Takeovers and Tender Offers – Mahon – Spring 2011

I. The Basics A. The Players:

o The Acquiroro The Targeto Accountantso Investment Bankers

Large Portion of the deal Will typically pitch potential ideas to interested parties Gives a “fairness opinion” of deal

o Attorneys Like bankers, play large portion of stewarding the deal Negotiate on behalf of their party Identify and deal with regulatory issues Due Dilligence:

The process of assessing the legitimacy of the transactiono Acquiror Concern Assess viability of targeto Target concern Assess value of deal to them

Note: The target, unlike the Acquiror, will also assess the potential “Fiduciary

Duty” issues, and the duty owed to its minority shareholders It is not uncommong for the BOD of the Target to actually retain their own,

independent counsel that solely deals with Fidicuary Duty Concern Issues lawyers should spot during process:

1. Federal Security Laws 2. Tax Implications 3. Anti-Trust 4. State Corporate Law

o Relevant state (1) Code and (2) Common Lawo Each state may have nuanced interpretations

5. Industry Specific Regulation 6. Environmental CERCLA liability

o Note: Deal with this by adjusting price of transaction

7. Overall due diligence B. Reasons for Transactions:

o 1. Diversify businesso 2. Horizontal integration

Gain the efficiency of size—economies of scale Expand capacity

o 3. Vertical Integration Move up, or down the supply chain

o 4. Eliminate Competitoro 5. Finding an undervalued asset or businesso 6. Synergistic Benefitso 7. Enter new marketo 8. Obtain Intellectual property o 9. Gain access to human capital (employees) and/or existing client base (customers)

C. The Basic M & A Timeline: o 1. The Initial Discussion

CEOs will meet, discuss potentials and general issues Will lead to:

A. Confidentiality Agreement:o Determines what portions of the conversation is confidential o “All, and all discussion leads to is confidential”

Used so that discussion, and information given to attorneys, IBs and others will be either returned or destroyed

B. Stand Still Agreemento If the company is very worried about sensitive information

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o Will specify what the information is particularly allowed to be used foro EG:

You cannot use this information for a hostile takeovero 2. Letter of Intent (Memo of Understanding)

*Non-binding letter, documenting what will generally occur going forward Why: if not binding, it is not disclosable per Securities Laws

Discusses what was discussed, and gets continuity, and negotiations moving o 3. Retention of Advisors

IB, Accountants, Lawyerso 4. Due Diligence

*The most important part of Attorney’s job Generally will not negatively effect deal (especially for Public Corp., given all disclosures)

Note:o Even though Public Corps. Have substantial disclosure, and due diligence rarely discovers a

‘deal ender,’ it may affect the price of the transaction What it entails:

1. Acquiror will analyze Target extensivelyo Note:

Target will engage in extensive due diligence of: A. Fiduciary concern of minority shareholders B. If paid in Acquiror Stock, analyze Acquiror to assure value

2. Contractso Analysis of those material to the target

3. Security Regulation Compliance 4. Public Filings Compliance

o Has the Target correctly filed them 5. Environmental Compliance and Liability 6. Employee Benefits

o Given to specialized attorneys o Determining if Acquiror and Target benefit plans mesho “Change of Control”

If certain key employees have such agreements, triggered by merger or takeover, may give those employees leverage to get some type of payout

7. Ongoing litigation 8. Property, Plant, and Equipment 9. Patent and IP 10. Debt and its contractual provisions 11. Organizational Documents and Board meeting minutes

o Note that if bylaws have issue, they are easy to fixo AIC issues require shareholder voteo Make sure correctly filed with Secretary of State

Note:o Due diligence is ongoing throughout the process

o 5. Valuationo 6. Negotiation

Deal structure, price, and documents The Lawyers Role:

a. Articulate, and document the intent of the parties’ on the business related issues b. Advocate for your vlient in the drafting and negotiation c. Continually keep your client informed of the negotiation

o Constantly advising on the legal issues d. Continued Due Dilligence e. Coordinate and complete the Merger Agreement, and assorted closing documents f. Target:

o Assure that fiduciary duty issues are in place o 7. Prepare Closing Documents

Create Final agreement “Time and Responsibility Schedule”

Assigns tasks that need to occur prior to closing Assigns responsibility to according parties

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o 8. Get Board of Director Approval for Transaction, and Authority of CEOo 9. Shareholder Approval, if requiredo 10. Closing

Agenda will list what documents D. Potential Issues in Pricing:

o Generally: The transaction will take a lot of time to close “Time Delay” Because this process is long, the price agreed to in negotiation has the potential to change due to the value of

the firm or its stock changing in the meantime EG: Stock acquiror shareholder view deal poorly…may dilute them or be bad business…as acquiror

stock price decreases, due to selling, now value target receives (assuming stock) decreases Price adjustments assist the process

o Potential Price Terms: 1. Fixed Exchange Ratio:

The ratio of shares the target gets is specifically enumerated in the contract Note:

o Target bears all the risk of stock price decreasing o Acquiror gets predictable exchange rate o For these reasons, not the most common

2. Floating Exchange Ratio: Ratio of shares equals a fixed $ amount So, to continue $ amount, the ratio fluctuates to meet it

3. Price Collar: A hybrid of a fixed ratio and a floating ratio The ratio is fixed, but if changes by a certain agreed-to amount:

o The ratio will shifto Post-Closing Adjustments:

1. True Up: The price of the target will adjust based on the balance sheet of the target at closing If the balance sheet is above a certain agreed-to number Acquiror Pays more If below a certain number Acquiror pays less for firm

2. Earn-Out: If the target is willing to sell, but anticipates the year following transaction to be extremely successful Target is purchased, but based on next-years earnings target shareholders are entitled to certain $ that

was agreed to or % of incomeo Typically limited to 1 year

3. Contingent Value Right (CVR): If the target is paid with Acquiror stock, it may also be given a CVR If some agreed-to condition occurs, CVR acts like IOU and payment of money is made to Target

o EG: Target accepts stock payment and CVR. CVR may entitle Target to cash payment, if

acquiror stock drops by X % in certain time

II. Transaction Structures: See Structures Handout Basic Structures

o 1. The Statutory Merger [DGCL §251] The Process:

Acquiror pays shares or cash to Target shareholders Acquiror gets Assets and Liabilities as a matter of law…incorporated into surviving entity Target Dissolves Target shareholders get cash, or are now shareholders of Acquiror

Requires Shareholder Vote: A Majority of the outstanding shares of parties in Merger must approve 3 DGCL Exceptions to Stockholder vote in Merger:

o 1. Small-Scale Merger: Acquiring stockholders are not required to vote if

A. their rights are not modified at all and B. Shares are not diluted by more then 1/6 (hold at least 83% post-merger)

o 2. Upstream or Short-Form Merger: Neither side votes (parent or subsidiary) if:

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Board of Parent Corporation approves merger and Parent holds > 90% of subsidiary stock

Note: If downstream, and subsidiary survives, requires shareholder of parent vote

o 3. Holding Company Tax Implications:

Generally if Cash Transaction Taxable to Shareholders If Stock transaction Not taxable

Requirements of Board of Directors [§251] 1. Board must pass “Agreement of Merger” citing its approval 2. Statement of Advisability 3. *Best Interest of Shareholder

o although not required, makes sense…as it appeases any fiduciary duty concerns 4. Submit to Shareholder Vote

o Again, Majority of all outstanding unless exception applies 5. File Merger Agreement with Secretary of State

Stockholders’ Appraisal (Dissenter) Rights [§262]: Generally:

o the right of stockholders to petition a court to determine the fair value of their shares o In merger, target shareholders may be unhappy with the value they received…o This, modernly, gives minority shareholders, especially those who are given cash, a defense

against being squeezed out unfairly When it Applies in Delaware:

o Only Applies in Mergers 1. §251 Statutory Merger 2. Short-Form Merger Does not apply to asset sale or stock acquisition

o “Market Out Exception” Appraisal rights are not applicable to Public corporations who enter into Stock-Swap

Merger *Only applies to public corporations if Cash-Merger

3 Requirements: o 1. Dissenting Shareholder must have not voted for transaction [Must vote against]o 2. Dissenting Shareholder must hold shares from date of demand of appraisal through date of

transaction completion The Delaware Process:

o 1. Corp must notify shareholder of right, 20 days before Corp submits transaction to SH approval

o 2. Dissenting SH must notify corp prior to vote of intent to dissento 3. If Vote ratified, Corp has 10 days to notify those dissenting shareholders that correctly

notified Corp of their appraisal rightso 4. SH has 120 days to petition court to demand value determination

How is Value Determined: o Weinberger v. Weinberger:

Determine the Fair value of the shares Does not include speculative value from merger Does include future elements which are capable of proof as of the date of

the mergero As π, argue that future elements are not speculative…

Control Premium The cost to acquire the last remaining shares Dissenting SH argue that their shares are worth more, as they are more

wanted…but will be difficult to argue that they deserve premium above that which as paid to already-purchased shares

o Cede and Co. v. Technicolor: F: 2 step acquisition occurred. Dissenting shareholders held shares through stage 1.

Acquiror, post stage 1 but pre-merger began selling pieces of corporation for huge amounts of $, and bettering its efficiency

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R: Value to Dissenting Shareholder is of the going concern In 2 stage acquisition, pre-merger, value was added to the going concern

which was not ‘speculative’ and was proven The added value, pre-step-2-merger, is value that should be included in

dissenting shareholder appraisal of share value o 2. The Asset Acquisition [DGCL § 271]

The Process: Cash or Stock is paid to the Target for Assets Target then gives cash or shares to its shareholders

o If stock, Target shareholders become shareholders of acquiror Typically: Target then dissolves, shares cancelled Assets & Liabilities:

o While typically one can negotiate for just the assets, it is possible that the liabilities will also attach

o De-Facto Merger If a court accepts the argument, it may consider an asset acquisition a De-Facto

merger (as it does resemble a merger) and include the A & L This is largely in part due to the protection of the creditors

So that they are not left with liabilities and no assets Heilbrum:

In Delaware, Courts will not recharacterize an asset acquisition as a de-facto merger

Acquiror SH can argueo If they didn’t get to vote, may protect them

Target SH can argueo But if substantially all, they did vote

Voting Issues: Target:

o Target SH do not vote, unless §271, the sale involves ‘all or substantially all of the assets’ Hollinger v. Hollinger Test:

1. The Sale of Assets quantitatively vital to the operations 2. Substantially effects the existence and purpose of the corporation

o If unsold portion is substantial, viable, ongoing, portion of corporation then sale is not subject to §271 vote

o Target SH will probably vote for dissolution of corporation so arguably will have to vote anyway

Note: If both votes needed, combine into 1 vote Majority of all votes entitled to be cast

Acquiror:o Don’t have to vote unless stock-for asset acquisitiono Certain Exchanges require SH vote, if diluted by > 20%

Majority of votes cast Requirements of the Board of Directors:

1. Approve, and “Acquisition Agreement” 2. In the best interest of the corporation 3.* Although not required, get ‘in best interest of the shareholders’ 4. Submit to Shareholder Vote, if required

Distinction between Merger and Acquisition If applicable, avoiding the shareholder vote Position of target equity holders post transaction (most mergers are stock)

o 3. The Stock Acquisition The Process:

Acquiror deals directly with shareholders of Target Can be for Cash or Stock If all of stock acquired:

o Target becomes Wholly Owned Subsidiary If >50%:

o Target becomes Partially Owned Subsidiary

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Voting: No vote from Target, as they either accept or reject the offer from Acquiror If Shares are paid for stock, Acquiror SH may gain right to vote per Exchange rules

o If they are diluted by > 20% Distinction from Merger

1. Shields Parent corporation from liability of targeto It remains subsidiary, and Parent, as SH, has Limited Liability

2. Keeps the Target intacto Many contracts are predicated on break-ups, and other clauseso By purchasing the stock of a target, and it becoming a subsidiary, it is a cleaner transaction as

entity continues 3. Target SH do not vote

o Acquiror SH do not vote unless exchange rules §203: The Delaware Anti-Takeover Provision:

Rule: Prevents “business combinations” between an interested stockholder (owns at least 15%) and the target corporation for 3 years, unless exception applies

3 Exceptions: o 1. If Board of Directors pre-approves combination, prior to becoming interested SHo 2. Transaction that makes Interested SH, gives him at least 85% of stocko 3. Board of Directors approves the business combination after person becomes interested

shareholder, and 2/3 of outstanding stock votes for it Other ways around it:

o 1. Don’t opt ino 2. Put in by-laws, and have Board of Directors opt-out

This avoids the shareholders voting on the provision Complex Structures:

o 4. 2-Stage Acquisition The Process:

1. Stock Acquisitiono Acquiror gains >50% of Target shares, to become partially owned subsidiary

2. Squeeze Out Merger (Cash)o Form Subsidiary, and merge Target into subsidiary (avoids liabilities)

Effect: o 1. Because uses Subsidiary, only Board of Parent votes for merger (not Parent SH)o 2. Because owns >50%, votes, as SH of target, for the mergero 3. Cash-Merger, squeezes out minority as they hold no equity anymore

Why: o Speed: Once the stock-acquisition is completed, the acquiror can merge at its convenience o Faster then a triangular merger (the corollary to 2-stage) as first stage is faster to complete then

regular statutory merger or asset acquisitiono 5. Forward Triangular Merger:

The Process: 1. Create Subsidiary

o fund it with cash or stock 2. Merge Subsidiary and Target

o Like regular statutory Merger, stock or shares go from Subsidiary to Target SH, and Target sends A&L to subsidiary

o Parent BOD approves the merger of its subsidiary Why:

o 1. Isolates Liabilities from parento 2. Avoids Acquiror SH vote

With subsidiary merger, only parent BOD is required to vote o 6. Reverse Triangular Merger:

The Process: 1. Parent Creates Subsidiary

o fund with cash or stock 2. Target Merges into the Subsidiary

o Target continues on and Subsidiary dieso Parent corp gets shares of Target

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o Subsidiary sends stock or cash to Target o Target now becomes wholly owned subsidiary of Parent

Why: o 1. Keeps Target intact—avoids dissolution and more clean of transactiono 2. Isolates Liabilities from Parent

o 7. Recapitalization: The Process:

Parent Drops down a subsidiary “Downstream Merger” as Parent merges into the subsidiary Parent dies, and subsidiary exchanges new stock to parent Corporation shareholders for A+L Now, former CS and Preferred SH own shares of new-company Vote:

o Note that SH of merging parties must vote BOD will vote for Subsidiary and SH of Parent will vote

Why: o Avoid the Preferred shareholder vote if they lack specific voting rights o Through the subsidiary, they are then given new shares in exchange for their preferred ones

Preferred Shareholders: To protect themselves, their dividends, and cancellation of their rights by merger, Preferred

Shareholders should contact for it Elliot Assoc. v. Avatex (DE):

o 1. If there is contract that allows for vote on the change or alteration of Articles of Incorporation, the elimination of AIC through merger triggers it

o 2. Any rights, preferences, limitations on preferred stock that are distinguishing must be expressly and clearly stated

o 3. Rights of Preferred shares are not presumed…creature of contract o 8. LBO

See handoutIII. Acquisition Documents:

Preliminary Documents: o 1. The Confidentiality Agreement

Will broadly define what information is to be kept private Discussion Interview of employees Information generated

Will be enforceable as to confidential information, but: Clause will state that does not obligate party to deal or to further negotiate

When Closing occurs, there may or may not be information that continues to be confidential Closing documents will supersede this

o 2. Letters of Intent Following a successful beginning to negotiations, the Acquiror and Target will often enter into LOI Basics:

Will indicate nature of contemplated transaction and summarize basic terms—payment, conditions of closing

o Due Dilligence, Regulatory approval, and other terms Generally, these are made non-binding

o But—can make it binding with open ended terms…agreeing on the broad terms, with small stuff to be filled in later

Even if unenforceable, there may be sub-parts that are made enforceableo “No Shop” clauses: prohibiting negotiation with others o “Break up Fee”: If negotiations are terminated, for instance, pay a fee of X$, that is not the

exclusive remedy AIG v. Alaska Industries Hardware:

F: After a letter of intent was made, and it stated that efforts would be made to complete the transaction, an agreement was made and passed around. Acquiror refused to sign. However, he went to final dinner to celebrate, and actions and evidence seemed to show he accepted, although never signed

R: In some instances, evidence will bypass a LOI lack of enforeceabilityo Promissory Estoppel:

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In some cases, this will nullify a need to sign a final document, and mere failure to sign will not be enough to end contract

Requires: 1. Clear and unambiguous promise to sign 2. A reasonable and foreseeable reliance to promisee 3. An injury sustained by the party asserting estoppel by his reliance

Effect: Helps buyer line up financing Helps to have some agreement, before incurring substantial costs of process Gives seller bargaining advantage, and shows expectation of completion Gives buyer a bargaining advantaged, and shows expectation of acquisition

Binding Contract without Writing: Texaco v. Pennzoil F: Getty and Pennzoil had reached preliminary agreement on transaction. Then, Texaco came in a

negotiated with Getty, announcing a merger. Texaco argues that Getty never ‘intended to be bound’ with Pennzoil, and thus the merger is viable.

R:o 1. If parties do not intend to be bound, unless reduced to final formal writing and signed

by both parties No contract until that occurso 2. If have agreed on most substantial terms, an informal agreement can be binding even

if they intend to memorialize it in formal document later Issue is: Did parties intend to be bound informally, or formally

o 4 Factors Evaluated (Not required): 1. Whether Party expressly reserves right to be bound only with writing 2. Whether there is any partial performance by one party that arguing party accepts 3. All essential terms of the alleged contract are set 4. Was the complexity or magnitude of transaction such that a formal writing

expected? Acquisition/Merger Agreement:

o Generally: Negotiation:

As Acquiror, should leave room in a first draft that is given to the target for negotiation This not only gives bargaining tactic, but provides room for discovery/disclosure

o Having a specific clause may get Target to ask for a change…at that point, you seek justification which may reveal something due-diligence didn’t come up with

There are 8 common elements to all transaction agreements o 1. Parties of Transaction

while this seems straight forward, Identify the parties involved, who is surviving and have both signo 2. Representations and Warranties:

Representations: statements of fact that exist or will exist at the time of closing Warranties: Guarantee that the representations are true Essentially, conditions and facts that are present for the transaction to continue…Making sure you’re getting

what you pay for Purpose:

Gives the present position of both entities **Will mirror the due-diligence process

Contain: Regulatory Approval—for those that are complete No Undisclosed Liabilities

o Pending Litigationo Environmental Issues

Confirms Accuracy of Public Filings Confirms Materials provided are accurate

o Financial Statements are accurate Confirms contracts are valid Confirms tax filings are accurate Confirms employee benefits are accurate Confirms the entity is validly formed, and has corporate authority to transact Compliance with all laws and regulations No material adverse changes in business between signing and closing “Fairness Opinion”

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o For target, the Board of Directors will include this opinion, prepared by bankers, that shows the transaction is financially fair to shareholders

o Appeases fiduciary duty claims Target:

Insert “To the best of our knowledge”o Can only affirm what they know of

Acquiror counter witho “know or should have known”

Note:o If it’s a share-acquisition, the Target will have relatively little information in the Reps and

Warranties, as only the shareholders are dealing with Acquiroro 3. Covenants and Conditions:

Affirmative: those which parties agree to perform Negative: Those which parties agree not to perform Due to the lag time in transaction, this warranties what the acquiror is getting

Idea that the business continues on in the ordinary course Target typically promises:

1. Access to records 2. Take steps to complete transaction 3. Use best efforts to satisfy conditions precedent 4. Avoid Material Adverse Changes

o Not diminish company value/change in operationso Avoid Asset saleo Avoid firing key employeeso No settlements

5. Report periodically on condition of business 6. No new debt 7. Agree to “Fix” transaction if some condition precedent doesn’t occur

o this avoids the entire transaction falling through if condition isn’t meto agreement that parties will work together to fix it

o 4. Indemnification: In the private company context, the acquiror is indemnified by the target for any undisclosed issues In the Public Company context

This is not practical Because shareholders get the proceeds, its not practical to go after a dispersed group of shareholders

o 5. Structure: The type of structure chosen The consideration: Cash or Stock Price Collars, earn outs, true ups all included

o 6. Conditions Precedent: Will list the conditions that must be satisfied prior to closing What each party can expect from the other at closing

Regulatory approval, SEC filings, Shareholder Vote, fairness opinion, legal closing opinion Board Approval, etc…

“Bring Down” Clause: Confirm Representations and Warranties are accurate, and have been complied with Confirm Covenants and Conditions are accurate and have been complied with

o 7. Miscellaneous: Basic boilerplate

Severability, headings, time is of the essence Choice of Law Clause: Typically New York

o 8. Termination: Unilateral:

1. May be based on Price/Value changeo Balance sheet valueo Dilution of Acquiror, if floating ratio

2. “Breach by other party”o if other party fails to meet condition, rep & Warranty, or condition precedento Cure Period:

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This gives breaching party time to remedy the defect Rather then having whole deal unravel, this allows for remedy over relatively minor

breach 3. DGCL § 251: allows BOD to have power to abandon the merger unilaterally before closing date

o Either in breach of contract or because this right was negotiated in contract Automatic Termination:

1. Price/Value Change 2. Failure to meet Condition precedent

o If condition precedent does not occur, or is impossible, agreement may terminateo Mutual Cooperation Agreement:

Again, you can include an agreement for both parties to make efforts to keep transaction going by discussing it, or fixing it

3. Timeo EG: If conditions precedent have not occurred within 1 year of x, then agreement terminates

Effect of Termination: Will be based on why the termination occurred and may be punative 1. Breach

o Damages may ensue if covenant or representation and warranty not met 2. Break-Up-Fee

o Pre-negotiated fee if negotiation ended or other suitor accepted 3. Walk-Out Right

o 9. Schedules A supplement to the agreement, that may contain exhibits, and additional agreements Generally:

Non-Competition Agreement Post-Closing Adjustments

o Earn-Out Agreement: o O’Tool v. Genmar Holdings:

1. Delaware Contract law: implies covenant of good faith and fair dealing 2. This duty applies to earn-out provisions, and if you acquire a corporation and agree

to ear-out, you cannot take steps in bad faith to make sure earn-out provisions do not occur

Action to undermine the earnout will be a breach of the covenant The Closing:

o Generally: At the closing, the parties deliver the documents that satisfy the conditions precedent of the Agreement May include addition to schedule, due to the Bring Down clause, updating the representations and warranties

of changes or no changes in interim time Updates are typical, due to the typical business issues

Closing Opinion: Attorneys, through custom and practice, give their legal opinion Generally limited to verifiable matters of legal compliance that they know

Marcus v. Frome: F: Attorney gave closing opinion, asserting that representations and warranties were accurate, and had

been met as condition precedent. However, the attorney failed to evaluate before giving his opinion. R:

o If the Representations and Warranties are wrong, and you assert that they are accurate, there is a potential fraud claim against you as an attorney, and law firm

“Know or should have known”o Note:

Due diligence, evaluating the representations and warranties is very important They become Conditions precedent and assures the transaction can be complete if

they are accurate, and your reputation is effected Assures your opinion is accurate

IV. Federal Securities Laws and Transactions: 1. Proxy Regulations:

o A. What is a Proxy: Delegated voting power by a shareholder to an agent to vote for the shareholder That person is given the right to vote, the way you chose

Proxy Contest / Battle:

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o When several parties are soliciting proxies from shareholders in order to get them to vote a certain way…often termed a proxy contest or battle

State Versus Federal Law: Generally—for many of the voting and basic shareholder meeting issues with voting, state law applies However, it does not necessarily mandate specific things, or anything State:

o Generally governs the mechanics of the process Notice of meeting, when it will occur, how many votes you get, etc…

Federal: o Generally governs what is disclosed to the voters. I.e., the Proxy Statemento Rule 14(a)8 Shareholder Proposals:

Allows a shareholder with a minimum number of shares to be included in a proxy solicitation

Shareholder makes proposal to shareholders to vote on Limited purposes

o Shareholder Access: A contested issue (implementation delayed)—SEC rule allows in certain

circumstances, a shareholder that owns a certain number of shares to submit his own nomination for director

Allows a shareholder to nominate and include his nominee in company’s proxy materials

In the M&A Context: Due to the many things that need to be voted on in the M&A process, proxies are very common Most shareholders don’t attend, and thus the need to solicit their vote to vote for them is common

o B. Proxy Solicitation and Federal Rules: Generally:

Proxy solicitations may implicate both the ‘33 and ‘34 Acts §14(a)1 of 1934 Exchange Act:

o Whenever a vote occurs, in a public corporation context, a proxy statement will need to be issued

o Always applies with shareholder vote 1933 Securities Act:

o Whenever shares are issued in a transaction, the 1933 Act is triggeredo Note:

In cash transaction 1933 Act is inapplicable Only applicable if share transaction

The two may both be triggered when a vote is needed in a stock-for transaction o Rule 145 (infra)

1. Proxy Solicitation Rules (1934 Act): Apply When:

o Any solicitation occurso Stock or Cash Transaction

1. 14(a)9: Anti-Fraud Liabilityo Generally prohibits any material misstatements or omissions in Proxy materialo If you don’t comply with details of Schedule 14Ao Requirement to Amend:

14(a) 9 requires that company file an amended or supplemented materials to reflect material developments subsequent to initial solicitation

EG: If there is substantial lag-time between transaction, SEC may create comment letter asking to consider something

EG: New 3rd Party bidder with high offer, etc… If Occurs:

May need to redo “Board Determination Section” and “Financial Opinion” 2. 14(a) 12: Pre-Filing Communication Safe-Harbor:

o General: Because solicitation is such a broad term, essentially anything said while shareholders

are voting is considered a ‘solicitation,’ in violation of ’34 Act 14 (a)12 allows for certain communications prior to filing a Proxy Statement Requirements:

1. File your pre-proxy communications with the SEC

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2. Have a prominent legend on soliciting parties and their interests 3. Advise those reading the communication to read the proxy statement

3. 14 (a) 1: Proxy Solicitation and Statement Rule:o The Rule:

Whenever a vote is needed in a transaction, no solicitation can be made without furnishing a proxy statement with mandated information

o Solicitation very broadly defined in Regulation 14 Any Request for a Proxy Request to reject or revoke a proxy Furnishing the form of a proxy

o Applies to all shareholders o Exceptions to 14(a)1:

1. Statements about how you personally intend to vote Effect:

o Must be carefully worded, and within safe-harbor to avoid it becoming a solicitation

2. You may solicit up to 10 people without being subject to Proxy Rules Effect:

o People include institutionso *Registrant does not applyo However, Registrant’s employees may, in their own capacity, do

so Schedule 14(a) Form—The Proxy Statement:

o General: The form that must be filed with the SEC, and must accompany the proxy solicitation

o Contents of Schedule 14(a): 1. Description of the Proposed Transaction 2. Disclosure of the related party transactions and conflicts of interest

Conflicts include: o 1. Potential benefits to Affiliated Parties

EG: KKR owns debt, and this transaction will pay it offo 2. Employment/Management benefits from the transaction

Paid lots of $ Buyout Equity Compensation Continent Fees of Financial Advisor The idea that the management is pushing for, soliciting

proxy to approve the transaction so that they make $ 3. Background of Transaction

A recitation, in excruciating detail of exactly how the transaction came about What occurred during negotiations, who represents who, the dates of

meetings until the BOD approved an agreement, Literally will have all information Purpose and Effect:

o 1. From SEC’s Perspective: gives investors an idea of how the transaction came together

o 2. From Target’s Perspective: Gives them ability to argue they satisfied Fiduciary Duty Evidence will be there to show they did due diligence,

and that BOD had accurate information to say, this was “In best interest of company” or “advisable to company”

4. Board of Director Determination: Whether they Approve or Not Will lay out what was considered, essentially mirroring the “Background”

Section to show the Board of Director Requirements were met (see infra) 5. Financial Advisor Opinion:

Background of the quantitative valuation methods that were considered Why all factors considered were weighed evenly Shows valuation and why

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“Fairness Opinion” 6. Incorporate by Reference the Financial Statements

Note:o 1. If Cash Deal: Financials of Acquiror only needed if material to

shareholder vote, and only past 2 yearso 2. In Cash deal, Target only needs to provide bare-bones

financials 2. Mergers and Acquisitions: The 1933 Securities Act and Proxy Solicitation:

Applies: o Applies from the beginning—Rule 425 throughouto Whenever Shares are being issued in a transaction ’33 Act applies

Rule 145: o An offer, offer to sell, offer for sale, or sale occurs when there is submitted to security holders

a plan where they have to vote Eliminated Prior SEC theory, which did not equate the two

o Because a vote to approve a transaction in which shares are the consideration gives shares to target, that is considered an offer

Effect: Offers must be registered with SEC under §5 of 1933 Securities Act and Must comply with 1934 Exchange Act Proxy Solicitation Rules

Exceptions: o 1. Rule 425 Safe Harbor:

Identical to Rule 14(a)12 of Exchange Act (infra) File Communications with SEC Include Legend to read Proxy statement

Press releases, public communications are safe from securities law violations o 2. Private Offering Exemptions:

In a transaction, one could offer shares, Trigger Rule 145—which requires you comply with 33 and 34 Act, and then be exempt from ’33 Act

2 Common Ones: 1. Regulation D:

o §4(a) 2: Sale not involving the publico Exempt when Offering to 35 Unaccredited investors, and

unlimited accredited investors 2. §3(a) 9 Recapitalization Exemption:

o “any security exchanged by the acquiror/issuer with existing security holders exclusively where no payment is made to solicit an exchange”

The offering must be to existing shareholders and No one can be paid to solicit the proxies to approve the

transaction 3. The S-4 Form:

General: o So, in this instance, a proxy is solicited to approve a transaction that offers shares or stock-for

the transactiono Thus, per Rule 145, the ’33 Act is triggered in addition to the ’34 Act proxy Rules

The Form S-4 registration will consist of: o “Wrap Around”

1. Seller’s Proxy Statement /Acquiror’s Proxy Statement and 2. Acquiror’s Information for Registration

Generally incorporated by reference to other o In all, it will act as a prospectus for Acquiror although it will have an S-4 Title and signature

page, ‘wrapped around’ the proxy statement 4. Types of Proxy Statements and SEC Review Process:

Generally: o There is routine information that a company deals with and then there is non-routine

information (Such as a Merger or Acquisition) 1. The Preliminary Proxy Statement (PRE 14A):

o Must be filed with SEC at least 10 days at a minimum before Definitive Proxy Filed SEC is busy, however, and it will generally take much longer

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o Purpose: Must be filed for non-routine matters; transaction information is filed with the SEC

2. SEC Review Process: o A. Legal Review:

Checks compliance with Schedule 14(a), that all components are there, that S-4 complied with (if applicable—Proxy and Registration Statement)

May make ‘comments’ on it that need amendment resolve issueso B. Accounting Review:

Financials are reviewed in materials Comments on statements, if need be

o Throughout the process, commented on PRE 14As will go back and forth until finalized 3. The Definitive Proxy Statement (DEF 14A)

o Only filed after all comments and issues addressedo Actually Mailed to Stockholders with Proxy Cardo Note:

If the ’33 Registration is required too (as a result of proxy and stock for transaction), the accompanying registration statement in the S-4 must also be deemed effective order to Mail the Definitive Proxy Statement

Once that is declared effective, the combined Prospectus/Definitive Proxy is mailed with proxy card

o C. Federal Rules on Stock Purchases During Acquisition Period by Participants: Generally:

There are 2 key SEC rules that limit the purchase of stock by certain parties in the transaction, while the transaction is pending

1. 10b-18: Safe Harbor for repurchases from Anti-Manipulation rules Rule:

o The acquiror cannot re-purchase acquiror shares from The Public Announcement until: The earlier of the (1) Deal Closing or (2) date when shareholders have voted Public Announcement: “Any oral or written communication by any participant that is

reasonably designed to inform the public about business combination” Purpose:

Repurchasing issuer stock while offering it to target shows an artificially inflated volume, and price—raising market price to facilitate transaction is securities fraud

Safe Harbor:o 1. In a cash deal o 2. Exception for issuer with known track record of re-purchases

Issuer may repurchase on any given days that do not exceed the lesser of: 1. 25% of security’s four-week average daily trading volume or 2. Issuers average daily purchases during three full months before

announcement

2. Regulation M: Purpose:

o The issuer and intermediaries (Underwriter or Broker/Dealer) in a primary offering have an incentive to prop up trading prices they are attempting to sell to the markets

o In all—no acquiror can buy acquiror stock Rule:

o Reg. M prohibits issuers and intermediaries, affiliates, from directly or indirectly bidding for, purchasing or attempting to induce any person to bid or purchase any security subject to a distribution during The restricted period

Note: The SEC, in rule 145, determined that stock-for-asset, stock-for-stock

acquisitions, and stock-swap mergers are ‘distributions’ of new stock So they apply to Regulation M

o The Restricted Period: Begins on day proxy solicitation or offering materials are first disseminated Ends upon the completion of the distribution—the closing

Affiliate:

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o Note that because Regulation M is so broad, “affiliate” is read to even include the target from purchasing the acquiror’s shares

2. Tender Offers:o A. Defined through 8 Factor Test:

Generally: There is no explicit definition of what it is, and is vague and broadly construed There is no guidance on which part is weightier or not Overall:

o We are evaluating whether there is pressure on the person to sell or noto These factors show a pressure to sell quickly, and if it takes advantage of a shareholder, more

likely to be Tender Offer 1. Active and widespread solicitation

Through newspaper to get responses Sending out Tender Offer to widespread audience If you do not want to trigger a tendor offer, don’t make it public

2. Seeks a substantial % of the issuer’s stock While there is no guidance on what this is, because of the ‘mini tender offer’ exemption below 5% of

shares, it is often seen as anything >5% as being substantial 3. Offers a premium above market price

The “Tender Offer Premium” 4. Contains Fixed rather then flexible terms 5. Conditioned upon a minimum tender

Typically condition precedent that % of shares tendered give control Partial Tender Offer:

o Maximum willing to accept And and All Tender Offer:

o No maximum willing to accept 6. Open for a limited period of time 7. Pressures stockholders to respond 8. Bidder would hold substantial amount of securities if successful

o B. Tender Offers and Private Transactions: The 13(d) and 14(d) requirements do not apply to private companies

The Disclosure requirements do not apply However:

A Private company must to comply with Section 14(e) and Regulation 14E anti-fraud provisions See infra

o C. Types of Tender Offers and Application of Rules: 1. Issuer Tender Offer:

When a corporation purchases its own outstanding shares or tries to go private Option re-pricing—when options purchased, and reissuance of new options at lower price Rule 13e-4 and 14(e) apply

o Almost identical requirements to 14(d) 3. 3rd Party Tender Offer:

When other party, hostile or friendly, makes takeover bid Must Comply with 14(e) and Regulation 14D, §14(d)

o D. §14(e) and Rule 14(e) and Schedule TO Apply to All Tender Offers (3 rd Party, Issuer, Private): General:

§14e applies to Issuer, 3rd Party, and Private Tender Offers 1. §14(e) of 1934 Exchange Act:

Unlawful for any person to make untrue statement of material fact, or omit to state material fact in order to make already made statements not misleading

o No Materially Misleading or material omission in connection with affirmative statement 2. Rule 14e-1: General Requirements

1. Tender Offer must be open for at least 20 days 2. Bidder may not change % sought or price, unless tender offer remains open for at least 10 business

days 3. Bidder must pay consideration promptly

o Note: There may be efforts to say ‘as promptly as possible….but the SEC will make

comment on Tender Offer if done

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Must be Promptly without qualification 4. Bidder must provide notice of extension of offer

3. Rule 14e-2 Subject/Target Company Position: Within 10 business days of tender offer, the target company must tell its shareholders:

o Whether it (1) accepts, (2) rejects, (3) is neutral or (4) unable to take position on tender offer “Stop Look and Listen” Request:

o The Target company can notify its shareholders that it recommends that they refrain from tendering shares until management can make a decision

4. Rule 14e-5 Prohibited Purchases outside of tender offer: An acquiring company cannot purchase subject shares once tender announced

o Why: Otherwise, you would simply buy shares on the open market to meet your minimum

% you were seeking, outside of Tender Offer rules

o E. Additional Requirements of Issuer and 3 rd Party Tender Offers: 1. Per 13e-4 and 14d:

A. Withdrawal Ability: o Gives the shareholder who has tendered the ability to get shares returned before formal

acceptance and payment B. Pro-Rata Acceptance of Tender offers over desired amount:

o When shares are tendered beyond the desired %, the offeror must accept a pro-rata % of all shares so that all shareholders are treated equally

C. “All Holders Rule” o The Oferor cannot discriminate against any shareholderso All have to be able to participate in the offer

D. “Best Price Rule” o All shareholders must get the best priceo If price is changed, then all must get the better price

2. Disclosure Filing Requirements with SEC Schedule TO

o Includes disclosures to SEC Communications with Subject Company:

o Rule 14d-9 and 13e-4: Must file all pre and post commencement written communications from subject

company and affiliates 3. The 1933 Act and Tender Offers:

General: o Whenever shares-for shares transaction, instead of cash-for-shares transaction, the issuance of

shares is considered an offering and needs to be registered under the 1933 Acto Unless an exemption of ’33 Act applies, registration must occur

Filings: o File a Form S-4

It will, like the proxy, be a “wrap” A Schedule TO, Schedule 14D-9 filing requirements wrapped around a registration

statement and prospectus Process:

o Unlike Proxy, where you cannot solicit until SEC has approved a Definitive statement, in Tender Offer

o Early Commencement: You may tender offer as soon as filed S-4 with SEC Shareholders may tender their shares prior to effectiveness

Bidder can only accept when SEC declares effective

o F. §14 and Regulation 14D 3 rd Party Tender Offer Specific Rules: 1. Rule 14d-5: Subject Company Obligations to Disseminate

When a 3rd party begins a tender offer, the offer needs to be disseminated to the shareholders of the target

There are two options:o 1. The Target can give the offeror the list of stockholders to do himself oro 2. The Target can mail 3rd party tender offer material

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2. Rule 14e-2 Subject/Target Company Position: Within 10 business days of tender offer, the target company must tell its shareholders:

o Whether it (1) accepts, (2) rejects, (3) is neutral or (4) unable to take position on tender offer “Stop Look and Listen” Request:

o The Target company can notify its shareholders that it recommends that they refrain from tendering shares until management can make a decision

3. Rule 14d-9: Subject Company Solicitation: 14d-9:

o Must file all pre and post commencement written communications from subject company and affiliates

Schedule 14D-9o Must File when:

1. When subject company solicits or recommends of Tender offer with 14e-2 response

2. If the tender offer has been negotiated ahead of time with the Target Management, and the Target issues its affirmative recommendation to accept

The Mini-Tender Offer Exception: If a tender offer occurs for less then 5% of subject company’s stock

o Can avoid 14D requirements o Must comply with 14(e) Requirements

o G. Subsequent Offering Period: General:

After the period of the tender offer expiring, another may be commenced Requirements:

Can provide for between 3 and 20 days after expiration No Withdrawal Rights Initial offer exceeded 20 days Tender offer is for all outstanding securities of subject (No ceiling) Bidder immediately accepts and promptly pays for all tendered in initial period Announce results by 9am next business day Bidder immediately accepts and promptly pays for all tendered in subsequent period Same consideration paid in initial and subsequent periods

Purpose: Assists the bidder in reaching the statutory minimum for short form merger (90%) Allows those who failed to, or missed initial tender offer to tender so they don’t have to wait for back

end merger to sell shares o Speed

o H. The Tender Offer Process: 1. 3rd Party will put in Wall Street Journal 2. Mail target shareholder the Tender Offer Materials

Offer to Purchase and Letter of Transmittal 3. File Schedule TO with SEC

SEC reviews 4. Subject Company has 10 days to file 14e-2 response 5. Shareholders Tender their Shares, with letter of transmittal to what is typically bank –paying agent 6. Paid for (Only accept when SEC approves Schedule TO)

o I. Dangers of a Creeping Tender Offer Because the general factors used to evaluate a tender offer are so broad, there may be instances where a tender

offer is created inadvertently Factors include:

Significant open market purchases in short time frame Privately negotiated purchases of large scale in addition to open market

These may in fact meet the factors, if taken together, that make up a tender offer If the SEC decides to view them as one transaction with several people The SEC may be concerned with circumvention of Tender Offer rules and 14E

o J. Policy: Benefits and Drawbacks of the Tender Offer: Benefits:

1. Speedo a shorter time frame is used o No requirement of stockholder vote

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o Early Commencement allows immediate solicitation Unlike other transaction, and proxy for vote which requires SEC deem it wholly

compliant 2. No need for Board Approval 3. Terms are more easily changed

o Unlike a merger or acquisition of assets, where has been negotiated, and agreed to, and all provisions in contract are solidified—where a change in price would be huge deal—a tender offer merely has one party

o Because 1 party, just change price and notify Drawbacks:

1. Less certainty in outcomeo If you fail to get control, then subsequent vote is needed on a transaction like a merger anyway

so you don’t avoid the shareholder vote o Board of Directors of Target may in fact actively campaign against you

2. Puts Company “In Play”o as soon as you’ve made a bid, other competitive bids may come into playo BOD, with Fiduciary duties to Shareholders will easily accept the highest bido So—White Knight, perhaps BOD likes better may win

3. Market Demands may force higher price then negotiated mergero In M&A, you are negotiating outside of the market. Merely a price the two parties come to

terms ono However, here by tender offer, you’re actually only just starting the biddingo You may trigger competition, or that shareholders will think too low…

o K. Methods of Financing: 1. Cash 2. Negotiated Financing Arrangements 3. Anticipated Financing, which becomes condition precedent to closing on payment for tender 4. Stock for Stock

Note:o This triggers the 1933 Act. See, supra

Comparison of Proxy Rules to Tender Offer Rules

Proxy Tender Offer

Statute §14a §13e(Issuer); §14e(all); §14d(3rd Party)

Regulation Reg. 14A Rule 13e-4; Reg 14D; Reg 14EAnti-Fraud Provision §14a-9 §14e

Primary SEC Filing Schedule 14A Schedule TO

Safe Harbor Provision §14a-12 §13e-4 (Issuer); §14d-2 (3rd Party)

Securities Act Safe Harbor §425 §425Securities Act Filing Form S-4 Form S-4

3. Beneficial Ownership: o Generally:

Focused on the issue of control…can the party or does the party intend to control? §13(d) and Regulation 13D Framework of analysis:

1. Does 13d-1 (a) apply? 2. Do statutory Exceptions apply? 3. Institutional Investor Exception? 13d-1(b)

o If you can, you must use this 4. Passive Investor Exemption? 13d-1(c)

o §13d-1(a): If party (1) Acquired equity security after which holds (2) > 5% of class

Acquire equity security + 5% Note:

o You may acquire equity security that is less than 5%, for instance 4.99%18

o Then, purchase more and more, going over 5% limit does not trigger 13d-1(a), as long as your below the statutory exemption 2%

Filing: Must File a Schedule 13D [Long Form] Very detailed, and thorough Disclose intentions of transaction and the Purpose of the Transaction Timing:

o File within 10 days after acquisition Statutory Exemptions §13d-6:

1. Acquisition of less then 2% in any 12 monthso EG: You own 4%, and purchase 1.99% of shares in 1 year…still exempt from 13D filing,

although you are over 5% marko EG: You own 5% of stock, and acquire 1%, you don’t trigger 13d-1(a)

2. Acquisition by the issuer 3. Registered Exchange Offering

o It is already registered, and therefore filing 13D would be superfluous o Specific Exceptions:

If 13d-1(a) applies, you may be exempt from a 13D if: 1. §13d-1(b) Institutional Investor Exemption

Exempt from 13D Must be “registered” as they are highly regulated entities, which include

o Banks, Broker-Dealers, Insurance Companies, Investment Companies or Advisors They are in the business of buying and selling stock, not taking control

Filing:o 13G [Short Form]

Timing: Within 45 days after the year ends This allows you to go above the 5% mark, and then go back down below prior to this

45 days after the year end in essence, giving you the ability to not file once below Contents:

State you own >5%, your address, type of institution you are Note:

o Overall, the 13G is much less onerous then the 13Do However:

13D required if you exceed 10%, within 10 days of the end of month occurred 2. §13d-1 (c) Passive Investor Exception:

Non-Control investors are exempt from 13D 2 Elements to show non-control intent:

o 1. No purpose, or effect to change or influence control of issuero 2. Does not own more than 20%

Note: 20% is an arbitrary threshold the SEC modeled after accounting rules that are

used to show ownership Seen as the point you can control a corporation

Filing:o 13G [Short Form]

Timing: Within 10 days of acquisition Note:

o Not as easy as the Institutional Investor Exemption, but 13G albeit in quicker time frame is still easier than 13D

o However: 13D If you exceed 20%, within 10 days

3. §13d-1(e) Control Intent Filing Applies to Institutional or Passive Investor If you change your intent from passive or institutional to an intention to “control” Target

o Filing: 13D within 10 days of change of intention

Contents: o Purpose of transaction and Intention

“Cooling Off Period”

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For 10 Days post 13D filing, the filer may not o 1. Voteo 2. Acquire any more securities

Note:o You may accidentally trip into a change of intention to control based on statements made, or

other actions EG: If you make statements in Proxy, may trigger 13d-1(e), and a 13D filing

4. §13d-1(d) Catch All Provision: Generally:

o You may not apply under 13d-1(a), (b), (c), or (e)o However, this section catches all others

As of 12/31, the end of each year, if a reporter exceeds 5% threshold, and isn’t otherwise required to report because of Beneficial ownership exception must file

o Filing: 13G within 45 days of end

EG: o You own 4%, and then buy 1.99% falling under statutory exception, even though you’re over

5%o You must file a 13G under 13d-1(d)

o Amendments to Disclosures: Schedule 13D:

1. Any material changeo Most common will probably be a change of intent

2. Any increase or decrease of >1% 3. Must be Prompt

Schedule 13G: 1. Any change from prior information regardless of materiality 2. Must be made within 45 days of end of year (once per year) 3. Within 10 days of end of month you exceed 10% 4. Any change of 5% or more

o What is a Beneficial Owner 13d-3: Person who:

1. Has voting power or 2. Ability to invest, dispose, sell the investment There is no need to have title, or ownership interest

o EG: Investment advisor has no title to stock, but is a beneficial owner

Note: There can be more then 1 beneficial owner to 1 share

60 Day Look Forward provision: 1. Any right to an option, warrant, or convertible into stock security is treated as beneficial ownership

of stock 2. An agreement to purchase shares is also treated as a beneficial owner

o Formation of a Group 13d-5: Generally:

In some instances, a few people will get together to buy shares The Securities Laws treat those people as 1 entity, and may trigger the 5%

Rule: Group is formed when 2 or more people, acting in concert to acquire securities

o No formal agreement or writing is required If Group:

o Securities held by each member are aggregated togethero Aggregate is attributed to each member

Each member is deemed to beneficially own all shareso Regardless of whether group members own a lot or even 0 shares, all attributed allo Must File a Schedule 13D

o Issues in IPO: Facebook goes public next year. Owner currently owns >5%. When becomes public company, he also owns

5%

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However, he never “acquired” securities after which he owned 5%, as he already owned 13d-1(a) does not apply, but 13d-1(d) catch all does File 13G

4. Going Private Transactions: o Any transaction or series of transactions of the type in 13e-3 which have

1. Purpose or Reasonable Likelihood to produce effects of A. Cause class of securities to be held by less than 300 shareholders or B. Cause class of securities to be de-listed from a national exchange

Purpose: Something can be purposeful and fail to have effect Something may be inadvertent, like a tender offer and cause this too

o Note: To bypass, make condition of Tender offer that neither of these occur

“Transaction or Series” The 1st transaction, or step in series triggers 13e-3 Advise Clients:

o If there is a reasonable likelihood or purpose to cause these effects DO NOT ACT ON IT…make no transaction, because 1st one will likely trigger 13e-3

o Types of Transactions that Apply: 1. Purchase of any equity by an issuer or affiliate of an issuer 2. Tender offer for a class of securities made by issuer or affiliate 3. Proxy solicitation by an issuer or an affiliate

A. Merger, consolidation, reclassification, recapitalization or similar B. Sale of all or substantially all of assets C. Reverse Stock split of class of equity that then purchases fractional interests

o Affiliate (**Exam**): A factual and circumstantial inquiry Person that directly, indirectly controls, is controlled, or under common interest with issuer Factors to Evaluate:

1. Do they own > 20% numbero Again, an accounting convention used by the SEC to quantitatively distinguish someone who

could control a company 2. Do they have Board Participation rights

o the right to vote, or appoint 3. Do they have Board Observation rights

o sit in and observe meeting Evalute:

o If they have either 1 or 2 likely to be an affiliateo If Board Observation rights, it will depend on % of shares owned

Example of Affiliate: o 1. Executive Officers and Directorso 2. Significant Stockholderso 3. Investors holding Board Participation Rights

o Schedule 13E-3 Filing Requirement: Generally:

The effect of being in one of the specified transaction with according factors is that you must fileo Note:

The 13E-3 will generally not be filed alone This is due to the fact that it will be in addition to a tender offer or proxy to vote to do

the transaction So, will be 13E-3 & 14A or Schedule TO But, rarely alone

Each participant must submit: Schedule 13E-3 must be filed be each participant (issuer, affiliate) involved in the going-private

transaction Contents:

“Fairness Determination”o Each person that files a schedule 13E-3 is required to disclose

1. Whether filer reasonable believes transaction is fair to all other, non-affiliated stockholders

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2. Include detailed list of factors included in reaching fairness determination, and weight attributed to each

Filing: The 13E-3 will most commonly be included with a Schedule 14A (Proxy) or Schedule TO (Tender

Offer) materials, as the going private transaction will coincide with these activities as they are transactions that trigger it

The only time 13E-3 will be alone iso No shareholder vote or no tender offer

o 1 Year Limited Exception to 13E-3 Applies only to going private transactions that occur within 1 year of the date of expiration of a tender ofer

Consideration must be at least highest prior tender offer Must have disclosed intent to take company private in tender offer

Effect: If a Tender Offer gets to the 90% threshold—rather then having to file a 13E-3, this allows for a

short-form merger to take place Or, if acquire some amount of shares, this allows for a merger vote to occur without complying with

13E-3o Key Issues:

1. Once you are considered an affiliate of issuer Any transaction will be seen as the 1st transaction, triggering 13e-3 if other elements are there Abstain from any transaction

2. Stock-Buy Back Program Using a stock-buy-back program will be seen as the first transaction in some instances when other

factors are present, again, triggering 13e-3 3. If you fail to insert ‘going private’ clause into a tender offer, you miss out on 1 year limited exception

5. Disclosure Requirements Under Federal Securities Laws: o A. Duties to Disclose in General:

1. There is no general duty to disclose all information, or all material information Absent a duty, silence is acceptable and not misleading ½ Truth Rule:

o When you do disclose, per a duty Must be Materially Accurate and Complete No misstatements or omissions making statement incomplete

2. When Duty Exists: 1. When Mandated Disclosure

o You have a duty to disclose what is mandatedo In addition to what is mandated, you have a duty to disclose all material information to make

sure the disclosure is accurate and complete (1/2 Truth Rule)o EG:

8-K, 10-K, 10-Q, Regulation F-D, Proxy and Tender Offer Disclosures 2. When affirmative statement

o Must be materially accurate and complete 3. Liability for Material Misstatement or Omission when Duty to Disclose

10b-5 Note:

o When you are dealing with ’34 Act, as in Proxy or Tender Offer scenario, and shares are offered as consideration, will trigger ’33 Act as well, making you subject to liability thereunder

o B. Materiality: General:

When there is a duty to disclose, must be materially accurate and complete Defined as:

1. Substantial Liklihood 2. That a reasonable Investor 3. Would find the information significant given the total mix of information 4. In making an investment decision

Generally Looked at through Basic: Probability of the event occurring x the Magnitude of the Event

Do not have to show reliance In 10b-5 action, reliance is proven when you show Materiality of event/statement

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So, due to reasonable investor standard showing materiality is enough that reasonable investor would have relied, rather then the plaintiff actually did rely

Cases on Materiality: 1. Basic v. Levinson:

o I: When must preliminary Merger agreements/decisions be disclosed?o R:

A Fact Specific Inquiry balancing Probability of occurring x Magnitude of Event 1. Court refused the 3rd Circuit “Agreement in Principle Test”

o Bright line test allows easy skirting around, as simply don’t agree until ready to disclose

Note:o Practically, however, the PxM test looks to that agreement as a

weighty factor, and many people rely on it anyway 2. TSC v. Northway

o F: Facts alleged a material misstatement in proxy, in violation of §14a-9. Should have disclosed that management of one company was management of another by name, rather then simply stating it

o R: 1. Interpreted Materiality in the Proxy Statement Context

Substantial likelihood that reasonable investor would find significant given total mix of information in voting a proxy statement

2. Must Evaluate the Total Mix, Disclosures as a Whole: If something is already public, in total mix, not repeating it is not misstatement

Here, the statement did not specifically name management that was on both companies

However, it did state the information So in context, not naming individually in particular statement was not

misstatement Courts will evaluate the total mix of public information, and if something is

out there and public, there is no need to repeat it in “neon lights” 3. Lewis v. Chrysler:

o F: Chrysler adopted a take-over defense, poison pill plan amending its old plan. It issued a press release, mentioning it, without explaining in detail. Shareholders brought 10b-5 fraudulent misstatement or omission of material fact

o R: 1. Shareholders are charged with some “knowledge of information they should

be aware” Charged with notice that companies will engage in takeover defensive

tactics in undesired takeover scenario Shareholders should know management will do so to maintain control Thus, was not misleading, or omission that didn’t specify plan or its cost

4. PSLRA Pleading of Scienter for 10b-5 o Goldstein v. MCI:

F: MCI Worldcom had accounting issues, and πs claimed CEO recklessly avoided writing off receivables to boost value of firm

R: PSLRA Requires pleading with “strong inference of scienter”

o Circumstantial allegations enhance inference, but are not alone sufficient

To show Scienter, can be: o 1. Intentionalo 2. Knowing oro 3. Reckless

o C. Forward Looking Statements: Traditionally:

The SEC disagreed with Forward Looking Statements, and wanted companies to avoid themo Policy:

Felt that Investors would focus on good projections, avoiding negative More room for fraud in future projections Companies would bias information that came out

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Modernly: The SEC has encouraged forward looking statements

o Policy: Getting information from the “driver’s seat” of the corporation discloses things that

may not be viewable by other POVs So, to investor it further reduces the information asymmetry that exists in securities Encouraged in MD&A disclosure

Safe Harbor: Because forward looking statements open company up to liability, SEC allows for forward looking

statement to be qualified to show caution about the statement Equivalent of the Common Law “Bespeaks Caution Doctrine”

o Effect: If sufficiently cautionary language accompanies forward looking statement, it cannot

be considered misleading as a matter of law Case Law:

Puffing versus Actionable Opinion o Virginia Bankshares:

Opinion, puffing of general optimistic statements is not actionable without more Opinion can be actionable if:

Underlying facts are objectively verifiable and opinion is fraudulent Type of Cautionary Language Needed:

o Grossman v. Novell, Inc: R: 1. Forward Looking Statement needs Cautionary Language That is Adequate

Look For: o Made in combination with FLS, outlined the complexityo Risks involvedo Highly specific to facts of scenarioo Directly addresses statements made

Effect: o Adequate cautionary language makes a forward looking statement

not misleadingo Court will make people think for themselves a bit, even if SEC

does not believe they can… No Duty to Disclose Financial Projections:

o Walker v. Action Indus., Inc.: F: Issuer TO, 13e-4, where it made statement regarding expected financial results that

were forward looking. It met these results without surprise, and shareholders sold shares. Then, first quarter results were much more successful. Πs sue per 10b-5, arguing ∆s had a duty to disclose all financial projections of internal documents

I: Is there a duty to disclose internal, financial projection documents? R:

Court unwilling to impose duty to disclose financial projectionso 1. For Congress or SEC, not the Courtso 2. Speculative nature, uncertainty would mislead investors

Prudential concern not to mandate this disclosure Goes hand in hand with the ability to disclose forward

looking statements, with caution…but not mandatedo 3. Mandating Disclosure of Internal Documentation

Reminiscent of continuous disclosure of all information system, versus our system which is periodic disclosure

May chill internal record keeping Inapplicable to Going Private Transaction:

While the SEC encourages forward looking statements in the public context, it is not applicable to 13e-3 going private transactions

o Policy: SEC does not want overly negative forward looking statements to be made for

nefarious purpose of taking company private, benefitting management and screwing shareholder

o D. Specific Mandated Duties to Disclose

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1. Item 1.01 of 8-K: Entry into a materially definitive agreement must be disclosed in 8-K Things considered “materially definitive”

o 1. Merger, Acquisition, similar agreemento 2. No-Shop Provisions

Where target cannot seek offerso 3. Exclusivity Provision

Where target cannot negotiate with other parties for fixed time periodo Policy:

Because these are further along, and more material, these are considered agreements that need to be disclosed in an 8-K

Non-binding Agreements are not “materially definitive” o Advise your Client:

Assure the LOI/Confidentiality agreement is “non-binding,” other then for specific clauses within it

o 1. Letter of Intent/Memorandum of Understandingo 2. Confidentiality Agreemento 3. Non-solicitation of employees

If made non-binding, these will not be considered materially definitive Policy:

o These are vital and common to the beginning stages of a mergero While we want disclosure, we don’t want to negatively effect, and

chill transactions from occurring or opening up to market Preliminary Merger Discussion are not necessarily subject to disclosure

o While may be material, in context, may not be definitive given the clauses/agreements entered into

2. NYSE Disclosure Requirements: Generally:

o While the SEC and Securities Laws mandate certain rules on disclosure, the exchanges may mandate more strict, far reaching rules

A. General Duty to Disclose Material Events and News o The NYSE has a general duty to disclose material information, unlike Federal Securities Laws

B. Internal Corporate Matters o Confidential discussions are allowed, and should be confined to a small groupo However:

Corporation must make immediate public disclosure once confidential information that is “important” is made to outsiders of close confidential group

o Advise Clients: 1. Get Confidentiality Agreement with Parties Involved

Binding small-group with this should avoid slippage of confidential information

2. Avoid Leaks, which will cause early disclosure of negotiations For instance, parties go out of their way to assure nothing seems out of the

ordinary in negotiations So that not even secretaries are aware of some transaction occurring

C. Duty to Respond to Market Rumors and Unusual Market Activity/Unusual Price Movement o Unlike Federal Securities laws which do not impose a duty to correct, or make statement about

rumors or 3rd party informationo NYSE does mandate that you must make an announcement

Confirming or denying the rumor/unusual activity 3. Regulation F-D

Generally: o “Fair Disclosure”

Once materially non-public information is stated to some, must disclose to public absent a confidential relationship

o You cannot selectively disclose material non-public information, and if you do, you must then broadly disseminate it to the public

o Confidentiality Safe Harbor: If there is a confidential agreement/relationship, then you may disclose within that

whatever is desired

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Advise Clients in the M&A Context: Assure a Confidentiality Agreement is in place Disclosure of material non-public information then is ok

How to disclose Regulation F-D: o 1. Press Releaseo 2. Form 8-K

This is the most common, and one of the specifically mandated triggering events that triggers and 8-K

o 3. Public Forum if publically announced and public may attend

4. Regulation M-A (Mergers and Acquisitions) Generally:

o This is one of the several regulations of integrated disclosure systemo Required disclosures will specify which section of which Reg., whether it be M-A, S-K, or S-

X, must be added to the disclosure (8-K, 10-K, 10-Q, 14A Proxy Statement, Schedule T-O)o Mandated items one has a duty to disclose in filing

A. Item 1004 o Tender Offers:

Total number and class of securities Type and amount of consideration offered Expiration date of Tender Offer Whether subsequent offering period will be available Whether offer may be extended Withdrawal dates that tendering party may withdrawal by Procedure to Tender Manner in which securities will be accepted Statement as to Accounting Treatment of Transaction if material Federal Income tax consequences of transaction, if material

Note:o Tax disclosed to tell SH whether cost of transaction will hurt his

interest if cash-transaction, or if shares is tax freeo Mergers and Similar:

Brief Description of the Transaction Consideration offered Reasons for transaction Vote required for approval Explanation of material differences in rights of security holders as result of

transaction Statement as to Accounting treatment Federal income tax consequences of transaction, if material

B. Going Private Transaction Disclosures of 13E-3 o Generally:

Will be treated as needing more wholesome detail More subjective inquiry

o 1. Item 1013: Must state the Purposes, Reasons, and Effects of the Going Private Transaction

Effects Benefits Detriments Quantifiable benefits of transaction discussed

o 2. Item 1014: Fairness of Transaction

Each Party filing must say if fair to other unaffiliated shareholders State Factors evaluated, weight given, and why. Factors Include:

o 1. Current Market Priceo 2. Historical Market Priceo 3. Book Valueo 4. Going Concern Valueo 5. Liquidation Value

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o 6. Purchase prices paid in previous acquisitions by affiliateo 7. Any Financial Advisor Fairness Opiniono 8. Other offers

Indicate whether transaction is subject to majority vote of unaffiliated SH Discuss whether unaffiliated SH were represented in negotiation, appointed

by independent board membero For instance:

Did unafilliated SH have their own financial advisor appointed by their representative to evalute if it was Fair?

If not, the affiliated financial advisor will most likely find the transaction fair, as contingent fees are wanted

o 3. Item 1015: Conflicts of Interest

Must disclose and described any conflicts of interest of preparer of report, opinion

o Include: Contingent Fees of Advisors

o E. Gun Jumping Issues: Generally:

Gun-Jumping emanates from the Securities Act of 1933 and §5 Applies to any securities offering***

o Implications to the M&A Process: Whenever we have an M&A transaction where shares are issued as consideration,

triggering ’33 Act we need to worry about gun-jumping 3 Generally Prohibited Gun Jumping Scenarios:

1. Pre-Filing: Oral offers prior to filing registration statemento Quiet Period—before filing registration of securities, you cannot discuss it, or offer it for sale

2. Waiting Period: Written Offers after registration but prior to effectiveness of registrationo Exception:

Pre-Filing, Red-Herring Prospectus us allowed to disseminate This Prospectus will contain everything a registration requires, but simply states it is

not effective, and reader should wait for effective version 3. Post-Effective: Written Offers after the effectiveness that are not accompanied by a

conforming prospectuso Offers of securities after effective registration must include the final, effective prospectus

Rule 425 Safe Harbor As we see, supra, communication in a shares-for consideration transaction would almost be

impossible without a Securities Act violation But 425 gives important safe harbor for Tender Offers and Proxy Statements

o 1. File the Communication with the SECo 2. Include Legend that specifies to read final statemento Practical:

Allows the parties to discuss, negotiate, and offer to target firmo Forms These Disclosures Apply to:

Schedule TO Tender Offer Schedule 14A Proxy Statement Schedule 13E-3 Going Private Transaction Form S-4 Securities Act “Wrap Around” registration statement

6. Insider Trading Under Federal Securities Laws: o General Cause of Action is under 10b, and Rule 10b-5

“Possession of material and non-public information” arising out of relationship with duty of confidence requires either:

(1) Abstain from Trading or (2) Disclose to investing public

What is Material, Non-Public Information: Materiality:

o Any information which has “substantial liklihood that reasonable investor would find it significant given the total mix of information in an investment decision”

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o Note: May be either positive information or negative information about the company

Non-Public: o Potentially any information not known to the general publico EG:

In some instances, may be an issue of although it was disclosed, whether it was adequately disclosed and if not may be non-public

Examples: o Operating or Financial Resultso Business, technology acquisitionso Public or Private debt or equity offerings

Note: For instance, while knowledge of operating results would make stock go up,

knowledge of an equity offering dilutes shares. Often times, prior to this announcement, you will see the share price begin to drop for no reason—the reason is insider trading on bad news…

o Management Changeso New Product Announcement

o Theories of Insider Trading: Note:

All theories require a duty exist, for the insider trading to be actionable If Occurs Must disclose or abstain from trading

Parties Insider Trading Applies to: 1. Insiders Classic Theory 2. Outsiders Misappropriation 3. Tippees 4. Controlling Persons

o Rule: Persons found to be in controlling position over someone who violates federal

securites laws may be held jointly and severally liable May expose registrant corporation and management to liability

o Effect: Will have clauses in contract, and processes in place to avoid, and prevent insider

trading EG:

o Secret project names, policies, Chinese Walls If you have policies in place probably will avoid liability If you do not may be J & S liable

1. Classic Insider Trading: A Corporate “insider” that trades on material, non-public information

o Breach of the Fiduciary Duty owed to the corporation and shareholders

2. Tipper/Tippee Insider Trading: Tipper:

o Insider, in breach of fiduciary duty to company, tips, and gets a benefit from passing the information

What Type of Benefit: Very broad construction Can be almost anything you can think of, intangible, tangible, etc… Does not have to be $ payment, or anything like that **Overall Court is likely to find one

Tippee:o May Assume the fiduciary duty of tipper creating liability

Liable if: (1) Tipper breached duty, and tippee knows or should have known of

breach (2) Tippee used material, non-public information to trade on

3. Misappropriation Theory: When any person (“outsider”) misappropriates material, non-public information in breach of a duty or

relationship of trust owed to the source of information

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o Breach of Fiduciary duty is between trading/deceptive party and source of information US v. O’Hagan:

o F: lawyer, at law firm, used information from Grahm-Met, who was going to make tender offer for Pillsbury. He bought most options, and stock—eventually making profit of $4.5M.

o R: Misappropriation Theory

Was a relationship of trust and confidence, a duty owed by law firm to its customer

O’Hagan misappropriated the information in breach of the duty owed to customer by him as employee of the law firm…breached duty owed to source

§14(e)3 Tender Offer Insider Trading Liability “Disclose or abstain from trading” if in possession of material non-public

information about Tender Offer, regardless of fiduciary dutyo Note:

This is much easier to prove, and used often in connection with tender offer

Penalties: Criminal

o $1M and up to 10 years in Jail Civil

o 3x Profits Made oro 3x loss you avoided (if you saved $ by trading before bad news)

o §16 Report: §16(a)

Reports ownership and financial interestso Note:

This is different than 13d, Beneficial ownership This typically looks at how much you will make on a transaction

Who has to File 16d Report: o 1. Directors and Officerso 2. Shareholders of > 10%

§16(b) “Short Swing Profit Rule” If you are a 16d Report filer (infra) and

o Buy securities and sell them in a 6 month period Disgorge profits to the company

**Corporation’s Right to Cause of Action **o Profit Calculation:

Looks at lowest purchase and highest sale Texas International v. National Airlines:

F: TI bought 12% of company, in order to take it over. However, the company then agreed to merger with Pan Am. Rather then simply wait for the merger and amount of $ accompanying the transaction for TI, TI entered into an agreement with Pan Am prior to—Pan Am paid TI a premium. This occurred within 6 months

R:o Disgorgement of profits to the companyo So, in this instance money went right back to Pan Amo There is nothing in 16(b) which requires inside information or an inside transaction

A clear, prophylactic rule Can be Used as Means of determining Compensation in Transaction:

Because of 16(b) short-swing profit rule, if one falls into its ambit, the $ will be disgorged to corporation

Sterman v. Ferro Corp: o F: Crane corporation bought 22% of Ferro Corp. Later, Ferro corp began to negotiate the buy

back of its shares. They agreed tentatively to $30.30. However, Crane let Ferro know that it could not agree to that $, based on the short-swing profit rule. So, Ferro increased its offer to 31, exactly enough to cover the short-swing profit loss.

o R: This is acceptable use of 16(b) Disgorgement is the only remedy, so it may be useful to utilize as method of payment

o State Law: Generally:

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While Federal law mandates certain disclosures in regulations, State law also has disclosure obligations

Emanates from Fidudiary Duty and Equitable Fraud Doctrine Zirn v. VLI Corp (Del. 1996)

F: Company was going through patent difficulties, and eventually agreed to merge with company. In statement to shareholders, it addressed patent, but failed to let them know that patent attorney told them they have an “Excellent” chance of fixing it.

R:o 1. Under State Law, Directors have Fiduciary Duty to disclose completely when they seek

shareholder action There is a duty to disclose completely and accurately all material information when it

seeks shareholder action Must avoid misleading, or incomplete statements When statement made, must be materially accurate any complete

o 2. Duty extends to disclose all material facts Evaluate under “whether substantial liklihood a reasonable investor would find the

information significant given the total mix of information Note:

o The reasonable investor standard does not require you to show that misstatement would have cause different action—just that it was significant given total mix of information

o 3. Equitable Fraud: 1. False representation made by ∆ 2. ∆’s knowledge or belief that the representation was false or reckless 3. Intent to induce the π to act or refrain from acting 4. Π’s action or inaction is taken in reliance on representation 5. Damage to π

Note:o At equity No scienter…mere negligence can suffice

Difference from 10b-5 o Unlike 10b-5, where cause of π to rely on statement and enter into

transaction is assumed if materialo Here, actually have to prove that π actually did rely…that your

act caused them to act, so they reliedV. Anti-Trust Issues in the M&A Transaction

Generally: o Even though a merger may add value to the acquiring firm, and pay shareholders a premium in consideration, it may

also harm consumers and the market at largeo The following laws operate to protect the consumers and market in light of transactions

1. The Clayton Act: o General:

Federal antitrust statute that deters collusion and monopolistic behavior of anticompetitive practices Focus is on Market Competition Applies to:

Statutory Merger, Asset Acquisition, and Stock Acquisition Jurisdiction:

FTC and DOJ Actions Taken:

o 1. Take you to court to enjoin violating transaction o 2. Cease and Desist order against the merger

Enforced by: o Government or Private Cause of Action

o A. Rule: No one may transact when substantially lessens (reasonably likely) to competition or creates a monopoly

o B. Exception: Entering into transaction of stock purchase purely for investment

Why: o Investing in a company does not have the anti-competitive reason behind it, and therefore, does

not meet the policy of Clayton Acto C. DOJ and FTC Guidelines on Analyzing Horizontal Merger:

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Purpose: Avoidance of Market Power

o Enforcement will be engaged in to avoid Market Power: The ability to profitably maintain prices above competitive levels for long periods of

time Will be gradual increase

o Individually or Collectively with a few firms Explicit or Implicit Agreement to coordinate actions

Policy: o While wants to prevent this to detriment of consumer, does not want to overly interfere with

legitimate, non-violating M&A transactions 5 Guidelines to assess market power:

Balance: o 1. Assess whether Merger would significantly increase concentration of market

“Market” A Product or group of products and a

o What products are in the market that can be substitued Geographic area which is produced or sold

o What area Such that a Hypothetical monopoly would increase price gradually Note:

o Look at Oracle to see how courts construct Marketo 2. Assess whether merger raises concern of adverse competitive effectso 3. Assess whether suit/enforcement would be timely, likely, and sufficient to deter or

counteract the anti-competitive concern Against:

o 4. Assess the efficiency gain that could not be achieved otherwise Note:

In Fairness opinion, efficiency will be cited, but market share or price control will not!

Efficiency gives ability to trump anti-competitive concerns As long as cognizable and not anti-competitive probably ok

o 5. Assess whether, but for the merger, either party to transaction would fail If so, more likely to be ok

Overall: o The 5 prong analysis of balancing gives ability to determine Market Power

o Case Law: A Clayton Act claim can occur even after the transaction is complete:

Midwestern Machinery v. Northwest Airlines: F: Transaction occurred, and target was paid and its stock and entity were terminated. The plaintiffs,

private parties then brought suit alleging a Clayton Act Violation I: Can Clayton Act violation be brought after merger is finished? R:

o 1. Clayton Act violation can occur and be brought even after transaction is complete Statute explicitly provides that claim occurs when “all” stock/assets acquired Policy:

Otherwise, to bypass the statute, parties would simply do the transaction as fast as possible

Would shelter from the law, and contradict the whole purpose purely basd on speed

Court Construction of relevant “Market” United States v. Oracle:

R:o Construction of Market to determine ∆ in Market Power includes:

Showing the Product market and Geographic Market, and then analyzing: 1. The market shares 2. The overall concentration level 3. Trends in the level of concentration Showing a firm would control undue percentage of market share of the

relevant market

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o Must Show the relevant Market: Without showing the relevant market, it is impossible to show concentration, anti-

competitiveness, or market power change o Here:

Failed to show “product market” and what substitute products it included Failed to show the Geographic Market

Can be worldwide! Price Fixing Among Competitor Bidders in Tender Offer is Accepted

Finnegan v. Campeau: F: Macey and Campeau began to bid for Federated, Inc. However, they realized that it would only

raise the cost to both. So, they agreed that Campeu would win and that it would sell to Macey two divisions.

I: Was this an explicit price fixing agreement that was anti competitive, and thus against Clayton Act? R:

o 1. Tender Offer Laws explicitly allow agreements of Joint Bidders Because of this, it cannot be authorized in one act and then another act allow liability

for it Clayton Act implicitly repealed in this instance Disclosure is means by which shareholders are protected

14D Filing Requires that agreements be disclosed Therefore, they may decide for themselves

2. The Hart-Scott-Rodino Antitrust Act or HSR: o Generally:

Mandates that in certain circumstances, transacting parties must submit notice to the FTC and DOJ of their proposed transaction for anti-trust approval

Pre-Merger Notification and approval of proposed transactions that could violate Clayton Acto Who Must File:

1. Acquiring party who would hold a total amount of securities and assets In excess of $200,000,000M OR 2. Above $50M but below $200M and

1. Manufacturing Target witho Net Sales or Total assets of $10M and Acquiror has Total Assets or Net Sales of $100M

2. Non-Manufacturing target ando Target has Total Assets of $10M or more and Acquiror has TA or NS of 100M

3. Any party witho Net Sales or TA of 100M and acquiror has TA or Net Sales of 10M

Overall: Above $200M You must file Above $50M but below $200M You may file, but must engage in analysis

Contents: Identify Business Ownership Describe Transaction Miscellaneous Submit all studies and analyses

o Note: Fairness opinion will not contain language of “market share” or price power Efficiency only

o Waiting Period for Approval: From Complete Filing:

15 Days for Cash Tender offer 30 Days for all other transactions

In Review: The reviewer does not need to take all time and may grant early termination

o Exceptions: 1. Acquisitions by issuer of partially owned subsidiary (50% or more) 2. Acquisition for Investment <10% of securities

But if > 10% you must file o Case Law:

HSR Violation suit can be brought even after a Negotiated Settlement with the Government:

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California v. American Stores: F: Negotiated settlement was entered into with the DOJ and FTC. However, afterwards, California

brought private cause of action to enjoin the merger. R:

o The HSR Act will prohibit harms to consumers even after settlement occurs In Interim of Pre-Approving for HSR, Acquirer of competitor may not violate Clayton Act:

United States v. Computer Associates: F: Covenants section of a merger agreement had covenants that not only were typical but also

required certain pricing be enacted by the target, and exuded operational control over the target. R:

o 1. In the interim, Merger Agreements Cannot Exercise Operational Control and be Anti-Competitive When Merging With Competitor

What is acceptable: Standard customary covenants Covenants that require business to continue in the “ordinary course of

business” Covenants that assure “no material impairments of assets occur” Covenants that assure no added debt, above certain amount

o Why: Standard covenants that protect acquiror in the interim of

waiting for approval from waste Customary protections are intended to protect Balance

Sheet Operational Control is unacceptable:

Controlling what operations the target engages in, pricing, discounts to acquiror, and other anticompetitive activities are not allowed in interim

Reason: o Otherwise, would contradict the whole intention of HSR approval

to have it reviewed But, regardless of when the agreement becomes effective, when it is entered

into, it cannot in the interim be anti-competitive o Advise your client:

When drafting a merger agreement, avoid operational non-balance sheet controls in the covenants section when acquiring a competitor, large or small.

We want HSR to be clean, easy, and quick Avoid litigation with FTC and DOJ

VI. Duties of the Board of Directors: Generally:

o Fiduciary Duty owed which consists of: 1. Duty of Care 2. Duty of Loyalty and 3. Duty of Candor

Duty to inform shareholders of all facts The Business Judgment Rule:

o Starting Presumption: Rebuttable Presumption that the board is informed, acting in good faith, and in the best interest of SH Burden on the π

To Rebut: o Duty of Care:

Show the decision was uninformed Waste

o Duty of Loyalty Conflict of Interest/not in good faith to the corporation Self Dealing

o Effect of Rebuttal: Burden shifts to the ∆ to prove Entire Fairness Test

Purpose: Allows BOD to operate, exercising its judgment without fear that they will be punished for making

mistakes, or being negligent33

While presumption can be rebutted, gives them more freedom to make business decisions A. The Duty of Care:

o Generally: When a breach of the duty of care is alleged, Business Judgment rule must be rebutted Applies to both the Acquiring Firm and the Target Firm

o 1. What is “Informed” Smith v. Van Gorkum:

F: Board took 20 minutes, had no written valuation information, no paper documentation, no notice of the meeting, and relied solely on the oral statement of an individual who had not read any agreement information

R: 1. To show breach of the duty of care, must rebut the presumption that Decision was Informed:

o Informed: Of all material information reasonably available to the board

o Here: Business Judgment Rule presumption was rebutted by showing lack of informed

decision making Could bring duty of care fiduciary duty breach claim

o Overall: Create paper trail Use explicit process for making decisions

o 2. Effect of Rebuttal of Business Judgment Rule Entire Fairness Test: Cede III:

1. If the Business Judgment Rule is not Rebutted: Directors are protected

If the Business Judgment Rule is Rebutted, the transaction must be shown to be “Entirely Fair,” to the Corporation and Shareholders

The Entire Fairness Test: Burden Shifts to the ∆ Directors

o This is not per-se liability, and Directors can still prevail 2 Prong Analysis:

o 1. Fair Dealing in Process 1. Timing

When was the transaction timed 2. Negotiations

If typical negotiation, probably fair 3. Structure

Look at what was negotiated for Concessions for the Target of being able to accept other bids is good

4. Disclosures to Directors If any conflicts of interest exist, were they disclosed If none exist, fair

5. Director and Shareholder Approval/Disclosure to Shareholders Did directors make informed decision Did they rely on expert advice

o Directors may rely on expert opinion Was Duty of Candor met

o Full and Accurate Disclosre?o 2. Fair Price

1. Was price the highest value reasonable under the circumstances? 2.

Economic and Financial Considerationso Compared to other deals of similar sizeo If no other bidders for period of time, probably oko Assets, market value, future earnings, other elements of value

o Overall: The Entire Fairness test is evaluated as a whole, considering all facts Court looks at those that meet fairness against those that don’t

o 3. Timing of the Review for Rebutting Business Judgment Rule and Expert Opinions: Ash v. Maccall:

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F: Acquiring firm purchased a target that had accounting frauds. It hired the best accountants and lawyers, however, the firm still ended up taking major losses. The shareholders sue, arguing that Board breached its duty of care in the transaction for failing to make an informed decision in finding the fraud

R: 1. Evaluate at the time of the Transaction, not Ex Post:

o The Business Judgment Rule evaluation is evaluated at the time the transaction was entered into

Does not view with hindsight If the directors were informed at the time, result is irellevent

2. Board of Directors may rely on Expert Opinions: o The Board may rely, in good faith, on expert adviceo Here:

They used two of the best accounting and law firms to do the due diligence, and audit They were ok in doing so in good faith

Unless can show that they did not in fact rely in good faith, BJR protectso 4. Board Vote Buying:

Hewlett v. HP Co. F: Hewlett the former owner of HP, and large shareholder did not agree with transaction they were doing.

Engaged in long proxy contest. HP, purchased from an IB who held a large portion of shares, their vote to vote for the transaction.

R: 1. Vote Buying by Corporate Management is Subject to Entire Fairness Standard:

o May not defraud or disenfranchise the shareholders or deleterious Result:

Management may not use corporate assets to buy votes Disenfranchising shareholders means voting in a manner which

management wants to vote even though shareholders may disagree Effect:

Management cannot vote where it would actually cause any effect to the transaction

This is a De Facto ban on management vote purchasing then, as there is no real reason otherwise to purchase votes

2. The Vote buying that is allegedly deleterious does not need to be Contract/Agreement o While there is an understanding, there isn’t likely going to be a written contract to vote to

defraud shareholders anyway o Focus is on harm to shareholders, not contract of board

3. There is no minimum % threshold to make vote buying fraudulent o Even small amounts of votes can tip in favor one way or another o No minimum vote purchase needed to state cognizable claim

B. The Duty of Loyalty: o General Rules:

1. If the Majority of the Board is not interested No Duty of Loyalty Issue—Business Judgment Rule Presumption

2. When there is a Duty of Loyalty issue; if majority of BOD is materially interested, is not independent or if there is a controlling shareholder

Entire Fairness Test applies (Fair Process and Fair Price)o Note:

Bypasses Business Judgment Rule due to conflict/Heightened Scrutiny Effect of Controlling Shareholder: The idea that, because the shareholder can vote for

directors and control the vote, essentially all Directors have a conflict of interest Burden on the ∆

o The burden, in Entire Fairness Test, is on the ∆ to prove it was fair 2. If a Special Committee is Created / Vote

Committee of disinterested Independent Directors Independent legal counsel and Investment Bankers Effect:

o Delaware: Entire Fairness Test applies: Shifts burden back to the π to prove unfair

o MBC State:

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Business Judgment Rule is re-invokedo A. “Materially Interested”

Orman v. Culman: F: There was controlling shareholder of corporation that was approached by an acquirer. Special committee

was created of independent directors, and they approved transaction. R:

1. “Interested” o Directors cannot appear on both sides of transaction oro Derive any personal financial benefit or detriment from it

2. “Material” o Benefit or detriment was significant enough to have made it improbable that director could

perform fiduciary duties owed without being influenced by personal interest 3. “Independence”

o Director’s decision is based on corporate merits of subject before the board rather then extraneous considerations or influences

Not Independent demonstrated by: Controlled by another Direction of conduct by controlling party Dominance Must be actual control

o B. Duty of Loyalty When there is a Controlling Shareholder: 1. Weinberger v. UOP:

R: 1. When Controlling Shareholder

o Burden is on the ∆ shareholder to prove fairness 2. Voting Cleanses the Transaction: Shifts burden to the π to show unfair

o Requires: 1. Fully informed shareholders

Informed : o ∆ still has burden to prove complete disclosure of all material

facts relevant to the transaction 2. Majority of the minority shareholders approve

Minority:o Should include minority shareholderso But should not include those parties that are affiliates, Officers

or Directors of the Acquiror or Targeto Minority should be made up of the non-interested parties

Here: o Failure to fully informo The directors of company did a study for the controlling shareholdero Study showed that squeeze out was advantageous

2. Rosenblat v. Getty Oil: What needs to be disclosed to “Inform” Minority:

It is not required that controlling shareholder disclose its top bid for minority o Here:

Controlling shareholder prepared a report for itself to use Does not need to be disclosed to minority shareholders of target

3. Glassman v. Unocal: In short-form Merger (90% owned by controlling shareholder) Entire Fairness is not applicable

Thus, shareholder may not bring entire-fairness suit due to controlling shareholder’s act Their sole remedy is appraisal proceeding

4. Tender Offers and Duty of Loyalty of Controlling Shareholders:In Re Pure Resources, Inc.

F: Controlling shareholder of Pure, Unacol, made tender offer for rest of the shares. The issue becomes what happens if the minority does not want to tender. They are essentially left with nothing. So the offer becomes coercive

R: 1. In Tender offer by Controlling Shareholder:

o The Entire Fairness Test does not apply

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There is potential coercion and unfairness posed by Controlling shareholders seeking to acquire minority interests

o The possibility of coerciveness is high when controlling shareholder wants to purchase rest of shares outstanding

Either tender, or be left with minor interest that can do nothing Left with shares that are very thinly traded So choice to tender is more akin to coercion

o When a controlling shareholder wants to acquire the remainder of company’s shares: Must show that it is not coercive:

1. Subject to non-waiveable majority of the minority tender condition 2. Controlling stockholder promises to consummate a prompt merger if it

obtains more than 90% of the shares and 3. No threats have been made

Note:o When a Controlling SH corporation wants to take 100% control of a corporation

1. Either merge (upstream or triangular) or 2. 2 Step Acquisition (Tender offer + Merger)

o This case makes second one preferable As it avoids the entire fairness test

o C. Duty of Loyalty in Minority share Repurchase in Close-Corporation: Lawton v. Nyman:

F: 3 shareholder of voting class of stock sent letter out to minority, non-voting shareholders offering to repurchase their shares. They repurchased many of them, and several weeks later, entered a sale of the company for large sum of money. Due to their purchase of shares, they became substantially wealthy. Minority brings suit arguing breach of “duty of loyalty”

R: 1. In Close- Corporation, there is heightened duty to disclose in share repurchase

o Officers, Directors, and Controlling shareholders have duty to afford Complete Disclosure of all material information when offering to purchase shares

Anticipated Transactions: Even if negotiations not under way, if anticipated, reasonably likely to occur

and there is more than a remote possibilityo Why:

There is no public market for stock Whereas in public corporation, the disclosure would elevate market price,

perhaps damaging the transaction With closely held corporation, there is no public market to reflect stock price

o D. Recapitalizations: Levco Alternative v. Reader’s Digest:

F: Two classes of shares were being recapitalized. One class was getting premium, and that class was owned by a fund that the directors were on.

R: 1. Entire Fairness Test Applies:

o Here, directors of recapitalizing firm had interest in fund that owned majority of shares 2. Special Committee Can approve Transaction

o Must be Fair Price and Process to meet entire fairness standard o Shifts to π

Here was not fair process or price: o With differing classes of shares

Must determine that it is fair, per each class of shares and Fairness to the whole corporation

C. Duties of Controlling Shareholders: o 1. When Selling Shares:

Absent: Fraud, looting of assets, conversion, or bad faith Controlling shareholder is free to sell, at a control premium

Minority Shares are not entitled to participate in this premium

o 2. Sale of a Controlled Subsidiary: McMullin v. Beran:

F: ARCO owned 80% of Sub. ARCO negotiated a 2 step acquisition with a 3P.

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I: What duty owed when Controlling Shareholder negotiated the transaction of sale? R:

o When Controlling SH Negotiates, Board of controlled corporation owes same duties as if it had negotiated Transaction

Duty of Care Duty of Loyalty and Duty of Candor

o Protection of Minority In Controlling shareholder situation, the controlling shareholder will be able to veto

any transaction it disagrees with, or, push through the one it wants Regardless

Protection of the minority is protected Must fulfill duties so that the minority can make an informed decision

o 3. Controlling Shareholder Selling to Looter: Debaun v. First Western Bank:

The Controlling shareholder must exercise good faith and fairness When Reasonable Prudent man would know of buyer’s looting/should have known

o 1. Must conduct reasonable investigation of the buyer ando 2. Owes Duty of Care to the Corporation

Effect: Must do some type of due diligence to cover yourself as controlling

shareholder

o 4. Duty not to sell an Office: Essex Universal Corp v. Yates:

It is illegal to sell corporate office/management without stock accompanying the sale o Reason:

Managers on behalf of the corporation may not sell it as their own property Corporate Democracy:

It is the stock holders right to appoint management What is legal:

o It is legal to sell office when selling shares, and is inevitable that shareholder would be able to make alteration to Directors

If “reasonably certain” to have acquired voting control, then sale of office with shares is ok

o 5. Duty not to Usurp Corporate Opportunity: Thrope v. CERBCO:

F: CERBCO held subsidiary. Erikson was controlling shareholder and director of CERBCO. INA offered to buy subsidiary, but Erikson eventually negotiated that he sell his controlling shares to INA.

R:o 1. A Controlling Shareholder who is a Director has the same duties as Director

Duty of Care Duty of Loyalty and Duty of Candor

o 2. Elements to Consider whether a Usurpation of Corporate Opportunity Occurred: If there is presented an opportunity to an officer or director and

1. The corporation is financially able to undertake 2. Is in the line of the corporation’s business and 3. Is practical advantage to it 4. Corporation has an interest The law will not permit the director to seize opportunity for himself

o Here: Duty of Loyalty was breached

Interested transaction (Director got benefit to detriment of SH) Failed to disclose it

Not usurpation of corporate opportunity: Why:

o Sale of Subsidiary was sale of “all or substantially all”o This gave shareholders vote on the transaction

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o As controlling shareholder, Director would therefore vote against the transaction

o The corporation would be unable to take advantage of opportunity, and therefore did not belong to corporation

Had there not been shareholder vote, most likely would have been usurpation by director

D. Target Board’s Decision to Block a Takeover: o Generally:

There are two separate legal issues that need to be addressed: 1. Is the defense chosen by the board void ab initio (from the beginning), as simply beyond the scope

of powers afforded the board? 2. Fiduciary Duty:

o Even if board chosen defense is oko Did Directors breach fiduciary duty in deploying or failing to defuse chosen defense?

o 1. Potential Defenses: Generally:

Note that the term “defense” is broadly used However, many of these chosen methods are not reactions to a takeover Rather, some simply exist in the Articles of Incorporation as good corporate governance Modernly, most corporations have some form of “defense” already within their Articles However, some are in reaction to a takeover, while some simply exist

1. The Shark Repellant: A. Staggered Board of Directors:

o Portion of Directors chosen in intermittent yearso 1/3 of Directors chosen each year is typical

Deters take over due to time it will take to get control (several years) B. Eliminating “Voting by Written Consent”

o Such voting by written consent eliminates need for shareholder meetingo So, shareholder with enough shares could simply write in his votes and take over

C. Limitation on “Right Of Special Shareholders Meeting”: o In this instance, a majority owner could bypass typical schedule, call special meeting, and then

vote his shares in the meeting to take controlo This prevents an ad hoc submission of transactions to shareholders o Limit it by increasing vote required to declare meeting

D. Removal of Directors Only “For Cause”:o So hostile shareholder cannot simply vote them out quickly

E. Limitation on New Board Seats:o Otherwise, hostile shareholder would make meeting, add several more board positions making

other board members moot in any decision F. Two-Tier Voting Stock:

o For instance, Ford has Class A and Class B, with Class B being 10x votes of Ao Class B is solely owned by Ford familyo Effect:

This deters takeovers by allowing maintenance of control by owner or certain shareholders

The hostile party will be unable to get control as they will be unable to get shares with higher voting rights

G. Super Majority Provisions:o Require that, if shareholder hits above a certain percentage (i.e., 15%), super-majority of all

outstanding shares are required to vote to approve business combinations Effect:

Extreme deterrent as far fewer then 100% of shareholders turn out So, % of votes needed of those turning out will be extremely high to meet

super majority DGCL §203 is an example

2. “Crown Jewel” and Asset Based Strategies: Generally:

o When a hostile bid occurs, the target board will consider Accept the bid?

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Defend against bid? Find a “White Knight” other buyer

A. Crown Jewelo Firm takes its most valuable asset

Either: Sells it outright or Gives another firm “option” to buy it in future

Effect: Less attractive to acquirer if prime asset gone or could be gone Gives leverage to board to negotiate

B. Greenmail:o Unwanted bidder, who is acquiring stock in the target is simply bought off buy the target for a

higher premium on his shares For instance:

Activist investor, like Carl Ichan, begins acquiring shares, making public announcements about intentions, etc…nuisance to greenmail company

Company then buys off his shares to make him go away C. Golden Parachute:

o Historically: Large pay packages were contracted into with managers that were contingent on

change in control A.K.A. “Change in Control Contract” Purpose was to increase cost of the takeover, so as to deter the takeover attempt

o Modernly: Has negative connotation Is used even in friendly transaction as method to negotiate out of the contract Managers will be paid a portion of it to waive its provisions

D. White Knight:o Once hostile bids are received, the Company decides it will sell itselfo Typical Scnario:

Hostile bidder is seeking to break up the company, selling piecemeal Target will seek a white knight who may want, instead, to merge with it, or buy it to

continue it rather then break it up EG: Wallstreet

Note:o See infra, Revlon Duties, as they may trigger when White Knight

defense used E. Clayton Defense:

o In response to a potential takeover, the target will acquire a company in same market, raising HSR concerns (supra)

o When it is acquired, the acquirer, if in the same market, will have to deal with broad HSR and Clayton Act issues

o May pose disincentive to do so F. The Pentagon:

o When a target is being sought by a foreign issuero Target will acquire a subsidiary that deals with “national defense issues” or has security

clearanceo Creates national defense concern

G. Pac-Man Defense:o When acquirer is deciding to take over target, the target takes over the acquirero For instance:

Porsche was in the midst of taking over VW When couldn’t line up financing, VW bought Porsche out

3. The Poison Pill Generally:

o Also known as “shareholder rights” plan o Attributes:

Plan will issue some “right” to each shareholder The right will be allowed to be exercised by every shareholder that does not “trigger” Option, typically, to buy quantity of stock at large discount

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“Triggering Event” Some event, like a stock holder acquiring a fixed percent, will trigger the

right Purpose:

Board has time to consider the transaction, approve it or not Board will have the option to “waive” the right, defusing it This helps avoid fast moving offers Gives Leverage to negotiate the transaction

o Effect: Gives shareholders immediate profit of buying at discount Floods market with shares Reduces the hostile bidders ownership %, as it is diluted greatly Makes the takeover prohibitively more expensive to do

Call Plan Poison Pill: o If Triggered, the stockholder gets right to buy shares at a deep discounto Does not cost the corporation any $o Dilutes Hostile shareholder, as he may not participate in buying, while all other shareholders

buy more shareso 1. Flip In:

Once a % is triggered, the call poison pill is flipped-in Can be automatic or contingent upon event

o 2. Flip-Over: If Merger occurs, shareholders are entitled to buy shares of the surviving corporation

at a discount Put Poison Pill:

o Shareholders are given a right to sell back shares to the corporation at a premiumo Extremely costly for the corporation o Requires the acquirer to have to deal with paying for all of the put options it now may acquire

via the target o 2. Defenses “Void Ab Initio”

Quickturn v. Shapiro: F: “Dead Hand” provision and “No Hand” were in place.

o Dead Hand: If board is replaced, only remaining board members who existed when poison pill was in place may waive it

o No Hand: No directors, not even existing ones, can waive poison pill when board members are replaced via certain triggering events

R:o 1. Any defense which restricts the board of directors is unlawful

No Hand and Dead Hand restrict the Board of Directors

o 3. Fiduciary Duty of Board in Decision to Block Takeover: Unitrin, Inc. v. American General Corp. F: AG tried to merge with Unitrin. When Unitrin denied, AG began its hostile attempted takeover of Unitrin. It

made several tender offers to shareholders, and in response Unitrin adopted a Poison Pill and Repurchase Program, to raise the market value which it felt was below fair value of the company. Inside management was not participating, thus the repurchase of outstanding shares increased their % ownership.

R: 1. Enhanced Scrutiny Unacol Test during Takeover Defense

o The board, in a takeover defense, will demonstrate action to defend companyo Inherent Conflict of Interest:

As defense tactics may injure shareholders, and the board may be acting because of its own self interest in maintaining its board position

Therefore, Enhanced scrutiny by courts is mandated o Board of Directors has burden to prove:

1. Reasonableness: That board had reasonable grounds to believe danger/threat to corporate

policy and effectiveness o May be a threat to shareholders being uninformedo Inadequate Consideration: Threat because offer is lower then what

board believes is fair value

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o Threat to company’s Long-term, future, strategic plan o Fails to reflect long term value

Independent Committee may be used to bolster “reasonableness: ”o If Directors may also be officers, committee of outside directors

may be used to review transaction to see if reasonable threato This will negate finding that Board is acting in Conflict

2. Proportionality: Demonstration that board defensive response was reasonable in relation to

threat May not be Draconian: “Preclusive or Coercive”

o Avoids concern that Management is Conflictedo That management is “entrenching itself” rather then acting as

fiduciary to shareholders Coercive: aimed at forcing upon stockholder management sponsored

alternative/voting for other then merits of transaction Preclusive: deprives shareholder of right to receive all from bidder to or

precludes bidder from seeking control by effecting vote Overall:

o A Defensive measure cannot force shareholders to accept management plan, entrench management, or mathematically or logistically preclude other bids

o If Proven Business Judgment Rule Invoked Burden shifts to the π Must show, based on anti-takeover technique:

1. Board was primarily concerned with entrenching and perpetuating itself 2. Breach of Duty of Care or Loyalty

Paramount v. Time: F: Time negotiated with Warner to have stock merger. Paramount swooped in at last minute and

offered cash per share of time. Time erected takeover defenses purely against Paramount, attempting to continue on its already agreed upon merger with Warner.

R:o In Unacol Test, threats other then inadequate price may be considered

Board took into consideration continuing interest of shareholders As shareholders would become shareholders of new entity

Threat can also include: Lack of continuing interest Shareholder’s misperception of perceived value of transaction Conditions to closing that may create uncertainty in transaction Last minute attempt to confuse shareholders’ considering other transaction

o Proportional Response if applying to solely 1 party: To defend against hostile takeover, in favor of preexisting agreed to transaction was

reasonable and proportional Shamrock Holdings:

R:o Inadequate tender offer may be a threat when concern of shareholder’s ability to evaluate

future prospectso When Corporation value is uncertain (here uncertain value of litigation), an offer may be

threatening to the shareholders, as they are unable to evaluate liklihood of success

E. Target Board’s Duty at Sale of Corporation: o Revlon v. McAndrews:

1. When a company has “put itself up for sale,” Revlon duties trigger Duty owed:

o Duty of Board is to maximize shareholder value by getting best value reasonably available

2. Enhanced Scrutiny, when Duty applies, of the defenses taken against alternative bidders 1. Determine board adequacy in the decision making process

o What information did the board rely ono Were they adequately informed, in attempts to get highest value available

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2. Determine the reasonableness of the action taken in light of all circumstances o Did the board maximize and get the highest value reasonably available?

Note: Defensive measures, or deal protection measures against one party may be,

under Unocal, preclusive and coercive and not reasonable Application:

o A board, dealing with many bids as duty to take highest valueo When company is “put up for sale”

When transactions afford shareholders the opportunity to continue their interest (offer stock)

Unacol will apply Unless there is controlling shareholder, and then Revlon applies

o So: Share transaction, with sale of company to company

without controlling shareholder, and shareholders continuing interest will not invoke Revlon duty

When transaction is cash Revlon applies

If mix of stock and cash Revlon applies

o Paramount v. QVC: F: Paramount agreed to merge with Viacom and had several deal protection provisions, including “no shop”

clause,” Termination Fees and stock option plan, which gave Viacom option to buy stock in Paramount if the plan fell through.

R: “Put Up for Sale:”

o 1. Active Bidding Process Evaluate:

Were bankers, and lawyers soliciting bids; Did term sheet/agreement get passed around

Revlon zone may have been triggered o 2. Break up of the corporations divisions or businesses

Like a Crown Jewel Defense, Selling off assets may trigger Revlono 3. Sale of the Target for Cash

When shareholders are cashed outo 4. When transaction approval results in a “change of control”

Will Occur: When shares are exchanged for shares, and target shareholders get shares of

company with controlling shareholders Control changes

But, Does not occur when: Stock-swap transaction where acquirer is diversely held, and large, fluid

changing market exists This is not a sale of control, as still widely held stock base

o No Revlon Unocal Applies No Controlling Shareholder

How can board ensure Best Price: o 1. Market Auction:

Auction off with active bidding for the company After which, if no more bids, most likely will have fulfilled duty to attain best price

o 2. Fairness Opinion evaluation of the price of the company, through IB, and attaining that price

o 3. Market Test Retain bankers to seek potential acquirers, seeking other potential bidders If no one else bids, most likely fulfilled your Revlon duty Doesn’t have to be $:

Can be other considerations, such as cash, cash and stock, or strategic alliances

But, should quantify so that they are comparable Deal Protection Provisions:

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o The Deal protection provisions, above, were not reasonable for corporation to enter into, and impeded the directors from getting the best value reasonably available

Merger Agreement Provisions’ potential effect on Revlon Duty: o Certain merger agreement provisions could be seen as in breach of Revlon duty in certain

scenarioso If these provisions have the effect of limiting/preventing alternative offerso If the agreement did not entail a market test or auction

1. No-Shop Provision Prohibits the company from soliciting other bids, encouraging or discussing

them 2. Termination Fee

The more punitive the fees, the less likely a board may be to entertain other offers

3. Stock Options available upon deal terminating Acquiror may attain stock options if the bid falls through In this instance, a successful opposing bidder would buy company, only to

have less control then thougho Method of allowing these provisions:

Either do a pre-deal auction/test to assure Revlon met pre-signing Then, you can verify that although these provisions are preclusive, best price

was satisfied Or, be able to show Revlon met post-signing However:

They may potentially be considered “Unreasonable” under Revlon’s second prong

o Preclusive, potentiallyo Deal protection Provisions Outside of Revlon Zone:

Omnicare v. NCS Health: F: Deal had shareholder agreement that guaranteed controlling shareholders would vote for the transaction, and

that even if the board disagreed with transaction, they would present it to the shareholders. This guaranteed its approval.

R 1. Deal protection measures are evaluated under Unocal analysis

o Fiduciary out Clause: Permits the board to exit a transaction of superior offer comes along in order to fulfill

its fiduciary dutyo In Absence:

Cannot lock up board by contract, limiting board from discharging its fiduciary duty Board must have the ability to exercise its fiduciary duty meaningfully

Does not necessarily mean a fiduciary out clause is required Here:

o 1. Did not meet Unocal analysis Reasonable perception of threat was Threat of deal falling through Was preclusive and coercive

Coerced shareholders because no other option, and management alternative was only option

Precluded other offers because this was guaranteed approval Vote was only thing that could be voted for based on agreement

o Presentation Clause Required that shareholders be able to vote on merger even if Board disagreed

o Controlling Shareholder agreement Controlling shareholders agreed to vote for it, therefore guaranteeing it In this instance, the board could not exercise its fiduciary duties to defend against a

takeover to protect shareholders o Breakup Fees:

Brazen v. Bell Atlantic: Liquidated damages are valid, and not preclusive or coercive if:

o 1. Uncertain Incapable of calculation and

o 2. Reasonable

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Potential loss of merger does not occur Difficulty in calculating loss

o May not be penal Overall:

Penal liquidated damages can be preclusive and coercive under Omnicare ,Unocal, and Revlono Could arguably prevent board from exercising their fiduciary duties meaningfully if it affects

their decision, Unreasonable and coercive to shareholders who see high fee, etc… F. State Anti-Takeover Statues:

o 4 Types: 1. Control Share Acquisition Statutes

Absent board approval or existing shareholder approval, certain shareholders cannot vote their shares Removes voting ability of shares

2. Business Combination Statutes DGCL §203 Prohibits combinations of certain threshold shareholders and the company for certain amount of time

3. Fair Price Statute Combination of certain shareholder and firm must be with fair price to the shareholders of the target

4. Redemption/Appraisal Gives shareholders a right to put their shares to the company for certain value if certain stock

acquisitions are triggered o DGCL §203:

Combinations between shareholders of target of 15% and target are prohibited for 3 years 3 Exceptions:

o 1. Board of Director Approval pre-transaction o 2. Transaction results in ownership of 85%o 3. Board of Director approves and 2/3 shareholder approval (not including interested party)

Purpose: Encourages negotiation pre-transaction Deters coercive/hostile bids Decreases speed, giving target time to negotiate and leverage itself Raises prices

Unocal and §203: As §203 is an anti-takeover provision, its action by the Board may be seen under the Unocal test Also gets enhanced scrutiny if the board decides not to approve something, for instance

BNS v. Koppers: 1. §203 is not preempted by the Williams Act:

o §203 still gives a “meaningful opportunity of success” as there are opportunities to successfully make a tender offer under it

2. §203 does not breach Dormant Commerce Clause o It is not discriminatory, and consistently regulates Delaware corporations, protecting

shareholders which is a state concern G. Combinations of Tender Offers and Proxy Contests:

o Generally: Courts, when dealing with shareholder voting ability and Proxy battle, use heightened scrutiny

o Blasius Indus. V. Atlas Corporation: F: Proxy contest began for ∆ corporation. The acquirer sought a shareholder meeting to expand the size of the

board and to add new directors to it. The ∆ board decided to increase its own board, and filled it with 2 directors it desired. Less then a majority of the board seats available under the charter were left, leaving the shareholder meaning useless.

R: When taking an action that restrains the action of the shareholders to vote:

o Inherent conflict exists Shareholders ability is to vote for directors Entrenchment concern is clear

o Action designed to principally impede the shareholder vote requires that the Board of Directors bear burden to demonstrate compelling justification”

Framework: o Blasius becomes an additional prong when Unocal standard for defensive measures applies

1. Was there reasonable interpreted threat? 2. Was reaction proportional?

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3. If primary purpose of action to interfere with vote, was there compelling justification?

o Hilton Hotels v. ITT: F: In response to a falied tender offer, acquirer began proxy contest. Immediately prior to the proxy contest,

the board elected to change the board structure to a staggered board, leading to a meaningless shareholer vote. R:

2 Types of Power may yield 2 types of analysis: o Power over the assets of the corporation:

Unocal or Business Judgment rule analysiso Power over the relationship between the board and shareholders

Blasius analysis When an acquirer launches a tender offer and proxy Both standards are triggered Timing of Board Action

o Even if an act of the board is legal, if the primary purpose is to impede shareholder vote in light of a proxy battle, it is prohibited

o Look at timing Immediacy before shareholder vote

Effect: Attempt proxy contest, rather then tender offer Blasius standard is difficult to apply

o Seek out: Non-classified board of directors Low threshold for shareholder meeting Lack of anti-takeover statute

If so, proxy contest may be suitable to get rid of board

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