 Legal Due Diligence

 M&A Due Diligence: Buyer or seller aims to evaluate and put value on target business. M&A due
diligence broad in scope but we are concerned only with legal due diligence.
 This usually pertains to following documents: Organization, subsidiaries, shareholder, taxes,
insurance, litigation, intellectual property, antitrust laws.
 Access restricted due to confidentiality concerns; Buyers may limit scope to reduce expenses;
sometimes due diligence conducted in stages where later may increase.
 In general, disclosure of attorney-client communications to third party waives privilege BUT in M&A,
buyers may deem it necessary to review privileged information. (Hewlet Packard Case). Note Privileged:
communication between client and counsel, intended it be confidential, made to obtain legal advice.
 M&A Agreements (Preliminary Agreement)
 Confidentiality Agreement: This is usually first signed; provides rules which parties agree to abide by.
This allows sharing of information and confidentiality. Usually target drafts this. Typical agreement has
the following:
 (1) Definition of Confidential Information: such info may be written or oral (Contracts, interviews).
 (2) Use of Confidential Information: Note: because rare for lawyers to agree to be bound by
confidentiality agreements potential buyers may agree to be responsible for them.
 (3) Protecting Against Solicitation of Employees: Sellers should be aware of state laws that prohibit
non-competition agreements.
 (4) Standstill Provisions: If target public company then there can be a standstill agreement which
restricts buyer from purchasing target stock or initiating any other business combination without
target board’s approval. Note: Standstill often includes a term DADW (Don’t ask, don’t waive)
restriction: This prohibits buyer from making offer for target without expressly being invited to do
so and from privately or publicly asking for a waiver of standstill. Court may enforce DADW if it
enhances leverage target’s leverage and not if it views as prematurely cutting off bidding process.
Note: Court may imply a standstill agreement as it did in Vulcan Materials Co: Here there was
provision that stated using confidential information for ‘possible business transaction’ Court looking
at external evidence noted this was for friendly and not hostile transaction.
 The Letter of Intent: Usually prepared by buyer (Known also as Memorandum of Understanding). LOI
outlines key terms upon which parties intend to enter into agreements should they go forward with
acquisition. Typically this includes: Proposed structure of deal, price, and form of consideration. May
include legal terms such as the scope of seller’s representations and warranties or indemnification
obligations. MOST LOI’s state that they do not create a binding obligation.
 Note: LOI not necessary and parties can directly enter into binding agreements. LOI done to establish
whether parties have rough agreement on material terms of deal before they spend time, effort and
money. NOTE: LOI’s may contain exclusivity agreement whereby parties agree to negotiate exclusively
for certain time. NOTE: Seller has leverage in negotiation because many potential buyers. Note:
Provisions intended by parties to be non-binding may later be found by court to be binding. Note:
Typically LOI’s contain: identification of key representations, warranties, indemnities, form of
consideration, and any termination fee.
 Key Issue: Whether LOI binding: United Acquisition Corp v Banque Paribas: Four factor test: (1)
Does document contain an express statement of intent to be bound by written agreement? (2) Has
one party partially performed and has other party accepted performance? (3) Are there issues left
to be negotiated? (4) Does the agreement involve complex issues in which definitive contracts are
the norm? Most imp factor: Language they included in agreement (whether it indicates intent of
binding).
 Merger Mechanics
 Five ways of acquiring control of corp: Merger, purchase of all or substantially all of target’s assets; proxy
contest; tender offer; negotiated or open stock market purchases. Note: Statutory merger (first two)
require approval by target’s board. Non-statutory (last three) do not require approval by board.
 Merger: This occurs when articles of merger (document) filed with officials. Must be approved by board
and shareholders of each corporation. Disadvantage: Accounting and legal expenses due to shareholder
vote required. Note: Consolidation: Here two corp’s merge but none of original corp survives. Note:
 Compulsory Share Exchange: Acquiring corp buys all shares of target, unlike tender offer this is binding
on every shareholder (have to sell). (MBCA 11.03). This must be approved by board and shareholders of
both corporations. There is exception to this (MBCA S. 11.04) Target not entitled to vote IF: Articles of
incorporation will not change, no change in stockholder’s rights, number of shares to be issued by
acquirer does not exceed 20% of acquirer’s outstanding shares. (11.04(g)).
 Short-Form Merger: Parent merges with a majority controlled subsidiary. No vote required. DGCL S.
253 specifies conditions that must be met: (1) Parent must have at least 90% of sub stock that
would be entitled to vote on merger; (2) Parent must file statement of how much stock it owns and
a certificate of merger with state. As no shareholder vote no need to prepare and solicit proxies, no
shareholder meeting. Note: Minority will have appraisal rights to allow them to obtain fair value.
 Sale of All or Substantially All Assets: Transferring control of assets complex as document of transfer
must be prepared for every asset sold. Proceeds of sale are usually distributed to dividend or target
dissolved.
 Tender Offer: Buyer acquires controlling share from shareholders directly. Need not be hostile: Can be
executed faster than a merger as no need for a vote. Partial Tender Offers: Problem with this is that
leaves minority in place. This may result in litigation over the fiduciary duties of controlling shareholders.
Acquirers often solve this by a freeze-out merger in which minority shareholders are squeezed out. (2)
Two-Tier Tender Offers: Variant, acquirer first makes offer for controlling block, at same time acquirer
discloses its intention to effect a clean up merger if successful. Note: Still fid duties (3) Three step
acquisition: (a) Acquirer opens with large block purchase; (b) Then makes friendly tender offer; (c) Then
followed by a freeze-out merger. Intended to speed up process and be non-hostile. (4) Exchange Offers:
Simply tender offer in which all or part of consideration is paid in form of acquiring company stock or
debt securities rather than cash. (5) Creeping Tender Offers: Acquirer buys shares on open market or
negotiated block purchases until it has a controlling interest in firm. Then wages a proxy contest. May
follow up with a freeze-out merger.
 Negotiated or Open Market Stock Purchases: S. 13(D) SEC requires that any person who acquires more
than 5% must file a disclosure statement on Sch 13D. Note S. 16(b): Short swing profit rule: Once crosses
10%, its profits on subsequent sales within 6 months to be given to target corp.
 Proxy Contest: Acquirer nominates directors to be elected at annual meeting. This is the most
expensive and uncertain, thus least used.
 Merger: Under MBCA requires four steps: (1) Plan of merger drafted; (2) Board approves; (3)
Shareholders approve; (4) Articles of Merger filed. Force the vote provision: Board may be contractually
bound to put merger to shareholder vote even if later changes mind. Note: Omnicare v NCS: Where
fiduciary duties contrary then not valid. For shareholder vote: Majority, MBCA went further: If quorum
present merger will be approved. Key: Options that limit shareholder voting: Triangular mergers, tender
offers, asset purchases. Note: Stock exchange listing standards may apply which require shareholder
vote: If acquirer uses own stock in an acquisition AND the effect is to increase number of outstanding
acquirer shares by 20% or more. HOWEVER: shareholder vote not required if public offering for cash.
 Triangular Merger: Wholly owned subsidiary of acquirer is merged with target. Here only target’s
shareholders and subsidiary’s shareholder gets to vote. Usually acquiring corp sets up shell
subsidiary. Shell capitalized with consideration to be paid to target. Shell then merged. In forward
triangular merger, shell is surviving entity, in a reverse the target survives. NOTE: If merger then
liability also assumed. Here however unless P pierces corporate veil, liability is limited.
 Note: MBCA S. 11.04: Requires group voting on merger in certain cases: (1) Plan of merger
contemplates converting that class into other securities. As per DGCL S. 242(b)(2): Group voting is
triggered only in the event of an amendment to the COI by which a class or series of stock affected
adversely. Example: Corp’s board proposed amendment that would cut preferred stock dividend from
8% to 5%.
 S. 11.07(a): Transferring assets and liabilities to surviving corp. S. 11.02(c)(3): Consideration
allowed.
 Compulsory Share Exchange: This is binding on all shareholders (S. 11.03 MBCA); Must be approved by
board, and subject to limited exception, shareholders.
  Two-Step Transactions: Disadvantage of one-step merger is that requires shareholder approval; Here
buyer makes cash tender offer for all target stock followed by squeeze-out of minority at same price.
This is speedy. S. 251(h) permits this.
 Purchase Agreement
 No purchase agreement that is ‘standard’. Despite this, basic framework of typical acquisition
agreement has become standardized.
 A. Price and Form of Consideration: Ultimate price for target likely to consist of a fixed price payable at
closing AND possible contingent adjustment to that price post-closing based on valuation of target. Two
mechanisms can be used to make price contingent on post closing measures of a seller’s financial
conditions are price adjustments (PPA) and earnouts. Calculating purchase price in non-cash transactions:
A ratio must be established. Because acquirer’s stock usually falls target may insist on a floating
exchange rate, perhaps with collar that negates deal if seller’s stock rises or falls beyond certain point.
 B. Representations and Warranties: This is viewed as most important and substantial space devoted to
them. Rep: This is made to induce someone to act; Warranty: Seller’s promise that the thing sold is as
represented. Seller will often seek to impose limits on its reps and warranties: (1) Specific Time Periods:
Target can limit rep and warranty to cover only certain time period; (2) Disclosure letter: Seller can try to
include exceptions to rep and warranty in disclosure letter. For example: Seller can limit its exposure
under litigation rep and warranty by listing all litigation claims against company as exceptions in its
related Disclosure Letter. (3) SEC Reports: Seller can limit rep and warranty by reference to any
information (such as reports, schedules, agreements or other documents) filed with SEC. (4) Data Room:
Seller can try to limit a rep and warranty by excepting from it any information provided to buyer in Data
room.
 (1) Knowledge and Materiality Qualifiers: Seller can limit reps and warranties through this as well.
Knowledge Qualifier: ‘To the best of seller’s knowledge there has not been any proceeding against
company’. Materiality Qualifier: ‘There is no material proceeding that has been or is pending against
the company.
 (2) Common Reps and Warranties: Target is properly incorporated, COI and bylaws are valid.
Company’s financial statements fairly represent its financial condition. Note: Buyer may require rep
of any pending litigation.
 C. Covenants: These are series of promises about how parties will behave in the future. Between signing
and closing of transaction, covenants serve to regulate how seller will run company. Usually target is
prohibited from doing anything other than in engaging in ordinary course transactions consistent with
past practices. Certain acts will be expressly forbidden such as changes to: articles, bylaws, dividends.
Buyer can also use covenant to require seller to notify it if any rep or warranty no longer accurate.
 A second category of covenants relates to actions post-closing: Covenants not to compete with
target; others include cooperating after closing with respect to regulatory matters.
 Breach of covenant, like breach of rep and warranty, may provide basis to other party for invoking
remedies under purchase agreement.
 D. Conditions: After signing purchase agreement, parties obligated to honor their covenants and
proceed to closing unless one party breaches a condition. Breach of this allows other party to walk away
without penalty. Bringdown clause: Requires reps and warranties to be true as of date of signing and
closing. Note: With conditions there may be material qualifiers.
 E. Indemnification: Allows parties to expand or limit remedies that would be available at law. Generally
Indemnification provisions provide that Indemnitor (person providing indemnification) will reimburse
Indemnitee for losses occurred as a result of Indemnitor’s conduct in connection with transaction. Note:
Buyer will be more focused on this. Note: In many purchase agreements, the indemnification obligation
begins on the closing date of the transaction. Types of Indemnification provisions: (1) Breaches of reps
and warranties. Check book. Limitations on Indemnification Obligations
 (1) Survival: When target is public company its reps and warranties are extinguished at closing. In
contrast, reps and warranties made by seller of private company usually provide buyer with a basis
for post-closing indemnification claims. Unless parties agree to a survival clause extending reps and
warranties, the breaching parties cannot be sued post-closing. Survival clause will typically specify a
limited time period during which reps and warranties remain binding post closing.
  (2) Caps and Baskets: Indemnification obligations can be limited to a cap. Small claims can add up
and so agreement can be of a basket as well i.e. claims be made only to certain aggregate amount
(250k).
 (3) Sandbagging: This refers to right of buyer to seek indemnification for a breach of seller’s reps
and warranties even though buyer had knowledge of misrepresentation before closing. US case law
on sandbagging varies across jurisdictions. There may also be anti-sandbagging provision that
expressly limits buyers remedies for breach if they are aware of it before closing.
 Note: Due to multiple shareholders, buyers often demand that a portion of purchase price be
withheld from purchase price transferred to seller at closing in some form. (A Hold Back).
 F. Closing Date: This may be adjusted or be made dependent. G. Termination: Under certain
circumstances, one party may be permitted to terminate agreement without penalty: A party materially
breaches contract for example. Note: There may be termination fees if one party does not go ahead.
There may be further conditions for these fees to be applicable: Target accepting higher bid.
 Clauses
 Material Adverse Change Clause: MAC provision gives buyer option not to go forward should a MAC
occur. MAC can be market wide (changes in macroeconomy, regulation); specific: Design defect in
product or loss of key consumer. Courts have interpreted MACs narrowly.
 Hexicon Specialty Chemicals v Huntsman: In 2007 two chemical companies entered into merger
agreement (Hexicon to buy Huntsman). As parties negotiated seller reported disappointing
quarterly results, missing numbers it projected at time deal signed. Buyer claimed MAC. Held: Seller
has not suffered MAC. (A) Carveout inapplicable: Here agreement (carveouts) stated that effect or
changes to general condition of financial market was not MAC unless there was disproportionate
effect to the firm. Since there was no catastrophe Huntsman’s performance being disproportionate
to the chemical industry is not enough. (B) Huntsman has not suffered MAE: P must show that poor
results are long term rather than short term hiccup (years rather than months) which will last into
future (difficult). Burden of proof on buyer. P’s argument: Poor earnings performance; increase in
net debt; underperformance of Textile and Pigments lines of business. (1) Mere disappointing
results not enough. P then argues D failed up to projections. Merger agreement however disclaims
any rep or warranty as to forecasts. P could have negotiated for this. (2) Parties thought net debt
would decrease from 4.1 to 2.9 bn but it did not. P according to documents estimated it to be 4.1
billion. P cannot claim that a 5% increase in net debt from its expectations should excuse it from its
obligations. (3) Under merger agreement, an MAE is to be determined based on examination of
huntsman as a whole, not its divisions. Additionally, troubles of division seem to be short term: cyclic
business effect due to financial conditions Also, court noted that P was well aware of cyclic nature of
business.
 Bringdown Clause: Require Rep and Warranties to be true as of date of signing and closing.
 When reps and warranties that have been negotiated include a materiality qualifier, these bringdown
clauses are increasingly subject to a materiality scrape. Example:
 (a) The reps and warranties of seller set forth in agreement shall be correct, without giving effect to
any limitation indicated by ‘material adverse effect’ ‘in all material respects,’ in any material respect,’
‘material’ or ‘materially’, EXCEPT where failures of such reps and warranties to be true would not
reasonably be expected to have a material adverse effect.
 Underlined has effect of requiring all materiality qualifiers to be disregarded for purposes of
bringdown clause. Italicized has the effect that only if problem with rep or warranty rises to level of
MAE would the closing condition excuse performance. Thus: No materiality qualifier IF reps and
warranties lead to MAE.
 Note: In contrast to bulk of reps and warranties subject to materiality scrape, certain of target’s
reps may be regarded as fundamental so that buyer will want the right to refuse to close if they are
inaccurate. Accordingly, the bring-down condition separates such reps by requiring that they be
accurate ‘in all respects other than de minimus inaccuracies’ or ‘in all respects’.
 Williams Companies v Energy Transfer Equity LP: ETE agreed to acquire assets of Williams. Merger was
conditioned upon issuance of an opinion by ETE’s tax counsel that the second step of transaction, transfer
of Williams assets to ETE in exchange for Class E partnership units should be tax free. Agreement also
 contained provision that required parties to ‘use commercially reasonable efforts’ to obtain this opinion
and to use ‘reasonable best efforts to consummate transaction. After agreement, market turned bad
and transaction became undesirable to ETE. Latham which was ETE’s counsel said it could not give
opinion on tax effects. William’s counsel disagreed. P claimed that ETE breached agreement by failing to
use ‘commercially reasonable efforts’ to obtain tax opinion and ‘reasonable best efforts’ to complete
transaction. Held: Latham acted independently and in good faith. ETE did not in any way contribute to
Latham’s inability to issue tax opinion.
 Sale of All or Substantially All Corporate Assets
 Note: If buying corp pays cash in asset acquisition, proceeds of sale will be taxed twice: selling corp will
pay corporate tax on proceeds; shareholders will pay income tax on dividend. Mergers taxed once
though.
 Note: In asset sale purchaser does not take liabilities of selling company unless written assumption of it.
 Note: In merger approval of both shareholders required. Here only vote by selling party required.
 Note: shareholders have appraisal rights in sale of assets but purchasing corp shareholders do not.
 Meaning of ‘Substantially or All’ Assets
 Gimbel v Signal Cos: Here stockholder of Signal wants to prevent sale to Burmah of Signal Oil. Signal
Oil represents only 26% of total assets of Signal. While Signal Oil represents 41% of Signal’s total
net worth, it produces 15% of Signal’s revenue. Quantitively the transaction is sale of ‘all or
substantially all’ assets. Additionally, Signal engaged in wide variety of business which contemplates
sale of independent business branches. Thus qualitatively transaction is not sale of ‘all or
substantially all’.
 Katz v Bregman: Here Plant National Quebec represented 51% of Plant’s assets. It also represents
45% of Plant’s sales revenue and 52% of its pre-tax income. Held: Key factor in determining whether
sale is of ‘substantially or all Corporate assets’ is whether sale is in fact an unusual transaction or
one made in regular course of business of the seller. Quantitively this is significant. Qualitatively
Plant’s business has not been to buy and sell industrial facilities but to manufacture items.
Furthermore, proposal (after sale of National) to embark on manufacture of plastic drums
represents radical departure from making steel drums.
 De Facto Mergers: Transaction planners can structure deals so as to avoid shareholder voting and
appraisal rights. Shareholders may however seek those rights by invoking the De Facto merger doctrine.
As per this doctrine courts will look to outcome of transaction when determining whether to apply
statutory merger law. Example: Triangular Merger: Here buyer’s shareholders do not vote neither will
they get appraisal rights.
 Hariton v Arco Electronics: Delaware SC rejected De Facto merger doctrine. In contrast, Pennsylvania
courts have tried to preserve the doctrine. The legislature however amended state’s corp code thus
eliminating de facto merger doctrine. There still are some states with de facto merger doctrine.
 Note: In triangular merger parent does not inherit liability. Thus P would have to pierce veil.
Additionally, even in sale of assets liability does not pass. P would have to pierce corporate veil.
HOWEVER, even this remedy not available if acquirer effects acquisition by purchasing all or
substantially all of target’s assets. Instead, subject to few exceptions, liability remains on sellers: (1)
Buyer expressly assumes liability; (2) Transaction amounts to a merger; (3) Transaction is
fraudulent and intended to provide escape from liability; (4) Purchasing corporation is a mere
continuation of selling company.
 Philadelphia Electric Co v Hercules: Hercules paid for PICCO’s assets with Hercules stock. Agreement
contained substantial provisions indicating continuation of PICCO’s enterprise by Hercules. Court
imposed successor liability. Note: Key question whether intent on parties to effect a merger.
 In contrast, many cases have found that there was no de facto merger where purchaser paid with
cash rather than stock. Likewise, courts have declined to find de facto merger even in stock for
asset deals where there were no common officers, directors after transaction.
 Tender Offers
 Absent cumulative voting, ownership of 50.1% of voting stock gives right to elect board. News of
acquisition however drives up stock price. Tender offer devised to bypass this and other costs.
 Tender Offer: Public offer to shareholders of target corp; offer may be for all or portion of shares.
 S. 13(d): SEA (William Act): This requires person who acquires ownership of more than 5% of shares to
file Sch 13D within 10 days of such acquisition to SEC. S. 13(d)(3): Any person may include two corps
provided they act as a group for purposes of acquiring shares. Generally, some agreement is necessary
between parties and must be for a purpose ‘acquiring, holding, or disposing’ or even now voting stock.
Proving agreement is a difficult question of fact. Most groups do not file because minimal penalties.
NOTE: After acquiring 5% Acquirer must file in 10 days. Usually in these 10 days acquirer buys up 10% or
even 25%. Note: If acquires more shares (of at least 1%) must amend Sch 13D promptly (no more than
couple days).
 Content of Sch 13D: Item 2: Identity; Intent: (this is heart, most important source of litigation.
Require disclosure of ‘any plans or proposals which reporting persons may have. Usually what
happens is that acquirer buries its true intent in a lengthy statement of everything it might do some
day); Contracting and Understandings: Requires disclosure of contracts, arrangements,
understandings, or relationship with respect to the securities of the issuer. At min requires terms of
agreement among members of a reporting group.
 Target usually resists by S. 13(d) litigation, claiming some form of non-disclosure.
 In the Matter of Cooper Laboratories, SEC Release: Cooper did not file amendment promptly. No
Brightline test for determining when an amendment is ‘prompt’, we will consider factual
circumstances. Although generally understood ‘any delay beyond time the amendment reasonably
could have been filed may not be deemed prompt’.
 Definition of Tender Offer: Not defined in Williams Act for flexibility. Issue arose in connection with two
stock purchasing techniques: Creeping Tender Offer and Street Swap.
 Creeping: Bidder directly purchases sufficient shares on open market to give control to target; after
control effects merger with target to solidify control and eliminate minority.
 Street Swap: Starts with conventional tender that is later withdrawn. Tactic designed to take
advantage of Arbitrageurs who seek a profit by buying target company stock on open market and
later sells it at higher price. They thus take risk of deal not going forward. After withdrawing tender
offer it purchases controlling block of shares directly from arbitrageurs.
 S. 14(d) regulates tender offers generally, contains information about bidder, source of funds, plans.
 Key issue is whether above techniques come within definition of tender offer thus subject to s.
14(d). Courts have looked at eight factors of Welman Test to determine this: (1) Active and
widespread solicitation of shareholders; (2) Solicitation for substantial percentage of stock; (3)
Offer made at premium; (4) Terms of offer are firm rather than negotiable; (5) Offer contingent on
tender of fixed number of shares; (6) Offer for limited time; (7) Offeree pressured to sell; (8) Public
announcements of purchasing stock.
 Note: Rule 14e-5: This prohibits a bidder from making open market or private purchases of target
during pendency of tender offer. This has minimum effect with street swap as difficult to prove
such relationships with arbitrageurs exist.
 When does tender offer commence? This is imp because: (1) Tells bidder when its disclosure obligations
are triggered; (2) Many tender offer rules contain time periods that run from commencement date.
 Rule 14d-2: Two events constitute commencement (whichever occurs first will commence): If bidder
discloses information such as its identity, target’s identity, amount of securities it will buy, price
willing to pay. Exemption if: (1) Communications do not identify the means by which target
shareholders may tender their stock AND (2) All written communications are filed with SEC and
issuer
 Content of Required Disclosure: On day offer commences, bidder must file disclosure document on Sch
TO with SEC. Most info must also be given to target shareholders. Williams Act gives offeror two
options as to how to effect distribution: (1) Long-form publication of offer in newspaper (unpopular
because expensive; (2) Offeror publishes a summary of the proposal in a newspaper advertisement and
mails a more detailed disclosure directly to shareholders. Such disclosures are similar to Sch 13D but
more detailed.
 Procedural Rules:
 Rule 14e-1: Obligates bidder to keep bid open for 20 days;
 14d-11: permits bidder to provide optional subsequent offering period;
  14d-8: In partial tender offers if more than specified number of shares tendered, offeror is to take
up tendered shares on pro rata basis.
 14e-5: Prohibits bidder purchases outside of tender offer. 14d-10(a)(1): All holders rule, requires
that tender offer be open to all security holders. 14d-10(a)(2): Bidder may not make tender offer
unless consideration paid to all securities equal.
 Exchange Offer: This is tender offer in which some or all of consideration is paid in form of stock or debt
securities. S. 5(a) SA 1933 makes it unlawful to sell unregistered security unless exemption applies. Thus
exchange offer requires compliance with both Securities Act registration scheme AND William Act’s
various procedural and disclosure obligations. Note: Thus cash tender offers are faster.
 If tender offer made, William Act mandates target board disclosure statement on Sch 14D-9. 14e-2 also
requires target board to make a recommendation of either to accept or reject or express no opinion or
is unable to take position. Must disclose reasons too.
 Insider Trading: SEC v Texas Gulf Sulphur Co: Anyone who possesses material non-public information
required either to disclose it before trading or abstain from trading. Chrialla v US: Here court said
liability only to be imposed if D was subject to a duty to disclose prior to trading. A duty to disclose only
arises where insider breached a pre-existing fiduciary duty owed to the person with whom they traded.
 Hypo: Law firm hired by A to buy X. Law firm has fiduciary duty to A but not X. Thus if partner in firm
bought shares in X there would be no breach. Rule 14e-3 and misappropriation theory created to
counter this.
 14e-3: Immediate response to Chiarella Prohibits insiders of bidder and target from divulging
confidential information about tender offer to persons that are likely to violate the rule by trading
on it. Note: Does not prohibit bidder from buying target shares. It prohibits tipping of information to
persons who are likely to buy target shares. ALSO this rule prevents a person that possesses material
info relating to tender offer from trading in target company securities IF bidder has commenced or
taken substantial steps to commencement of that bid. Note: Substantial steps include: Voting on
resolution by board; formulation of plan to make tender offer.
 Case Law
 Unocal Corp v Mesa Petroleum: Mesa (owner of 13% of Unocal) commenced two tier cash tender offer
for 37% Unocal shares at 54. At back end of two-tiered tender offer were junk bonds. Board said price
inadequate, board pursued self-tender of own stock for 72 and excluded Mesa from it. Mesa said
discrimination against it violated fid duties. Held: Board may repurchase stock from selected segment to
defeat a perceived threat to corp so long as board’s selection is reasonable in relation to threat and not
motivated primarily out of desire to effectuate perpetuation of control. Key: Defensive measure must
be reasonable in relation to threat posed. Threat may be inadequate price
 Revlon v MacAndrews & Forbes Holdings: In response to unsolicited tender offer by Pantry, Revlon
undertook defensive measures. Board entered into merger agreement with white knight, which had a
lockup arrangement as well as other measures designed to prevent Pantry’s bid. Held: Revlon’s
defensive tactics upheld under traditional Unocal analysis. In relation to lockup arrangement though
court said: Revlon board’s authorization permitting management to negotiate a merger or buyout with
third party was recognition that company was for sale. The duty of the board thus changed from
preservation of Revlon as a viable corporate entity to maximization of company’s value at sale for
stockholder’s benefit.
 Unitrin v American General Corp: Amgen made offer which was a substantial premium to market price.
Board said Amgen offer inadequate and sought to defend itself by implementing a poison pill, an advance-
notice bylaw, and a tender offer to repurchase 5 million, or 20% of its shares. Held: Preclusive or coercive
measures fall within common law definition of draconian and as such are impermissible. A repurchase
program not inherently coercive. Moreover, does not preclude future bids or proxy contests by
stockholders who decline to participate in repurchase. Nonetheless, Chancery court must determine
whether repurchase program would only inhibit Amgen’s ability to wage a proxy fight OR whether it
was in fact preclusive because success would either be mathematically impossible or unattainable. If
lower court concludes that repurchase was not preclusive, one question will remain: Whether the
repurchase program was within a range of reasonableness.
 Non-Pill Defenses to Hostile Acquisitions
 Most common response to hostile takeover bid is litigation, usually raising some violation of tender
offer rules. We consider other defenses:
 (1) Pre Offer Planning: Previously corp’s had predetermined responses to unsolicited offers. Today this is
not advised as canned responses will fail the test many courts use when reviewing consistency of defence
with fid duties to the corporation.
 (2) Early Warning Systems: Counsel advise targets to conduct daily reviews of trading in company’s stock
and review shareholder list.
 (3) Defensive Acquisitions: In olden days, target would acquire other companies to cause antitrust
problems for most likely bidders. Problem: May be unprofitable, which may cause price to fall.
 (4) Stock Repurchases: Such plan reduces number of shares bidder has to buy to achieve control.
 (5) Lock-Ups: An arrangement by which target corp gives favored bidder competitive advantage. Such
provisions usually include large cancellation fee or agreement by target to use takeover defense. Lockup
options: Agreements granting acquirer an option to buy shares or assets of target. Option becomes
exercisable upon acquisition by some third party of a specified percentage of target stock. Stock-lock up
provisions: If exercised before shareholder vote on merger then may vote in favor of merger; If competing
bid prevails, bidder can exercise option and sell additional shares or tender them to successful bidder.
FINALLY: the risk that option will be exercised, thereby driving up number of shares that must be acquired
to obtain control and thus increasing overall acquisition cost, deters competing bids.
 Asset-lock up options: Grants favored bidder option to purchase significant target asset.
 AC Acquisition Corp v Anderson, Clayton & Co: BSG made tender offer for Anderson Clayton at 56 for
any/ all shares. Stated that if it succeeded in acquiring 51% to do a follow up merger at 56. Anderson and
Clayton announced commencement of self-tender offer for 65% of its stock at 60. Company announced
that at closing of tender offer it would sell stock to newly formed Employee Stock Ownership Plan
amounting to 25% of all issued stock. Held: Unocal: (1) Whether there was reasonable ground for
believing that danger to corporate policy or effectiveness existed. This merely requires that corporate
purpose was undertaken, not one personal to directors by defensive action. (2) Whether the defensive
step is reasonable in relation to the threat posed. Here there is an issue. No rational shareholder would
tender shares to BSG because: BSG offer subject to condition that certain shares be tendered, Tendering
shareholders would thereby preclude themselves from getting fat front end of Company Transaction and
risk having the value of their shares fall dramatically. Offer is coercive and thus not subject to question of
whether defense taken is reasonable.
 Barkan v Amsted Industries:
 Paramount Communication, Inc v Time Inc: P launched bid for Time after it negotiated merger with
Warner. Time thwarted bid by transforming its original merger deal into tender offer by Time for Warner,
thereby making it too debt ridden to be an attractive target. Time shareholders and Paramount sought to
enjoin tender offer. Held: Revlon duties not triggered here, thus board acted reasonably in its long term
plan to create business value (rather than to optimize current value under Revlon).
 Two circumstances which implicate Revlon duties: (1) When corp initiates active bidding process
seeking to sell itself or to effect a business reorganization involving clear break-up of company; (2)
Where in response to a bidder’s offer, a target abandons its long-term strategy and seeks an
alternative transaction also involving break up of the company.
 THUS: IF board’s reaction to hostile tender offer is found only to be a defensive response and not
abandonment of the corp’s continued existence Revlon duties are not triggered, though Unocal
applies.
 Here: (1) Time negotiating with Warner about merger did not make break up of corporate entity
inevitable. (2) Change of Time to make tender offer for Warner not a basis to conclude that Time
either abandoned strategic plan or made sale of Time inevitable.
 Unocal: (1): Whether reasonable ground for believing danger to corporate policy or effectiveness:
Yes: Paramount’s offer posed threat to corporate policy; Time shareholder may tender in ignorance
of long term benefits of Warner agreement. (2) Whether restructuring was reasonable in relation to
threat posed: Paramount says tender offer was preclusive because shareholders not given
opportunity to vote. Court: Delaware recognizes that board in charge of managing company. Time’s
 response was not aimed to cram down a management sponsored alternative but rather had goal of
carrying forward a pre-existing transaction. Paramount could still make a tender offer.
 Paramount v QVC: Paramount approved merger with Viacom. Agreement had various defensive
measures: No shop provision (cannot solicit offers), there was a termination fee provision, and a stock
option provision under which Viacom could purchase 19.9% of Paramount stock if merger not
consummated. QVC made higher offer. Viacom also then made similar offer for 80. Paramount approved
this although previous defensive measures were in place. Viacom later raised offer to 85 and QVC to 90.
Paramount then chose Viacom merger as in best interests of Paramount. Held: Although management is
to be exercised by board, two cases where court plays an active role (1) approval of Change of control,
and (2) adoption of defensive measures in response to threat to corporate control.
 In sale of control context, shareholders must maximize shareholder value. D says that Revlon duties
not triggered in absence of break up of corporation. Court: Revlon duties imposed where there is
pending sale of control, REGARDLESS of whether or not there is a break up of the corporation.
Time-Warner merger distinguished because there the stock would be owned by unaffiliated
persons both before and after merger. KEY: The two circumstances states in Time-Warner expressly
state that they are not the only circumstances where Revlon duties apply. MOREOVER< instant case
clearly falls into first scenario where a corp ‘initiates an active bidding process seeking to sell itself
OR to effect a business reorganization involving a clear break up of the company.
 D’s position that both change of control and a break up be required must be rejected.
 Thus defensive measures were inconsistent with board’s fiduciary duties and thus unenforceable (no
shop provision, termination fee, stock-option agreement).
 Defenses Affecting Shareholder Voting Rights
 Blasius Industries v Atlas Corp: Blasius, 9% stockholder, wanted to restructure Atlas management. When
management rejected Blasius proposals he announced a campaign to obtain shareholder consents to
increase Atlas’s board from 7 to 15, max size allowed by Atlas charter and to fill new board with Blasius
nominees. Atlas board preempted Blasius by immediately amending bylaws to add two new seats and
filling these with own candidates. Held: Motivation of board was to delay or prevent shareholders from
placing a majority of new members on board. It is established that board may take steps to deter change
in corporate control when those steps taken in good faith pursuit of corporate interest, and are
reasonable in relation to threat posed. BUT this rule does not apply to interference with shareholder
vote. Even BJR does not apply to shareholder voting issues.
 Kalick v Sandridge: Sandridge board faced a proxy fight. TPG, 7% stakeholder, launched consent
solicitation to destagger 7-member board by amending bylaws, removing directors and to install its
own. Board resisted, they even tried to obtain revocations from stockholders who gave consent. Board
told shareholders that new slate election would lead to change of corporate control which would
trigger the requirement in Sandridge’s note indentures that Sandridge offer to repurchase its existing
debt (Proxy Put). P argues that directors breaching fid duties by failing to approve TPG slate under
which the indentures governing Sandridge’s notes would mean that stockholders could replace board
without triggering proxy put. Held: For board to refuse to grant approval the other directors must: lack
integrity, were corporate looters. This is not shown here. Thus Shareholders must be given chance to
choose.
 Third Point v Ruprecht: To oppose shareholders Sotheby board adopted a rights plan which was two-
tiered in structure. Under this those who report ownership under Sch 13G may acquire up to 20%
interest in Sotheby’s. A person is eligible to file a Sch 13G only if they have ‘not acquires securities with
any purpose of changing or influencing the control of the issuer AND they own less than 20% of issuer’s
securities. All other stockholders including those who report ownership pursuant to Sch 13D are limited
to 10% stake in company before triggering the rights plan or ‘poison pill.’ Third Point filed Sch 13D with
10% stake and Marcato had 7%. Held: Unocal applies: Whether there was a threat and whether
response was reasonable in relation to the threat. Issue: (1) Whether board breached fid duty in
adopting rights plan; (2) Whether board refused fid duty by refusing to grant Third Point a waiver from
rights plan’s 10% trigger.
 In Blasius we noted that board must provide compelling justification when it interferes with
stockholder vote. P did not invoke Blasius because rights plan does not have primary purpose of
 interfering with shareholder voting, Proxy contest remains a viable option. Nonetheless NOTE:
Rights plan was adopted to respond to threat in corporate control and that any effect on
shareholder electoral rights were incidental. Plan was not coercive or preclusive: Shareholders not
forced and still proxy fight.
 Unocal: (1) Directors satisfy first prong by good faith and reasonable investigation which identifies
objectively reasonable threat. (2) Plan was not coercive or preclusive. Next must consider whether
actions fell within range of reasonable responses to threat. A 10% limit is reasonable because
multiple funds can team up to acquire blocks of company’s shares to achieve control. Although
plan is discriminatory against activist shareholders (those wanting control) it is required here. As
such no breach of fid duty.
 For Issue (2): P wants to acquire 20% and have 10% limit waived from it. This is significant
percentage and 20% may give shareholder power to exercise disproportionate control over
corporate decisions. Thus threat is change in corporate control. As for second Unocal prong, rights
plan is not coercive or preclusive. AND the waiver fell within range of reasonableness to address
threat of corp control.
 Poison Pills
 First Generation Pill: Flip-over plans: Issues rights as a pro rata dividend on common stock. Because
issuance of rights does not require shareholder approval a board, without shareholder approval may
adopt it. These rights become triggered on certain events example: (1) Tender offer for more than 30%
stock; (2) Acquisition of 20% or more of stock. NOTE: First Generation Pills were ineffective: Bidders
continually found flaws in the plans.
 Second Generation Pills: Flip-in Plans: This prevents bidder from implanting the Goldsmith strategy. If
triggered, the flip in pill entitles holder of each right – EXCEPT the acquirer and its affiliates or
associates – to buy shares of target issuer’s common stock or other securities at half price. Trigger:
Usually acquisition of some specified percentage of issuer’s common stock.
 Redemption Provisions: Such provisions gives target leverage to demand higher price in return for
redeeming poison pills. (Without redeeming poison pill even if majority of target shareholders accept
tender offer there still may be dilution and it would be difficult for merger).
 Window Redemption Provision: Board retains ability to redeem rights for specified period following
issuance of such rights.
 White Redemption Provision: Target may redeem rights in connection with a transaction approved
by majority of continuing directors.
 NOTE: Combining a poison pill with a classified board shark repellent gives boards an especially
powerful negotiating device. The pill will deter a bidder from buying control block of stock prior to pill
being redeemed. As for classified board, the acquirer must go through two successive proxy contests to
obtain a majority of the board. (If this does not exist then may change board).
 Modern Poison Pills: Recently decline in classified boards which meant that weakening of poison pills
by making it easier for bidders to force their redemption. Poison pills also less used. Large corp’s
continue to be willing to adopt new poison pills if they perceived a takeover threat. This worked
because it allowed pills to be specifically tailored to defeat the bidder at hand.
 Third Generation: Dead-Hand and No-Hand Pills
 Standard poison pill weakness: Subject to redemption at nominal cost by target board. Redemption
thus makes target vulnerable to a combined tender offer and proxy contest: Acquirer could trigger
pill and conduct proxy contest to elect new board which if elected would redeem pill.
 Dead Hand Pill: Deprives newly elected directors the power to redeem the pill. It may also provide
that pill may only be approved by those directors who were in office when pill became exercisable
(Or their approved successors).
 No-Hand Pill: This contains a provision making it non-redeemable for six months after a change in
corporate control. Validity of BOTH these pills cast in doubt by Delaware cases, although no-hand
pills have been upheld in other jurisdictions.
 Unocal and Poison Pills:
 Moran v Household International: Here there was poison pill which was to be triggered if (1) tender
offer for 30% or more shares; (2) 20% of shares acquired by a person. Held: This is a defensive
 mechanism that is allowed. BJR applies here. Plan not coercive or preclusive. Corp can still be
acquired by hostile tender offer. Can also initiate proxy contest. As for validity of no hand pill and
dead-hand pill SC set out in different direction. Court noted no-hand pill is not valid unless it is set
out in the articles of incorporation.
 Air Products and Chemicals v Airgas: AP launched tender offer for Airgas. Airgas had defense pill and
staggered board. Majority shareholders wanted to tender. AP wanted poison pill removed. Note AP
could still continue buying Airgas through two ways: (1) Call a special meeting and remove entire
board without cause by 67% vote, as provided in the charter; and (2) Wait another eight months to
nominate another class of directors at next annual meeting. Held: Poison pill reviewed under
Unocal:
 (1) Defensive measure taken against threat: Requires good faith, reasonable investigation, and
threat to corp. Types of threat: (1) Structural coercion (different treatment of non-tendering
shareholders); (2) Opportunity loss (shareholders may lose opportunity to choose a better offer
proposed by management; (3) Substantive coercion (shareholders may accept inadequate offer).
Here there was substantive coercion. Shareholders willing to offer at inadequate price.
 (2) Defensive measures reasonable in relation to threat: Must show that defensive measure not
preclusive or coercive AND that it fell within range of reasonable responses.
 Coercive: If meant to cram down a management sponsored alternative.
 Preclusive: If it makes it ‘realistically unattainable’ for bidder to win proxy contest and gain
control of target.
 Defense not coercive or preclusive here. Although AP’s removal of entire board without
cause at special meeting is realistically unattainable, is realistically attainable for AP to
nominate another slate of directors at next annual meeting.
 Considering circumstances, response falls within range of reasonableness.
 Case Law
 Lyondell Chemical Co v Ryan:
 C&J Energy Services v City of Miami: C&J was to merge with Nabor subsidiary but Nabor would retain
majority of equity in surviving corp. C&J negotiated for certain protections: Bylaw guaranteeing that all
stockholders will share pro rata in event of sale of new C&J, which can only be repealed by unanimous
vote; C&J also bargained for a fiduciary out if a superior proposal was to emerge during market check.
Lower court here held that there was violation of Revlon duties because the board did not affirmatively
shop company either before or after signing merger. HELD: No breach of fid duty. Nabors deal made
business sense and offered benefits. Although Revlon does apply it DOES NOT require for company to
shop itself to seek highest value. There is no specific route, when board exercises judgment in good
faith, tests transaction through viable passive market check AND gives shareholders a fully informed
uncoerced opportunity to vote, we cannot conclude that the board violated Revlon. In Revlon board
entrenched itself which prevented higher bid. No hint of such defensive entrenching motive here.
 Deal Protection devices: (1) No Shops and No Talks: Not to shop itself or supply confidential information
to alternative buyers, MAY also require to submit merger agreement to shareholders for approval, AND to
recommend that shareholder approve the agreement; (2) Lock Up: Asset or Stock Lock up: Right to
acquire corp asset or stock after triggering event that signals deal will not close. (3) Termination Fee:
Lump sum payment not more than 3-4% of the deal price easily accepted.
 Note: Fiduciary Out: Following Smith v Van Gorkom lawyers tended to put in all merger agreements that
constitute a change in control a provision that allows the target to terminate the contract in the event
that its fiduciary obligation to get highest available price requires that action.
 A fiduciary out may specify triggering event: A better offer OR opinion from outside counsel that
board has a fid duty to abandon original deal. Company will still however pay termination fee.
 Case Law
 In Re Topps: Topps was to be sold. Eisner made offer for 9.75 and promised to retain management. Upper
Deck made superior offer for 10.75, subject to financing condition and later a 10.75 without the financing
condition. Topps board rejected this and put forward Eisner merger to shareholders without mentioning
seriousness of Upper Deck’s proposals. Also did not disclose that Eisner promised to retain management
 after the merger. Upper Deck could not negotiate directly with shareholders due to a standstill
agreement. HELD: Where Revlon applies must obtain highest possible value, although Antitrust issues
and financing conditions in Upper Deck’s offer, these could be negotiated. Also, directors must provide
shareholders with all material facts, and avoid making material misstatements. Here D breached fid
duty by not pursuing 10.75 as it was a better price. Compounded this breach by inaccurately describing
events in its proxy statements. P’s motion for preliminary injunction against Eisner merger granted until
Topps permits Upper Deck to (1) make an all shares non-coercive tender offer similar to $10.75 offer,
and (2) communicate its version of events to Topps shareholders. Topps must also issue corrective
disclosures.
 In Re Lear Corporation: P wants preliminary injunction against merger. P has two claims (1) Board did not
make proper disclosure in regards to merger; (2) Board failed to take reasonable steps to get highest
bid:
 (1) Disclosure Claims: Rossiter CEO concerned that his company might go bankrupt, thus lose his
retirement benefits. He also had large holdings in company which he could not sell due to insider
trading restrictions. Merger with Ichan allows Rossiter to cash out all his equity stake in one lump
sum, also Icahn agreed to employment terms with Rossiter that gave him payment of retirement, a
better salary and bonus package. A REASONABLE shareholder would want to know this.
 (2) Revlon Claims: Revlon merely requires that directors take a reasoned course of action in
maximizing value NOT that it must obtain best value. Here only Rossiter negotiated with Icahn. P
claims Rossiter had personal motives which meant that best possible price not reached in merger
with Icahn. Because of Rossiter’s personal interests Court notes that it would be preferable for SC
to have had its chairman or lead banker participate with Rossiter in negotiations. Despite this
however, D’s actions came within reasonableness (not perfection). This is because: (1) D removed
poison pill which meant others could come forward with an attractive bid but no one did. (2) Deal
protections in merger with Icahn not unreasonable: Go shop period (45 days) allowed board to
search for higher offer. Termination fee of 3.5% is hardly of magnitude to deter a serious rival bid.
Note: Before Icahn emerged Lear was trading at 17. Icahn offered 36. P said this was too less but
market valued Lear at 17.
 In Re Family Dollars Stores Shareholder Litigation:
 Board’s motivation: Before addressing conduct upon which P focus Revlon claims, helpful to consider
Board’s motivations. Here 10 out of 11 director’s independence not questioned. As for Levine P fails
to demonstrate he had entrenchment motive. Record shows that Levine was planning retirement but
had been told to do so as a negotiating tactic; Tree (buyer) insisted Levine stay to help with
integration of the companies. Levine also had shares of Family and so had incentive to max value.
 Levine’s Role in Sale Process: P says board abdicated responsibilities by allowing Levine to conduct
much of the sale process with minimal supervision. This is wrong because evidence shows that
Advisory Committee and Board were actively engaged in Sale process and received updates from L.
 Decision not to Inform General of Sale: P argues that Levine acted unreasonably when he failed to
inform General that Family was under a sale process. P says if it did then General would have made
a better offer. Court: Decision not to tell was reasonable because: (1) Board feared that if General
knew it would make hostile bid for Tree or other action adverse to Tree; (2) Board was concerned
that they would violate terms of NDA if they revealed that Family was having discussions. This was
advice given by lawyers. MOREOVER: General was not prevented from making own offer and may
still do so now.
 P then argues that Board acted unreasonably when it refused to engage with General after it made
revised offer for $80 and expressed willingness to divest up to 1500 stores. Court: Financially
superior offer does not equate to financially superior transaction if there is a meaningful risk that
the transaction will not close for antitrust reasons. After consulting with lawyers board determined
that divestures of 1500 was not enough. Board was told that success rate of proposed transaction
was 40%. Board determined that General not willing to go beyond 1500 cap. General could have
written its revised offer to indicate some level of flexibility to divest more than 1500 stores.
 Terms:
 Going Private: Reduces number of shareholders such that no longer public company.
  Technical going private transaction: A non-controlling shareholder may also effectuate a buyout:
Because such a shareholder does not owe a fid duty the court’s apply BJR.
 Certain types of non-controlling shareholder transactions, however, create inherent conflicts of
interest for target company’s directors or officers that merit greater scrutiny: MBO (Management
Buy out): One or more of target’s senior managers participates as member of buyer group. The entire
fairness standard of review will apply here in evaluating management’s role in these transactions
UNLESS certain procedural safeguards implemented.
 MBO’s are typically funded by a Private Equity Fund in which investors pool their capital together.
 Leveraged Buyouts: Private equity acquisitions are generally structed as leveraged buyouts (LBOs),
meaning significant amount of consideration used to purchase target comes from borrowings.
Buyer in LBO is usually a PE fund that does not wish to commit or be liable for all funds. Usually
collateral provided is that of the Company for such loans. THUS LBOs allow investors to benefit
from leverage without exposing them to recourse.
 Management Buy Outs: These also rely on leverage. Note: Even LBO can include managers. What
separates the two is that in LBO managers are encouraged to participate in transaction; whereas in
MBO managers seek outside investors.
 Note: In LBO or MBO new investors form shell corp or other special purpose vehicle for specific
purpose of acquiring target.
 In Re Toys R Us: Toys R US wanted to sell division for Toys. It received some bids. Recognizing that these
may be lost if extended bidding process much longer, it sought a final bid. Winning bid was 26.75. Board
after examination of alternatives and final reexamination of market accepted this. There was a 3.75%
termination fee. P said D breached Revlon because it did not take sufficient time to conduct full search.
They argue that deal was draconian. Note: 26.75 was 123% premium over market price. HELD: No
breach of fiduciary duty. It took time to educate itself and consider alternatives. Size of termination fee
not too great. REVLON does not require perfect deal but reasonable measures to obtain highest value.
 Omnicare v NCS Healthcare: Genesis entered into negotiations to acquire NCS. It also entered into an
exclusivity agreement which prevented NCS which prevented it from engaging in negotiations in
regards to competing acquisition. Omnicare contacted NCS for transaction, did not respond due to
exclusivity agreement. There was also a voting agreement under which NCS board and CEO agreed to
vote all their shares – combined majority – in favor of merger agreement. There was no fiduciary out
clause. Omnicare submitted superior proposal. HELD: When there is no change of control in transaction
then BJR applies. Where change of control then Revlon. The defensive devices here require enhanced
judicial scrutiny under Unocal because of the inherent conflicts between board and stockholders. In
applying Unocal reasonableness, court must first determine whether measures taken preclusive or
coercive. Here combination of exclusivity agreement, stockholder voting agreement, no fiduciary out
clause. Here NCS will be forced to accept Genesis merger (coercive) defensive measure preclusive as
combination of defensive measures made it impossible for any other merger proposal in succeeding.

 Freeze-Out Mergers and Variants

 Freeze out usually effected using a triangular merger in which corp is merged with wholly owned
subsidiary of controlling shareholder. Merger agreement will provide that minority will get cash while
controlling shareholders all the stock of the merged entity.
 Sinclair Oil: In a transaction between target and controlling shareholder two standards apply: (1) BJR;
(2) Intrinsic Fairness. Latter will only apply when the parent has received a benefit to the exclusion and
expense of minority.
 Freeze out and Appraisals: (right to receive fair value of shares in cash): Appraisals have disadvantages:
(1) Shareholder must perfect appraisal rights before shareholder vote; Many jurisdictions do not allow
class action; Should appraisal rights be regarded as exclusive remedy?
 Weinberger v UOP: A freeze out merger must satisfy an ‘entire fairness’ standard: This has two
components: Fair price and fair dealing. Weinberger ruled that any future challenges to merger’s
fairness must be made by an appraisal proceeding. This meant no class action. Later Rabkin however
changed this.
 Rabkin: appraisal is exclusive only when P’s claims go solely to fairness of price.
 Kahn v M&F Worldwide: M&F (43% owner) of MFW. M&F wanted to buy remaining stock. Transaction
subject to two stockholder protective procedural conditions: (1) approval of SC; (2) Approval of majority
of minority stockholders. Stockholders minority approved. Held: Where transaction self-dealing by
controlling shareholder challenged, review is that of entire fairness with D having burden. In Kahn we
noted that D may shift burden to P by either (1) Showing transaction approved by SC of independent
directors; or (2) Show transaction was approved by an informed vote of minority shareholders. We hold
BJR applies where both exists. (1) Committee must be independent, empowered to choose its own
financial and legal advisors, exercise its duty of care; (2) Stockholders must be informed and uncoerced.
 Here requirements met. Although certain members of committee have social or business
relationships with M&F, such allegations not enough. Existence of some financial ties not enough.
Inquiry must be whether ties were material in the sense that they could affect impartiality of
individual director.
 Kahn v Lynch Communications: CGE’s indirect subsidiary, Alcatel held 43% of Lynch. Alcatel selected five
of Lynch’s directors. Lynch wanted to buy Telco. Alcatel pushed it to acquire Celwave, a subsidiary of
CGE. Lync wanted Telco deal, Alcatel’s designated directors said no. Lynch created independent
committee to review Celwave. Committee backed after bad ratio for stock merger. Alcatel then offered
cash for 14. Committee got offer to 15.5. Alcatel threatened to make tender offer. Committee felt it had
no choice but to approve, though it believed price unfair. HELD: Burden of proof of proving entire fairness
does not shift here because Alcatel dominated the committee. To shift burden (1) controlling
shareholders must not dictate the terms; (2) committee must have authority to negotiate at arm’s
length. Committee did not believe 15.5 was fair but was afraid that Alcatel would make even less
favorable tender offer. Thus no arm’s length negotiation. Case remanded for entire fairness of merger.
 Solomon v Pathe Communications: CLBN controlled 89.5% of Pathe. It made tender offer for rest. Pathe
created SC to review offer. SC supported offer. P claimed that Pathe directors improperly supported
tender offer. P claimed price inadequate and offer coercive. Held: In case of voluntary tender offers,
courts do not impose any right of shareholder to receive a particular price. So unless there is coercion
or materially false or misleading disclosure made P has no relief. A transaction involuntary if coercive or
complete disclosure not made. Case dismissed.
 Glassman v Unocal Exploration: UC owned UXC (96%) and decided to eliminate UXC. Delaware allows
short form merger if 90% above. No stockholder vote required. P said UC and directors breached
fiduciary duty of entire fairness to UXC stockholders. HELD: Delaware law allows this, absent fraud or
illegality, appraisal is exclusive remedy available to minority. Although fiduciaries not required to
establish entire fairness in a short form merger, the duty of full disclosure remains.
 In Re Pure Resources Shareholder: Unocal owned 65% of Pure. Unocal made tender offer for remaining
shares. Unocal promised in tender offer to consummate prompt short form merger. Offer was 27%
market premium. Offer contained condition that offer was valid only if it obtained a majority of minority
shares (90%). However, offer included Unocal directors in definition of minority shares. Unocal said entire
fairness did not apply because standard was only applicable to negotiated merger and not to tender offer.
Note: SC did not recommend Unocal’s offer because favorable ratio not given. HELD: An acquisition of
tender offer by controlling shareholder non-coercive only when (1) Subject to non-waivable majority of
minority tender condition; (2) Controlling stockholder promises to consummate prompt short form
merger at same price if it obtains more than 90%; and (3) Controlling shareholder made no retributive
threats. ALSO majority must give directors on target board free rein and time to consider tender offer, by
hiring own advisors. When these conditions met then entire fairness does not apply.
 Here offer is coercive because it includes within definition of minority the directors who are
affiliated with Unocal. Also includes management whose incentives skewed by employment
agreements.
 Despite this no requirement that board should have blocked offer by pill. Board could recommend
against merger.
 In Re CNX Gas Corporation Shareholders: CONSOL (D) owned 84% of CNX. After unsuccessful attempt at
acquiring rest of CNX shares it eliminated CNX board and decreased directors. Only one director was
independent. Price, holder of 6% of both CNX and Consol negotiated on tender offer. CONSOL
commenced two step freeze out merger, offering 38.25 for tender offer and planning short form merger
 afterwards. Offer was conditional on majority of minority shares being tendered. CNX board authorized
SC consisting of Pipski (one independent director) to consider merger. Board refused to authorize
committee to negotiate. HELD: BJR applies where negotiation and approval by SC and majority of
minority. SC did not recommend transaction. Second, SC not provided with authority to negotiate or
consider alternatives. Third, Price owned both stock. Agreement with price guaranteed that tender
offer’s success nullified protection of majority of minority condition.
 Mendel v Carroll: Carol family owned 48-52% of Katy. Carol proposed to buy rest for 22. SC refused 22.
Price increased to 25.75 which SC accepted. Later SP offered 28. SC said it reserved opinion regarding
Carrol merger. At meeting Johnson stated that Carroll not interested in selling shares and so no use of
considering SP offer. P contends that when offer for 25.75 made company put up for sale so Revlon
applied. SP offer was for 28 with stock option agreement which would dilute Carroll from 50 to 40%
block. Board rejected SP offer because they said it would deprive Carrol family of their voice in corporate
affairs and constitute a breach of fid duty. HELD: Court noted that must take into account premium of
control of Carroll stock and so the 25.75 for minority shares may be justified. WHEREAS the 28 offer was
for all shares. No part of fiduciary duty requires Carroll to sell. This does not mean however that they
cannot use their control to effect a self interested transaction at unfair price. Nothing to suggest that
25.75 was unfair.
 Morton’s Restaurant Group: Harlan owned 28% of Morton and placed two executives on board, one was
de facto chairman of board. Remainder (7) were independent. Harlan suggested that Morton consider
selling itself and it agreed. Morton entered into merger agreement with Fertitta which is wholly owned
by Landry. Agreement provided for 6.8 per share, 33% premium. P challenged saying that Harlan acting
in own self interest caused Morton to sell company quickly without regard to long term interests of
shareholders. According to P mere presence of controlling shareholder in a transaction – regardless of
whether controller receives anything different – triggers entire fairness review. P claims that Harlan had
unique liquidity need that caused it to push for sale at inadequate price. P also claims that Harlan
dominated board. Held: P’s claim to invoke entire fairness fails on two levels: (1) Here Harlan was not a
controlling shareholder it had 28%; (2) Even if it was a controlling shareholder Harlan had no conflict of
interest with other stockholders. There was arm’s length transaction resulting from thorough market
check. Consideration divided among all shareholders.

 In Re Telecommunications: TCI and AT&T talked about merger of a AT&T subsidiary into TCI. Malone
insisted that to obtain his approval TCOMB (which was B stock that had 10 times more voting power),
TCOMB would have to receive 10% premium. SC met and considered whether 10% was fair. It was
unclear whether it was fair where all shares sold together. Despite this SC recommended the
transaction. Held: Entire fairness applies when party stands on both sides of transaction. TCI directors
held significantly more TCOMB shares (84% was owned by 5 board members). Burden of fairness rests on
D: SC was not entirely disinterested they held TCOMB stock. Thus Fairness: Fair dealing and fair price:
 Fair Dealing: There was no fair dealing as SC did not have clear mandate to look after minority
interests. SC were not composed of independent directors. SC did not have separate legal and
financial advisors. SC was also not informed fully in making determination.
 Fair Price: TCOMA price they received was unfair in light of premium offered to TCOMB shares.
 Levco v Readers Digest: RDA had recapitalization. Voting stock would get a premium (24%) and non-
voting stock would not. Key to recap proposal is agreement by RDA to purchase shares of Class B stock
from shares owned by funds. P sought injunction asserting that recap was ultra vires in that it
contravened RDA’s charter to treat all classes identically. P says that SC failed to consider non-voting
stock’s interest.
 There was unfairness: both in terms of dealing and price. SC failed to consider minority interest.
Burden of proof is on D. SC never sought its financial advisor an opinion as to fairness. P thus
demonstrated reasonable probability of success on merits. This allows injunction.
 In Re John Q Hammons Hotel: JQH was to be merged into acquisition vehicle owned indirectly by Eilian, A
stock holders would get 24. Hammons, controlling shareholder (class B) received a small equity interest
in surviving limited partnership, a preferred interest with a large liquidation preference and various
other contractual rights and obligations. Held: Where minority squeeze out the standard is of fairness.
 Here minority not squeezed out because controlling shareholder did not make offer. Nonetheless, the
effect of transaction same as freeze out as minority ousted.
 IT IS NOT sufficient for SC to be independent and disinterested. SC must have authority and
opportunity to bargain on behalf of minority, including able to hire independent financial and legal
advisors. Here BJR would apply if independent committee recommended, and approved by
majority of minority AND that there was no coercion or material misstatement. Here fairness
applies because although Hammons did not stand on both sides of transaction it is nonetheless true
that Hammons and minority were competing for what Eilian was willing to pay. As a result of
controlling position Hammons could veto any transaction. Here price was not fair.

 In Re El Paso Corp: Foshee (CEO) responsible for negotiating sale of El Paso to Kinder. Foshee did not
disclose to board that he had interest in purchasing a portion of the El Paso business back from Kinder. El
Paso used Goldman Sachs (GS) as its financial advisor. GS owned 19% of Kinder stock AND had two
principals on the kinder board who owed fiduciary duties to Kinder. Lead GS banker personally owned
340k worth of Kinder stock. Although Morgan Stanley was brought in to wall off GS in effort to avoid GS
conflicts, GS continued to advise El Paso on merger. GS also persuaded El Paso to agree to. Pay MS $35m
fee only if El Paso adopted strategy for selling to Kinder that GS was proposing. El Paso did not seek other
bidders or attempt to make Kinder bid public. Board also allowed Kinder to back out of a deal and
agreed to a lower price. Under merger agreement: (1) El Paso could not solicit higher bids; (2) Required
to pay a $650m termination fee (3.1% of equity value). Some of El Paso’s shareholders (P) sought
preliminary injunction to enjoin stockholder vote on merger. Note: Deal offered by Kinder was still a
substantial premium to market before bid made (Kinder stock had risen). HELD:
 Revlon requires: (1) obtain reasonably highest value; (2) Actions not compromised by self interest.
 Here GS had potential conflict: owned kinder stock, controller two Kinder board seats, Lead banker
owned Kinder stock.
 A corporate fiduciary breaches its fid duty when its decisions are motivated by self-interests.
Although here GS was walled off by bringing MS, GS still played a major role. ALSO: CEO had a
conflict of interest: He did not disclose that he had an interest in purchasing a portion of El Paso
business. Thus injunction issued because balance of equities favors granting it here. Note:
Injunction granted when P shows: reasonable probability of success on merits, irreparable harm if no
injunction, balance of equities weigh in favor of injunction.
 Potential Conflicts for Investment bankers:
 (1) Relational conflicts: Refer to past, present and prospective advisory relationships that may
influence or bias the decisions of advisor.
 (2) Contractual conflicts: Where firm providing fairness opinion to board has financial interest in
consummation of transaction for fee. Thus usually for fairness opinion independent IB hired.
 (3) Conflicts arising from multiple functions: IB may for example provide advisory services to the
seller and lend money to buyer as part of financing package deal: AKA: Stapled Financing.
 RBC Capital Markets v Jarvis: Rural formed SC after RBC (IB) advanced idea of Rural acquiring its
competitor (AMR). Later board reformed SC to respond to an approach by PE firms: SC regarded offer as
too low. Later PE firms were interested in partnering with Rural to buy EMS. RBC noted that if R engaged
in a sale process led by RBC, then RBC could use its position as sell-side advisor to secure buy-side roles
with PE firms bidding for EMS. RBC thus recommended to R an immediate sale ‘because M&A
environment was strong.’ RBC hoped to offer staple financing to buyers, although they did not disclose
this fact. Rural advised by legal counsel to be vigilant if they were to select RBC, could consider appointing
second firm which would not be in a position to provide staple financing. SC appoints Moelis as secondary
advisors. JP Morgan advised Rural to wait to attract greater interest from buyers. Bid for 17.25 were made
WITHOUT mentioning staple financing from RBC. RBC provided inadequate analysis on the fairness of deal
and recommended a sale WITHOUT disclosing that they solicited a buy side financing role from Warburg
(bidder). RBC also manipulated valuation metric to make deal more attractive. Merger was approved.
 Held: Revlon applies. Solicitation process was structured and timed in a manner that impeded
interested bidders from making higher bids. RBC designed sale process to run in parallel with EMS
process. RBC did not disclose that this served RBC’s interest in gaining a role on the financing of
 bidder for EMS. The board took no steps to address or mitigate RBC’s conflicts. Directors need to be
active and reasonably informed when overseeing sale process. However, board is not required to
perform due diligence on its advisors.
 RBC aided and abetted Board’s breach of fid duty of disclosure due to the fact that the PROXY
statement contained false and misleading information about RBC incentives, in addition to false
information that RBC presented to Board in its presentation.
 Failed to disclose: (1) How RBC used rural sale process to seek financing role in EMS
transaction, (2) Did not disclose RBC provided staple financing to Warburg.
 In Malpiede the court observed that a third party may be liable for aiding and abetting a breach of a
corporate fiduciary’s duty to the stockholders if the third party knowingly participates in the breach.
 Requirements: (1) The existence of a fiduciary relationship, (2) Breach of the fiduciary duty (3)
Knowing participation in that breach by D, and (4) Damages proximately caused by the breach.
 It is the AIDER and ABETTOR that must act with SCIENTER. In this case, RBC acted with scienter and
can be held liable for aiding and abetting.
 Moelis as secondary advisor does not clean the process, and its fairness opinion does not cure RBC’s
aiding and abetting of Board’s breach of duty of disclosure.

 DGCL S. 102(b)(7):
 Exculpatory provision (limiting liability of director) may not limit: (1) duty of loyalty; (2) Acts or omission
not in good faith; (3) Intentional misconduct or knowing violation of the law; (3) Self-interested
transaction.
 Corwin v KKR Financial: P challenged stock for stock merger between KKR and Financial holdings, here
KKR received 35% premium. P argued transaction was subject to entire fairness because FH’s primary
business was financing KKR’s leveraged buyout activities and that FH was managed by another affiliate
of KKR under a contractual agreement that could only be terminated via termination fee. As a result P
said KKR was a controlling shareholder of FH. HELD: KKR not controlling shareholder as it owned less
than 1% of FH, had no right to appoint directors, and no contractual right to veto board action. There
may be cases where shareholder may have control without majority: voting power and management
control such that stockholder could be deemed to have effective control of board. This did not exist
here as every corp free to enter into contract. No facts pled that KKR board could not exercise free
judgment.
 P further contends that even if KKR not controlling shareholder, Revlon applies and there was
Revlon violation. D: FH had exculpatory provision and that transaction was approved by
independent board majority AND by a fully informed, uncoerced stockholder vote. BJR applies as
uncoerced, informed vote of stockholders.
 Volcano Corp. Shareholder Litigation: Philips was to merge with Volcano. Phillip wanted cash out merger.
GS concluded 18 offer was fair. Board then approved merger was to be two-step transaction under s.
251(h) (two step merger; this is quick; buys controlling stock and then squeezes out minority at same
price, avoids stockholder vote). Board thus recommended that Volcano shareholder tender their shares.
90% tendered, merger was consummated. P brought suit because Philip rejected earlier offer for 24
from same acquirer. P brought action against board and its advisor (claiming latter aided and abetted).
HELD: The fully informed, uncoerced, disinterested approval of a merger by a majority of corporation’s
outstanding shares pursuant to a statutorily required vote renders BJR irrebuttable. Same reasoning
applies to tender offer.
 Here stockholders fully informed and disinterested and uncoerced. P says they were not fully
informed because failed to disclose GS interest in transactions. Court said they could reasonably
infer GS interest in transactions from information provided.
 BJR irrebuttably applies. Merger can only be challenged here where claim of corporate waste i.e.
merger ‘cannot be attributed to any rational business purpose.’
 Complaint fails to state a claim for Abetting: Directors did not breach fid duty. Requirements: (1) The
existence of a fiduciary relationship, (2) Breach of the fiduciary duty (3) Knowing participation in that
 breach by D, and (4) Damages proximately caused by the breach.

 Singh v Attenborough:
 Lower Court held: Shareholder vote approving Zale’s sale to Signet entitled Zale director to deference
of BJR under Corwin; AND that since there was no claim against directors for breach of fid duty under
the BJR there could be no aiding and abetting claim against financial advisor.
 SC: Disagreed: Considered whether despite BJR applying whether Zale directors breached their duty
of care by being grossly negligent, despite SH vote.
 Under BJR a fully informed, uncoerced vote of SH, the only viable duty of care claim is
Corporate Waste. Applying Corporate Waste, SC found no Corporate waste occurred.
 Also noted that financial advisor that induces a board to breach its duties in sale of control can
be held liable for aiding and abetting even in the absence of a finding of gross negligence by
directors.
