PARTNERSHIPS, CORPORATIONS AND THE VARIANTS PROF. BRUCE MCCANN SPRING SEMESTER LECTURE 5 TAKEOVERS PP Business Organizations Lectures

Directors and Tender Offers Lec. 5 Sem 2, 2011 Corps Prof. McCann The “Enhanced Business Judgment Rule”  Directors must determine if takeover proposal is in the best interests of the corporation and its shareholders.  If they act to repel the takeover, their decision are shielded by the BJR if  Directors first establish that they had reasonable grounds for believing that the takeover posed a danger to corporate policy and effectiveness.  Burden is satisfied by showing “good faith” and “reasonable investigation”

Unocal Lec. 5 Sem 2, 2011 Corps Prof. McCann Is offer in the best interests of the corporation? If contend it is not, the board must show:  Offer is threat to corporate policy or effectiveness  Via evidence of investigation  The defensive response is “proportional” to the threat.

Revlon Lec. 5 Sem 2, 2011 Corps Prof. McCann Once board takes steps to sell the corporation (or where sale inevitable) duty of board is to maximize the price. Defensive measures are “moot”. Triggered at lease two ways:  When corporation initiates active bidding process to sell itself or  When a corporation seeks to reorganize in such a way that it involves a clear break-up of the company

Paramount v Time Lec. 5 Sem 2, 2011 Corps Prof. McCann Even an “all cash” sale can be a threat under Unocal where sale will defeat corporate strategic alliance of potentially greater benefit So long as response does not preclude future offer for the combined alliance it is reasonable. Where Board’s only response to a takeover is defensive and not an abandonment of the corporation’s continued existence, Revlon is not implicated

Paramount v Time Lec. 5 Sem 2, 2011 Corps Prof. McCann Unocal analysis:  1. Did the Paramount offer pose a threat to corporate policy or effectiveness?  Threat was the disruption of the strategic plan and risk shareholders would not be able to learn of greater potential of the Warner merger  Board’s determination of whether threat exists in an all cash deal may go beyond examining whether offer is below fair value  2. Was the response “proportional”?  Decision to restructure the transaction with Warner was not out of proportion to the threat the Board perceived.  Paramount retained the freedom to take over the new company

Paramount v Time Lec. 5 Sem 2, 2011 Corps Prof. McCann Directors are obligated to chart a course for the corporation without regard to a “fixed investment horizon.” Board is not under a per se duty to maximize shareholder value in the short term.

Paramount v. QVC Lec. 5 Sem 2, 2011 Corps Prof. McCann Directors face enhanced scrutiny where they approve of a transaction resulting in a sale of control while simultaneously adopting defensive measures to defeat another suitor.

Stalking Horse Lec. 6 Sem 2, pp Corps Prof. McCann The initial bidder with whom the debtor negotiates a purchase agreement is called the "stalking horse" bidder. The term is an old hunting term referring to either a real horse or an image of a horse (typically some type of screen) behind which a hunter would hide to conceal himself from, and get closer to, his prey.

DGCL Section Mergers Lec. 6 Sem 2, pp Corps Prof. McCann Board of each corporation must first adopt resolution approving merger agreement. Agreement shall set forth terms of the merger, mode of bringing into effect, manner of converting shares. The agreement shall then be submitted to the shareholders of each corporation for vote on no less than 20 days notice. Merger is not effective until requisite number of shares approve it.

Omnicare Refinements to Unocal Lec. 6 Sem 2, pp Corps Prof. McCann Where defensive measures are invoked to protect a merger agreement, Unocal proportionality test is applied as follows: 1.Court must first determine if the measures are preclusive or coercive. If either, measures are illegal. 2. If measures pass that threshold test, then the Board must establish their measures were within a “range of reasonable responses.”

“Force The Vote” Provisions Lec. 6 Sem 2, pp Corps Prof. McCann Refers to board commitment to suitor that the board will submit the proposed transaction to the shareholders for a vote even if the board does not recommend that the shareholders approve the transaction. Such provisions now expressly permitted under Delaware law and the Model Act Why bother? Because often the merger agreement is signed simultaneously with voting agreements binding the majority of shares to vote for the transaction if it is put to a vote. The suitor knows the transaction will be approved even if, under a “fiduciary out,” the board must withdraw its approval.

Break Up Fee Lec. 6 Sem 2, pp Corps Prof. McCann Also known as a “Termination Fee”, it is a fee commonly paid to a prospective purchaser if a contemplated transaction is not consummated for reasons specified in the purchase agreement, including the seller’s acceptance of a competing bid. It is intended both to reimburse a "stalking horse" bidder for costs incurred in connection with due diligence and to compensate for the time, resources, effort and lost opportunity costs and risks incurred by a disappointed purchaser.