1. Section 203 of the DGCL Deemed Ownership April 8, 2016

2. | 2  Generally prohibits “business combinations” with an “interested stockholder” (generally a holder of 15% or more of a corporation’s voting stock) for a period of three years following the time at which the stockholder became an interested stockholder, unless:  prior to the time the interested stockholder became such, the board of directors approved the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.  after the time the interested stockholder became such, the business combination is approved by the board and by stockholders at a meeting by 2/3 vote of the voting stock which is not owned by an interested stockholder. Section 203

3. | 3  A “business combination” is broadly defined to include:  mergers and consolidations with or caused by an interested stockholder;  transactions resulting in the issuance of stock of the corporation to the interested stockholder or any increase in the proportionate share of any class or series of stock owned by such interested stockholder;  dispositions of 10% or more of a corporation’s assets to or with an interested stockholder; or  the receipt by the interested stockholder of the benefit of loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.  Importantly, transactions that do not involve the interested stockholder, such as a sale of the corporation to a third party where the interested stockholder does not receive a benefit that is different from the other stockholders, are not business combinations and, thus, are not subject to the restrictions of Section 203. Section 203

4. | 4  Interested stockholder  The direct or indirect owner of 15% or more of the voting stock of a corporation (as well as any affiliate or associate of such an owner).  An affiliate or associate of a corporation who was, within the prior three years, the owner of 15% or more of the corporation’s voting stock.  Determining ownership. For purposes of calculating ownership under Section 203, a person is considered to be the owner of stock:  that it beneficially owns;  that it has the right to acquire or vote; or  with respect to which it has an agreement, arrangement or understanding for the purposes of acquiring, holding, voting or disposing of such stock. Section 203

5. | 5 Consider:  What is the nature of any contingency with respect to the agreement or understanding, i.e., contingent on target board approval? (Siegman I and II)  Is the agreement an accommodation to target, negotiated primarily by target and its agents? (Matador)  Does an agreement or understanding create substantial economic incentives with respect to shares such that one party would be unlikely to do anything other than to vote its shares consistent with the other party’s interests? (Chesapeake) What constitutes an agreement, arrangement or understanding for purposes of acquiring, holding, voting or disposing of stock?

6. | 6  The action arose out of a cash-out merger transaction through which Smith & Nephew, Inc. (“S&N”) acquired 100% of the outstanding common stock of ArthroCare Corporation (“ArthroCare”).  One Equity Partners LLC (“One Equity”) a subsidiary of JPMorgan Chase & Co. (“JPM”) owned more than 15% of the outstanding voting stock of ArthroCare before the merger with S&N.  Plaintiffs alleged that S&N entered into an “agreement, arrangement or understanding” with JPM for the purpose of acquiring all outstanding shares of ArthroCare’s voting stock when it: (a) hired JPM as its financial advisor for the acquisition and (b) agreed that JPM’s banking subsidiary would underwrite the term loan, the proceeds, of which would be used for the acquisition.  Plaintiffs claimed that by virtue of this “agreement, arrangement or understanding” with JPM, an affiliate of One Equity, S&N became an “Owner” of One Equity’s 15.2% stake in ArthroCare’s voting stock and thus an “Interested Stockholder” under Section 203. In re ArthoCare Corporation S’holder Litig., C. A. No. 93130VCL (Del. Ch. Mar. 21, 2014) (TRANSCRIPT) and (Nov. 6, 2014) (TRANSCRIPT)

7. | 7  Plaintiffs’ alternative Section 203 theory: Before the ArthroCare board approved the merger agreement, One Equity agreed to enter into a voting agreement with S&N (though it didn’t execute the agreement until later—after the S&N Board had approved the acquisition) whereby it “irrevocably and unconditionally” agreed to vote its ArthroCare stock in favor of the merger with S&N. Plaintiffs claimed that this agreement to enter into the voting agreement constituted an “agreement, arrangement or understanding” whereby S&N became the “Owner” of One Equity’s position in ArthroCare and thus an “Interested Stockholder” under Section 203.  Plaintiffs argued that because the ArthroCare board did not approve these alleged “agreements, arrangements or understandings” or approve the merger with S&N before S&N became an Interested Stockholder, the merger required the approval of two-thirds of all outstanding shares other than the shares owned by S&N as a result of its agreements, arrangements and understandings with JPM and/or One Equity. The merger did not receive such two-thirds vote. In re ArthoCare (continued)

8. | 8  The parties ultimately settled, with S&N paying $12 million on behalf of all defendants. At the settlement hearing, the Court characterized the Section 203 claim as “seemingly quite strong,” but noted:  “Importantly, however, I do not think this claim would likely have resulted in money for the class. It probably would have resulted in relief in terms of the voting requirement or in the [3 year] moratorium that applies under 203.”  It is not clear from the transcript whether the Court was referring to one or both of the plaintiffs’ 203 theories when it referred to the strength of the Section 203 claim. In re ArthoCare (continued)

9. | 9  PE Firm SH is 18% stockholder of Company A. PE Firm SH went above 15% as a result of Company A’s repurchases of stock.  PE Firm Buyer, who does not own any shares of Company A, partners with PE Firm SH and submits joint proposal for the purchase of Company A. The PE Firms will form a newco to merge with Company A and cash out the other stockholders.  Parties negotiate merger agreement with Company A and board approval is obtained at the end of the process. ***  Did PE Firm Buyer have an “agreement, arrangement or understanding” with PE Firm SH with respect to voting or acquiring stock of Company A such that PE Firm Buyer became an interested stockholder for purposes of Section 203? Fact Pattern #1

10. | 10  CEO is an approved interested stockholder (17%) of Company B.  PE Firm wants to make an offer for Company B.  PE Firm believes from casual conversations with CEO of Company B that she would be receptive to participating in such a buyout.  CEO’s willingness to roll her shares is critical to PE Firm. ***  Can PE Firm have discussions with CEO to formulate joint offer conditioned on receipt of Board approval or would PE Firm be attributed CEO’s ownership for purposes of Section 203?  Alternative ways to submit an offer? Fact Pattern #2

11. | 11  Company C has two 10% SHs who are members of management.  Company C runs a full auction and PE Firm Buyer emerges as the highest bidder.  PE Firm Buyer has requested that the two 10% SHs enter into a voting agreement in support of the transaction.  The voting agreement will not be executed until after the Board of Company C has approved the merger agreement and the related agreements. The voting agreement is negotiated after Company C and the PE Firms Buyer have reached agreement on price and material terms. ***  Did the discussions among the two 10% stockholders and PE Firm Buyer rise to the level of an agreement, arrangement or understanding prior to Company C board approval? Fact Pattern #3

12. | 12  Focus on Section 203 early and throughout process.  Consider obtaining/providing board approval for Section 203 purposes before transaction is fully negotiated if circumstances warrant.  Structure initial proposal to avoid or postpone Section 203 issues. Takeaways

13. | 13 Case Summaries

14. | 14  Siegman I: In connection with Sony’s acquisition of Columbia, Sony entered into an option agreement with Coca-Cola, Columbia’s 49% stockholder, for the purpose of acquiring Coca-Cola’s stock of Columbia. The option agreement was contingent on Columbia and Coca-Cola board approval.  In denying a request to preliminarily enjoin the transaction, the Court of Chancery found, if the Columbia board had not approved the option agreement before it was executed, the entry into the option agreement likely would have caused Sony to become an interested stockholder” notwithstanding the contingent nature of the agreement.  The Court noted that nothing in Section 203 “limits the Act to non-contingent contracts.”  Siegman II: Over three years later, on summary judgment motions, the Court found that there were material issues of fact as to when Sony became an interested stockholder. In particular, the Court considered whether Sony became an interested stockholder of Columbia the day before the Columbia board approved the merger agreement.  Defendants argued that the language in the option agreement stating that it was contingent upon approval of the Columbia board was not determinative, but was “strong evidence” that “no ‘agreement, arrangement or understanding’ came into being until the contingencies were removed” unless the facts would demonstrate that the language was a “sham or mere window dressing”  The Court stated that “the critical factual issue here... is whether the agreement was truly contingent.” Siegman v. Columbia Pictures Entertainment, Inc., 576 A.2d 625 (Del. Ch. 1989) (“Siegman I”) and 1993 WL 10869 (Del. Ch. 1993) (“Siegman II”)

15. | 15  In connection with ACS’s acquisition of BRC, Esping, a 20% stockholder of BRC, entered into a stock tender agreement for the purpose of selling her shares to ACS in the merger. The stock tender agreement was requested by ACS, but was negotiated solely by BRC and its agents.  The Court determined that such a stock tender agreement was not an agreement, arrangement or understanding between ACS and Esping prior to the time that the BRC board approved the merger. Instead, the agreement was only an agreement between BRC and Esping.  “In the circumstances of this case, it would make a mockery of Section 203 to enjoin a transaction negotiated by the BRC board in which Mrs. Espings’s agreement to tender was given as an accommodation to the BRC board in order to satisfy one of ACS’ demands on it.” Matador Capital Management Corp. v. BRC Holdings, Inc., 729 A.2d 280 (Del. Ch. 1998)

16. | 16  As part of a strategy to acquire Shorewood Packaging Corporation (“Shorewood”), Chesapeake Corporation (“Chesapeake”) entered into a stock purchase agreement with Ariel Capital Management (“Ariel”), a firm that owned more than a 20% interest in Shorewood, pursuant to which Chesapeake agreed (i) to purchase 14.9% of Shorewood’s stock from Ariel and (ii) to pay Ariel an additional amount if Chesapeake or another bidder acquired Shorewood at a higher price than Chesapeake had paid Ariel for its shares.  Shorewood argued that the second prong of the agreement distorted Ariel’s economic incentives with respect to the shares it retained, incentivizing it to support a change-in-control transaction, with Chesapeake or a third party, even where it believed the company was worth more under management’s current strategic plan. Shorewood argued these economic incentives constituted an “agreement, arrangement or understanding for the purpose of … voting” the shares retained by Ariel, such that Chesapeake should be deemed to own Ariel’s other shares for purposes of Section 203 and was thus an “interested stockholder.” Chesapeake Corp. v. Shore, 771 A.2d 293 (Del. Ch. 2000)

17. | 17  The Court acknowledged that the arrangement could create incentives but that Ariel’s interests would not be aligned with Chesapeake’s in all instances:  “Given the broad language of the statute, it is plausible that an agreement could create such substantial economic incentives for the seller with respect to purchased shares that the agreement could also, as a practical matter, constitute an ‘agreement, arrangement or understanding for the purpose of... Voting’ other shares still held by the seller. But for that to be the case, there should be persuasive evidence showing that the agreement essentially renders it economically irrational for the seller to, in almost all likely circumstances, do anything other than vote his remaining shares in lockstep with the buyer.”  The Court found that Ariel’s agreement with Chesapeake did not approach this level of incentivization, noting that it did not “render [Ariel’s] legal right to vote its remaining shares a pretext.” Chesapeake (continued)

18. | 18  In making this finding, the Court noted that not only does Ariel have no contractual duty to vote the retained shares a particular way as a result of the agreement with Chesapeake but:  “In the most likely scenarios, Ariel will vote the Non–Purchased Shares free of any influence by the Agreement. And in no case will it ever have an incentive to prefer a lower Chesapeake bid over a more lucrative [third party bid]—including one proposed by Shorewood itself. Coupled with the not insignificant reality that Ariel has the legal authority to vote the Non– Purchased Shares in any manner it so chooses, these facts undercut the defendants’ claim that Chesapeake and Ariel have an understanding ‘for the purpose of’ voting the non-Purchased Shares.” Chesapeake (continued)

19. | 19 Melissa A. DiVincenzo PARTNER Delaware Corporate Counseling Group (302) 351-9623 T mdivincenzo@mnat.com Melissa is a partner in the Delaware Corporate Counseling Group. She provides advice on corporate governance matters and the Delaware aspects of various corporate transactions, including initial public offerings, mergers, asset sales, domestications and financing transactions. Melissa’s work involves guiding Delaware corporations on the requirements of the Delaware General Corporation Law, counseling boards of directors and board committees with respect to fiduciary duties, and providing formal legal opinions on issues of Delaware law. Speaker

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