs to exercise oversight over the entire process. CEO should not be allowed to accept any bid w/o the BOD saying yes or no. BOD or committee
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 process. CEO should not be allowed to accept any bid w/o the BOD saying yes or no. BOD or committee members should be at every meeting w/ the bidder, and if not, CEO should report to BOD before making a decision. (7) Take Minutes Prove Deliberation Taking Minutes: (1) Do them (2) Do them right away. You need to have decisions documented so you can prove you went through a deliberative processes. Netsmart: Court hates the fact that no minutes exist for some meetings. Is highly skeptical (8) Sufficiently Deliberate Under the Circumstances (Emergency) Van Gorkom: hastily calling meeting without prior notice of subject matter, proposed sale of company without any prior consideration, the urgent time constraints imposed for nor reason. the meeting lasted only two hours, nobody read the merger agreement. There was no crisis or emergency that would excuse the board from acting so hastily. (9) Disclose All Information Reduces Delays Disclosure: (1) Need to be accurate (2) have material information that is included. Need to disclose conflicts of interest. The more common course is for Delaware courts to make you fix your disclosure, not to say that this deal cant go forward. Tell the SHs everything and see if they vote for it. Lear must disclose CEOs retirement benefits before SH vote. Topps must disclose Upper decks offer before SH vote on alternative transaction.

Deal Protection Devices: Omnicare Omnicare Inc. v. NCS Healthcare, Inc. (Absolute lock-ups are not permitted under Unocal & Unitrin; Unenforceable / Invalid if there is a Force-the-Vote provision DGCL 146, + Voting Lock-up Agreement. BOD cannot institute deal protection devices that circumvent or preclude the BOD from exercising its fiduciary duty to seek the highest value possible for the minority shareholders) NCS, a public company majority owned by two shareholders, was near bankruptcy and looking for potential acquirers. Omnicare was initially interested, but after a deal could not be reached, NCS began to negotiate with Genesis. Omnicare subsequently became interested. NCS perceived the Omnicare interest as a threat because it could cause Genesis to walk away from the deal, and then NCS would be subject to Omnicares terms. NCS entered into a lock-up w/ Genesis that included a no-shop, a termination fee, force-the-vote provision pursuant to DGCL 146, and no fiduciary out clause. The two NCS controlling shareholders entered into a voting lock-up with Genesis whereby they agreed to vote their shares in favor of the agreement; NCS was made a party to the agreement to circumvent DGCL 203; there was no fiduciary out in this agreement either. Issue: Are the BOD-approved defensive devices w/i the limitations of statutory authority and consistent w/ the BODs fiduciary duties? o Conflict b/w BOD interest in protecting the merger it approved, shareholders statutory right to make the final decision, and BODs duty to exercise its fiduciary duties after merger agreement is executed. Rule: Unocal; measures must be instituted in response to a threat, and then must be neither coercive not preclusive and within the range of reasonableness Holding: The defensive measures where instituted in response to a threat (good faith, reasonable investigation, independent committee), but they were both coercive and preclusive, and thus not w/i the range of reasonableness. Moreover, the NCS BOD was required to K for an effective fiduciary out clause to exercise its continuing fiduciary responsibilities to the minority stockholders. o Coercive b/c the defensive measures force public shareholders to accept the Genesis merger Cramming down, makes shareholders vote for a transaction that is not in their best interests NCS was a party to the voting agreement to circumvent DGCL 203, that is why the voting agreement was considered BOD action, and the voting agreement was considered coercive. o Preclusive Because defensive measures make the Genesis merger an accomplished fact, any superior transaction is mathematically impossible or realistically unobtainable, and thus is precluded from being considered. Proxy contest is not a realistic alternative o The deal protection devices adopted by the NCS board were designed to coerce the consummation of the Genesis merger and preclude the consideration of any superior transaction. The NCS directors defensive devices are not within a reasonable range of responses to the perceived threat of losing the Genesis offer because they are preclusive and coercive. o Under the circumstances of this case where a control group is irrevocably committed to the merger transaction, representation of the minority interests is imposed on the NCS BOD. NCS
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o merger transaction, representation of the minority interests is imposed on the NCS BOD. NCS BOD was required to negotiate a fiduciary out clause to protect the NCS stockholders if the Genesis offer became inferior to another offer. Note: Unenforceable / Invalid if there is a Force the Vote provision, DGCL 146, + Voting agreement / lock-up. Consider that a controlling shareholder can have less than 50% if it is a Bill Gates type of shareholder who is very influential. BOD Should always negotiate a fiduciary out. Cant absolutely lock-up the deal, but can try to deter competing bids. Revlon didnt apply b/c the deal was structured as a stock deal. Controlling shareholder may also owe fiduciary duties to other shareholders (see Kahn v. Lynch) so perhaps wise for controller to also negotiate a fiduciary out in a voting agreement.

Application of Revlon duties: Netsmart, Topps, Lear Netsmart Topps

Why Revlon Applies? Violated / Complied
Situation
Selling company for cash Selling company for cash

Lear
Selling Company for cash

Violated Revlon duties

Complied in part Violated in part

Complied w/ Revlon duties

No PS Mkt Check + Windowshop Small Cap

Court hates the fact that no minutes exist for some meetings. Is highly skeptical.

No PS Mkt Check + Go shop, Larger Co Matching rights + breakup fee

No PS Mkt Check + Go shop, Larger Co Matching rights + breakup fee

Standstill agreement prevent UD from communicating w/SH or media.

Ichan voting agmt to vote for superior bid he has 25% No pre-signing auction, OK Didnt want to lose the bird in hand (Icahn) Did have a Go Shop w/ 45 day period that allowed them to shop the company T wo-tiered term fee. (3% rule of thumb based on EV; sometimes above 3% OK)

Why?

When small cap, need pre-signing mkt check Omitted Strategic buyers, but didnt have sufficient information to omit them. Didnt call strategic buyers pre-signing actively solicit Need current information on the mkt place Had Window Shop provision Strategic buyer not going to jump deal b/c Netsmart is small, not well-known Failure to seek strategic buyers = breach of Fid Duty Proxy incomplete b/c no cash flow projections

No pre-signing auction, OK Didnt want to lose the bird in hand (Eisner)

Did have a Go Shop w/ 40 day period that allowed them to shop the company

Call directly when deal on the table /

T wo-tiered term fee; higher after go shop

But violated Revlon duties b/c did not treat Upper Deck fairly: Not even handed treatment / No good faith effort to bargain with Upper Deck; looked like mgmt favoring bidders to the detriment of SHs

Yet, could have extended negotiations w/ Upper Deck

calling them an Excluded Party, but didnt matching rts for Eisner

Voting agmt by Icahn

Everything OK

Abuse of standstill agreement to prevent UD from communicating with SH and doing non coercive TO = breach of fiduciary duties
Proxy is materially misleading

No Evidence of Revlon violation But, must disclose CEOs retirement benefits as a possible COI

Practical Action

No injunction b/c no other bid pending but need to disclose more info about decision to rule out strategic buyers and cash flow projections.

Removed standstill provision so UD could proceed w/T O. Also required more disclosure so that proxy statement is not materially misleading.

Required disclosure

Note: in each case, court required additional disclosure. Transaction was allowed to go forward after additional disclosure. Auctions are not required. Pre-signing mkt check (mkt canvas) is also not required, if there is a goshop provision. A Go-shop provision would allow the target to actively search for competing bids for a period of time after signing the merger agreement. A window shop provision whereby the target announce the deal to the world and if a competing bid expresses interest, the target will entertain it. But if you dont want to worry about Revlon duties, hold an auction. Once you sign someone up, just make sure that deal protection devices satisfy the Omnicare test. Implications of Breach of Revlon duties: Ryan v. Lyondell Breach of Revlon: Breach of Revlon duties usually is a breach of duty of care subject to exculpation, only
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Breach of Revlon: Breach of Revlon duties usually is a breach of duty of care subject to exculpation, only bad faith if utter failure to obtain best price Merely having inadequate or failed process is duty of care violation Duty of good faith is a subsidiary of the duty of loyalty, and duty of loyalty violation is not subject to exculpation Duty of Care Failure to act with informed judgment / gross negligence Duty of Loyalty (included Good Faith) Not subject to exculpation 1. Conflicted / Not Independent - Prove that you acted with personal financial interest, not shared w/ SHs; on both sides of the transaction 2. Bad Faith (subset) a. Utter failure to inform yourself of best price, zero effort b. Ill will - Consciously lie or withhold information c. Ill will - Intent to violate the law If cant rebut the BJR, Motion will be dismissed. Also if you can only rebut Duty of Care, but corp has a 102(b)(7) provision, will be dismissed if raise aff. defense Ryan v. Lyondell Chemical Co. (In determining whether disinterested, independent directors violated duty of loyalty concerning corporations possible merger with acquiring company, inquiry was whether directors utterly failed to attempt to obtain the best sale price, not whether they did everything that they arguably should have done to obtain the best sale price; Revlon violations might implicate duty of care violations for failing to act w/ informed judgment, or for negligence, but doesnt matter if 102(b)(7) provision) Facts: Lyondell was the largest independent publicly-traded chemical company in North America. Directors were independent. Bassell expressed interest in Lyondell in April of 2006, but its initial 26.50-28.50 offer was rebuffed. Filed Schedule D to acquire 8.3% in May of 2007. Lyondell BOD met, recognized the Schedule D might signal that it was in play, but decided to take a wait and see approach. Bassell CEO met with Lyondell CEO on July 9, 2007 to discuss merger at $40/ share, that Lyondell CEO negotiated up to $48. Lyondell BOD met on July 10, 2007 to consider. Deal had a termination fee, no shop w/ fid out. Lyondells advisor (Deutsche Bank) said deal was fair, and that no other acquirer would likely offer as much. On July 16, BOD accepted the proposal. In November, 99% of SHs that voted approved the merger. Directors Revlon duty to maximize sale price of corporation started when directors began negotiating sale of corporation [on July 10, 2007], not earlier date when acquiring company filed [a Schedule D] Securities and Exchange Commission (SEC) schedule disclosing its right to acquire block of corporations stock and signaling to market that corporation was in play. The duty of a corporations directors to seek the best available price applies only when the corporation embarks on a transaction, on its own initiative or in response to an unsolicited offer, that will result in a change of control of the corporation. There is only one Revlon duty, which requires directors to get the best price for the stockholders at a sale of the corporation. o Not a breach of the duty of care b/c did not apparently act in a grossly negligent manner, but even if they did, Lyondell has a 102(b)(7) provision in its charter. o Not breach of duty of loyalty b/c BOD was independent and not motivated by self interest or ill will Bad faith on the part of a corporations fiduciary will be found if the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. In determining whether disinterested, independent directors violated duty of loyalty concerning corporations possible merger with acquiring company, inquiry was whether directors utterly failed to attempt to obtain the best sale price (i.e. they did not fail to undertake their responsibilities); inquiry is not whether they did everything that they arguably should have done to obtain the best sale price. To satisfy their fiduciary duty of loyalty, decisions of a corporations directors must be reasonable, not perfect. In the transactional context, an extreme set of facts is required to sustain a disloyalty claim premised on the notion that disinterested directors of a corporation were intentionally disregarding their duties. Revlon Summary When does Revlon duties apply? You dont know until you know the structure of the deal. 1. Whenever there is a change of control a. whenever a company sells itself for cash or debt securities (stock-for-stock deals are not a change of control) 100% cash for stock
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a. 100% cash for stock 33% cash, 67% stock too little for Revlon duties (Santa Fe) 60% cash, 40% stock yes, there are Revlon duties (Lukins) one controller to another controller cash deal yes (McMullin) 1. BOD has fiduciary duties to the minority shareholders to get them as much value as possible b. stock for stock deal that results in an aggregated group of shareholders going to a controlling shareholder or some cohesive group of shareholders i. One controller to another does not trigger Revlon 2. Whenever there is a break up of the company (QVC) of control) i. ii. iii. Revlon Requirements 1. No single blueprint for satisfying Revlon duties; BOD must be informed; have knowledge of relevant markets to form basis that BOD got best value for shareholders. (Barkan) Auctions are not required. Pre-signing mkt check (mkt canvas) is also not required, if there is a go-shop provision. (See Barkan; see also In re Topps, In re Lear) a. A Go-shop provision would allow the target to actively search for competing bids for a period of time after signing the merger agreement. (See Topps, Lear) b. A Window shop provision whereby the target announces the deal to the world and if a competing bid expresses interest, the target will entertain it. (See Netsmart) c. But if you dont want to worry about Revlon duties, hold an auction. (Revlon, Barkan) 2. Once you sign someone up, just make sure that deal protection devices satisfy the Omnicare test. a. BOD cannot institute deal protection devices that circumvent or preclude the BOD from exercising its fiduciary duty to seek the highest value possible for the minority shareholders i.e. negotiate a fiduciary out Breach of Revlon duties What does it mean? 1. Ryan v. Lyondell - Bad faith on the part of a corporations fiduciary will be found if the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. a. Del Sup Ct says not a breach of duty of loyalty for bad faith unless BOD utterly fails to get the best price, or they fail to undertake their responsibilities as directors. b. Not a breach of the duty of care if does not act in a grossly negligent manner, but even if they do, could have a 102(b)(7) provision in their charter. Other considerations w/r/t Revlon duties 1. Default rule is that stock deals do not trigger Revlon 2. Issue w/ whether Revlon duties apply depends on if the minority shareholders will ever be able to realize a control premium at the time of the deal. If it is a cash deal, they are going away forever, so must get control premium now. If stock for stock deal that results in dispersed group of shareholders going to a controlling shareholder, in the future, an acquirer will only be worried about appeasing the controlling shareholder, so minority must get control premium now 3. If going to have an auction, assume Revlon is going to be triggered, unless somehow know for sure that the consideration will be all stock.
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Interference with the Shareholder Franchise

Monday, March 19, 2012 9:49 PM

On Tuesday, March 20, we will begin our discussion of Assignment #20.

Interference with the Shareholder Franchise 20 CMCMA: 576-585 Blasius Industries, Inc. v. Atlas Corporation MM Companies, Inc. v. Liquid Audio, Inc. (available on CTools) Mercier v. Inter-Tel, Inc. (available on CTools)

On Wednesday, March 21, we will conclude our discussion of Assignment #20. Note: I will hold a review session on tax and valuation considerations on Friday, March 23, from 2:30-4:30 PM in Room 236HH. The session will be recorded.

Legal standards applicable to devices that interfere with shareolder voting rights Standards of review What standard of review applies when inteference with sharehodlers franchise BJR - defential Enhacned scrutiny Unocal Omnipresent specter of directors acting for entrencthmetn motive Revlon Enhanced duty g/c directors need incetive to get highest price in sale of contol trancation b/c no tomorrow Blasius Compelling justification standard Concenred about balance of power between shareholders and directors Entire fairness Our cocnenr here Are board members acting with a proper purpose Blasius, historically was a death sentence So sTine in Mercier urged modified unocal But with Blasisus, wanted to make it a true test that people would have a chance of passing and actually able to show a compelling jsutication Before Balsius Directors actign for entrenchment movites, implicate duy of loyalty, can't be sustained in equity See Schnell But in Blasius - directors acting In good faith Blasius Industries, Inc. v. Atlas Corproaiton (Court of Chacnery) 1988 Concenr about allocation of power between shareolders and directors in regards to who makes decisions for corporation Actions taken by board members that can twhart the efforts of who will be on board should be suspeicoius Not per se invalidation of all activiteis that interfere /I mpede with sahreodler franchise But such actions subjected to heightened scruitny Burend on board to prove they have a compelling jsutication for taking such actions F: Blasuisu acquried 9% stake in Atlas - clearly wanted a take over Sought meeitn gwith management Blasius propsoed restrucitng and distribuiton of cash to sharhoelders - i.e. wanted ocmpany sold off Sell assets Cash dividend to sharehodlers Non-cash dividend B's approach Propsal to expand board form 7 to 15 and elect 8 persons to fill new directorships This would give them control In resposne BOD to this prosal - expanded bboard by two and filled with people they slected

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This would give them control In resposne BOD to this prosal - expanded bboard by two and filled with people they slected Balsisus decided to go around management and go forward with a shareodler consent Under 228(a) - sharheolders can act by written consent if you have enough (i.e. don't need a sharehodler meeting allt he time) Some companies, in charter/bylaws restrict sahreodlers ability to prevent actions by cosnent But here- no such thing Blasius set fort following thing in Consent (what he was seekign approval for) Recommend resstructing Bylaw ammendment expanding board form 7-15 Elect 8 new directors Company's charter Had staggered board So Blasisus couldn't remove some of the directors - can only be removed for cause Limit of 15 directos Blasisus wanted to expand board up to 15 (max number) and elect 8 new members, giving blasisus a majroity on the baord. Shareodler cosnent sent to management on dec 30th Atlas reacts byexpanding board from 7 to 9 Board can't ammend charter But provsion in charter gave power to amend bylaws to board of directors So they used that power to epxand board Then filled thos etwo vagancies with Atlas friendly directors Effect of expansion b/c before Balsius got consent agreemetn signed up and fianlzied - 9 member board - none can be removed b/c on staggered board So at most Balsius can get 6 of the 15 slots, not enoguh for control This is a delawy tactic by board Question: is that activity of epxanidng the board to 9 something reaosnble that courtcoudl uphold? No Board formulated a new stand: Compelling justifiaction for the board of directors Courts analysis Motivation of the baord in taking this act Here: board action in question was motivated by desire to preclude the holders of a marjoity of shares form palcing a marjoity of new directors on the baord through Balsisus cosnent solicitation Compelling justifaction When such a motivation is hsown, itnerference with shareholder franchis Directors have burden of showing a compellign justication for thei ractions Appliy standard Here: facts in this case do not allow directors to carry burden No coercion of sharodlers If they didn't agree, dind't have to sign No time pressure No chance sharehodlers going to be confused, manamgnet had plenty of time to get info out to shareholders Substnative coercion - idea that sharoedlers might make wrong decision (See Airgas case study) That sharoedlers might side with wrong party is not sufficient justifaction for board to take this sort f action Court: lots of situations where we allow board to make decisions and don't' give sharoelders any say at all But if we're talking about matters related to shcaorelder franchsie, these kinds of activiteis need to be sbjected to enahcned scruitny because of board legitimacy Voting rights are special, the very things that legimate the exercise of power of directors and officers of vast aggregations of proeprty they don't own Actions thwarting votigin rights touch on issues with the allocaiton of authority between agents and pricnapls (directors and shaorelders) Disagreemetns over how the corporation should b egoverned Improper to leave decision to directors over who is to have the job of director And the directors should not be permitted ot take actions that thwart the sahreodler franchsie without a compelling justifcation Compellign jsutifaciton: Very high hurde Footnote 5 Board takign 11th hour action to take control away from somene intending to do harm to the corparotion might be a compelling justifaction This standard is even more stringent than unocal standard Blasius is heightened scruitny to Unocal/revlons enhanced scrutiny If you apply blasisu standard to a partiucalr standard, the action of directors will probably be shot down This is why the courts say this standard is to be applied sparingly

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 This is why the courts say this standard is to be applied sparingly Criticisms of this deicsion Why higher standarad for director elections tha poison pill Employng a poison pill is preveting sharhoelders form selling shares when they want
Board was acting in good faith (preventing transaction that was bad for shareholders), but was it still impermissible to inte fere with sahreodlers right ot vote by diluting the ability of the insurgents to take over the board Must demonstrate a compelling justifcation for interfering with shareholder franchise Could have spent money to infomr electorate but instead exercised power for priamry purpsoe fo foreclosing effective sharoelder action Thus even though taken in good faith, violated tuy of loyalty MM companies v. Liquid audio (2003) Circumstances where borth unocal and blasius might be implicated Unocal Circumstacnes where BOD is taking defenseive aciton in resposne to threat to corpaotion Blasisus Director action that thwarts shareholder franchise Hostile takeover Often see proxy fights wwhere board has icnentive to thawrt the effective exercise of sahrohelder franchise as one defensive measure Footnote 3 of Stoud v. Grace: When you have a circumstacne that indiactes unocal and Blasisu- use both Unocal 1: burden on directors to show threat Unocal 2: proporationate ressposne? Impeding sharehodler franchsie (as goal) Blasisu: Is there a compelling justification for taking that action? F: By laws- staggered board 3 classes 1 up for election each year 1 - 2 member Calss 2 Classs 3 2 vacancies on board - > Liquid audio fills those vacancies on their own -> so all 5 seats filled Reject MM acquistion proposal MM was in bad shape because of posion pill Would need to Seize contorl of board of directors Get new directors to redeem posion pill But with staggered board, can't remove directors without cause, so at most, could only get two seats (only two seats comign up for election ) Palnnign on getting 2 on board (nominated two for sharoeldder meet), and get one or two of the liquid audio directors to resign So dead lock or majority for MM would result Wanted to icnrease size of board by 4 additoinal spot So MM wants to have 2 out of 5 slots But then liquid audio decides on its own to expand board of directors to 7 Sharodlers Sat 2 nominees, but did not expand board by 4 Result - MM has 2 out of 7 votes Court of chacnery Took this expansion and filled vacancies with own nominees for pirmary prupsoe of diminishgin influence of MM nominees incase elected Did not violate law, though Blasisus not implaicated because the sharoelder vote was implicated in any signifanct way Before - free to choose whether or not to seat 2 board After expansion, still got 2 seats Also, passess msuter under unocal Not coercive or prelcusive, not outside scope of reasonablness Issues What standard - uncoal, blasusis or both Was it an error to say unocal not vioalted by this activity DE supreme court Yes Blasius applies Start with idneitfying the priamry prupsoe fo the activity Liquid audio board clear nervous about one or two existing directors resignign and control landing with MM So primary purpose was to be sure that we dind't have a circumstance where there was deadlock

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So primary purpose was to be sure that we dind't have a circumstance where there was deadlock When a board acts for the primary purpsoe of itnerfereing with or impeding the effective exercsie of a sharehodlder vote, board bears burden of demosntrating compeling justifaction for actions Blasisu and unocal stand side-by-side Look at compelling jsutifaction under unco - see footnote 3 of Stroud v. Grace In this parituclar context - no compelling justifcation Board dd not put forth a good enoguh reason for impedign franchise Thus disprotiaotnate under 2nd prong of unocal Compelling justifaction only when priarmy purpose of action is to interfere with or impede exercise of sharoelder franchsie Expanded board form 5 to 7 and appoitned two directors after MM had requested liquid audio call special meeting to consider filing existing vacancies on the Baord and consider other prososlas - but stockhodler not allowed to call special meetings Alliance -stock for stock merger Here- appointment of 2 - would diminish the influence of nay nominees of MM that were elected, even though doesn't prevent them from getting or block mm's proposal to add 4 more seats
On compellign jsutifciaton Just says that the purpose of the board was to itnefere with sharhoder vote -> not a compelling justifiaction No real analsyis as to what their jusitfication was

Mercier v. Inter-Tel, Inc. (J. Strine(available on CTools) postpone vote okay as long as to give more time to finform stockholder J.Strine Opinion is how the various standards of review apply Strine is saying its tiem to back-up, we don't need all these standards to answer the question of whetehr or not director action is valid in certain circusmtnaces Strine would rather not use Blasisu - says unocal standard can be used in this sitaution Doesn't like the prejorative use of langauge in Blasius Court said Blasi applies when directors seeking to imepde sahreodler franchise That already sounds like something bad it's alrady a conclusion Would rather thave standards that actually help figure out if activity is valid or not As oppsoed to what usually happens - look at activity, if they don't like it, then slap Balsisu label on it And if they think its okay, apply business jusdgment rule (non-hostile takeover) or unocal (if hostile takeover) and then just approve it anyway Unocal and Revlon are becomign more BJR like- more defential But needs to recognize precedent And precedent says if touches on sharoedler franchsie, must apply Blasius But if using Blasisu, as a strict scruitny, need to eserve test for circusmtances wehre there really is the question of the allocation of authoir Blasisus seemed to suggest that you use Balsisu not just with director elections, but any effort to thwawrt sharoelder francshie Strine says this goes too far Strine says should reserve forsitautions related to director elections or wher ethere is a shroelder vote regarding control of the corporation Here- sharoedler vote related to control of the corporation F: Founder/ large sharolder, asstranged from rest of company Intertel had been approached by buyers Mihaylo (19% of shres) offered to by rest of company along with private equity firm Eventually he backed off Internetl found MITel - offered 25.60 in cash for acqusition No shop provision, but fiduciary out Mihaylo poposed reaptialization program instead Said would be self-tender for 28, remaining shares would trade at 30 By intertel dind't think this was a good idea Wrong projections No sense of where market was Intertel thoguht best opproutnity for shaorlder to obtain value was thorugh mitel merger But majroiety of shaorelders, leaidng to special meeting re: merger transaciton, most sharoelders, and ISS (proxy advisory firm) actually recommended sharoedlers vote no to the merger Because of proxy solications Proxy solication firm starts voting them in advance of meetig So clear to interntel before meeting takes palce that transciton would be defeated Original meeting date - june 29th Special committee knew, as date approached, would be defeated Thought this defeat was a msitake Market detorioring Credit tightening- would prevent private equtiy form coming in Mitel indicated it wouldn't raise price

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Mitel knew about intertel's perormance 2nd quarter performacne worse than projected So Mitel wasn't going to budge Board thought sharehodlers were making a mistek- the option was really 26.50 from mMitel or nothing at all On morning of June 29th meeting date, board of directors decided to postpone the meeting Minutes from meeting heavily lawyered Talked abut sharehodlers needed additoinal informaiotn Quarter about to close, by first week of july, shaorelders would see new finacnial results If sahroedlers could see sitaution, wouldn't be so quick to say this wan't enough Arbs here Could be friend of Intertel - will flip if they can get higher price Now -sahres trading for 24 a share So if they could chagne Record date for voitng on this trasnaciton to some date in the future, can get more arbs into the stock, more likley to vote yes Intertel moves back date of special meeting by a month, moves record date forward At new meeting - approved ISS now recommends yes vote

Question for court: what standard of review should apply? P: Blasisus should apply because moved sharoedler vote because knew you were going to lose Victory was assured for those opposed to transaciton By movign out a month, changed outcome D: Business judmetn rule should apply See MONY GROUP Board acting in goodfaith, not entrenchment (no jobs with acquirer) Decline dto apply Blasius Because all they did was just move the date abit Strine- upset that court is being asked to decide if he thinks these directors are good guys or bad guys and then decide what standard to apply So instaed, going to actualy use blasius because supreme court says to do that when interfering with sharoedler franchise Court's prefered methodology (don't use this Evaulation of activit in light of modified unocal standard Instead of using langauge aobut perceived threat to corpaote policy and effecitvies Prong 1: burden of identifying legitmate corporate objective underlying activity Must be proper objective No selfish Legimiate corpoate objective that can actuallyjustify decision to postpone meeting and set new record date Prong2: board must show its actions were reaosnable in relation to legiatme objectie Not coercie or prelcusive Here Yes- legimaite corpaote objective- give more infomraiton to sahreodlers Postponenment reaonble because the company in this case only moved meeting out by small amount, did not preclude anything - could still vote no No mertis to coention that what chagned vote was movement in stock to arbs b/c what was outocme dtermienative was that long-term sharoedlers just chagned their minds If we have to look at the Blasius standard: I would hold that even if it applies, the board is ogin got win, there is a compelling justifiaction Board thorugh stockholders pooised to reject and offer that was lielyt to be the best Board had relevatn informaiton that it had not yet shared In event of unfavorable vote, buyer could have walked away form the analysis, leaving Inter-tel with nothing at all

Reschedule meeting b/c the dirctors believe the merger isi nteh best interests of the stockholders Kow that if the meeitn gproceeds the stockholder will vote down the merger Reasoanbly fear that in the wake of the merger's rejection, the aquiror will walk away from the deal and the corporation's stock price will plummet Want more time to communicate with and provide info to stokcholders beofre vote on merer and risk the irrevocable loss of the pendign offer and Reschedule the meetign with a reaonble time period and do not precldue or coerce stockholders from freely decidieng to

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 treject the merger

Hypos Is it compelling to say sahreodlers want this deal (m/b b/c arbs), but say that they shouldn't want it So could board have expanded board to prevent arbs form doing whats in best short term interest Note: UNOCal/ Airgas says substantive coercion can be basis of protectoin i.e. can protect long termers from short termers Specifically mentions worries about arbs and shits But note: in unocal the notion of protecting corporation form short term investors is okay But blasisu says not buying substantive coercion in this case As distniguished form unocal I.e. Blasisus wouldn't find substnative coercion as a compelling jsutifcation AD: current state of law: If issues of Board legimaticy and allocation of power -: won't allow board to say "we know better than sharodlers" regardless of who the sahroelders are Can thwart their automony in context of hostile teakeover (See uncoal But when it comes to decidign who is on the board itself- that type of substnative coercion goes too far Note: blasuis only applying to director elections This is what page 26 of red book syas But Strine says if blasisus should apply in Mericer too - change of cotnrol Why didn't they use blaisus in Time? Would it have been a compelling justifaction to compeltely reorienate transaction So that itno longer required ahrehodler vote Random notes Strine's 4 objections ot usign Blasisu Too stirngent of a standard Realtes to unocal is unclear Strine does not lqiudi audio decision Says that Blasisu is used in 2nd prong of Unocal But sometimes the chancery court will just use blasisu, sometimes use unocal and blasisus, someitmes doesn't apply blasisu really, just applies it after the fact to behavior decided bad Strine's "Comeplly jsutifcations" These sutifcations don't sound terribly "compelling" i.e. shareodlers aren't going to be harmed because it's not like company was going to be liquidated here Maybe here- he found it compelling because it was short But that's more of a balacnign test, not a finding of the justification as compelling Hyp F: Cavanaugh corp 14 directors 11 otudisde/indpendent 3 inside Cavanaugh entereed merger agreement to be acquired for 31/per hsare, cash by BTR corp Record date set as feb 6tgh Shareodler meeting for approval set for March 28th Cavanugh is sued Breach of revlon duties Failure to provide adequate disclsorue in proxy statement Delware Chancery court Revlnon duties met But yes disclsoure problem -Board needs to make ammendments to proxy statements so they aren't misleading Opinon released march 21 - limited injunciton Between record date (feb 26h) and release of opinion (march 21) there's been a chane in the shareholder base Trading volume unusually heavy 52% of shares have traded hand Precise reasons for heavy volume not known But probably arbs in and out of stock And BTR, when it decided to acquire Cavanaugh, issues convertible debt securities Issued at 23% discount to BTRs stock price One of the provisoins is that upon closng, the ocnvertible debt securities could be converted into stocks of BTR without discount Thus the pruchasers of this debt have icnentive to see to it that the Cavanaugh merger succeeds So buyers of this debt are buying shares hoping to influence merger approval Alhtough after record date, hoping cavanaugh might etend record date If merer doesn clsoe, securiteis redeemd at face value, no profit Cavanaugh board meets after courts opionnon march 21 Supplemental dislcosures easy to make

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Cavanaugh board meets after courts opionnon march 21 Supplemental dislcosures easy to make Related to Change in control payments i.e. severance package 79 million dollars in severance 47 million was going to the 3 inside directors So need to disclsoe about this Also know that , at this moment, defeat of merger looks likley Proxy solicaiton firm says most sharohdlers aren't voting, and those that have voted although in favor, won't be enough Think low partipation is ecasue so many shares have changed hands Note- pushes up against idea that debt holders are buying to influence vote So board decides to move dates Allow change in control payment disclsore Enranchise sharehodlers that have bought since feb 6th Increase odds of approval If they leave record date as is Half of current shareodlers can't vote (B/c 52% have changed hands Assume you're outside legal counsle and the board of directors have asked if its permissible under delware law to set a new record date of may 12 and set new record meeting for sharoedler approval of transaction to June 22nd Issues- length of moving Not idnication that they've got infomraoitn to share with sharoelders what will show them that they should accept this deal instead of rejecting it Unocal Threat Rejecting deal that is in thei rbest interst Proportional resposne? Coercive- no Prelcusive- no Range of reaosnabnless? Comeplling justifiaciton Problem - unlike in Inter-tel - no informaiotn to be ahred with stochkhodlers that would favor them approving merger Intertel- evidence of deterioating Answers: (from classmates) Comparable to Mercier v. Itner-tel Similiarites Pushing vote back Differences Not only a delay, bt a chagne in identities of sharhoelders So some csahreoldder disenfranchsiesd, while others enrcnachised This did also happen in Inter-tel But there, pointed to evidence that the inclusion of the arbs didn't chagne the vote Could look back in hinsight- insitutoinal ivnestors went form no to yes New sharehodlers more likely to vote yes Mathematics 52% turnover, less Convertible bonds Standard of review? This is thwarthing franchise, it's enhancing it - so Blasisu sdoesn't apply Use modified UnoCal gtest from Inter-tel BJR - no entrenchment motive, not fending off a hostile bid Blasius? - worry that it might apply to all matters tocuhing on shareholder franchsie See language in liquid audio Most pertinent to director elections Strine in Inter-tel - should be used for director delections and matters related to corporate control

Court's decision Note- this won't provide much help in giving guidance In re MONY sharheolders litigation case D's in intertel cited this Board of directors permitted to chagne record date and court applied Business Jdument rule Straight up BJR review Blasius not applicable b/c "here the board actually provided for a vote, that is fuller and fairer and that more stockholder ahving a direct interest int eh outcome of vote are more liley to vote" Clear majority of shaorelders voting before postponenemtn expressed approval Just not enough of them to get over absolute majority requiremtn (of all sahres outstanding

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Clear majority of shaorelders voting before postponenemtn expressed approval Just not enough of them to get over absolute majority requiremtn (of all sahres outstanding Did not think Unocal made sense No hostile bid But strine in Mercier v. Inter-tel Thinks that even in thesese circumstances, BJR not enough b/c still tinkering with sharodler franchsie mechansim Show Msut idneitfy legimatie corpaote ogbjective Show acitons are reaonble in achieivng that objective So under Strine, this would probably be upheld too Differnces between here and intertel Know outcome will chagne in both But here- not chacnign b/c manipulating corpaote machinery such that before chagne, a majority don't want it and then post chagne get approval anyway Here- most current sshareodlers do want it, just not enough partipating Not prelcusive Sharoelder free to reject proposal Just as free to do so under old sate Note coercive 90 days isn't too long Here- not trying to provide sahrolders with more information But did have to deal with limtied injunciotn requiring additonal disclsoures Note: 10-60 days notice between notifiaciton and vote Required by delaware law i.e. limits between record date and voting day

Wrap-up I'd get rid of allt hese different standards Just duty of care and duty of loyalty

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Circon
Sunday, March 25, 2012 2:44 PM

On Monday, March 26, we will conclude our discussion of Assignment #20 and begin our discussion of Assignment #21 (the Circon case study). You should be prepared to answer the following questions about Circon:

1. Why was Circon a takeover target? 2. How did U.S. Surgical conduct this takeover battle? Assess its strategy. 3. Are the takeover defenses implemented after Circon received the hostile offer from U.S. Surgical permitted under Delaware law? Why or why not? 4. At the board meeting at the end of the (A) case, what options were available to the board? Which appears to have been the most attractive? How should the board have implemented this option? 5. Assess the outcome, as described in the (C) case. How did internal governance and the market for corporate control affect the outcome? On Tuesday, March 27, we will begin our discussion of Assignment #22 (freeze-out transactions). I will provide a broad overview of background cases in the area, including Weinberger and Pure Resources . Most of our class discussion will center on CNX Gas . Please be prepared to (1) describe the standard of review applied in CNX Gas and discuss how it differs from the Pure Resources standard, (2) discuss (in detail) why Judge Laster concluded that the entire fairness standard should be applied to CONSOLs freeze-out of the CNX Gas minority shareholders, (3) discuss why the standard of review matters to controlling shareholders engaging in freeze-out transactions, and (4) discuss what factors (both legal and non-legal) controlling shareholders should consider when structuring such transactions. On Wednesday, March 28, we will begin our discussion of Assignment #23.
Pasted from <https://ctools.umich.edu/portal/tool/ab3f7ecd-5934-4476-aefe-2c8e345e9cc7?panel=Main>

Facts: Long running hostile takeover attempt Compare with Air Gas Looks like company was right to resist Here: Circon - not so happy US Surgical makes play for Circon Circon run by dude who took over the business at a young age (Auhll) Took it over and built it upto a big ole company Auhl

1. Why was Circon a takeover target? Stock price down after acquistion of Cabot led to negative earnings announcement in 4th quarter of 95 (pg4) Also had beaten out US surgical in biddign contest fo rABbot Class Low share price - makes attractive to USSC Cabot losses Acquired in 1995 Beat out CEO of SU surgical Feb 1996 -> stock price down to 11.25 Since clsoing of cabot transaciton, gneerally ranged fro 22 -15 Went down to 11.25 after earnings announcemnt Hirsh called up Auhll, said he was launching bd for 18 dollars a sahre 70% premium over pre-takeover price
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 70% premium over pre-takeover price

2. How did U.S. Surgical conduct this takeover battle? Assess its strategy. Conduct - starting on page 4 No friendly overtures Went hostile right away Aug 1 1996- tender offer for 18 per share -230 mm total value 70% premium over pre-anncouncement price (11 Surgical had alread purchased 8% stake through open market Bid expiered on on dec 15 - annoucned it lwoered bid 10 17 per share and extneded June 16 - increased Got 2 directors elected to board Assessment Question: were they really trying to by Circon or just trying to disrupt a compeitotr If trying to acquire - it seems like the disruption they casued may have been reducing value of company they were trying to purcahse Class No upward trajectory in price, instead went down 18 dollars Aug 1996 17 dollars in 12/96 Between - picked up shares at 14.50 a sahre (in separate tender offer) To get from 8% ownerhsip of copany (via open amrket transactions) tog et up 14.9% - just below tirgger for poison pill Saves 2 dollars per share for Also cheaper price for minoirty positons than control position Buying control means you need a high enough price to convince a majroity fo shareholder Always some mimnroity willing to get out at lower prices 16.50 by 8/97 Sends message to market that company was not so great Signal to decrease shareprice Strategy assemsent Downward trajectory Thompson - "if he had gone to 19, probalby would have gotten board to go along with it Here- with every passsing quarter Circon is doing worse Offering to pay less puts more presure on shareholders to put pressure on managers Mr. Hirsch has fidicuariy duties of care, require him to act with informed jdugment Unclear if Circon is foudnering b/c hostile takeover bid is really distracting, or if something is fundamentally wrong with busienss AD: here- it looks like a little of both No friendly overture Presev discoutn in market price AD: usually initailly overture Avoid unpleasantness of hsoitle takeover battle Hadn't filed sharehodler authoried resolutions That would have barred sales by wirtten cosnent Bars sharehodler votes at special meetigns Gives less time for company to prepare/ put in place defensive measures Although posion pills odnt' take long AD: frienldy overtures don't hurt, and maybe help smooth thngs over

3. Are the takeover defenses implemented after Circon received the hostile offer from U.S. Surgical
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3. Are the takeover defenses implemented after Circon received the hostile offer from U.S. Surgical permitted under Delaware law? Why or why not Unocal sstandard Substnative coercion See airgas Defenses Poison pill - triggered at 15% Sharheolder resoltuio prohbiting action by written consent and sharhodler action thorugh special meeting Staggered board (already in place) Employee Retention Plan - tiggered by change in contorl Increased size of board Permitted Page 5- defenses faiclited by delware court- board no requried to accept all cash bid for company, regardless of support by stockholders in the form of shares tendered, as long as the board determines that its stategic plan" will dleiver more value to stokcholders ove rth elong run See time v. Paramount Pg 6- fairness opion that b18 per share bid was inadequate from bear stearns After shopping around for firms Issue - pg 6 - board ostensibly outsiders (not Circon employees, but all but one had been nominated by Auhill himself Surgicals bid But Class Defenses for tender offer Posion pill 203 :prohbition on business comindations Probhibits second stage merger unless Board approval for transaction Company could opt out of it in initail charter But it didn't Defenses for Proxy fight b/c if can get contorl of board, can redeem poison pill Staggered board 3 classes How US surgical culd respond Poison Pill Sue to remove or proxy fight 203 Board approval of transaciton Won't happen here Have 85% of the shares Hard here, (even though cshares of insiders don't coutn for this calculation) 13.1% held by officers and irectors 11.5% Auhll Total for D and O =24.5% Need 85% of remaining 75.5percent of sahres, means 64.2% of outstandng shares This is best bet here though, although hard Would still have to deal with posion pills too If 2/3 of nonaffialited sharehodlers vote in favor of trasnaciton i.e. nonaffialited with US surgical But do count shares owned by offiers and directors of target This is going to be hard here Note 141k(1) if director on calssified board, can only be removed for casue So can't just get amjority of sahres and remove directors
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 So can't just get amjority of sahres and remove directors What about board packing? Couldn't it radically icnrease the number of board members? Here- bylaws; only directors can change number of seats on board Could ammend by law swith 2/3 vote of shareholders But shareohdlers can't call special meetings under circon resolution Can't act by written cosnent either So wold have to wait till next meeting anyway So what Circon has is an effective staggered board: can't be easily dismantled Effective staggered baord- with these features - pretty hard to be taken over in less than 2 sharehodler meetings Classified Default provison: can't be removed without casue Inability to pack baord by icnreasing number of directors The Cour toption Arugemtn poison pill must be redeemed: Unocal/ Unitrin Standard Threat Reasonable resposne Preclusive Coercive Range of reaosnbnelss Circon's arugemnt Threat Substantive coercion Sahrehodlers will tender in mistaken belief that that offer will give more value than can achiee as standalone company Reasonable response See airgas- can keep pill in place even for like 16 months Surgical's argument Court option regarding silver parachutes Standard: Unocal/Unitrin - since initiated in resposne to takeover What about compsoitionof board of directors 8.96 Auhll Frank Hartloff Schulte Blokker 4.97 +Cloutier 7.97 +Thompson 10.97 +Elson +Krulac Minus auhill and Hartoff (class 1 directors voted off) 11.97 -Schulte resingns +Auhll Is this problematic in any way related to fidicuairy duties? Issues 100k in stock for Elson and Krulak form US Surgical AD: this is not unusual Courts will look to see if compensation is excessiv,e would comporomise aiblity to make decisions on bhealf

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of corpaotion as a whole This isn't enough They also got indmeinfication from US surgical b/c other board members not give them infeminifcation Went form 5 to 7 people loyal to Auhll Repaoppinitn gAuhll Board expansion See liquid Audio Board epxansion analayzed under Blasius b/c expansion lessened influence of new directors Reappointing Auhill upon resignation of Schulte? Is this inteferecne with shareholder franchise? Shareholders voted out Auhll Court results: US surigcal sued for evertyhign Court: allowed to keep posion pill in palce Court didn't even look at board expansion m/b b/c US surgical didn't raise it properly Or they hadn't ,at that early poin (april) made it clear they were going to engage in a Proxy contest Court before 97 meeting: at the time of proxy statmetns for 97 meeting, Circon told shoareholders important for Mr. Auhll to be on oard, so even if he lost seat, they would find someway to researt him USS: that's a blasius violation If shareholders know that Auhll will just be put back on board, Court - hasn't happened yet Come back and talk later US surgical never went back to court about this AD: thinks USSurgicla has a good arugemnt here

4. At the board meeting at the end of the (A) case, what options were available to the board? Which appears to have been the most attractive? How should the board have implemented this option? Options Fire Ahull Ask Auhll to resign Insist on forming Special committee to negoiate sale Special committee to negotiate sale probalby most attractive Avoid optics of Auhll resigning is Class At end of case, sales process a flop Company continued to miss projections Second proxy contest coming Arbs putting together a slate Stock in free fall What to do

5. Assess the outcome, as described in the (C) case. How did internal governance and the market for corporate control affect the outcome? Market for corporate contorl cost Auhll his job, maybe distracted management too much The board being too beholden to Auhll was a problem, lax oversight No budgets Hard to get information about company to

Class
One possiblitie: market for corporate controls erves a discilplining function over
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 One possiblitie: market for corporate controls erves a discilplining function over management Indepndnet directors suppose to form a discplining fucntion as well Also look out for managerial slack Here- Cloutier coems on board as one of Auhll's friends - helpign him beat it Not till her starts reading Delaware cases Realizes about fiduciary duties preEnron - lots of directors saw their jobs as helping CEOs This is a pretty good example of management digging in in a way not in shareholder interest Although hard to say how bid affected company, it certianly led to managerial dsitrraction, probably led to problems with company As we saw with Air Gas -sahreolders did better stickign with amangemnts long term plan Note: delware legislation left out provison that would require board approval of stock transactions So if the legislature wanted management to weigh in, could give them approval Are sahroelders sopshitticated enoguhtto make own decisions, do sahroedlers need protecting Yesteday What a makes a company a takeover target (you'll see a question about this on exam) Strategy for take over (will be on exam) Various tactical advantages of US Surgical and the defensive measures that thwarted those measures Posion opill Staggered board Standard of review for the poison pill and silver parachutes and those activitie sthat have the primary purpose of thwartign the shareholder franchise

Video -debate: Are antirokever defesnes good or bad Gordon (Lipoton) - these are just tools When sahrehodler and board interest are aligned, don't have problems with poison pills and defesnive measure But circon is exception Most of the time, boards of directors have same interest as sharoedlers Usually use posion pills/ takeover defensies to buy time for better deals Problem with Circon case Board captive to CEO Cases just likeCircon CEO founder, or family of founder Most of the directors are cronies in some way Issue isn't takeover defneses, it's all about making sure board members are indepdnent Baker (Harvard law) These are weapons of mass destruciton, like neuclear wapons, you can just say don't want people to have them Judge Jacobs( Delaware Chacnery) Corporations can put in place poison pills But if the baord decides its going to use "the gun", it's decision will be reivewable under fiducairy duty pricniples i.e. can't use pill to advance own self interest at expense of shareodlers Mst exercise for benefit of shareholder "the just say no" problem The real question is: "just say no for what purpose"? Scenerio 1 If a board wants to use the pill even to stop a high preimum, above market offer, to get a white niknight, to get a better offer, no question it can use the pill fo rhta tpurpose Scenerio 2 Board on good faith reaosnbly believes that if it keeps pill in place, it can internally generate higher returns, even though for a logner term
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internally generate higher returns, even though for a logner term Philoshphicaly, may say this is bad But think about history of how economy developed Companies need to remain idnpenedn t to be able to bring products to market So arugemnt we want directors to be able to do this Scenerio 3: the real just say no problem w'ere going to keep pill in place and not let shareodlers accept the offer Not looking for better deal Not looking ot internally improve value Just want to stay the board and believe company should stay indepndent Arguemtn for pill / justificaitons Board has better information than sharehodlers Judge: this model has a shitty view of sharoelders If this model matches what's happenign, that's okay But in 1985, did not have the level of snitutional ivnstor holdings like we do now So we see a different profile of sharoedlers Question: does this chagne in basic facts requrie a change in legal models, and thus a chagn ein rules? Were not there yet Selling the company is soemthing th ebaord should have a say in Case author Analzyed all the posion pills Can remain indpendn 65% in short run compare to 35% without the poison pill Remainig idnepend though, is generally a bad thing for target sahrehodlers Targets, remianign indnepend, usually see sharehprices go back down to wehre it was before offer Arguemtn often put forth tha tyou gain more from bidder b/c of marketing power But eveyr firm has pill now So look at staggered board Anectdotal evidcne this works But across all the bids, no evidnece staggered board give higher premium Pat MCGurn ISS George Cloutier At the time they had AD: We had an opproutnity to here from Auhll and Cloutier about their perspectives And a few proffesors nad things invovled in corporate governance ISS Thinks posion pill is bad corporate governance Chacnery court judge (now on Delware supreme court (JACoBS) Ability fo sharoelder, thinking bout whether or not to sell shares, what the law thinks of those kinds of determinations Pill possiblities (see above) 2nd opiton Respected point of view, boards willuphold 3rd scenerio Imagine board of sceneiro where board isn't seeking out higher value transacitons, not thinking own internally generated paln will ive sharhoedlers higher valeu over long term ,just wants to say not Said: "court may require redemeption" AD: not clear even in this circumstacne board will be requried to remove Council at least, will advise client to go into court saying they have a plan And then court msut dcdie if that plan is credible And Delaware Supreme court, itme and time agan, has sided with management
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sided with management Auhll : what he was thinking about tender offer from Hirsh Thought would turn around cabot Admited earlier higher price too high, but thought 18 dollar offer inadequate Said were definitely going ot get sold Said used poison pill to negoiate and get price higher In ligh tof emprical data presented, and what Auhll said

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Freezeout Transactions
Wednesday, March 28, 2012 2:47 PM

Freeze-Out Transactions

22

CMCMA: 727-729 CB: 159-177; 401-402 (Note 3) CMCMA: 803 (beginning with Note 3) - 815

Weinberger v. UOP, Inc. In re Pure Resources, Inc. Shareholders Litigation In re CNX Gas Corporation Shareholders Litigation (available on CTools)

Freeze-outs History Standards for fidicuary duties BJR A reubttable presumption that when amking busienss decisions, the board is actually disinterested, indpendent, acting with infomred judment and due care, and acting withbleief that actions are in best itnerst of company and stockholders As long as decision can be attributed to any rational business purpose, decision will be upheld Only looks at progress Even if your deicsion is shitty, if process is okay, deicsion will be undistirubted Entire Fairness (opposei tof BJR Looking at substance of transaction Not just price paid Substaivey, di dthey get a fiar deal Is the process emploeyd fair Fair price Economic and ficnainl considerations What's the dollar value Is it a fair price under these situations See Valuation to detemrine whether this price is fair Fair Dealing Questions of whether or not the process is fair How was transaciton timed Timed to take advantage of low price How was transciton intiitated structureD? Negotiated? Disclsoed? How was approval of directors and stockholders obtained Not a bifurcated test Essentailly a test looing at the facts and circumstances as a whole Weinberger: hwen talkinga bout a transaciton about cashing out sharolders, fair price si liely to be a predominatn concern If process is terrible, and price ultiamtely fair, court will uphold b/c it'd be hard to figure out the damages Weinberger v. UOP, Inc.
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 Weinberger v. UOP, Inc. Freeze-out of UoP minoriyt sharoelders Freeze-out Tranactions wehre someone prevoulsy a majority decides wants to freeze out minority Here- via merger Price- 22 dollars a sahre Minority sharoelders allege too low Delware Chacneyr court Held for d's De supreme court Reversed Transaciton did not meet the entire fairness standard Entire Fairness Fair price Fair dealing Entire Fairness analysis Analysis applied here Process not fiar Consideration (prcie) remanded to chancery to use new valuation metholdoiges that are permitted b/c no longer (here) required De Blcok method Said can use any valuation method used by broader fiance community Fair dealing Can't hae directors on both sides of transactions, syayign theyir acting in best interst of both, when they're pitting the companies agaisnt each other Famous footnote number 7: Parent subsidairy context, shwoing that both parties exerted bargianign power leads to presumption of fairness i.e. - when control relationship, going to have directors put on subsidiary board by contrller But need to try and simulate an arms length bargaining power This footnote seen as genesis of Special committee i..e to simulate 3rd party arms length negoiating process Use subsidairy of board not contrlled by parent corpraoiton to negoiate After weinberg- having special committees became standard praccies History in resposne to weinberger 1st opinion: special committee can never truly be independnet from controlling parent- contrller is gorrillathat will inevitably control directors Argued that merely putting special committee in palce does not warrant special defensce in regard to what standard of review should be applied 2nd opinion: should give at least some deference with special committes because jduges not in a good posiont ot judge substance, leave that to the special committees So after weinberger, not sure exactly what standard is going to be In years after weinberger, opposing views came to determien how chanery court judges would look at cases, what level of defence applied to special committees In 80's and 90's chacnery court opinions divided along this score 1 set of judges: special ocmmittee process changed standard of review from entire fairness to BJR 2nd set of judges: (includign javob): special committee approval only shifted burden form porving entire fairness from defendant to plaintiff

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 Kahn v. Lynch (Delware supreme Court) entire fairness but burden shifting if Special Committee apporval or approval of majority of disinterested SH When you have a transaciton where contorller sits on both sides of transciton, a freeze-out transciton, entire fiarness is the only standard that can govern In order to get some benefit, hwoever, out of the speical committee -> burden shifting If truly idnepnedn SPEICAL COMMITTEE with ability to say no, that moves the burden showing entire fairness form D to Plaintiff If not approval of distinerested, independ majroity of board members, then the burden stays with D So after Kah: if transaction invovling cotnrolling sharolder Means entire Fairness is only standard If transaciton approved by diint/indp directs / indep/disn/ informed majroity of the minority sahroelders then burden o fproof is on the P If not, Burden stays on D So now - you'll want to have a Special committee- not bearing the burden makes it a lot easier to win case So we knew speical committes matterd (Weinberger And we know from Kahn about majority of minoirty sharoelder approval Either speical committee approval or majority of minroity will shift burden But having bothdoesn't gie you extra points Although maybe more persuasive for court Difficulty - majority of minority sharolders needs to be informed amjroity Easy to say failures of disclsoure in proxy statemetns So P's can always makeotu case that you faield to tellt hem something when socliting their vote Glassman: short-term mergers not subject to entire fiarness
But mergers are just one way to effectuate frreezouts Mergers Reverse stock split One other (missed this, in reading) Freeze-out via tender offer followed by merger When contorlinng sharehodler takes this route, laucnhes tender offer to buy any sahres they don't currenlty own Any sahares theyu don't' acqurie here, freeze out Typicaly targets will form special committtee b/c have to draft 14d-9 resposne to tender offer Inclduing things to say to sharolders If contorller gets 90% of sahroers in tneder offer, will perform short-form merger to freeze out minority sharolders Short-form - don't need vote of minority sharoedlers Pracitoners long assumed that freezeouts followed by merer subject to entire fairness, then thought the tneder offer followed by short-form, would also need EF But case (in reading) suggest maybe not the case (salomon versus Path) Tender offer found not to rqeurie entire fairness standard of review as long as no coercion in connection with this transaciton So then pracitoners thought if you structured tender offer so not coercive, no entire fairness review for that portion But qeustion if the shrot-form merger part would require entire fainress Then other case: Siliconix - > short term mergers have no process at all -> so entire fairness doesn't apply
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 - > short term mergers have no process at all -> so entire fairness doesn't apply No way to look at process for fair dealing Only thing can compalin about is the price But can just go through an appraisal proceeding And if there is some hint of fairness in apprasial proceeding, chanceyr court judge can take that into accunt But entire fairenss won't apply This gave pracitoners a path to say a way to do these transaciotns (freezeout) withotu being subejct to entire fiarness reivew In re Pure Resources, Inc. Shareholders Litigation F: Strine: Begins to address disparity between two priamry routs for effectuating freeze-out transacitons Mergers Weingerg, lynch route Contorlling sharoelder in place, worry about ability to domiante target corp and to actually make retributive threats, don't ever think process can be idnepnednet fo contorller So always requrie EF to be standrd of review With burden shifting Silconix- tnder offer with freezeout Not entire fiarnes, just BJR For deicsion to have tender offer and the short-form merger S one path of tentire fiarness, one path to BJR Here: attempt to bring two strands together a little bit more Following Solomon - decliend to say entire fairness hsoudl be applied to tneder offers But says the exemption from entire fairness only applies totnder offers that are non coercive Non-coercive Subject to no-waivable majority of the minority condition Majority of minority sharoelders must accept tender offer And msut not be waivable Can't say it's a conditon and then waive it later on to close transciotns COUnt only sahroelders compeltely idnepned Affiailted shaorlders don't count Contorller msut promsie to promplty consumate short-form merger at same price as tender offer if it obtains 90% or more of the sahres To avoid two -tierred tender offer Controller must make no retributive threats in negoiations with Special committee What is a retributive threat? i.e. if 3rd party says it'll walk away, or that they'll go hostile, we don't' think much of that But when talking about controllers, we want them to be allowed to bargain with speical committee, but don't' wan SC in fear of what will happen if they don't take the offer Majroity stockholder msut permit the independnt directors on the board free reign and adequate time to react tnder offer by Leetting them hrie own adivsors Issue opinon on offer
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 Issue opinon on offer Furnish enoguh information to minroty to allow them to form opinion Indpent directors msut take task seirously, indpenednlty, and prusue best opitons for mirnotiy sharodlers So after pure resoursce,s still two standards Just brought them together by saying to get EF review for tender offer- need to be non coercive No BJR rule potnetial for long temr mergers But yes potijon for short form mergers Strine's idea for unified standard Cox Communicaitons Mayb eshould stenghten standrads for tneder offer, short-form merer, if not recommended by Special committee, or was coercive or there wasn't disclsoure of all material facts i.e. there should be potnetial for there being EF and BJR for mergers and tender offers In re CNX Gas Corporation Shareholders Litigation (available on CTools) Purpsorts to adopt Cox communications unitary standard A unified standard Provides BJR for freeze-outs (both mergers nad tender offers +short-form mergers) Negiaoted and reocmmended by special committee And approved by minroaity of marjoity sharhodlers Applies to long-form megers and tender offers followed by short-form merger offers Essentially, any transaction that is a long-form transaction would require a sharehodler vote Long-form merger- controllng shareholder has enough sahres to paprove transction So need majority of minority provison so sahrhodlers have some say With tender offers, if contrller tryign to get to 90% ownerhsip, and only needs a little bit to get to 90%, still need marjoity of minority sahres to be tendered in the tranasction for a majority of the minority Must be non-waivable conditon of offer Must actually be tendered CNX Gas Parent (Console) wanted toacquire all shares of CNX gas it didn't already own Already owned 83.5% Reps contolled board Parent apporached large public sharolder to try to get to sell sahreos directly to console (T Rowe Price) Held 37% of public float of CNX gas Amounted to 6.4% of CNX common stock And 6.5% of consol's common stock So cross ownerhsip T Rowe Price )and family of funds) Held shares on both sides of transction T Rowe Price agreed willing to sell sahres to Consol at price of 38.25 a share in cash After working out deal , Board of CNX gas authorizes formation of Special committee Only idnepent director- acommittee of one Suggested icnreasing size of board so he could have more people on SCLong Page 193

 Suggested icnreasing size of board so he could have more people on SCparent said no But could hire advisors Could write 14d reocmmendation Recommendation as to fairness of transction But not given authority to negoiatate with aprent, put in defesneive measures or consider other altenratives Console commenced tneder offer in april 2010 Consumation subject o nonwaivable conditon that majroity of minroty sharolders tender into offering Sahres that coutned to minrotiy did notcount shareds held by consol But did incldue 6.3% of shres held by T Rowe price But b/c T rowe price had already agreed to tneder its sahres in connection with this And their sahres represented 37% of mirnotiy shares Only needed 13% of minoirty sharoelders to tender shares The agreement made the odds of cusses on minority of majroity enhanced a month after special committee CNX board retoractively authorized board to be able to negiate with parent company Consl not oepn to negioating But banker said 38.25 was fair, but though Consol could pay more - just no willingness to pay more So SC in 14d didn't make a reocmmendation for or agaisnt the transcaiton - decided to stay neutral For Monday, come prepared to talk about the strategy emploeyd by console, talk about the Sepcial committee, and talk about the new unified standard If you were a contorllng sahroelder would you be sasifeid Do SC have too much, too little power Going back to this Fails fisrt prong - Special Committee did not recommend transaction Stayed neutral - thinks Console could pay more, wishes had gotten full authority So no BJR judgment here, instead Entire Fairness Need majority of minotirty provison Here- not sufficeint T. Rowe Price owned shares in contorlled subsidiary and controller Ownerhsip interest just about equal Means they're roughly indifferent with respect to outcome of this transaction So b/c T. row Price icnluded in inority If using Pure Resoruces standard- would just issue prelimianry injunciton and let them try to get majority of minoirty But not here under this standard Here- need affiramtive reccomendation of special committee- so Cox Standard not met So Entire Fairness Things to think about Structure of the transaction Is BJR worth it? BJR vs. EF? Do you want to enter into agreements with large minority shareholders to et them on your side? What kind of authority should you give to Special Committee?

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 Was negotiating with T Rowe Price a bad strategy here? Problem: they own shares in parent and subsidiary Need to be excluded from marjority of minoirty caluclation if you want to get BJR Court: not contollers job to look at motivations of shareholders, lots of instituions with cross-ownership But T Rowe Price at issue here because you brought them into the negotiations, you set the price by negotiatiating with them - so here - by bringing them in, no longer disinterested q: why not just buy the shares from T Rowe Price before the tender offer, i.e. why not, before annoucning tender offer, just negotiate a private transaction with T Rowe Price Could have gotten to 89.8% of shares just by getting T Rowe Price's shares Only need .2%, could probably buy it on the market AD: probably did this b/c they wanted to maximize the chances of getting people out of the appraisal process If you only get to 90%, 10% of shares can exercise appraisal rights This gives deal uncertainty - might end up paying much more than you originally thought And it probably never occurred to them, before this case, that brinign them into negootaitons brought them out of the 'minority' in the marjoity of the minoirty calculus They went to T rowe price to know that they'd at least tender Wanted to negotiate - first tneder offer was balked at by shareholders After this case: commentaros asked: how do you know T Rowe Price indifferent? Doesn't mean their investment preferences, desires, consistent across two firms i.e. if CNX gas is grwoing more quickly than Console, they won't be excited about cashing out ownership of faster growing company unless high enough price Structurign this transaction How would you recommend someone structure a freezeout transaction? Long-form merger Tender offer followed by short-form merger Issue: De supreme Corut hasn't ruled on CNX gas/Cox standard So given the facts that supreme court hasn't said what standard is DE Supreme only said Entire fiarness applies to long-form merger (see ____ case) Pure Reources BJR to non-coercive tender offers CNX Unified standard for long-from mergers and tender offers with Short-form merger b/c DE says only entire fairness can apply to long-form, not sure it'll adopt CNX /Cox standard, should do TO/Short form And do Special committtee with rull authority and reccomendation of trasnction Majority of minority Risks going with this standard? Have to give special committee full power to negotiate Consider other alterantives Engae own legal and finacnail advisors
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 Engae own legal and finacnail advisors Have time to review and evaluate the proposed freeze-out tranaciton Able to negotiate terms and conditons of tranasction with cotnrolling sharoelder Neeeds to be able to consdier and possibly pursue other alternatives to proposed freezeout transaction Able to put in place rights plan and other defensive mechanisms against contrllingsharoedler To give it time to resposnd, negotiate, develop alternative Compare here to Pure Resources 'don't need authority to put poison pill in place since poison pills only obligquely sacntioned Lasiter- if want this to be arms-length like, need right to insitute posion pill Previous requiremtns Right to say no Own legal/ financial advisors Needs to be able to file litigiation against controlling sahreodler i.e. replicate arms-length transaction To meet Lasiter/CNX/ Cox standard- SC must have full authority Note: if somoen owns 83.5% sahre owner, probalby not many altenratives, but maybe with good counsel, can come up with somehting, or maybe an alternative the controlling sharheodler migh prefer So need to atleast hold out this kind of possibility Question: any worries the controller won't be treated fairly by Special committee? Contorlling sharholder can get rid of directors If can act by written consent, can get rid of directors right away But would new directors be considered independent? Ad: if you put on your own 'independent directors' court will questionhow indpendent they are AD: would not recommend you do this Trying to simulate arms length process If can't replace board members on opposite side, shouldn't try to replace them ehre Long-form merger Can get burden shifting under Kahn without fulling empowering Special committee Get burden shifting Approval of special committee or Approval of amrjotiy of minoirty Then burden on P to prove not fair If not - then burden stays on D to prove fair But if you start with Tender offer/short form, see resutls aren't going yoru way and move to long- form merger (to try and get burden shifting), it'll be easier to show transaction not fair because of this switching AD: what does this all mean? BJR vs. EF?/ is it worth it BJR - hands off presumption- don't deserve busienss descisions made by corpaote directors Allows D's to get dismissal of lawsuit at early stage And deferential review at trial
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 And deferential review at trial Reduce litigation cost Reduce risk of adverse determination on merits Pitting potentail for BJR review against cost and uncertainty of implementing precdural mechanims required to get BJR review Is it worth it to Have fully empowered SC - ability to say no Entire fairness has strong risks Even with burden shifting, still not optimaal to controlling sharodler, because if you lsoe, perosnal laiblity for all directors with conflicts i.e. directors on controlled subdisiary and contorlling sahreodlers could be perosnally laible So great deal of litigation risks for entire fiarness If burden stays on D Factually intensive to prove this Virtually impossible to have dimsissalon the peladings alone Elevates risk to controller at trial Shifting burden to P helps Elevates P's risk at trial Often leads to circumstance where willing to settle So shiftng burden icnreases your litigation value Note: burden shiftign rarely leads to dismissal So transactions requrieng entire fairness, always have some settlement value b/c D will want to avoid a trial So Qualfiying for BJR is much better for contorlling sharoelders than Entire Fairness, with or without burden shifting BJR Defense on merits simplier More opproutnity for pre-trial dismissal Remember, Law is just one cost faced by controller Remember the amount of money you'll have to pay to effectuate this freezeout i.e. if, to get BJR review, you need to give SC power to say no, if SC will make it uneconomic, then won't want to go forward If you empower SC to put defensive mecahsims in place, we essentially take away the controllers implict threat to put forth the kinds of threats (Factually determiend ideas of altearnatives) if they refuse to negoitate With non-waivable majroity of the minority condition, have risk to contorlling sharolders that minority sharoelders will hold out i.e. hedge funds, arbs, trying to extact a higher price Question: how much is it worth to get BJR review If it makes the transaciton too expensive, it's not worth it So as cotnrolling sharodler thinking about how to strcuture, consider Who is likely to be a member of the Special commtitee Your sharolder base What is it now What will it be like post-annoucnemnt Would they No vote (merger Refuse to tender (Tender offer) So weigh cost saving from beter standard in litigation agaisnt increased cost of sahreodler hold-up and overzealous special committee Appraisal vs. Entire Fairness? Why is one worse than the other Anytime cashing out shaorlders (short-fform merger or cash-out
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Anytime cashing out shaorlders (short-fform merger or cash-out long-form) -> appraisal rights for sharehodlers Injunctive relief? If stockholder can convicne a court that cash-out merger is product of unfair dealing and damages won't be adequate, then can have injunciton CNX: post-consumation damges remedy under entire fairness would be adequate here But injunctive releif nto availbe in appraisal proceeding Class Action Appraisals are opt-in proceedings Shareholders have to comply with satturoy apprasial scheme before stockholder vote held As a practical matter, not many shareoler exercsie apraisal right But Plaintiff's attorneys can apply for class action status placed upon the matter, and if stockholders have an entire fainress claim ,can brign it as a class action on bhealf of all similary sitauted stockholders So with EF, damage award would be applied to every sharodler, not just those opting in to appraisal More uncertainty for entire fairenss calss action Won't know the amount, will be set upon entire class of shaorelders Apprasial rights- controlling sharodlers can say will not clsoe transaction if, before certain dae, see X% indicate intention to exercise apprasal rights So at least with apprasial rights, you'll know how many shareholders will exercsie From perspective of minroity stockholders If make claim for entire fairness, can retain merger consdieration And damage award is on top of that With appraiasal, only get money after appraisal proceedign And may be more, less or same as what you would have received in merger transaction Thus more downside risk with apprsail Possiblity of recessionary damages with Entire Fairness Seek recssion of merger, or at least get damages equivelent of getting the amoutn of money proportionate interest in corpaotion would be worth if merger never actually occurred Note: delaware has never awarded recissionary damages

1) describe the standard of review applied in CNX Gas and discuss how it differs from the Pure Resources standard, CNX Gas standard From Cox Comnications BJR applies when Freeze out is conditioned on both Affimrative recommendation of a psecial committee and The approval of a marjoity of the unaffiliated stockholders

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The approval of a marjoity of the unaffiliated stockholders If p shows one of the above devices is missing, or can plead with aprtiucalrliy facts suggesting device ineffective, than Entire fairness applies BJR SHOULD APPLY TO ANY FREE-ZEOUT TRAnsaction that is structured to mirror both elements of an arms' length merger, viz approval of distinerested directos and approval by disitnerested stockholders

Comaprison with Pure Resources Pure Resources Page 8 BJR for tneder offers that are non-coercive Non-coervice when Subject to a non-waivable majroity of the minority tneder conditon The controlling stockholder promises to consumamate a prompt 243 merger at same price if it obtains more than 90% of the shares The controllng stockholder has made no retributive threats Duty on controlling stockholder to permit indpendent directors on the target board both free rein and adeequate time to react to tnder offer By at least hiring own advisors, Proviidng minroity with a recommendation as to the advisability of the offer Disclosing adequate info for the minority to make an infomred judgment Comparison CNX standard Means both freezeouts and mergers can have BJR or entire fairness Pure Resources- BJR for some freeze-out tender offers (Thos that are not coerciver), but freeze-out mergers would always be under Entire Fairness CNX - B Under Pure Resources- would b3e inclidned to enjoin tranction (page 14) Takes 'coercive analysis out of it' Instead - BJR as long as simulates arms length transaction

(2) discuss (in detail) why Judge Laster concluded that the entire fairness standard should be applied to CONSOLs freeze-out of the CNX Gas minority shareholders, Criticism of Silonix (sayign that 'contorller's unilateral tender offer followed by short-form merger is reveid under BJR) Lack of explict role in General Corpaote law for target board of directors responsding to a tender offer But - as in Pure Resources, stautory distinciton fails to justify adequatley the divergent fiduciary duties Solomon (tender offeror has not duty to provide a fiar prie) - did not invovle a freeze-out transaciton Standard applied Special committee did not recommend in favor of trasnaction (Stayed neutral) Fn8 = page 10 why require SC to recommend In arms length, third party transaction, directors must approve and recommend the transaction before it is submitted to stockholders Thus need affirmative recommendation for entire nfairness not to apply And cotnrolling sharhoelder does not have an inaleinable right to usurp or restrict the authority of the subsidiary board of directors b/c in 3rd party, arms length transciton, subboard would have power to respond effectively to a tnder offer Majority of the minority Issue here: T. Towe Price owned more Consol than CNX gas (cross-ownership) So don't count them as meeting the majrotiy of the minoority requiremtn b/c
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Issue here: T. Towe Price owned more Consol than CNX gas (cross-ownership) So don't count them as meeting the majrotiy of the minoority requiremtn b/c need to take T rowe price out of calculation But note: ourt just says there are factual issues raised on this, not going to rule definitively on the effectiveness of the majroity-of-the minority condition

(3) discuss why the standard of review matters to controlling shareholders engaging in freeze-out transactions, and BJR standard, or entire fairness with burden shifted to P (under lynch) means lower cost for the merger Less likely to be litigated at all And more liekly to be thrwon out earlier Less leverage for P negotiating settlement More likely to prevail But may have cost associated with meeting any requriemetns to get BJR i.e. like ind. Directors might drop poison pills, do other things to raise price or otherwise thwart deal

(4) discuss what factors (both legal and non-legal) controlling shareholders should consider when structuring such transactions.
Legal What standard of review will apply, will there be burden shifting In regards to getting favorable standard of review Minotiryt sharheodlers Cross-ownership worry Fidicuary duties Risks of injunction b/c maybe can just consumate ht emerger and then pay damages later Non-legal Will they alienate independent directors Espeically coenrning if they need their approval Price to pay Timing

Summary We don't know what the standard is Wouldn't want o recommend client go forward with a long-form merger and expect to get unfieid standard from CNX 3 standards out there Kahn Standard Pure Resources Cox/ CNX So should recommend client just try to do something reasonable Don't get too hung up on what the xact standard will be Try to make the process seem as fair as possible Have arms length bargaining where minority sharodlers are not coerced More can look like this, the better off you'll be, regardless of what standard is applied

Fiduciary Duties Related to Freeze Outs

Controlling SHs have fiduciary duties to minority SHs. Freeze outs and share purchases performed by Controlling SHs are conflict of interest transactions, thus are subject to Entire Fairness If a controlling SH negotiates a transaction after he is already controlling, we are worried b/c he has dominion over the BOD and minority SHs. Therefore, if a SH is trying to negotiate a transaction after he is controlling, must replicate a situation where other party
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negotiate a transaction after he is controlling, must replicate a situation where other party has equal bargaining power o Four Scenarios: If transaction negotiated b/f SH becomes controlling this is more likely to be an arms-length neg. b/c both parties have equal bargaining power If transaction negotiated directly w/ Target BOD (Long Form) as is the case w/ long form merger and asset sales, then it must give the BOD the power to say no If transaction w/ minority SHs (TO) in the case of a TO, then must remedy collective action problems (Majority of Minority), make sure they are informed, and not make it coercive (if 2 tier TO + Short Form at diff price) dont have to give BOD power to say no, giving SHs power to say no. Short Form Merger: - dont owe any duty, SHs only have appraisal rts Motivations for freeze-outs o Eliminate free-riding acquirer may have to share with the targets minority shareholders the gains from any improvements in the profitability of the target, even though the minority shareholders may have played no role in facilitating these gains o Access to T-Corps Assets w/o having to worry about approval or lawsuits from TC-SH. TC-SH going to monitor use of assets o Costs of Public Ownership SOX, SEC filings, quarterly reporting, etc. Can eliminate these costs by freezing out the minority Normal business transactions are given the Business Judgment Rule, which can be rebutted by the Plaintiff if he can show that there was a conflict of interest in the transaction (breach of duty of care gross negligence, breach of duty of loyalty, breach of duty of good faith utterly failed). At which point the burden shifts to the defendant to prove entire fairness. Defendant can cleanse/ratify the transaction by showing that the conflicted transaction was approved by a majority of the disinterested members of BOD, or by an informed, disinterested shareholder vote. Burden then would shift back to the Pl Freeze out transactions, transactions b/w controlling shareholder and subsidiary, are by nature conflicted, thus apply entire fairness standard to the defendant. (does not get business judgment rule) o First question is who has the burden of showing entire fairness? If the controlling shareholder transaction was approved by a committee of independent directors, or a majority of the minority vote, the burden will be on the plaintiff, if not, it will be on the defendant o Second question will then be if whoever has the burden can show entire fairness: Looks for fair dealing and fair price court looks at the totality of the circumstances when determining whether the transaction is entirely fair. Controlling shareholder is one that controls the corp, but doesnt necessarily have more than 50% of the shares. Revlon duties do not apply in freeze out transactions

Long Form Transactions (Weinberger)

Weinberger v. UOP, Inc. (In a long-form freeze-out transaction under DGCL 251 where there is overlap in the BODs of the parent and the subsidiary, acquiring company must show entire fairness, which entails (1) fair dealing, and (2) fair price.) Involves a freeze out merger b/w Signal and UOP. Signal controlled 50.5% of UOP and decided it wanted to acquire the remaining 49.5% of UOP. Two Signal officers & directors who where also UOP directors did a feasibility study and determined that $24 would be a good investment. These officers had confidential information from UOP. Didnt tell the other UOP directors about the feasibility study. Ultimately deal was closed at $21 per share. Both sides had fairness opinions from investment bankers. Rule: When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness
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 required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain; burden of showing fairness initially lies with person on both sides of the transaction Holding: Merger did not meet the test of fairness b/c conflicted transaction, and minority vote ineffective b/c lack of candor in disclosures to UOP BOD & Shareholders. Test: Entire Fairness has two elements. (not a bifurcated test, is a holistic test) o Fair Dealing Duty of Candor Timing Is there something about the timing of the transaction that is disadvantageous to the minority, e.g. target just came out of bankruptcy In this case, four business days. Court noted that timing alone is not indicative of lack of fairness, but what did not occur during short time period is what makes time constraints relevant Initiation if only parent, raises a red flag; but not inherently unfair Structure if only parent determines, raises red flag; who benefits from the structure chosen? veto rights to minority majority of minority. If there is adequate disclosure and SH is informed, is a way to guarantee that transaction is fair Negotiation complete lack of negotiation could be inherently unfair Replicate a 3rd party bargaining process (footnote 7) Need an independent neg. comm. to act in the best interests of the sub. Disclosure Candor required what kinds of disclosures are made to minority BOD and Shhldrs Dirs of UOP that developed feasibility study for Signal had fid duty of loyalty to disclose that they were using the UOP internal information against UOP, and exactly what the report said. Approved Approved by Independent committee, and/or an informed vote of the majority of the minority. If not adequate disclosures approval of independent committee is circumspect, and/or shareholder vote would be meaningless b/c it would not be informed o Fair Price all elements of value, i.e. intrinsic value (DCF analysis, comps, precedent transaction, value of assets, market value, earnings, future prospects, any generally accepted method) Remedy (long-form) Cf. Glassman (short-form): Appraisal remedy 262 fair value should be determined by taking into account all relevant factors (DCF Analysis, Comps, Precedent Tran); liberalized appraisal o If appraisal is not adequate, e.g. fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching, Chancellors powers are complete to fashion any form of equitable and monetary relief as may be appropriate, including rescissory damages. o In Radkin, exception to appraisal swallowed the rule. o No opt-in, action can be brought as a class action, probably faster process than appraisal, Plaintiffs attorneys are incentivized w/ class actions, damages are up to the judge, and are potentially very large, no downside risk for shareholder gets to keep merger consideration even if entire fairness value is less than transaction price. o Before the transaction is consummated, plaintiff shareholders could try to enjoin the transaction. Does the record show that the transaction is not likely to survive entire fairness review? (hard to undo a deal once it is done) Note: Is a holistic review, but typically if the price is deemed fair, the deal will satisfy entire fairness even if the process is bad, and less than textbook.

Controlling Shareholders, Entire Fairness, Initial Burden of Proof (Kahn v. Lynch)

Kahv v. Lynch Communications (Kahn I) (Shareholder need not be majority owner to exercise control. Entire Fairness is the level of analysis for interested transactions. Initial burden of establishing entire fairness rests on party on both sides of the transaction. Existence of independent committee does not shift the burden unless (1) maj doesnt dictate terms (make
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independent committee does not shift the burden unless (1) maj doesnt dictate terms (make threats); (2) independent committee has real bargaining power (can say no)) Alcatel owned 43% of Lynch and strong position on BOD. Lynch wanted to merge with Telco, but Alcatel proposed that Lynch merge with Celwave, one of its subsidiaries. Alcatel said it wouldnt consider a Telco deal until Lynch considered a Celwave deal. Lynch BOD formed a 3 member Independent Committee that rejected the Celwave option. Alcatel launched a bid for the 57% outstanding of Lynch. Lynch BOD authorized Independent Committee to renegotiate with Alcatel. Accepted Alcatel bid of $15.50, in part based on fear/threat of a hostile TO at a lower price. Court doesnt explicitly mention it but the transaction was a TO short-form merger. Controlling Shareholder - Court found that despite only 43% control. Alcatel exercised control over Lynch; Charter provision of 80% vote for business combinations; Instances of domination. Therefore owed fiduciary duties to Lynch shareholders. Interested Transaction Entire Fairness remains the proper focus of judicial analysis in examining an interested merger, irrespective of whether the burden of proof remains upon or is shifted away from the controlling or dominating shareholder because the unchanging nature of the underlying interested transaction requires careful scrutiny. Initial Burden of establishing entire fairness rest on the party who stands on both sides of the transaction. However, an approval of the transaction by an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff. Wherever the burden falls, entire fairness is the standard. Independent committee - Existence of an Independent Committee does not shift the burden unless (1) majority (controlling) shareholder does not dictate the terms of the merger, and (2) the committee must have bargaining power that it can exercise with the majority shareholder on an arms length basis. Holding The ability of the Committee to negotiate at arms length was compromised by Alacatels threats to proceed with a hostile tender offer if the $15.50 price was not approved by the Committee and the Lynch board. Remanded to Chancery Court for a redetermination of the entire fairness of the cash-out merger to Kahn and other Lynch minority shareholders with the burden of proof remaining on Alcatel. Policy rationale for Entire Fairness in Interested Transactions Even where no coercion is intended, shareholders voting on a parent subsidiary merger might perceive that their disapproval could risk retaliation of some kind by the controlling stockholder [(e.g. controller may stop dividend payments, or cash out at lower price)]. This potential for that perception, and its possible impact on shareholder vote, could never be fully eliminated. Consequently, in a merger between the corporation and its controlling stockholder even one negotiated by disinterested, independent directors no court could be certain whether the transaction terms fully approximate what truly independent parties would have achieved in an arms length negotiation. Given that uncertainty, a court might well conclude that even minority shareholders who have ratified a . . . merger need procedural protections beyond those afforded by full disclosure of all material facts. One way to adhere to such protection would be to adhere to the more stringent entire fairness standard of review. Kahn v. Lynch Communication Systems, Inc. (Kahn II) (Analysis of entire fairness criteria) After Remand, the Court reviewed the chancery courts finding of entire fairness. Transaction was a TO for a total of 94% of Lynch followed by short form merger. Test: Entire Fairness: (1) Fair Dealing; (2) Fair Price o Fair Dealing Initiation & Timing Alcatel initiated the transaction at a time when Lynch was looking to acquire or merge with a partner that had fiber optic technology. Fact that the transaction was initiated at Alcatels discretion does not dictate a finding of unfairness unless the minority shareholders
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does not dictate a finding of unfairness unless the minority shareholders were harmed by the timing of the transaction Negotiation & Structure Unanimity on Independent Committee not required, and negotiated the price from 14.00 to 15.50. Committee retained two investment banking firms and outside legal counsel. Used Independent Committee when could have gone directly to BOD of Lynch, which it controlled Disclosure Did not have to say in 13D that Alcatels TO price would have been far below the merger price. Little doubt that Alcatel intended to acquire the entire entity Approval Independent Committee approved. Could not rely on shareholder vote, Court noted that overwhelming acceptance of Alcatel TO placed the case in the category of nonfraudulent transactions in which price may be the preponderant consideration. o Fair Price Alcatel satisfied burden by using investment banker that calculated the price of Lynch at 15.50 to 16.00 per share, which represented a 41% to 46% market premium. Independent committee hired two investment bankers who valued Lynch at between 16.50 to 17.50 per share. When Alcatel revised downward its forecast, firms opined that Alcatel merger price was fair. Holding: No error in Ct. of Chancerys finding that Defendants (Lynch & Alcatel) carried their burden of showing entire fairness of the transaction, and affirmed.

Tender Offers Short Form (Glassman, Soloman, In re Pure Resources)

Glassman v. Unocal Exploration Corp Tender Offer Freeze Out (In order to serve its purpose, 253, short-form mergers, must be construed to obviate the requirement of entire fairness, unless the transaction was tainted with fraud or illegality) Unocal Corp was the 96% owner of Unocal Exploration (UXC) and wanted to freeze out the 4% minority. BODs of Unocal and UXC appointed special committees to consider the merger. UXC retained financial and legal advisors and met four times before agreeing to the merger. UXC committee consisted of three directors who where also directors at Unocal, but not officers or employees of the parent company. Issue: Parent corporation cannot satisfy the entire fairness standard if it follows the terms of the short-form merger statute without more. Holding: In order to serve its purpose, 253 must be construed to obviate the requirement to establish entire fairness. o If a corporate fiduciary sets up negotiating committees, hires independent financial and legal experts, etc, it loses the benefit provided by DGCL 253 of a simple, fast and inexpensive merger process o But violates entire fairness if it follows the statute o Defer to the intent of the legislature Remedy (short-form) Cf. Weinberger (long-form): Appraisal is the exclusive remedy available to a minority shareholder who objects to a short-form merger. Fair value must be based on all relevant factors, including damages, and elements of future value, where appropriate. Is an opt-in procedure, no class action, can take years to resolve, more cumbersome process, requires lots of resources, damages limited to the difference b/w transaction price and appraisal value, no downside protection you get the appraisal price the court sets even if less than transaction value. o Before the transaction is consummated, plaintiff shareholders could try to enjoin the transaction. Does the record show that the transaction is not likely to survive entire fairness review? Hard to undo a deal once it is done. Soloman v. Pathe Communications Corp (Entire fairness does not apply to voluntary Tender Offers, they get BJR; unless they are (1) coercive or (2) there are false/misleading disclosures)
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Offers, they get BJR; unless they are (1) coercive or (2) there are false/misleading disclosures) Minority shareholder challenged a public tender offer by a controlling shareholder for substantially all of the minoritys shares. Issue: Whether BOD breached its fiduciary duties by not opposing a tender offer that was assertedly unfair based on its allegedly inadequate price. Holding: In the case of totally voluntary tender offers, as here, courts do not impose any right of the shareholders to receive a particular price. o In allegedly voluntary tender offers (in contrast to cash-out mergers), the determinative factor as to voluntariness is whether coercion is present, or whether there is materially false or misleading disclosures made to shareholders in connection with the offer. (quoting Eisenberg v. Chicago Milwaukee Corp). Under these circumstances, tender offer may be considered involuntary despite being voluntary in appearance or form. o In the absence of coercion or disclosure violation, the adequacy of the price in a voluntary tender offer cannot be an issue
Note: After Unocal Exploration, planners recognized that its holding could be combined with the holding in Solomon to possibly permit the controlling shareholder mergers without invoking Weinberger entire fairness obligation. First step: TO conditioned upon increasing controllers stake to at least 90% o no entire fairness under Solomon Second step: Short-form merger under DGCL 253 o no entire fairness under Unocal Exploration In re Aquila, Inc. & In re Siliconix blessed this conclusion

In re Pure Resources, Inc. (TO Short form freeze outs do not get entire fairness if they are (1) Non-coercive: (a) Maj. of Min, (b) 253 @ same price, (c) no retributive threats; (2) Fair: Target BOD Independent Dirs given time to react by: (a) hiring advisors, (b) provide min shs w/ recommendation as to offer, (c) disclosing adequate info for min to make informed jdgmnt) Unocal owns 65% of the shares of Pure Resources, Inc. Unocal wants to undertake an exchange offer whereby it obtains at least 90% of the Pure Resources shares, and then will consummate a 253 short-form merger as soon as practicable at the same exchange ratio. The minority consists of some officers who are affiliated with Unocal as directors or officers. Had a non-waivable majority of the minority tender provision, which required a majority of the shares not owned by Unocal to tender. Pure formed an independent committee that was not given the power to respond to the offer, but it could retain advisors, take a position on the advisability of the offer, and to negotiate with Unocal to try and increase its bid. Committee ultimately did not recommend that shareholders accept the Unocal TO Issue: Whether entire fairness review apply to Tender Offer Short Form Freeze Outs o There is a potential for coercion and unfairness posed by controlling stockholders who seek to acquire a minority o Kahn v. Lynch is premised on the power of the controller to take retributive action; this potential is also present with TOs. o Solomon is premised on the policy of willing buyers and willing sellers, but leaves minority without redress for unfairly timed and priced offers. Rule / Test: Follow Solomon that TOs will not get entire fairness (BJR applies) if they are non-coercive and majority allows independent committee to do its job: o Coercion Will be deemed non-coercive if: It is subject to a non-waivable majority of the minority tender condition The controlling stockholder promises to consummate a prompt 253 merger at the same price it obtains more than 90% of the shares; and The controlling shareholder made no retributive threats Independent Comm (overcome informational and timing advantages of majority)
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o Independent Comm (overcome informational and timing advantages of majority) Majority stockholder owes a duty to permit the independent committee directors on the target board both free rein and adequate time to react to the tender offer, by (at the very least) hiring their own advisors, providing the minority with a recommendation as to the advisability of the offer, and disclosing adequate information for the minority to make an informed judgment as to whether or not to tender Independent directors have a duty to undertake these tasks in good faith and diligently, and to purse the best interests of the minority. Holding: Offer in its present form is coercive b/c it includes within the definition of the minority those stockholders who are affiliated with Unocal as directors and officers. This problem is cured if Unocal amends the offer to condition it on approval of a majority of Pures unaffiliated stockholders Note: BOD does not have to be given the power to say no to the TOs TO v. Long Form: In long form need to give the BOD power to say no, however in TO dont need to give BOD power to say no, just need to give them ample time to assess transaction and advise SHs. Cox Communications (This is Chancellor Strines perfect scenario, and is just dicta) Problem - If the freeze-out is a long-form merger, only std is entire fairness. If std is entire fairness, there is nothing that the controller can do to get the case dismissed before trial or summary judgment b/c there is no BJR presumption applied to controlling stockholder transactions. Thus, your only hope is that you can shift the burden of proof through satisfaction of the entire fairness review. In Lynch cases, there is always settlement value b/c defendant has the burden to show entire fairness. Plaintiffs attorneys are always going to bring case. Noted that Pls have never gotten a judgment above the price that was offered in the merger. If it were up to Chancellor Strine, would change from entire fairness being automatic to in any going private merger, if any shareholder negotiated a transaction that mirrored an arms length bargain and was approved both by disinterested director approval and stockholder approval, then the transaction would get the BJR. o If there was a merger with a controlling shareholder that was negotiated w/ independent committee and conditioned upon the approval of the majority of the minority shareholders, the Business Judgment Rule would apply o This would give controllers the incentive to go back to long-form mergers. If the freeze out is a TO-shortform, would want standard where if Independent Committee says No, the standard going forward is Entire Fairness on the controller. This would give the Independent Committee the real power to say, No.
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Letter of intent, confidentiality agreement and Consideration

Monday, April 02, 2012 2:24 PM

Letter of Intent, Confidentiality Agreement and Consideration

23

CB: 285-287 (through introduction to Section B.1); 292-300; 312 (beginning with Note 2) - 316; 905-907 Sample Confidentiality Agreement (available on CTools)

Process when parties decide they want to engage in a transaction Drafting documents Due diligence Sample Confidentiality Agreement CA/ Non-disclsoure agreement Before sharing confidnetial info with prospective buyer, want to make sure info will be kept secret Usually a unilateral agreeemtn Bidder agrees to keep targets info confidnetial If mutaul exchanges of info- mutual condifentiality agreement Usually signed as soon as possible AD would call propsective bidders on phone, tell them the size and industry, but make them sign confidnetailtity agreement before getting any other info Often some back and forth negotiations about confidnetailtiy agreement Will onot communicate with target company employees for 2 years Idea: acquierers often conduct field visits to targets operations Meet employees Target worried propsective bueyrs are on fishing expeditions, worry about poaching good people Note: some just say can't hire, can't solicit, or break up by levels of seniority, etc Any written info, request,s analyss must be turned over or destroyed Only represenations are those in an Acquisiton Agreement (Written i.e. no contract formed without definitive agreement Does not include letter of intent Auction process will be conducted anyway the target wants, in sole discretion , and acuierer will not sue for any reason Note: if prospective bidders are sharehodlers, all of boards actions are subject to revlon duties This paragraph is tryign to say, you as a bidder, as oppsoed to our shaorelders, can't come sue us saying we didn't treat you fairly Indmenify seller for any harm done to ou thorugh disclsoure of any evlauation material Entitled to equityable reliefe, injunctive relief, specific performance May be modiefed or waived only by a separate writing signed by the company Severability Choice of law Point of agreement If parties are going to receive confidential information in regards to their assessment of whether or not to buy, must keep info confidnetial And if they sahre this info with advisors, etc, should have them sign confidnetiality agreement Scope of this info Infomarmation handed over from target
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 Infomarmation handed over from target Any notes derived from that info If you're going to dislcose, give target time to get gag-order, etc Stand still agreement Won't go hostile Won't launch proxy contest See it as a rule of the road for the negotiations So typically more in agreement than just 'you'll keep this info confidential'

lanning Problem: negotiating and documenting the Acquisition of a Privately Held Company Negotiating the Transaction Use of Non-Disclosure/Confidentiality Agreements Acquisition Consideration: Business Considerations and Legal Issues Purchase Price: Cash vs. Stock as Acquisition Consideration Different Mechanisms for Making Purcahse Price Adjustments Earn-outs Not common in public company mergers Typically earn-outs and escrow arrangments are designed for private company transactions These are difficult because determing the formula for whether or not extra turn out will be paid is difficult What should it be based on, EBITA, Net Income, Will we be charged overheads from acqueireor Will target management retain control to see to it they'll achieve the kind of performance needed to get earn-out How much autotnomy will target have after consumation If it's integrated, it'd be ahrd to pull out how much of the firms performancecoems from that new subsidairy/business, w/e Negotiating the Terms of an Earn-Out Drafting the Formula for the Earn-Out Dispute Resolution Mechanisms Note Escrows Post-Closing Purchase Price Adjustments Notes Fiduciary Duty Law Fixing the Terms of the Exchange Ratio in Public Company Deals Determining Fair Value Use of Fixed Exchange Ratio Use of Fixed Dollar Value Exchange Ratio Collars So far we've only really looked at fixed exchange ratios Usuually put into agreement on day its signed And does not change So if between time of signing and clsoing of transaction, acqueirers stock price changes, the exchange has a different value to sahreolders Signing HP price 100 Expect for each share of Compact, going to get something wroth 63.25 If between signing and closing HP price
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 HP price 50 Only going to get half as much in value Other options Pure Flotaing/ Fixed Dollar value i.e. give Compaq holders 63.25 worht of HP shares for each share of compaq For target - This gives you certainty about what value of transaciton will be From perpsective of acquierer sharehodlers - not good Means HP doesn't know how many shares it'll have to issue with this transaction i.e. value is fixed, but number of sahres is uncertain If HP's stockprice falls, number of sahres will have to be increased to keep value to shareholders the same Often, get lower purcahse price if you're going to get Fixed dollar value exchange Collars: mechanical possibliteis for how to give more certainty to parties regarding how many shares will be issued or the value of the transaction Firm boundaries at top and bottom (caps and floors) But uncertaitny wihtin range Fixed Price collar: Most common Price fixed within collar boundaries Might see something like, if price stays within range (in terms of Bidder co's stock price) will guarantee you 30 dollars per share to T If price above or below, price floats according to some formula Fixed Exchange ratio collar Exchange ratio is fixed e.g. 1:1 fixed ratio Bidders price 20 Collar- low of 15, high of 25 Between 15 and 25, exchange ratio stays 1:1 But if bueyrs stock price is less than 15, exchange ratio equal to 15/buyers share price, and if bueyrs hare price is greater than 25 dolalrs will be equal to 25/bueyrs share price at clsing i.e. if at closing, bidders price is 22 dollars 1:1 stays If instead, bidder price = 10 15/10=1.5 1.5 1.5:1 exchange ratio If we instead assume bidders price is 30 dollar/share 25/30=.83 .83:1 exchange ratio Letter of intent (pg 905-907) Controversial Parties love to put together term sheets Love to put terms down in writing before they contact lawwyers Letters of intent are minefields Might be way to structue stransaciton more advnagtagous to client Miaybe consdierations client didn't take into account Drafting without legal assistance, may end up with something bidnign after all, even though intended to be non binding Business people like because they then feel like they have a deal, So want to find out if there are any deal breakers at the beginning of the process before getting due diligence and legal work going
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before getting due diligence and legal work going Helps focus negotiations Shows what the points are Able to tlak about hem without all the legal verbiage

Intended to be non binding But once client has signed it, hard to walk awayf from that If parties think they need 3rd party (i.e. finaicning) approval or regualtory approval, letter of intent helps Makes the deal seem more real Regualtory approval Can at least start talking to regualtors about what kinds of road blocks might be insitutted Some times contian binding obligations, Things want to have settled early i.e. binding exclusivity provision Agreement about who pays cost and expenses related to transaction Usually parties just pay own expenses, but sometimes work out some other deal Reasons not to do letter of intent/ term sheet Company may find themselves in a bidnign agreement they dind't mean to enter into May weaken negotiationg position, hard to back peddle Takes time to negotiate and prepare a letter of intent Impairs deal momentum if get bogged down in deals early on Trade-off Certainty of deal in pricnpal Or not wasting time with prelminary deal
3 possibilities for courts construing letters of intent Letter of intent is an enforceable, binding contract LOI is a contract creating an obligation to negotiate in good faith LOI - mere term sheet, basis for discussion Galaxy-Trekeer letter of itnent (pg 905) Use terms throughtout saying non-binding AD: usually see entire paragrpah saying "this docuemtn is not intened to be bindign ,except paragraphs 3, 5, and 8 Sometimes if a letter isn't drafted clealry - courts will find the docuemtn to e bidnign Enforceable: Merely having a LOI saying that later on you'll draft more detailed agreement, may not be enough for court to find its non-bining Courts look to Is there enough informaiton to discern intent of parties, even if they'd have to fill in more detail later Good Faith Olbigation: Courts will sometimes imply an bligation to negotaite in good faith Saying parties wouldn't have entered nto this agreement without some sort of meeting of the minds Means the LOI is thought of as an initial framework form which the parties will hammer out their final agreement Usually obligation to good faith found to mean that parties can't just renounce deal, abandon negotiations or insist on terms inconsistent with preliminary agreement Courts often find outside agreement if request is unreasoanble and is just a thinly disguesed attemtp to get out of the deal Court will say acting otusdie duty to negotate in good faith Scope of obligation to negotiate in good faith can only be discerened by looking at terms of agreement Duty to negotiate in good faith does not mean required to clsoe deal Court needs ome snes you're behaving reaosnbly, trying to honor terms, not just
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 Court needs ome snes you're behaving reaosnbly, trying to honor terms, not just tyrign to get out because you changed your mind Doesn't mean the person negotaiting on behalf of the party, is requried to get approval from final approving body (i..e Board) i.e. no vioaltion of good faith if negotiater fails to strong arm the board into accepting trasnaction This is most likely otucome, once you sign the agrement, probalby obligated to negioate in good faith So this is a reaosn to avoid these Get hamstrun with terms you might not like in the end
Curts say just a termsheet sometimes

Citigroup-Wachovia-Wells Fargo Case Study F: Fall of 2008 - Wachovia 4th largest BHC In trouble Feds had to get involved b/c of acqusition of Golden West finacnail Had a lot of bad debt on books Also silent run Depositros left Taking away a lot of Wachovia's finaicng Regualtors had just seized WaMu and sold it off Negotiated with Wells fargo and Citi Wachovia prefered transaction with Wells Fargo Wells said would buy hold company But then walked away Feds intervene, borkered transaction with CITI Citi enter agreement in pricnple and exclusivity agreement Spend a week tryign to negoiate a deal, hammer out deals Then suddenly change in tax law, Wells is interested again Instead of only being able to carry NOLs forward next year says you can use them all in the same year Makes Wachovia more attractive Value of 25 Billion to apply loses all at once

This case study asks us to look at How governmetn acted to save Wachovia How Wells Fargo and Citi interacted Lets look at the What today: What was the transaction with Citi like form perspective of Wachovia Page 5 Asset purcahse Acquired most assets and laiblties fo1 per share for 2.16 billion Wachovia would retain Wachovia Securiteis and evergree- worth 2 per sahre Mean valued Wachovia at 3 per share i.e. citi just pulling out pieces it wants Wants Retail banking presence
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 Wants Retail banking presence Section 338(h)(10 eleciton /asset deal for tax purposes How is this possible? Don't you have to be buying stock of subsisdiary coproation for this sort of deal? Read: Citi buys the stock of Wachovia's bank subsidiaries The bank subsidiaries are considered assets of the company So it's an asset transactionf for corpaort elaw purpsoes b/c buying stock of a subsidiary corpaoiton, can treat stock deal as an asset purcahse for tax purpose 338(h)(10) gets rid of double taxation otherwise you'd get in asset purcahse of stocks Wachovia would retain non-banking assets, as indpendent business Citi was excited Us bankingoperations Bigger platform for pushing home loans and credit platforms Customer deposits - 400billion dollars Reduced Citigroups dependence on outs Citi would absor 42 billion in losses, FDIC would take on rest

And 312 bn portifolio of loans, so that's a lots of risk going onto FDIC's books

But FDIC got noncumaltive

If deal for subs not cosnumated, Citi has option to purchase all of them at fair market value anytime within 12 months b/c substially all the assets, need Wachovia sharohlder votes Wachovia agreed to keep trying for 6 months if vote fails intitially Why was wells transaction superior Merger, all assets all laiblities, no governemtn Exhcibit 5- exclsuvity agrement between Wachovia and Citi, excluivity till oct 6th i.e. Wachovia agree not to do anything to sell company for 7 day period Agree would be irrepadable damges- remdy of specific performance, injuncite relief avialble So was this a Citi Transaciton a good deal for Wachovia? Shareodlers only get 1 dollar per sahre for the good assets, holding the bag for crappier assets (1) identify and assess the options faced by Citigroup after learning of the deal between Wells Fargo and Wachovia, Sue Wachovia for breach of contract For specific performance, see exclusivity agreement Sue Wells Fargo for Tortituous Interference Increase offer / counter offer Or find a way to split the company up to otherwise take advantage of the tax rule Anythign where a counter party to Wells, Wachovia - put the screws to them Demand more collateral Do nothing, focus energy on other aspects of your busienss Certianly other acqusitions out there

Options Match bid But probably can't afford it Sue Wachovia for breach of exclusivity agreement Wells fargo for tortious interference
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 Wells fargo for tortious interference Challenge US treasury for tax regulation Challenge 126(c) Lie Low- wait for the wells fargo deal or comboination to crash and burn assessment (2) evaluate the actions of Wachovia after receiving Wells Fargo's offer, and What they did Hecuedled board meeting same evening to reivew proposal Knew was going to get sued by someone Believed tha unless agreement signed, FDIC would put into receviership Board accepted rpospal, claled pandit and told him Options Let citi know of wells offer and see if they can match it/up there offer

assesment Note about transaciton not in case study This was a stock for stock merger Wells fargo sahreolders getting shares worth 7 dollars Note: since stock transaciton no revlon duties Still fidicuary duties No lock-up (omni-care) Also, separate share exchange agreement Wells and Wachovia exchange, Wachovia would issue new preffered shares to Wells fargo that will gie it 39.9% of eh voting rights in wachovia And this excahnge was to take place before the sharehodler vote This was to increasae certainty that deal would go through Note: fidicuariy duties chagne in context In zone of insovlency have duty to corpaotion as a whoe, not just shareodlers Is there a risk in givng Citi a heads up? Worry about deal falling apart Maybe Pandit will go and try to get an injunction
The deal is good for wachovia, the governemtn (since no FDIC backstop) Note: Wells in better fiancial postion than Citi Citi needed bail out, wElls didn't need it (took it anyway) AD: the risk of there being injunctive releif sought right away and Wells gettign Skittish, would have chosen not to call (3) evaluate the actions of Wells Fargo after receiving notice of the tax code change. Options With new tax laws, made sense to place higher bid Tax rule chagne: can write off NOLs from acquired instituion in the same year Usually have rule lmiitng offset gains because worreiied acquieres will be buying companies, not for econmic reasons, but as a tax shelter Changed to make more attractive to acquire financail insituions Here: made 25 billion bonus in acuqiring Wachovia Previously had walked away Issues that made them say no in first place But now Tax Company share price going down, comeing in with 7 dollar offer
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 Company share price going down, comeing in with 7 dollar offer (compared to initial 10 dollar offer) The decision to go forward given the agreement in principal and the exclusivity agreement Sec 126 FDIC authority (from Tarp act) No provion contained in any existing or future standstill, ocnfidinetality or other agremetn that, directly or dindierectly Probhits or restricts ability to acquire all or part of any insrued despositoy isnituion in any transaction in wihich FDIC exercises its authority under section 11 or 13 shall be enforceable or impose laiblity on such person as uch enforcment or alblity shall be cotnrary to public policy But what if this had never been passed?

Assessment

For tomorrow Think about what Wells Fargo is offering and why that's more attractive for Wachovia Be prepared to answer questions about Timeline When wachovia made various decsion Whenwells When citi. What happened Sued Wachovia for breac of exclsuviity agreemnt Sued WF for tortious inteference Tried to enjoin trasncaction The argumetns All Citi had that was bidning was exclsuvity agreement, term sheet was nonbinding In some states, still have duty to negoitate in good faith upon signing term sheet (even thought nonbidning) Note - no language int his agreement that said would be workign towards any sort of agreement Under NY law (applicable here) courts tend to look harder to see if itnetn to negoitate in good faith 'agree to work diligently towards the following ends" 'agree to work in good faith toards" In delaware:? Sometimes imply obligation to negoitate in good faith even without explicity language, but if provisons in letter of intetn indicating some effort from both parties to achieve certain aim 'take following actions by following dates' Here: no such langauge Here: "proceed to negotiate to form staisfactor to each of them" So some commitement to denvevous to move towards defintiive agreement Probably enough to find obligation to negotiate in good faith AD: under these facts, citi has good argument that wavchoia has obligation to negoitate in good faith and not to negoitate with Wells fargo till expiration Citi found a state court judge to hold hearing on this on a Saturday Enjoined transaction Tolled exclsuviity agreement Judges order overtuned, no authority to issue that outside of new york (he actually lived in connecticut Also,because he wasn't on speaker phone, it was sort of a sham of a process
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actually lived in connecticut Also,because he wasn't on speaker phone, it was sort of a sham of a process Note- all you get under exclusivity agreement is obligation to continue to negotaite till exclsuvity period ends So even if tolled -> only gets you a few days And Wachovia then just requried to have conversation with you AD: citi could have said a obligation to negotiate in good faith meant you can't just change terms, need reasoanble basis for refusign to sign But never got this far b/c of 126(c) Citi and Wachovia cross sued on whetehr retroactivity was a problem re: 126(c) Statutes don't govern retroactively absent clear congressional intent But here - yes retroactive intent Citi argued claim arose on Thursday, statute not passed till frida Court: this statue clearly designed to govern passed behavior And didn't file lawsuit till after statute was passed So statute governed Ultiamtely, CITI continued to fight, Wachovia and Wells agreed in 2010 to pay 100 million to Citi to sttele suit Citi originally sued for 100 billion, only got 100 million Wells thinks the deal worked out better than expected, so didn't really care about settlement Wachovia got sued by shareholders Claim of breach of fiduciary duty Wachovia won on almost all points North Carolina court: board did not vioalte duty of care, acted with informed judgmetn, yes tight timeline but had 800 pound gorilla in FDIC saying would put in receivership if no deal by oct. 3 SH plaintiff said Wachovia should have just waited, new bialout bill was going to be voted on Friday, see fi Tarp funds would be made avialble Court: no indication governemtn was interested in helping Wachovia remain idnependnet Court: share wexcahgne agreement reaosnble P had made omnicare argument, preclsuive and coercive b/c locked up 40% of the shares, forces deal downtheir through Court: 60% of shares still free to vote against transaciton, so no majority lock up Also- not usual times, no better deal around Court did strike down provison on issueing shareaes in exchange These were preferred share, with 18 month tail on redepmption if deal blocked by sharehodlers b/c if sahreodlers voted no, Wells would still have 40% of the shares If a superior offer came on down the road, Wells could hold onto shares for 18 months and blcok any other deal Court: that is preclusive, struck that provison down, upheld everything else So Wells dropped requiremtn for 18 month tail, Wells completed acquistion on dec 31,2008 Got 76% of shareholder vote A marjoity of the minoirty still upheld transaction Wrap up Yesterday talked about wh lawyers don't like letter of intent Today, ended up with letter of intent voided Purpsoe: think about what board members confront in time of crises Compare to discussions about how much deliberation boards have to do and how much process

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 Negotating and drafting the acquistion Agreement The Basic Agreement Preparation of the first draft Circulating first draft for comment Representations and Warranties vs. Covenants vs. Conditions to Closing Represetnations and warranties Disclsoure Schedules Bring-Down Basis for indmeinifcation Covenants Negative vs. Affiramtive Covenants Conditons to Clsoing Bring-Down Condition Closing: Post-Closing Covenants and Closing Documents A Mock Negotiation over the Terms of Target Company's Representations and Warranties Deciding which issues not to negotiate over The impact of Sarbanes-Oxley Reforms on Negotiations for Financial Statemnt Covenant Introduction of a "Materiality Qualifier"' Horse Trading Between Bidder and Target Note Impact of Sarbanes-Oxly on Acqusition NEgotiations HP-Compaq Merger Agreement Structure Tax free regorganization Terms of which operations of HP and Compaq will be combined This agreement will allow us to tsee the mechasnics structure of transactions and what kinds of eocnomic problems the agreement is meant to address Boiler plate Better approach is to think about particular problems trying to solve Points of value want to be sure you're getting Particular cocnerns of seller Concerns of buyer being able to tmake good on promises Worries about clos if reps and warranties are trobuled Preamble Defines basic structure of transaciotn Pre amble Parties and Date HP, Compaq, Merger Sub Recitals Rationale for the trasnciotn Respected board find advisable Boards have approved and recommended REOrg under 368(a) Article 1 Describes merger Reverse triangular merger 1.1: at effective time, merger sub shall be merged into compaq Separate corpaorte existence of merger sub shall cease AD: if this had been asset purchase or stock purcahse agrement, this part would talk about he assets/stock to be purcahsed 1.3 effect of merger 1.2: effective time, clsoing, when transaciton consumated Certificate of merger filed with secretary of state
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1.2: effective time, clsoing, when transaciton consumated Certificate of merger filed with secretary of state 1.4: certificate of incorpation and bylaws of compaq Will be ammended to be idneitacal with merger sub Article 1 of certifacte of incorpation of surivign company will sa "compaq" 1.5 who the initial directors and officers will be Will be directors of merger sub Officers willb e officers of merger sub i.e. since separate incorpaoted body, but wholly owned subsisdiary, still need corporate formalities 1.6 (a)Effect on capital stock What happens to sthe Each share of compaq converted into right to receive .6325 shares of HP This is a fixed exchange ratio Note- even though some cash - for fracitonal shares- not enough cash to tirgger appraisal right 1.6(G) adjustments oe exchange ratio Only for stock pslits, etc But not price protection No collar, no flaoting exchange ratio 1.7 establishes mecahsnims for compaq SH to exchange for HP shares Represenatiosn and warranties Most important part of agreement Promise that things set forth in this agreement are true (or at least materially true) Generally - more extensive reps and warranties coming from sellers Sellers know more about busienss than buyers, buyers rely on seller to give informaiton they otherwise wouldn't have Process Draft usually comes form buyer (b/c taking on most risks) Starts off with lots of reprsntaitons and warranties Buyer- wants to say these things are tru ein all respect Seller will want to qualify by materiality Lots of back and forth with due diligence in the backgroun If the seller seems partiucalrly resistant to give you a type of rep, that makes you skeptical So this can be an information forcing process Article II Represenations and Warranties of Compaq All things are true except for dislcosures in discloure letter (aka disclsoure letter) Thus disclsoure schedules add dozens of pages for excpetions made to reps and warranties All become part of definitve agreement upon reference 2.1 Has power to enter into this tranaction Bylaws, article of incoraption disclsoed dleivered Exhiibt 21 on form 10-k incldues all signficant subsidiaries of Compaw Aka saying have provided all pertinetn infoamiton on organization 2.2. Captial structure Authroized captial stock Who has sahes, where they are Once transaciton clsoes, all shares of compaq exchagned for HP 2.3 (A) Authority Compaq has requriste corpaote power and authority to enter into this agreement - and they've met all the requiremetns under law, charter, by laws to
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agreement - and they've met all the requiremetns under law, charter, by laws to enter into these agreements (C) necessary cosnents to enter agreemetn 2.4 SEC filings Compaq says made all necessary filings (b) Fiancial statements Look at how this rep is wroded Environemtnal matters Here: compleid as to form in all amterial respects to ruels and regs form SEC, preapred according to GAPP, fairly presented in all material repsects the consolidated fiancial psoiton Aka saying it is materially correct Reflects, to material extent, fiancail stamtents are true 2.5 no material adverse Effect 2.6 Taxes Compaq has filed all materail, federal, state, local tax returns 2.7 intellectual property To the knowledge qualifeid To our knowledge, not infiringeing, misappriorpiatign any IP of other party Nothing about this deal will infrigne their itnellecutal property rights 2.8 Compliance, Permits 2.9 no litigation 2.12 employee benefit plans 2.13 Environmental matters 2.14 Contracts Material contracts Definiton List of materail contracts Says all material contracts are in effect AD: common due diligence project for 1st year si to review allthe contracts of parites Do they get a right to wal k away upon change of control 2.15 Disclsoure Non of the info supplied by or on behalf of comapq in reference on form s-4 will e untrue in material respect 2.16 Board approval Board has approved Recommend stockholder approve 2.17 Fairness opinion 2.18 rights plan Poison pill Compaq has dleivered accurate copy of rights agreement Declared rights divdiend, fixed record date Taken all actions to ensure that HP won't be consdiered an acquiring person as a result of entering into this agreement 2.19 Take over statues Wants to make sure board has doner everything to be sure 203 not triggered

Article III Represeantions and warranties of HP and HP Merger sub Normally acqueirers reps and warranties less extensive than with target But here- HP's reps as extensive as compaqs b/c compaq sharehodlers not being cashed out Here- merger of equals almost - compaq wants to make sure its sharhoelders are protected They are basically acquiring each other Want to make sure IP is there, no material contracts, yadiya-ya
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 Want to make sure IP is there, no material contracts, yadiya-ya If cash transaciton See stuff about atuhroity, validlty organzied, etc, etc Article V Partiuclar steps party nees to take, following signing andprior to consumation/termiantion of agreement Prospectus/ proxy statemnt Scheudlign and holding required stockholders meetings Board meeting and recommendation Regualtory approval Reasonable efforts to make sure make all approaptate regualtory filings List all regualtory filings currently contemplating Including HSR Reasonable efofrts to see to it athat lal actiosn needed taken 5.6 (e) limitaiton on divestrue Possible that, while seekign antitrust approvals, authorities will require you make divestitutres Sometimes hell or high water provisons - we'll do anything to make this happen But here- 5.6(e) won't agree to any divestirtures that FTC or DOJ might requier if it will materially adversely affect the business 5.8 - requried consents 5.9 new comepnsation plans 5.11 idneminfaction Protect compaq executives for 6 years 5.12 - what board of directos of HP will look like 5 comapq directors will be on HP's board 5.15- tax free reogranziation - don't do anything to fuck that up 5.16 putting rights plan in place 5.17 HP will make merger sub do whatever neede Article VI conditons to mergers Allocates risks to parties Ideally parties best able to bear the risk Each party sually beares risks its reps and warranteis are true Int eh best psotion to verify Certain events, beyond control of both partiies (6.1) Conditons to the obligations o each party to effect the merger Each party can rely on occurnce of these events for termianting agreement List Stockholder approval No governemtnal entity issuing an order to prhobit merger, make it ilelgal Regsitration stament effective Unless breach agreement to work towards it Waiting period for antitrsut over Tax opinons form counsel saying qualifies as tax free reorganization 6.2 additional condititions and obligatiosn of Compaq Compaq can wave these conditions - but it's compaq's options 6.2 (A) all the reps and warranties contained in merger greement shall be true and correct on the date herof with the same ofrce and effect as if made on the clsoing date (except if not , in aggregate, material adverse effect on HP and Compaq received a certifacte with resect to the foregoign signed on bhelf o f HP 6.2(B) HP and merger sub shall have perfomed o rocmplied in all material respects with all agreements and covenatns (C) no material adverse effect on HP shall have occurred sicen the date theorfo
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 (C) no material adverse effect on HP shall have occurred sicen the date theorfo conitnuign 6.3 additoanl conditons to the olbigatoins of HP (!a) representations nad warranties of compaq have to conitnue being true unless if not a MAC indivually or aggregate (B) comapq perofmred or complied with alla greements/ covnetnas requried No Material Adverse Effect Basically, can refuse to close if a MAC, or the reps and warranties aren't true (materially

Questions You should be prepared to explain why the representations and warranties are important to the target and the acquirer in this transaction Article II Buyer Wants to know what its buying Even though due diligence, Target has most initmate knowledge of its business So with warranties and represenations, have basis for penalties / law suits if they don't actually receive the business they've bargained for Records board approval to get around 203 See 2.18 Target b/c receiving stock, need warranties about state of target companies buisiness b/c target shareohdlers getting shares as consideration discuss any limitations on how the parties may conduct their respective businesses between the date the merger agreement is signed and the date the merger is consummated, Article IV Ordinary course- carry on in usual , regular, ordinary course, sam manner heretofroe conducted No delcairng dividends, changing capital structure Can't make loans or invesmtents No changes in ivaccounting, taxes Why have this Sometime between signing and closing Why this? Sharheolder vote Unless private company where can do sign and cosnent orders Time taken to actually draft disclsoure documetns s-4 b/c stock transaciton, sharhoedler vote Need joint proxy prospectus Regulatory approvals HSR antitrust approval Worry about opportunistic behavior between signing and clsoing Thus lmits on divididends, other distributions No selling shares of stock No incumbering shares of stock No new lines of busienss w/o permission These things require consent under 4.1(b) Ddclairing dividind, enterign new business, issuign stock, merge with any other entity B/c don't know what kind of acqusitions these will be
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B/c don't know what kind of acqusitions these will be No loans, advacnes, investments in other persons withotu cosnent No changing tax treatment of trasnscitons No material chagnes in accoutning No settling material law sutis No increasing compensation

- no issuing new shares

discuss any restrictions on the parties' ability to seek alternative transactions post-signing, and 5.3 Acqusition proposals 5.3(a) No shop provison: No solicitiatation (both HP and Compaq) Including particapting in negotations Not allowed to solcit, induce, etc making of any aqusition proposals Will not approve, endores or approve of any acuqisiton approval 5.3(b) notifaction of unsolcited proposal Have to notify other party (appleis to both) As probmply as reaosnbly practical Notification of unsolicted acquistioin proposals Including 48 hour notice of any board meeting whetereunsolicted offer will be discussed 5.3(C) Superior offers For either party If receive unsolicited offer that in good faith concluded like to result in Superior offer may Furnish nonpublic information Engage in negotiations Change recommendation i.e., if after consdiering offer, it's superior, can change recommendation to stockholder form voitng yes for transaciton to voting no Must actually be superio offer Sotkcholder meeting hasn't occurred Other party given notice of superior offer i.e. incase a better offer comes in, fiduciary duties require the board to consdier it (up till time transaction is closed But we've seen reaons boards give for not pursuing offer Fiancnaing not secured Basically this is a fidcuairy out Notice good faith requirement that board detemrien the offer is uperior, or likely to lead to superior offer Must consult without outside councel and must tell them ifailure to change recocmendation likely to reasult n breach of fidcuairy obligations 5.3(e) continuing obligation to call, hold and convene stockholder meeting No matter what, even if the board chagnes its recommendation, msut still go forward with sahorelder meeting i.e. this a a force the vote privsion Even if board changes recommendation, sharheolders get a vote This is incase the acquierer thinks they can convicne sharoelders the board is mistkaen 5.3(g)certain defintions Acqusition propsoal
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 Acqusition propsoal Someone seeking more than a 10% interest Superior offer Must include buying all or substainally all of the stock or assets And have reasonable likelihood of being consumated 5.4c confidnetiality, access to informaiton, no modifaction of represtations wararnties or covneants Continuous access to books and records So if there is additional infomraiotn parties need in connection with on-going due dillgence, like figuing out if theres a chagne in conditons, the parties will have to grant one another access to informaiton Lets parties verify warranties and reps Reasonable efforts 5.6(d) 2.2(E) no changes in capital structure An't issue stock Other than permitted acqusitions in 4.1. (b)(VI Also that provison, cannot acquire or agree to acquire by merging or cosnodliating with , or by pruchasing any equity interest in or a portion of the assets of, or by any manner, any busienss or any perosn or divison thereof, or otherwise acquire or agree to acque any assets which are material. For permitted agreements Comapq still needs to consult with HP's CEO and CFO for acqusiiton with consideration in excess of 50m Vice versa with HP describe the circumstances under which a party may terminate the merger agreement and any applicable fees payable in connection therewith. Article VII 7.1 Temrination Can be termianted at any time preior to the effective tme, by action taken or atuhroitzed by board of termianting party and except as provided below, whether before or after the reqise approvals of the stockhodlers Circumstances Mutual wirtten cosnent of both boards Not cosnumated by may 31 If transaction hasn't been consumated by may 31, 2002 Extended to Aug 30 - As a result of fialrue to satisyf 6.1(b)injunctive order (d)antirtust approval (E)governemtnrestrictions But if you're the cause of us not gettign to finish line, you can't rely on this provsion in court If governmental entity has enjointed ,restraiend the order As long as final or non-appealable No stockholder approval by either comapq or HP

By HP if triggering event with respect to Compaq Defined on A-42 Triggering events if Long Page 222

 Triggering events if Board withdraws, amendms or modifieds in manner advers to other party its recommdnation Faield to incldue in prospectus/proxy recomemdantion Board fails to reaffirm its reccomendation upon requestboard approves or reommended any acqusition prosal Tender or exchange offerin related to I.e. if if withdrwas, or doesn't recommend rejeciton of anotehr offer By comapq if triggerign event has occurred Board By c for breach of any representation, warranty or agreement Or if it has come undtrue But opprutnity for other party cure HP given sixty days after notice form compaq to cure By HP upon breach of any representation, warranty, covenatns, etc Same as above HP or C if Material Adverse Effect occurred to toehr company 7.2 notic eof termaitonn Once termianted, agrement of no further effect excet for section 5.4(a) confidnetialtiy This section 7.2 7.3 termaitnon fees and expenses Even if termiante agreement, most of it becoems of no futher force or effect, provisons on break-up fees survives Article VIII - gneral oblgiation Genrally relives partyies form any oblgiation but still laiblity for any willful breach of this agrement Thus if HP termiantes because a Compaq failed to got hrough on one of its covnenants, but HP can still sue for willful breach of agreement 7.3 Fees and epxens Each party bears their own expenses But note- once HP acquieres compaq, they'll really be paying these expenses 7.3 (b) When compaq must make payment to HP If contract termianted by either HP or compaq prusuent to 7.1(b) (not consumated), (e) no shareholder approval(f) compaq triggeirn event Note udner (b) or (E) 675 mm payment only needs to be made, if after the date of merger agrement and prior to consuamtion there has been an aqusiton propsoal with respect to compaq and tagreement of acqusition is consumated i.e. if agreement termianted because not clasued by march, or shareodlers vote no, or triggering event But if termianted under dorp-dead date, or sh vote no, payments only if antoher transaction If there's an annoucnemetn of altenative trasnaciton between signign and clsoing and then within 12 motnhs of signign and termiantion of this agreement, the fee is

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payble Altenatively, if no pbulic annoucnemtn of aqusition agrement between signign and clsoign, a nd compaq acquiered within 24 motnhs This lets HP get a break-up fee without it being coercive If this didn't say termination fee subject to antoehr privosion, will make it coercive b/c if triggered by naked no votesharehodlers, even if they don't llike the deal, will vote yes b/c of fear of losing 675m But if another acqueirer, that termiantion fee is borne by new bidder 7.3 (b)2 payment by HP to compaq Same as above in reverse No naked not vote 7.3(b)(Iv) acqusition is when someone hodls more than 60%, or 40% if an asset deal If terminted by HP or Compaq -> compaq pays 675 million

Article VIII Genera provisons Boilder palte 8.1 non surival of represatnions and warranties After clsoing- no survivavility of reps and warranties They all die as of closing Only covnenats that by their terms surivve surivive See 5.9(b) on employee compensation, etc 8.2 notices - how to send notices to laweyers 8.3. interpration, knowledge (A) r Including = icnlduign without out limitaiton Busienss of compaq or HP incldues subsidiaries as well An excpetion or discloure made in Compaq disclsorue letter, that exception is going to be applciable to any other rep or warranty of similar warranty rep that this would be applicable to Knowledge= actual knowedge of these named officers after inquiry of their repsective direct repros Note: often says constructe knowledge 8.3 defiens Material Adverse Effect AD: contrast this defintion with defintion in IBP/ Tyson case 8.11 waiver of jury trial Point of this General sense of what the parties are trying to do with this agreement As junior lawyers- most of your time spent on due diligence As you move up- do more drafting

We also will begin our discussion of Assignment #26 (the IBP case - read through the first paragraph of p. 363 only). Please be prepared for a detailed discussion of the facts of the IBPcase.

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Merger Agreements

Confidentiality Agreements
Note: Limitation on how long can keep merger negotiations secret. See Rule 10b-5 Target sends to prospective Buyer before it begins to exchange information. In order for Buyer to decide whether to acquire the company, certain types of information are required: internal financial information beyond federal security law mandated disclosure, such as detailed info by business unit, projections, strategic plan, where the company is going If one competitor is acquiring another, target is worried about sharing info because competitor could break off negotiations and then use the internal information in a competitive manner. If not a competitor, less of a concern, but still worried about leaks. Agreement essentially says: o Here is the information we are going to give you. You promise: Treat all information confidentially Limits on sharing the information If deal is not consummated, destroy the information or return it Limit the use of the information to the purposes of considering a deal Limits on stealing employees and suppliers Keep the negotiations themselves secret Buyer doesnt want to get into a bidding war Seller has a preferred buyer, and doesnt want to end up in Revlon land Standstill agreement Prospective Buyer agrees not to purchase shares in the target; launch a proxy contest for board; steal executives o The more information the Buyer has in the Target, the more confident they are in their bid o Target doesnt want the Buyer to have any more information than that which has been made available o If the Buyer has full information, more likely to go hostile and bid lower w/o standstill o Possible that Buyer doesnt want to be seen as a hostile bidder, wants to protect their reputation of negotiating in good faith Even if target is able to get Buyer to commit to a standstill agreement, that doesnt mean that the standstill is ironclad (see Topps) o Parties have to use the standstill to negotiate in good faith o Standstill cant be used to circumvent Revlon duties Confidentiality Agreements: Process First Step - Send out a Confidentiality Agreement with an Information Memorandum and give a date by which the potential buyers need to express interest Second Step - If they are still interested, invite buyers to come in for presentations and perhaps provide them a data room; then give them another date by which to submit their next bid Third Step Ask the buyers to provide a draft merger agreement with markups

Letter of Intent

Final Step Term Sheet, Letter of Intent or a Memorandum of Understanding; perhaps a Merger Agreement Business people like LOIs because it makes them feel like they have a deal, but lawyers dont like them because they want LOIs to be non-binding o Term sheet LOI Definitive Merger Agreement (degree of formality) Business people dont want to wait until the Definitive Merger Agreement because they
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Definitive Merger Agreements

Business people dont want to wait until the Definitive Merger Agreement because they take too long to negotiate and the lawyers prolong the negotiations Risks w/ LOI; how they could be interpreted by the court: o It is non-binding o It is binding If it does not include the words we do not indend to be bound See Arnold Palmer case Look to actual language to see if the parties intended to be bound, as well as the extrinsic evidence of intent If you leave to ambiguous as to whether you intend to be bound or not, could get in trouble: MAKE THE LANGUAGE CLEAR that do not intend to be bound by LOI o Duty to negotiate in good faith for the transaction outlined in the LOI Some courts will imply that there is a duty to negotiate in good faith, even if you agree that the LOI is not supposed to be binding LOIs set up the framework for how negotiations are supposed to take place, and once the agreement is in place, parties cant simply walk away unless there is a violation of that framework this is one of the main reasons that lawyers worry about clients entering into LOIs w/o lawyers to advise them Set down in writing what the buyer thinks it is buying from the Target, structure of transaction, purchase price, and consideration. Layout a statement from the Target as to the current state of its business affairs. Layout how the closing will take place; sets forth rights and responsibilities of parties between the signing and the closing, as well as some outcomes that will allow the parties to walk away from the transaction. Buyer wants to do due diligence before and after signing agreement, but the Target is in the best condition to know what condition it is in. That is what Representations and Warranties are for. If misrepresent, there will be penalties and indemnification. Target wants guarantees as to the condition of Buyer (representations and warranties) especially when a stock deal b/c the Target shareholders will become Buyer shareholders, so want to know what kind of business they are becoming a part of. Not a worry in cash deals b/c target shareholders will get cash and can invest elsewhere; not subject to condition of the Buyer Will contain a provision whereby the parties will continue to carry on their businesses in an ordinary manner so that neither one tries to make the business less valuable than it was. Agree to carry on business as usual. Covenants will be reciprocal in share deals. Can contain Deal Protection Devices, subject to Ominicare. BOD is not allowed to adhere to a deal protection device if it would conflict with their fiduciary duties. There will be conditions that must be met in order for each party to be able to close the transaction. If not, a party can walk away from the deal.

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Use of a materiality qualifier- Herein of MACs and MAEs

Monday, April 09, 2012 10:08 AM

In Re IBP, Inc. Shareholders litigation (Del. Ch.2001) F: IBP considers management buy-out Smithfield hears of this- offers to buy Tyson - wanted IBP too Bidding war Tyson wins w/ 30 dolalrs per share deal Lots of due diligence Knows of cyclical downturn Knows of harsh winter Ifnormaiton abut impact of accurnitng irreuglariteis in small divison - DFG Small but seen as engine of growth IBP had a set of bad quarters after signing Operating profit on normalized basis down 64% year over year DFB impairment charge is 60.4 million 15% Tyson also having trouble with down turn in economy Tyson wants to get out of deal Tyson wins initail auction Signs agreemetn on Jan 1, 2001 Goes forward with Tender offer In March - tyson announced intention to termiante transaciton Tyson brought suit seekign delcarotry jdugment for its' actions IBP sued in Delware - trying to get specific performance Can Tyson termiante transaciton and walk away Will IBP get specific performance Tyson 3 grounds that would give it the ability to walk away Breaches of Reps and Warranties MAC Right to rescission due to fraudulent inducemnt to tner transaciton Note: our casebook focuses only on the MAC Doesn't really go into the other two Breaches of Reps and Warranties Tyson: breach of reps and warranties Bring down condition: reps and warranties must be true as of the closing or other party may walk away Reps and warranties Tyson pointed to 5.07: SEC filings are materailly true/correct 5.08 Financail Statements are materially true/ correct 5.09 Disclosure documents are true 5.10 No MAC Court: Schedule 5.11 No undisclosed Material laiblities Except as set forth in scheudle 5.11, and se t forth in 10k, etc, no liablities except those in restatments and any further laiblites assoicated with
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except those in restatments and any further laiblites assoicated with certain immproper accoutning practices at DFG foods, subsidairy of IBP Ad: WHY SHOULD tyson be on the hook when these lialbities with DFG are mentioned in 5.11 AD: these filings wre all incorrect, IBP had to restate them Under normal circumstances- this would give buyer to walk away But b/c section 5.11 and schedule 5.11 Schedule 5.11 list all the liablities disclsoed in other parts of agreement as well as the DFG food issues Court: this is a very opened disclsoure Didn't give cap Open ended Basically, because open ended disclsoure, no cap, Note: this is scheudle 5.11, suppsoed to apply to section 5.11 But court applies it to 5.11 AD: be careful when draftign disclsoure statmetns, be sure to consider what a provison anywhere will do to the rest of the agreement Some cases say that one disclsoure is demed made with respect to any other presentaiton by such party to which such excpetion or dislcoure is clealry relevant If you're the seller, you want this sort of cross purpose disclosure so bueyrs can't come by later and ay you didn't dislcose it Thus the otherwise simple breach of reps and warranties, otherwise a slamt dunk, turned out not to work Takeway: a lot of these agreements prepared by junior attorneys Note: post-tyson,senior partners are paying clsoer attention to the disclosure scheudles Want to make sure there's no open ended- "any further liabliteis" langauge This would get rid of walk-away right So draft in way that is much more narrower Up to a certain amount The liabliteis incurred up to X date So natyhing new, If material, would give right to walk away MAC Clause (5.10) - no Mac 2 claims Finacial Results 4q 200, 1Q 2001 DFG impairment Charge Can't make this sicne measureing from date of last balance sheet and been disclsoed in 5.11 Also closing conditon that says don't have to Clsoe if MAC at IBP see page 350 AD: Note - this language doesn't say anythign about general economic/or industry down turns Compare with HP MAC (A- 45) Lots logner List thigns that aren't MACs Drops in stock prices Fialure to meet published revneue or reansirngs projectiosn, in and of itself Any Effect that results from chagnes affecting any of the ndustires in
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 Any Effect that results from chagnes affecting any of the ndustires in which such entity operates genreally or the US economy genreally Any effect aht results form affectign gneral worldwide eocnomic or cpaital market condtions Basically HP compaq MAC clause is a lot more extensive Carve out for general economic conditions So IBP didn't have carve out for genreal econoimc condtion So theoretically possible for this to believe a MAC But Tyson had burden of proving that the general economic downturn had the effect on IBP Need to see there has been some effect on IBP itself, the general economic down turn Have to measure the concurrence of the MAC agaisnt date set forth n agreement Here Dec 29th, 2000 As adjsuted by any additional disclsoures in warranted fiancails 5.11- Tyson on notice that there could be additoinal liabilities fromDFG So write downs form this aren't good enough - already know about addiitonal imparment clasuses How the Mac Clause should be interpreted Tyson was a strategic uyer, not a short term speculator So failure to meet expectations for 1 quarter As strategic buyer, only view downturn as material if affects a commerically reaonably period (measured in years, rather than in motnhs) Basically - a strategic buyer like Tyson shouldn't think a 'an earnings blip" is material, so long as targets overall earning prospects and potentail are not materially effected by that Blip or the cause of that blip IBP has history of volitile earnings Lots of swings in companies results Warranted financials also show swings Projections put together for LBO also show there is a drop in the companies earnigns So Tyson can't say that get to walk away after a couple of quarters, unless something happened in those quarters that is more permanent, something that will affect company over the long term Tyson should claelry be aware of the cyclcical nature of IBP's busienss, they're int eh same busienss And Tyson should be too concerned with quaretely swings, never asked for quarterly projections Analysts reaction to IBP has been changing IBP has apparently turned the corner Some Analysts were predicting return to finacial health Tyson's investment banker said deal was still within fairness range and offered great long term value If we look at IBP as a whole, given that its earnings fluctuate over time and it is subject ot business scycles, this isn't enough to call it a MAC Court: Mac should only be applied when Adverse developments of the sort no t known to the bueyr MACs shouldn't just be used to give bueyr right to walk away because it chagnes its mind Macas are backstop to protect buyer from unkonw circumstances that substnatially threaten the overall earnigns potentia of the target in a durationally signifcant manner. Note: so short term bueyr (finacial buyer) shorter duration impacts may be material
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durationally signifcant manner. Note: so short term bueyr (finacial buyer) shorter duration impacts may be material AD: if thinking about MAC drafting, and reprsenting seller, make it more like HP than IBP Make it more

Material Adverse Effect (or Material Adverse Change) In re IBP, Inc. Shareholders Litigation (IBP, Inc. v. Tyson Foods., Inc.) (a MAE is backstop protecting the acquiror for the occurrence of (1) unknown events that (2) substantially threaten the overall earnings potential of the target (3) in a durationally-significant manner (i.e. over the long-term)). Demand for specific performance of a Merger Agreement by IBP, Inc., in which IBP seeks to compel the Merger between itself and Tyson Foods stemming from Tysons successful $30 per share cash-share offer. Tyson was eager to win the auction for IBP. By the end of the auction process, Tyson had great doubts about IBPs ability to project its future earnings, the credibility of IBPs management, and thought that the important business unit in which DFG was located Foodbrands was broken Tyson raised bid $4.00 per share after learning of these problems. Also, signed the Merger Agreement at the beginning of 2001, which permitted IBP to recognize unlimited additional liabilities on account of the accounting improprieties at DFG. It did so without demanding any representation that IBP meet its projections for future earning, or any escrow tied to those projections. Tyson stockholders ratified the agreement. Tyson had buyers remorse and sought to terminate the merger agreement in March of 2001 citing a Material Adverse Effect from the combination of the DFG Impairment Charge of 60.4 million, a decline in IBPs overall performance in the last qtr of 2000 and the first qtr of 2001, significant underperformance Foodbrands of 2 mm as opposed to projections of 137 million and 145 million Issues Whether IBP breached the Reps and Warranties of No Undisclosed Material Liabilities (p335) in the Merger Agreement as to the financials of IBP. Whether Tyson suffered a Materially Adverse Effect that justified its rescinding the Merger Agreement with IBP. Whether Tyson had a right to rescission due to fraudulent inducement. Holding IBP has not suffered a Material Adverse Effect within the meaning of the Merger Agreement that excused Tysons failure to close the Merger. o MAE clause reads: any event, occurrence, or development of a state of circumstances or facts which as had or reasonable could be expected to have a Material Adverse Effect . . . on the condition (financial or otherwise), business assets, liabilities or results of operations of [IBP] and its Subsidiaries taken as a whole . . . . Have to figure out that there has been an MAE since the date of the warranted financials: December 25, 2000 o Where a Material Adverse Effect condition is as broadly written as the one in the Merger Agreement, that provision is best read as a backstop protecting the acquiror for the occurrence of (1) unknown events that (2) substantially threaten the overall earnings potential of the target (3) in a durationally-significant manner (i.e. over the long-term). o Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror Ct said that Tyson didnt carry its burden by showing that one qtr economic downturn is material because not (1) unknown; (2) threatening overall earnings; (3) in the long-term. Tyson had the burden of showing that a general economic decline had the
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 Tyson had the burden of showing that a general economic decline had the required level of materiality on IBP prospects o Extrinsic Evidence seemed to imply that Tyson got cold feet, not that there was a MAC: letter b/w general counsels, Tyson went to SEC asking about effect of withdrawing TO. o Even after extremely pessimistic projections for IBP in order to justify a lower deal price, Merrill Lynch (Tyson advisor) still concluded that a purchase of IBP at $30 per share was still within the range of fairness and a great long-term value for Tyson. This casts doubt on Tysons assertion that IBP has suffered a Material Adverse Effect. Business is also cyclical; should take long-term view o Impairment Charge is insignificant to IBP a whole, and DFG is a tiny fraction of IBPs overall business, and Tyson knew about the problems at DFG anyway. Holding: No breach of representations and warranties o Tyson said the warranted financials did not fairly represent the condition of IBP given the restatement. o Court said that Tyson acknowledged in Schedule 5-11 that it was aware that there were problems at DFG. The exception was allowed for DFG in the warranted financials. Thus, Tyson couldnt walk away. The exception provided for any further liabilities in association with certain improper accounting practices at DFG. Ruling: Court ordered Specific Performance of the merger agreement, that Tyson had to go through with the merger. Other Considerations w/r/t Material Adverse Effect Make sure that Merger Agreement also has the Right to Terminate if there is a MAE, even though in court it may be very hard to prove that there was a MAE Generally, Representations and Warranties do not survive the closing. o Once reach the effective time, they are no longer relevant o This is true in the public company context In the private company context, the stockholders and the officers tend to be the same people, so we think it makes sense in this context for there to be indemnification protection o Indemnification Seller agrees to indemnify the buyer if the representations and warranties turn out not to be accurate, or if unforeseen events occur Normally, what you will see is a section entitled Survival of Representations and Warranties Time Period Representations and Warranties contained in this agreement will survive for some period of time (typically b/w 0-2 years) after the effective date of the mortgage agreement o Typically there will be exclusions for some representations and warranties that wont survive Indemnification Stockholders of the seller are going to indemnify and hold harmless the buyer against claims, losses, liabilities, damages, attorneys fees . . . . o Selling stockholders will indemnify the buyer against all claims and losses . . . o That are incurred as a result of . . . (some sort of list as to what the basis for indemnification will be) 1. Breach of Representations and Warranties 2. Failure to comply with covenants 3. Idiosyncratic Concerns Buyers want this to protect their investment and to force the seller to tell the truth. Seller may try to say that the Buyer has access to due diligence, so no need for indemnification. (this doesnt work that often) Indemnification is not open ended: Limited time, never longer than two years Also there will be a cap on damages; % of purchase price, or $ Amt
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 Also there will be a cap on damages; % of purchase price, or $ Amt Basket Dont come for small things to nickel & dime. Is like a deductible. Until damages get to a certain amount, say 500,000, no indemnification o First dollar indemnification series of claims get up to 500,001; now there is a right to indemnification. Go back to the first dollar and get paid for everything.
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Indmenifcation
Tuesday, April 10, 2012 3:20 PM

Indemnification, generally Public companies Generally does not survive closing- see HP Compaq merger non-survival of reps and warranties Private companies Someitmes do survie closing If you want he reps and warranties to lead to an indmeifniaction claim, need those reps to last Length of surival period Generally covers general loses You breached on of the following rps Or include specific provisions These provisions allocate loss between buyer and seller - thus often subject to lots of negotiation Relevant issues Length of the survival period Will they survive closing? Public vs private Usually 6 months - 2years But sometimes you'll see them lasting through statute of limitations Some last forever/indefintately Certain things, like fundamental manners - like organizational structure, may want to be covered infindalty Types of losses covered Usually covers breaches of reps and warranties, breacheis of covenants Limitations on liability Tends to be limits on indemnifcation rights Seller who is walking away doesn't want this open ended liablity for things when it is already gone Baskets: require party to reach certain amount of losses before ineminfication is avialble Typically limits related to reps and warranties, not covenants And sometimes not even all reps and warranties Ways baskets can be structured Thresholds - dollar one/tipping baskets Your not entitled to protection for losses post closing till losses exceed certain thrshold, but once threshold reached, will pay all including dollar one Deductible - excess liablity baskets Seller not respsonbile for paying upon any losses till you cross the amount of the deductable, and only pay for amount above deductable Mini-baskets / Deminimis Thresholds Basically a provison that says seller doesn't want to be bothered with de minimis claims i..e ignore small claims Caps Cap total amount of recovery under indmeinfaiction Total maximum recovery in dollar amount
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 Total maximum recovery in dollar amount Sometimes escrow and cap is the same amount Generally caps only applied to breaches of reps and warranties Typical size 5% -30% of the purcahse price Depends on the negotiating power of the parties and what kinds of risk the bueyr thinks he/she is taking on More protection for buyer, the higher purchase price the seller will require

Whether indiminifaciton is the exclusive post-closing remedy Parties typically like indeminficaiton to be exclsuive post-clsoing remedy Typical indeminfication section will say ineminfiaction is the exclsuive remedy absent fraud, criminal activity, intetnional misconduct or claim for specific performance
Whether or not will have escrow as security for the indemnification

AT&T-T-Mobile Stock Purchase Agreement (available in the "Resources" section of CTools). You should be prepared to (1) describe the structure of the AT&T - T-Mobile transaction and Stock purchase agreement(asset purchase) ATT buying wholly owned subsidiary - T-Modile USA (De corporation) from TMobil Global ATT is purcahsing the Stock of T-Mobile USA form Holding Consideration - Cash and Stock 25 billion in Cash Stock - b Basiclaly 14 mllion in stock paid t The price of ATT tock will determine how many shares So this is a fixed dollar value transaciton Divide 14,000,000,000 (15b+ Closing Free Cash Flow Adjsutment Amount - estimated clsoing Discharged Indebtedness estimated divesture adjumsnt amount by By The average adjusted clsoing price (the purcahser shares" and together with the cash consideration , the purcahse price" Or purcasher Cash election Purcahser can choose to increase cash consideraiton by up to 4.2 billion decrease number of purcahser shares Prucahse price adjsumtnet For divistures Cloisng fre cash flow adjusmtnet (2) discuss the circumstances under which AT&T may seek indemnification post-closing and any limitiations on recovery. Circusmtances Breaches of reps and warranties Limitations
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 Limitations Q: want to know if a breach of 3.2(F) litigation for claim of 2million

Steps Idnetify source of breach See if it is a covered loss under agreement Look at 6.1 - Surivval - did loss occur in surivial period Reps surive for 12 motnhs from closing (except enumerated exceptions Here- no excpetion - surives for 12 months So ask client when this claim cosmes up Only entitled to indmenifcation Amount of loss suffered by indmenified party Here- can't be under de minimis amount 6.4(a)(2) 5 m for litigation, environemnt 1 m for any other fialirues of reps and warranties Certain reps and warranties subject to specified deductable How many claims must accumalte for cliams to be valid Here 6 m fo insurance 10 m for IP 15 m for complaicne with laws, absence of certain changes 25m for litgation, environmental matters, material contracts,sufficeinty and owenrhsi of assets; business 50m for undislcosed liablities So 9 subject to specified deducatble 16 other reps and warranteis not subject to specific deductable Still subject to deminimis ammount Overall threshold here- total claims over 500m But don't count any claims under deminimis amount For those claims with a specified decuatble, ignore amounts under those deductables before caluclating whether 500m threhsold has been reached So once aggregate amount exceeds 500 m above, then the seller is going to be laible for all damages above the deducatables So careout for envirmental matter- count amoutns over 1 m (even though deductible 25 m) Note: No limitations on indmeinfication as a result of inaccuracies in fudnamental Seller reps If you lied about this, no limts for amount can go after Note: no limits on damges for breaches of covenants or agreements Scope of indmeinfiaction under 6.2 Seller has to indmeinfy under following circusmtances Losses or damages from breach of warranty/covenants, etc 6.4 - limitatations on liablity Exceed De minimis? 5m for litigation
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 5m for litigation So if less than de minimis - then buyer can't collect form seller Theshold for Aggregated damges Needs to exceed 500 m Threshold (for total damages) (does aggregate in that section) Exceed Deductible? 25 m for litigation AD: if there's a breach of 3.2 f for 10 million - can bueyr revoer under indmeifnaction provison Answer following questions One in notes from yesterday re :10 mm litigation 3.2(f)litigation Deminimis amount- 5mm Deductable - 25mm in aggreagate 1m No less, than de minimis amount 10 mm An only claim during 12 month survial period Here- above deminims amount, but deductable of 25m. Thus no indeminfiaction protection Now imaigne 3 different claims all made in 12 month period 10mm 12mm 5mm Answer: All 3 claims above de minimis- get totaled for purpose of specified deducatable (27 mm total) However- not entitled to any compensation till we exceed 500m threhsold Thus no inemdinfifaciton Then go through all the questions just asked of us, assumign that instead of 3.2 (f) we're talking 3.2(q) + already a 560mm claim made. 3.2(q) total number of survivorers Deminimis - 1m (for all other reps and warranties) Specified deductable- none "note "6.4(a)(1) Deductiale, if appibacle" Overall threhosld of 500 m met here b/c of previous 560mm claim Once we cross that threshold, every other claim above the threshold no tsubject to dmeinimis, speciifeid deductable are things for which the breach occurred Answer all of the above are above deminimiss amount, and there is no deductable. Won't put over 9.75 billion seller cap, so Ineminfication avaialble here
6.1 - survival : effect of matierality qualifies Reps and warranties of seller and prucasher in effect until 12 months after closing
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closing Except for Environmetnal matters and prohbited payments- in effect for 3 years And reps and warranties that are Fudnamental Seller fundamental - Ownership, Captialization, sbusididairy Equity Interst and Prucahser shares reps) survive for 10 years after the clsoing Date All other covenants and agreemnts survie 12 months after closing Anymateriality qualifier regardign reps and warranties should be disregarded Except for reps and waranty in 3.2(o)(i)J) t-mobile contracts- (aka matrial contracts) 6.2 indemnifaction (a) seller indmienfies purcahser from Failrue of reps or warranties to be true Any nonfullfillment, violation or breach of any covneant made by seller and Exlcuded liablities Provided that Dexcept for reps and warranties about fiancial stamtetns, unsdiclsoed laibliites, damages limited to Pre-Clsoing Taxes resulting form, arising out of or icnurred in connection with such breach Limitaions Only for as long as survival periods in 6.1 Purcahser indemnifies seller From failrue of puarchases rep snad warranties or beach, vioaltion, nonfullmint of covnant Note: notlimit to Pre-Clsoing Taxes 6.3 third party claims Seller has right to seize control of thrid party claims But limitations on ability to setlte 6.4 limitations on Indmenifaction Except for 'fudnemantal selelr reps For 6.2(A)(i) (warranties and reps) Selelr only must pay if more than de minimis amount And must exceed specified dudeuctable Damages-demini minimis amount minus specified deducatible must be over 5000million For 6.2(a)(iii) (excluded liabilities) Must eexceed 16m Limitations - cumulative aggreagate liablity all damges under 5.2(A)(i) shall not exceed 8,75 billion (sller cap) But limiations don't apply to misreprestations abin fudnamental seller reps, and those won't count toawrds threhsold or seller cap De minmis 5 m with respect to failrue of rps and warranties regarding litigation, enviroenemtnal, intelelctual properties 1 million for all other rpes and warranties Specified deducatable 5 mi in aggregate with repsect to all fialrue of the rps and warranties of selelr set forth in 3.2(j) Insurance 10 m in aggreagte with respect to all fialrues of the reps and warranteis of seller in 3.2 (intellecutal proeprty 25 m regarding complianace with laws and absece of certain changes 25m regarding litigation, environmental matters, material contracts, sufficiency and owenrhsip of assets 50m for undisclosed liabiltiies
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 50m for undisclosed liabiltiies Purcashed shall hav eno liability Purcahser liablity capped at 39 m minus the cash consideration Or ofr damages less than de minimis amount

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Rohm and Hass case

Tuesday, April 10, 2012 8:56 PM

On Wednesday, April 11, we will begin our discussion of Assignment #27 (the Rohm and Haas case study). You should be prepared to answer the following questions: F: Dow really wants to do transaction with Rohm and Haas And they pounce
1. Why does Dow want to acquire Rohm and Haas? What types of synergies does Dow expect to achieve? Strategy Dow had w prong stragegy Merger with Rohm Sell assets To Kuwait Petrochemical Industries To stranger dow brand

Good operational fit Leadership Customer fcus Higher margin/ higher growth Less cyclical than dow

Synergies growth synergies / revenue synergies Generating 2.0 to 2.6 billion Expanded product portfolios, innovative technologies, increased geogrpahic reach, and improved market channels) Cost synergies When you combine businesses together can elmiante back office services Dow estimatin 800mm annually in cost synergies Although 1.3 b upfront cost to achieve these shared services and governance, purcahsing synergies, manufcaturign, supply chain, work process improvement and corpaote business development overlap Financial Synergies Smooth out earnigns- get rid of cycllicality? Markets like predictability

2. What was the proposed financing plan for the transaction? Page four Structure Reverse subsidiary transaciton Total deal value 18.8 billion Will pay 15.3 billion in cash, take on 3.5 billion in debt Financing 3 billion bonds from berkshire 1 billion from Kuwait's soeverieng wealth fund 14 billion bank loan For 17 billion total (only needed 15.3 b) in cash

Dow will issue 3 billion of convertible preffered equity to Berkshire Hathaway and 1 billion to Kuwait's sovereign
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Dow will issue 3 billion of convertible preffered equity to Berkshire Hathaway and 1 billion to Kuwait's sovereign welath fund and a syndicate of 19 banks will provide a one-year, 14 billion bridge laon for the tranaciton 3. Review the deal provisions described in Exhibit 4. What deal risks are addressed in the agreement? Which party ultimately bears these risks? Seller's risk Buyer won't/can't pay Financing Buyer's consideration being less at closing Timing to Close Adverse effects between signing and closing Risk buyer walks away/ terminates Post closing remedy (indmeinfication)
Buyer's risk [sh approval] [regulatory approvals] Superior proposal /losing the deal Target loses value/changes Financing Changes in own business that change ecnomics of doing the deal Both parties (may overlap with above) Compleition certainty Changes Mechanisms for enforcement

Page 14 Risks Party bearing

doesn't close by January 10, 2009

Material Adverse Effect in Rohm this MAC is tight - favors seller can't walk away because of decline because of enral economic conditons, or something happenign to our stock price, proejctions in and of thsmelves. No walking away b/c change in financial, debt, credit, securities markets.

Dow via ticking Fee - consideration shall increase by 3 million a day

Rohm bears this risk

Downturn in genreal economy, debt, fiance markets Antitrust concerns

RohmTerminates b/c superior offer Meger does not occur by oct 10

Dow Down - hell or high water divsture provison

600 million fee to Dow Dow pays Rohm 750 million (note - unsuault to see reverse temrination fees with deals between public companies - this is sign of how anxious dow was to do the transaction) Dow- no financing contignency Dow - allows specific perfomance

Unable to get finacning Breaches, threatened breaches

Specific perfomance provision Very similar to IBP provision - where court ordered specific performance Usually, for cash transactions, cash damages okay, and no specific perofmance But here, Rohm and Haas said didn't want monetary damages, intrinsic value to these busiensses being put togetehr. Has right to enforce them to follow thorugh
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being put togetehr. Has right to enforce them to follow thorugh So this is a Seller Friendly aggreement Valuation Upon annoucnemtn - Dow's share price fell Thought it was a good eal, but consdieration too high Dow has offered 78 per share DCF: Original projections 46.62 Why would dow offer to pay 78 for a company that the DCF seems to be 47 How much are the synergies worth? How much of those synergies are you willing to share as opposed to keeping t ourselves (Dow) Dow's analsys (per share) Value of rahm Cost Synergies 47 32

Growth synergies 12 Total 91

So 48% of the value is attributable to Synergies Essentially Dow is givien Rohm and Hass 47 dollar stand alone value +70% of the 44 synergie value = 78 per share Why Dow may no longer be interested in the trasnsaciton Financial crisis Capital markets freezing Global recession Chemical firms going bankrupt No demand for products Bank taking lead on Bridge loan needed government loans Prices of oil falling Dow loss 1.4 billion in 4q of 2008 As dow goes into free fall - Rohm and Haas ends up being worth more than Dow

4. Assess the options available to Dow and Rohm and Haas as of early February 2009. What should Andrew Liveris do? What should Raj Gupta do? Dow - page 7 Close the deal at 78 a share But permanent fiancing difficult given state of cpatial markets Could cut dividend but end firm's streak Asset sales would have to be done at fire sale prices Ditto for equity Could use bridge laon - but unliekly tob e able to take it back - Moody's said it would downgrade Dwo to Junk status Terminate deal through litigation Requires Dow to prevail in court Avoid specific perfomance Renegotiate specific terms Problem - Rohm won't get as favorable a deal, only upside ofr them is actually getting the deal consumated (at least quicker and cheaper than specific performance
Rohm - page 8 Litigating to close the deal at 78 per shaer Merger agreement tight and clear Dow can raise the funds (see above) Renegotiating key deal terms with Dow But what should be rengoegitaed
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 But what should be rengoegitaed Fiduciary duty to sahroelders Agreeign to anything less than 78 per share might violate his fdicuary duties How would you advise Roh and Hass Does Rohm and Haas care if Dow would have to slash dividend or something to pay for the deal? To Whom does Rohm and Haas owe duties? The R&H sharhoelders They don't care if dow goes bankrupt the day after the deal Revlon duties Usually owe fidiucary duteis to the company and its stockholders Usually aligned In M&A context, when sharehodlers are being cashed out, your duty is to maiximize sharoelder value So if there's a choice at the time of cashign out shareodlers (cash or stock) at that point in time you're tyring to miaximize the value for the shareodlers, not the corporation generally So get as much stock or cash for your shareholders for But still consider risk of onconsumation
Some states have stakeholder constituency statutes

Exhibit 7a Rohm and Haas - revised forecasted projecitonsdownward significanlty So probalby not easy to get dow to pay 78 again INITIAL dcf - 49 dollars per share New projections - 29 dollars per hsare Exhibiti 8 Covenants on Dow Bridge laon Net debt-to-toal cpatilziation < 65% Leverage ratio < 4.25x So now, after hit the market, Dow already breaching covenants And this will ause defualt And lots of loan agreemetns say once default on one loan, default on other laons Thus bankruptcy onercns are quite credible MAC? Very tightly worded does not include Economy Industry Financial/securities market Failure to meet internal or projected methods

5. If you were Judge Chandler, how would you resolve this dispute? Page 9 Options Find MAE - thus no breach if Dow terminates
Specific performance Economic disaster for both firms adverse change in target's business that is conssequential ot the compny's long -term earnigns power over a commercially reasonable period, measured in years rather than months. Erik: argument goes No specific performance, ther'es a termination fee Liquidated damages Such a severe economic downturn, fiancing freeze will have a direct and severe effect on the demand for Rohm's good over a time frame of years. Even though MAE does not include "events or changes generlaly affecting industry or econmy or markets. Because although those events are separate (alhtough the casue

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of) the decline in Rohm's busienss propsects. i.e. the event is the poor future prospects of Rohm - given a years long downturn in demand.
Summary Hard for paties to really know what was hapepenign in amrekt CDS spreads not very high- indicating bankruptcy risk for Dow not that high Arbs thoguht deal would be rengeoatiated, thought would come donw closer to 50 dollars Actual Results Dow did end up cutting dividend from 1.68 per share to 60 cents per share Freed up 0.9 billion dollars a year Stock fell to 81% of what it was when deal was announced Dow negotiated with Gupta at Rohm and Haas for a week Announced revised deal on March 9th - day trial was suppsoed to begin New Deal Price stayed at 78 per sahre Amount of ticking fee added in 78.99 per share was final prce Better terms, different finaciang Dow Concessions form banks and a couple R and H sharehodlers Bridge lenders reduced laon amount Extended term of loan for second year Increased leverage/coverage ratio So wouldn't be out of compliance on the covenant on day they closed transactoin Convicned two of R's largest sahrehodlers to take preferred stock instead of cash So reduced cost of merger Dow also had asset sales to raise additional finacning Sold morton salt 1.8 billion Lots of small holdings/joint ventures divested Decided there'd be more cost savigns than initially thought From 800 million to 1.3 million Nobody thought transaction was likley to go forward if went to trial Rohm and Haas mocked by commentators 'one of the strangest pleadigns - reads like mesyter' Asks chandler to adopt holsitic appraoch, take into consideration all the constineucnies effected by merger But many of us seem nterested in taking this borader view And other states have taken this approach Dow now Has bounced back Trading at 32 dollar now, Deal has turned out to e good Really did fit into transformative strategy Everyone considers his a real home run And dow may have walked away form it if it had a better legal argument

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Continental European M&A Trends

Monday, April 16, 2012 2:26 PM

Dr. Ziegenhain A brief introduction to differences in M and A in US and Continetal Europe Note: UK practice very similar to USA Challenge with private m and A - not much documentation Unless bond offering part of it Table of contents Letters of itnent/ heads of agreement Effective date vs. Clsoing Date MAC conditions Representations and Warranties Indemnities Freedom of contract Multijurisdictional Transactions Letters of itnent/ heads of agreement Widepsread use in the 80's and 90's of letters of itnent But now it's very rare Because now practice is to run a limited auction Have a data room Seller always prepeares the documentation Contra earlier practice - buyer would draft the agreement With seller drivien process- no LOI 6 or 7 parties in play Offers are mark-ups of the seller prepared document with consideration, etc American companies in these trasnactions end up marking up a lot They'd rather use own documentation, but not accepted in europe unless in finale round and only remaining bidder Typically sued in one-on-one transactionscombined with exclsuvity undertakings given by the seller Basic terms of agreement covered by LOIs Trasnaction structure: asset deal vs. Share deal Price range or price methodoloyg Scope of rperesedtantions and warranties Remedies (Statute of limiton, caps) Governing law, jurisdiction Cost reimbursement Exclsuvity period and penalty provisons (liquidated dmages) Differences Europe less litigious Less likely to see suits Usually only for fraud, and not breaches of reps and warranties Due dilligence in europe mostly doen before signign In US - lots of due diligence after signing In Europe- no due diligence between sigingin and clsoing
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In Europe- no due diligence between sigingin and clsoing No bring downs of reps and warranties upon closing Europe: purpose of reps and warranties Less expectations reps and warranteis are perfect The prevelance of private aucitons has led to the disappearance of LOIs in private M and A transactions over the last decade Fully fledge sller-friendly SPA drafts are instead circulated ot the bidders requesting purcahser's mark-up Indicative offer letters reflect certain elements of LOIs whch are non-bidnign on the parties LOIs and/or Term Sheets are still commonly used in Joint venture negotiations (commonly led one-one-one) Public M and A transactions But public M&A much smaller in continetanl europe No culture for pbulic stock market Lots of huge, wealthy family own businesses

In pubic m &A transactions, the board of the target compnay only permits due diligence if and when the key terms of the tender offer (price, accpetance hurdles ocnditions precedent, MAC) are substantially agreed upon LOIs reflect deal parameters which are eventually contained in the business combination agreement or ivnestor agreement Effective date vs. Closing Date Effective Date: commerical effect of the transfer fo the Target i.e. when does economic risk shift Closing Date: completion of the actual transfer (in rem) of the target US practice: Effective Date often Equals Closing Date Risk shifts to purcahser upon actual change of control Economic effects, such as right to divdiends and /or cash flow shfits on the same date Continental European practice: effective date differs from the clsoing date Effective date may be prior to the singing Date ("locked-box") Why do this? Why have somoen risk the business going south before clsoing date? Locked box- purchase price is locked in, only adjustmetns for interest Feffective date is between the signing date and the clsoisng Date Locked Box was widepsread before "Lehman", however, it is back again Why does this fly over there Can't really say, just a market standard Any logic behind it? Probably but nothing terribly good Audited accoutns required Ring fencing covenants against cash leakeage Ring fencing the locked box so you can't take cash out of the business (thus defrauding the purcahser) Bottom line, economic risk shifts retroactively

MAC conditions Mac conditions are commonly used both in private and pbulic M&A transactions However, nubmerous exmaples exist of seller being unwilling ot accept any uncertainty at clsoing and therefore reisted attempts to negootatie MAC clause Transaciton certianly typically ranks very high among the key objectives of seller Often price is traded for transaction certainty MAC clauses in Continetnal Europe tend to be more narrowly drafted than int eh UK and US
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 MAC clauses in Continetnal Europe tend to be more narrowly drafted than int eh UK and US MAC conditions exclude in particular Changes int eh gneral Markets Chagnes int eh fincnail markets Adverse effects resulting form the announcement of the trasnaciton MAC condtions are commonly qualified by threshold amounts eg. Loss exceed a mulitple of (recurring) EBITDA upon Clsoing Actual damges (vs. potential damages) incurred upon Closing exceeding x Euros Mac Codntions are drafted as "withdrawal rights" not as negative clsoing conditions: in the event of a MAC, purcahser may withdraw form the SPA Similarly to a MAC, purchaser may withdraw in the event of a breach of representaitosn and warranties or covenants, if the losses resulting form such breach exceed a certain threshold amount (typically in the range of 10-20% of the equity value) Further damages are excldued Fast-track arbitration procedure commonly sued Deicsion taken by single arbitrator Deciion often not subject to review by the courts

Representations and Warranties Scope of representaitons and waranties less detailed, with a hgiehr level of materiality than in the US Represenatiosn and warranties are not designed o guarantee the target will bei n "perfect conditon" To the xtent that future cash-outs are incldued int eh business plan underlying the valuation of the target, no prtoection is rquired for purcahser (no double dip) The relevance of represeantions and warranties has diministehd over the last decade: Secondary buy outs Dual-track sales Emphasis on cash-free/debt-free purcahse price and ring fencing instead No undisclsoed laiblity representaion No "10b-5" represetnaiton i.e. seller disclsoed everything a reasonable purcahser would want to know Meaning if you, as abuyer, have a 10b-5 rep, you're happy Can always find something not properly disclsoed if you need to get out No Catch-all rerestnaiton (e..g. compliacne with all laws") Broad disclsoure concepts prevail Disclsoure secheudles ("garbage disclsorue") Data room disclsoure (n paticualr virtual data rooms, VDD reprots, legal fact books) Q&A disclsoure Use of vendor due dilligence reprots has become very common Reliance vs. Non-reliance based VDD reprots Dislcorue concept Seprate laiblity of seller's advisors to prucasher No "bring down" of representaitons and warranties However, certain representaitons and warranties are brought forward to the clsoing (e.g. reprsetnation as to title, absence of insolvency In the even of breach of reprsetnaitons and warranties: compensation for losses Defintion of losses typically excldue Contignetn losses Lost profits Internal losses Damages are subejct to de minimis provisons, deductibles/baskets and cap

Indemnities
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 Indemnities Indemnties are given seprately form reps and warranties, though they may cover the same subject, e.g. taxes Example Rep and warranty: "all tax returns are duly and timley filed" Inemnity:" selelr shall inemnify prucahser for all taxes relating to period prior to the effective date" Indmentiies are given in the folloiwn ga reas: Tax Environmental health and safety ("EHS") Pending litigation against target Unkonw risks purcahser is not prepared to assume, e.g. asbestos laiblities Liablities not relating to the business being sold (in particular in the event of a preceding carve out) Reverse idnemniteis for the benefit of selelr Inemdinties protect against a broder scope of losses than reprs and warranties De minimis clauses, deductible and baskes apply ona case-by-case basis Indemnities tend to be tailored to the deal; reprs and warranties tend to be more standardized Idneminties run for period of up to ten years post clsoing, in some isntances for an unimlimited period of itme Reps and warranteis, except those relating to title, are tolled 18-24 months post-closing

Freedom of contract Traditonally the applicability of statutory remedies for "lack of specifications" was alawys excldued under German SPAs Implied warranties would nover profitability, sales and similar items Breach of implied warranties does not always lead to a claim for damages by prucahser In 2002, the german Civil Code was amended to also cover M&A type of transacitons In spite of the amendment, statutory provisions are excluded to the extent legally permissible (i.e. excluding fraud) German contracts may, therefore, not rely on the statutory provions with regard to the "conformity with specifciations" ; instead, recourse is taken to tailor-made contract provisions Multijurisdictional Transactions

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Simulation wrap-up
Tuesday, April 17, 2012 3:08 PM

AD thought we did a great job Where we wound up at the end of the day Transaction 115 per share - united Brands Cash or stock transaction @ shareholders election 70% tender condtion Break-up fee cahs, cf or high water divestiture provsiion Last bids CF - 85 Lanza - 97 Past years W2011 105/share, cash, Lanza But some finaicning from Unit Brands Invested in foods business W2010 No deal Target deal Spun off food business at beginning of transaciotn -> mass consution W2009 96.26/share - United brand 82.3% cash, 17.7% cash @2008 AM: 135/ sahre (123 cash, 12 stock) United brands PM: 142.50/ cash - Lanza W2007 102/share, UB, 60% stock, 40% cash W2005 AM: 112.50, cahs, lanza PM: 113 F2010 AM 135/cash, cf PM- 110/ cahs, UB Is this surprising Target had info about value and synergies So if you entered into confidnetialnegotiations, would see that info What happened during the simulation Initial hearing: redemption of poison pill Decided could leave poison pill in place, but not dead hand Thought GF said offer for CF was inadeqaute, presence of arb contributed to threat that shares would be tendered at the offer price CF: GF had not demonstrated arbs sufficiently likley to tender Essentially board of glboal foods carried burden of showign threat to corpaote policy Inadequate price

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 Reasonablness? AD: should have cited J. Jacob about ihreat and reasoanblness, etc Scenerio 3 - just saying 'no' for just now Even if can't say no forever So even if not waiting for a better offer, can say 'no' Shareholders Meeting CF put up a slate of 4 for Class I directors Also expansion of 5 additional board members This is the first year AD has allowed this to be a possibility Usually, charter provisions would say no more than 15 board members Removed that, and wondered what would happen differently Expanded board elected Contorled 9/17 board psoitions But - never voted to redeem posion pill b/c fiduciary duties Just like airgas case Saw business plans, saw more value Filings made GF HSR 14a proxy statement 9 14D-9's CF 14a Did already classify board members Additional directors Court required them to be Lanza- walked away at 97 As pre-simulation memo said they would Omnibank

Institutional Investors Proxy solicitations- decided to put pressure on management Supported Raisers slate Arbs Note: Free to dsiclsoe things to sharhoelders but need Reg FD (if not subject to standstill) Thus need to e-mail entire simulation group Note: Airgas - CEO went on road show, to try and persuade arbs to see hings their way Note: confusion as to how stock price could be updated Either actual share prices But stockholders should have gotten together and decided what the price was supoosed to be
Target Board- in realtion to sharhoelders Often you have the inside directors feeling attachment to the corporation See Circon But here- our target board idnd't seem to have that attitude - started exercise being preparedfor sale No entrenchment motives But often see this is the real world Shareholders rights in this context Vote Sell
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 Sell Or sue But if posion pill in place, nothing you can do to force a sale other than selling Target board- once arbs took over - worry need to consumate deal or else stock price would plummet See Circon Airgas case- boards don't view arbs as real sahreholders But real sahreodlers did sell to those arbs at previaling market price- thought shares worth selling at that price Banks Hudson Bank Did it add anything with havign 2 different banks - did the bnaks get played off each other
Regulators Gave Lanza civil penalty for fialrue to file out 2nd page of form TO But team said confused about langauge, not intetional But then once they withdrew the offer + the explanation - SEC rescinded the penalty Bidder's thoughts on regulatory reuqirements Lanza thought 2 page form was confusing There are issues that come up as you issuing filings-get long comment letters People in simulation found it Annoying Distracting Some wish more serious repercussions Antitrust Moderately concetrated, ptoentially could raise signifcant concenrs, but not abosltute deal stoopper Have the market boundries been drawn properly Merging firms want to draw boudnaries broadly, makes market look less concentrated

Valuation Just looking at Exhibit 12 Only thing people dind't all have was 6 dollars per share in hidden assets, and 22 dollars per share of ysnergies with untid brands 113.69 with hidden value (DCF With synergies - 135, 136 Parties should look at what's in exhibits as starting point But should have looked- a large part of the value here, derives from the terminal value So assessments of terminal value have a huge impact on what the shares are worth If you take growth rate from 3 to 2 Shares form 108 to 78 in DC analaysis Assumptions in exhcibits 4 and 5 Sales growth year over year, gross margins, operating income margins Compare the past, to the future projections 4 (historical numbers) to exhibit 5 with projection assumptions Reaosnable sales growth estimates, maybe somewhat modest in relation to historical Foods - 9, 8, 7, 6% flattening out at 5% per year But in last decade, 8, 9, 10, percent growth Chemicals- projcectiosn Gross margins Chemicals - pretty much in line with historical numbers Assuming gross margin of 46, 45% Historically, somwehre in 46-48 % Food- historically - from 29-34.4%
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 Food- historically - from 29-34.4% But projections- 38, 39, 42 through 2006 This is the kind of thing to ask about Why think your margins will improve going forward Things that might be manipulated that can have big difference WACC Proejctions Terminal value As you look at comps in Exhibit 7, should take some time figuign out if these are the proper comps See some very large companies - like dow, to some very small Should try to figure out whether or not these chemical companies are truly comparable Same line of business Are they of roughly the same size Blend multipels together of 2 divisions See Kohler case study Choce between kitchen and bath and engines, etc Are those muliptes weighted the way the company is actually divided Use sales, or revenues Or assets Note here- revnues much greater for chemical division Basically, if someone gives you a number and says that is the value, need to ask what assumptions Errors in spreadsheet models One of thedepreciation cells in exhibits 5 and 6 And refinacinng section of LBO model is erroenous Makes one seem like aslam dunk Aslso includes write down of good will - no longer legal

Wrap-up questions Note- if counting on having assets in place with synergy numbers-how do you address prices later on Revlon duties Only kick in when board starts to take action twoards a tranasaction that is a revlon transaciotn Revlon transaciton Cash deal (at least mostly cash) Becoming sharohelder in coproration where contorl moves form amoproehaous boyd of shaorelders to specific shoarelder Revlon starts when they start taking actions So if bidding process- but final deal is for stock -then no revlon duties But if doing auction and don't know results, but might be cash deal - need to act like there is revlon duties Just because someone sends offer- no transaction started yet, if not negotitating in response Things that hwart exercise of sahrehodler franchise can give rise to Blasius claim Includes delaying shreodler vote Packing board with own nominees So these can bet things before, or after the sharehodler vote that thwart the vote somehow

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Semester Wrap up
Wednesday, April 18, 2012 3:19 PM

Target boad Pressure Shareohdler How much power Deal Laweyrs Different roles Negotiating Drafting Hostile takeovers vs. Negotatied transactions

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