Professional Documents
Culture Documents
Table
of
Contents
Attack
Sheet
of
the
Standards
of
Review
...................................................................................
2
I.
Entire
fairness
rule
.................................................................................................................................
2
II.
Entire
fairness
+
shift
of
burden
......................................................................................................
2
III.
Blasius
standard
....................................................................................................................................
2
IV.
Revlon
standard
.....................................................................................................................................
2
V.
Unocal
standard
......................................................................................................................................
3
VI.
Negligence
or
Gross
negligence
......................................................................................................
3
VII.
Business
judgment
rule
....................................................................................................................
3
Overview
of
Corporate
Law
and
Corporate
Finance
.............................................................
5
VIII.
The
Separate
Legal
Entity
..............................................................................................................
5
IX.
Agency
problems:
.................................................................................................................................
5
X.
The
Corporate
Form
..............................................................................................................................
6
XI.
The
Capital
Structure
..........................................................................................................................
8
XII.
Introduction
to
Finance:
Expected
Return
and
Risk
............................................................
9
XIII.
Limited
Liability
..............................................................................................................................
11
Creditor-Shareholder
Agency
Problem
..................................................................................
13
I.
Protections
of
Creditors
.....................................................................................................................
13
Shareholders-Management
Agency
Problem
.......................................................................
15
I.
Fiduciary
Duties
....................................................................................................................................
15
II.
Duty
of
care
............................................................................................................................................
16
III.
Duty
of
Loyalty
....................................................................................................................................
18
Shareholders-Controlling
Owners
Agency
Problem
..........................................................
21
I.
Duty
of
Loyalty
of
Controlling
Owners
........................................................................................
21
II.
Shareholder
Voting
&
the
Board
...................................................................................................
23
III.
Shareholder
Voting
&
Proxy
.........................................................................................................
26
IV.
Transactions
in
Control
...................................................................................................................
27
V.
Mergers
&
Acquisitions:
Structure
..............................................................................................
29
VI.
Mergers
&
Acquisitions:
Appraisal
Rights
..............................................................................
34
VII.
Mergers
&
Acquisitions:
Hostile
Takeovers
.........................................................................
36
Securities
Regulation
....................................................................................................................
41
I.
Efficient
Markets
...................................................................................................................................
41
II.
Securities
Exchange
Act
10(b)
and
SEC
Rule
10b-5
.........................................................
42
III.
Insider
trading
....................................................................................................................................
42
Legend:
From
Class
or
From
Reading
&
Discussed
in
Class
From
Reading
Only
c.
d.
e.
f.
Hi
Utility
Lo
$0
$1K
Dollars
10
f.
1. Specific
risk:
Events
that
will
affect
mostly
the
single
corporation
were
looking
at;
e.g.
the
probability
that
the
talented
CEO
of
the
corporation
will
die
or
move
onto
another
corporation
2. Systematic
risk:
Relates
to
events
that
when
they
happen,
they
will
affect
most
of
the
market,
or
a
substantial
part
of
it
(e.g.
Bernanke
changing
the
interest
rates,
inflation,
depression)
Investment
strategies
in
response
to
risk
1. Diversification:
Investments
involve
risk,
and
investors
try
to
manage
that
risk
i. Investors
will
hold
a
portfolio
of
various
different
industries
and
makes
sure
that
the
specific
risks
of
one
investment
isnt
totally
related
to
the
other
investment,
such
that
any
loss
is
a
wash
with
another
investment
ii. Therefore
there
is
technically
a
scenario
where
you
can
diversify
enough
such
that
specific
risk
is
0,
and
all
you
have
is
systematic
risk
(since
you
can
control
specific
risk
by
diversification,
but
clearly
you
cant
eliminate
systematic
risk,
its
systematic
to
the
entire
market)
2. CAPM
model:
Expected
return
to
risk
analysis
i. Expected
return
to
risk
relationship:
20%
Expected
Return
2%
ii.
iii.
iv.
v.
vi.
Risk
Hi
If
you
want
to
invest
with
0
risk,
i.e.
us
government
bonds,
you
will
get
compensation,
probably
2%
But
as
you
assume
more
and
more
risk,
investors
will
demand
higher
and
higher
expected
return
Anything
above
the
line
is
a
good
investment,
and
anything
below
the
line
is
a
bad
investment
Anything
on
the
line
is
indifference
curve
There
is
therefore
an
inverse
relationship
between
the
expected
return
and
the
amount
we
are
willing
to
invest
11
b.
c.
d.
e.
ii. To
protect
the
shareholder
from
creditors
filing
suit
against
them
individually
(in
addition
to
the
corporation)
2. In
the
perspective
of
creditors:
If
you
know
that
whatever
assets
you
can
go
after
are
at
one
place,
its
easier
than
following
the
one
corporation
than
following
all
the
shareholders
3. In
the
perspective
of
the
capital
market:
Allows
for
shares
to
be
a
tradeable
product
i. With
limited
liability
you
transform
the
shares
into
a
product
that
can
be
traded
ii. Because
when
the
value
of
the
share
is
determined
not
also
but
the
Risk
and
Expected
Return
but
also
by
the
buyer
and
the
seller,
you
wouldnt
be
able
to
trade
the
share
iii. Therefore
you
wouldnt
have
an
equity
market;
you
would
only
have
a
bond
market
4. In
the
perspective
of
the
corporation:
its
easier
to
diversify
risk
amongst
many
investors,
since
shares
are
freely
tradeable
by
virtue
of
limited
liability
Illustration:
1. Suppose
X
wants
to
build
a
hotel.
X
goes
to
the
bank
for
a
loan.
The
bank
asks
what
the
hotel
has
for
collateral
2. Non-recourse
loan:
Loan
for
a
specific
business,
and
the
person
taking
the
loan
isnt
going
to
pay
for
the
loan
beyond
the
asset
of
the
building
3. With
limited
liability,
youd
like
the
creditor
to
assume
the
risk
of
the
business
4. Without
limited
liability,
the
owner
assumes
the
risk
5. Regardless
of
corporations,
you
can
regulate
liability
via
contract
Concept:
Think
of
limited
liability
as
something
you
can
contract
Limited
liability
and
tort
claimants:
When
we
provide
limited
liability
against
tort
claimants,
its
as
if
we
ask
the
population
in
large
to
buy
their
own
insurance
to
protect
themselves
from
corporations
that
cannot
pay,
as
opposed
to
asking
the
corporations
of
buying
that
insurance
Limitations
on
the
capital
market:
Manifestations
of
shareholder-manager
agency
problem
1. Asset
substitution
i. Assume
shareholders
as
the
bank
for
a
loan
ii. Bank
asks
what
the
corporation
is
doing,
and
the
corporation
owns
a
solid
building
in
Times
Square
iii. Bank
says
you
are
at
risk
A,
and
using
the
Risk-Expected
Return
graph
picks
a
certain
%
return
iv. Then,
all
of
a
sudden,
the
corporation
decides
to
produce
a
movie,
which
is
a
very
risky
business
(you
could
make
$100M,
or
lose
$100M)
v. Had
the
bank
known
about
this
purpose
in
the
beginning,
perhaps
they
wouldnt
have
determined
risk
to
be
at
point
A
but
rather
point
12
13
c.
d.
e.
f.
1. Concept:
Piercing
the
corporate
veil
but
not
getting
all
the
way
to
the
shareholder
of
the
corporations
2. Instead,
we
treat
them
(shareholder,
corporation,
other
corporations,
etc.)
all
as
a
single
unit,
so
were
piercing
up,
down,
across,
etc.
Doctrine
of
agency:
1. Concept:
i. Suppose
a
principal
creates
an
agency
relationship
with
an
agent,
and
the
agent
created
some
contractual
relationship
with
a
third
party
ii. If
the
actions
of
the
agent
were
within
the
authority
granted
by
the
principal,
then
agency
law
says
that
we
would
view
the
principal
as
if
he
or
she
directly
signed
that
contract
with
the
third
party
2. How
we
can
show
that
the
corporation
was
an
agent
and
the
shareholder
was
a
principal
(Walkovsky
v.
Carlton)
i. Showing
that
the
corporation
is
not
trying
to
maximize
its
own
profit
ii. Corporation
is
rather
doing
something
outside
its
line
of
business
iii. Activities
that
are
directly
benefiting
the
owner
but
not
through
dividends
3. If
you
can
show
the
doctrine
of
agency,
you
dont
need
to
pierce
the
corporate
veil
Reverse
Piercing
(Sea-Land
Services,
Inc.
v.
Pepper
Source)
1. Concept:
treating
all
of
the
shareholders
corporations
as
1
corporation
from
which
the
creditor
can
claim
priority
creditor
rights
2. Illustration
of
when
this
is
applicable:
i. Suppose
the
shareholder
owns
5
other
companies,
and
the
creditor
attempts
to
pierce
the
corporate
veil
for
Co.
A
ii. If
the
creditor
successfully
pierces,
it
might
be
the
case
that
the
creditor
only
at
best
gets
the
shares
of
the
shareholders
other
corporations
iii. Problem:
Creditor
will
lose
creditor
status
with
those
other
companies
since
now
creditor
is
a
shareholder
iv. Solution:
Reverse
Piercing
3. Can
be
accomplished
via
piercing
the
corporate
veil,
or
via
the
doctrine
of
agency
Equitable
subordination:
1. When
a
corporation
is
in
bankruptcy,
debt
claims
that
a
controlling
shareholder
has
against
the
corporation
may
be
subordinated
to
the
claims
of
other
persons,
including
the
claims
of
preferred
shareholders,
on
various
equitable
grounds
2. Subordination
is
a
less
drastic
remedy
than
the
remedy
accomplished
in
piercing
the
corporate
veil
Legal
capital
1. Form
of
ex
ante
protection
2. Rules
were
designed
to
provide
some
amount
of
capital
to
be
kept
within
the
corporation
and
serve
as
cushion
for
the
creditors
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
i.
j.
3. Characteristics
i. Reverse
triangular
merger
A. As
shareholders
dont
vote
and
get
no
appraisal
rights
(obviously
because
A
wasnt
part
of
the
merger
between
B
and
M)
B. Board
approval
of
A
is
required
1) Concept:
They
are
in
one
capacity
the
shareholders
of
M,
and
in
another
the
Board
of
M
C. Board
approval
of
B
is
required
D. Shareholder
approval
of
B
is
required
E. Shareholders
of
B
entitled
to
appraisal
rights
F. Unknown
liabilities
will
only
chase
B,
not
A
G. Franchise
titles
owned
by
B
will
survive
(since
B
is
still
alive)
H. Avoided
a
tender
offer,
private
placement
to
get
control,
then
another
tender
offer,
then
cash
out,
etc.
I. Effected
the
same
result
as
a
stock
acquisition
but
in
one
shot
Determining
the
nature
of
the
transaction
1. Test
for
whether
a
sale
is
substantially
all
of
the
targets
assets
for
purposes
of
asset
acquisition:
Gimbel
test
(Hollinger,
Inc.
v.
Hollinger
International,
Inc.)
i. Substantially
all
depends
upon
the
particular
qualitative
and
quantitative
characteristics
of
the
transaction
at
issue
ii. Transaction
must
be
viewed
in
terms
of
its
overall
effect
on
the
corporation,
and
there
is
no
necessary
qualifying
percentage
iii. The
sale
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
iv. Qualitative
prong
is
not
met
if
the
court
merely
believes
that
the
economic
assets
being
sold
are
aesthetically
superior
to
those
being
retained
v. Qualitative
prong
focuses
on
economic
quality
and,
at
most,
on
whether
the
transaction
leaves
the
stockholders
with
an
investment
that
in
economic
terms
is
qualitatively
different
than
the
one
that
they
now
possess
2. Substance
v.
Form
i. DE
Court
favors
form
over
substance:
even
if
the
substance
is
the
same,
even
if
a
merger
or
the
reorganization
is
effecting
the
same
thing,
DE
will
respect
the
form
nonetheless
(Hariton
v.
Arco
Electronics,
Inc.)
A. Implication:
If,
in
form,
a
transaction
is
held
as
an
asset
acquisition,
even
if
in
substance
the
transaction
is
really
just
a
standard
merger,
the
more
lenient
rules
for
asset
acquisition,
not
the
stricter
merger
rules,
will
apply
ii. PE
Court
favors
substance
over
form
(Farris
v.
Glen
Alden
Corp.)
A. Criticism
of
substance
over
form:
book
value
considerations
33
34
35
36
37
38
39
40
Securities
Regulation
I. Efficient
Markets
a. Main
goal
of
securities
regulation:
to
create
efficient
markets
b. Efficient
markets:
2
concepts
of
efficiency
1. Informational
efficiency:
Everything
in
the
market
will
be
priced
correctly
into
the
share
price
2. Fundamental
efficiency:
Prices
will
properly
reflect
the
true
value
of
the
corporation
(Important
focus)
c. Why
we
want
to
achieve
an
efficient
market
1. Efficient
allocation
of
resources
in
the
economy
i. We
want
good
corporations
to
raise
money
easily
and
cheaply
ii. We
dont
want
bad
management
to
get
as
much
money,
or
at
least
to
raise
money
on
expensive
terms
iii. This
minimizes
activities
of
bad
corporations,
and
promotes
activities
of
good
corporations
2. Reducing
agency
costs:
Capital
markets
are
important
for
this
in
2
ways
i. Affects
the
value
of
the
options
that
management
has:
If
the
corporation
does
good,
prices
go
up
in
value,
and
management
earns
on
their
options
ii. We
know
that
the
market
for
control
is
heavily
dependent
on
pricing:
We
dont
want
an
efficiently-run
corporation
to
be
undervalued
and
trigger
unnecessary
takeovers
3. Many
transactions
in
the
company
between
private
parties
will
use
the
pricing
on
the
stock
market
as
a
benchmark:
Some
private
companies
will
look
at
public
corporations
as
a
benchmark
as
to
the
value
of
the
private
company
d. Determining
the
best
way
to
allocate
resources
in
order
to
achieve
an
efficient
market
is
up
to
the
country
1. You
can
let
government
control
the
allocation
of
resources,
like
China
2. Or
you
can
give
that
to
the
banks,
like
in
Germany
or
Japan
3. Or
you
can
let
the
stock
market
allocate
resources
e. Categories
of
markets
1. Weak
efficiency:
If
prices
are
reflecting
only
information
that
is
embodied
in
past
prices
i. Empirical
studies
try
to
figure
out
if
you
can
forecast
future
prices
using
past
prices:
There
is
0
correlation
2. Semistrong
efficiency:
Prices
reflect
immediate
public
information
41
42
Good
News
Price
Bad
News
$200
-----
Insiders
Effect
$150
$100
Time
ii. When
insiders
trade,
obviously
they
move
the
price,
either
selling
or
buying
43
44
d.
e.
f.
g.
h.
i.
45
j.
46