Facts

• Amy was the chairman and CEO of Axel Corp. Bob owned Buzz Corp.
• On 1/1/16, Bob told Amy that he was interested in acquiring Axel. Bob said that he was willing to pay $20/share.
Axel rejected because it felt the offer was too low.
• Buzz Corp. owns a subsidiary named Sub Inc. Sub Inc has stock options to purchase 30% of Axel. On 1/1/17, Sub
Inc. stated it planned to exercise its options. Additionally, Bob once again told Amy that he is willing to negotiate
(perhaps up his offer to $25/share). He made it clear that he is willing to attempt a hostile takeover. In response,
Axel threatened its poison pill.
• On 2/1/17, Axel’s board had a special meeting and recognized that it signaled that the company was “in play,” and
announced that it has agreed to enter into a $100M merger with Scapegoat Co.
• On 3/1/17, Bob met with Amy to discuss a deal for $30/share, but Axel said the price was too low.
• On 4/1/17, the offer was raised to $40/share. Axel board held a special meeting that day, and allowed Amy to
negotiate a deal.
• On 5/1/17, the Axel board met again to consider the new offer of $41/share. The board considered relevant
reports etc. and ultimately decided to present the offer to its stockholders. The merger was approved by more
than 99% of the voted shares on 6/1/17.
• Stockholders brought action alleging that Axel’s board breached its fiduciary duties because it put its personal
interests ahead of those of the shareholders when it recommended the deal. Specifically, they alleged that the
directors failed to obtain the best available price.
 Analysis
• The facts are similar to Lyondale. Air Gas is worth reading as well.
• Read “Mastering Corporations”
• The purpose of this exercise is to provide a framework for answering
a merger question. It would be useful to go back through cases with
this framework.
• Analysis goes Unocal, then Revlon. May also want to quickly touch on
whether it is a direct or derivative suit on the exam.
 Unocal
• First question to ask is whether the action taken was within the
power/authority of the board? (2 parts)
• Does the statute authorize this defense? Yes, Poison Pill is common practice.
• If permissible under statute, does the firm’s charter impose any restrictions
on the use of this defense? No, highly unlikely this would come up.
 Unocal
• In order to evaluate the actions taken by the board in the face of a hostile takeover, one must examine both the actions taken and the boards
motivation (inside directors are subject to scrutiny under the duty of loyalty, not duty of care).
• Measures cannot be adopted based on the “omnipresent specter that a board may be acting primarily in its own interests” (i.e. conflict of interest
during takeover); thus, defensive measures are not judged by the BRJ. Instead, they are judged by an enhanced level of judicial scrutiny. The
scrutiny standard comes from Unocal v Mesa Petroleum. There are 2 components:
• (1) The target board has to be able to demonstrate that there is a good faith belief that there is a threat from a bidder (Cheff)
• Directors satisfy this burden by showing that defensive measures were adopted in good faith and following a reasonable
investigation.
• Facts – Bob made his intentions clear. Sub Co was going to exercise options.
• (2) The board must be able to show that its response to the threat was reasonable (i.e. proportional to the threat posed)
• Omnicare states that the board’s actions cannot be draconian (i.e. preclusive or coercive).
• Coercive – SHs were not harmed for not participating
• Preclusive – all SHs were able to participate
• There are a plethora of factors. Because the list is so broad, it is likely that under the Unocal standard that the target’s board will
almost always be able to come up with a firm-related reason for its defensive measure.
• Facts – this Poison Pill isn’t out of the ordinary. This is what companies do, so this is satisfied.
 Revlon
• In contrast to Unocal, the Revlon v. MacAndrews court held that once a board of directors has
decided to put the firm up for sale and abandon its LT strategy (Time, Cheff), it has to try to get
the maximum value for its shareholders.
• Just because a company is ‘in play’ does not mean that Revlon is triggered. Revlon is triggered
when the board says that the company is for sale (i.e. third party involved) and “the directors’
role changed from defenders of the corporate bastion to auctioneers charged with getting the
best price for the stockholders at a sale of the company.” (Revlon)
• This often happens when the company attempts to find a white knight. A white night is a
company that is sought by a Target company to avoid being acquired in a hostile takeover.
• Facts – entered into an agreement with Scapegoat Co.
• The board needs to maximize value, not price  maybe another company has other
resources that it thinks would be best.
 Revlon
• Once a corporation begins to negotiate with a third party, the duty of the board has changed to the maximization
of the company’s value at a sale for the stockholder’s benefit. Once this happens the protections of Unocal to
mount defensive measures evaporate. At this point, the directors cannot use their powers to erect obstacles for
bidders, even hostile bidders. Under Revlon, there are no legally prescribed steps that directors must follow to
satisfy their duties. The court cannot tell corporations how to get the best value.
• Facts – Axel negotiated with Buzz once it brought in Scapegoat. Court won’t ask if this was the optimal means
• Duty of care  you can say you assume 102(b)(7). Where there is 102(b)(7), courts will not analyze the duty
of care because you are exculpated.
• Duty of loyalty  they didn’t act in bad faith. The board tried to negotiate to get the best value. The Court
isn’t going to decide what the best means to get the best value is. The record does not show bad faith, so the
board acted properly.
• The imposition of liability on corporate directors for breach of the duty of good faith requires that the
directors knew that they were not discharging their fiduciary obligations. A breach of duty may be based
on
• (1) subjective bad faith, which is fiduciary conduct motivated by an actual intent to do harm;
• (2) lack of due care, which is fiduciary action taken solely by reason of gross negligence and without
any malevolent intent; or
• (3) an intentional dereliction of duty, consisting of a conscious disregard for one‘s responsibilities.
 Other Info
• Fiduciary Duties and How to Violate
• Multiple at play in many cases.
• Duty of Care – basically is the duty to act in a manner the director reasonably believes to be in the best interest of the corporation. Act consistent with the
responsibility of care when acting on behalf of the corporation. (Van Gorkom)
• Disney – the committee’s decision making process fell short of best practices, but did not fall below due care
• BJR – presumption that the directors acted on an (1) informed basis, (2) in good faith, and (3) in the honest belief that the action taken was in the best
interest of the company.
• Ways to violate the BJR: Oversight Liability (In Re Caremark), Uninformed Decisions (Van Gorkom), Irrational or Wasteful, Encouraging Unlawful
Activity, Fraud, Conflict of Interest
• 102(b)(7)
• Good Faith – best described as not bad faith. Remember that the triad no longer exists.
• You have bad faith when there is (1) intent to do harm, (2) lack of due care (i.e. gross negligence) (Van Gorkom), and (3) intentional dereliction of duty
(Francis)
• Duty of Loyalty
• Breaches: (1) directors knowingly and completely failed to undertake their responsibilities, (2) undisclosed conflicts of interest (candor), (3) taking
advantage of corporate opportunity (Broz)
• Direct v. Derivative Suits – To determine whether it is direct or derivative:
• (1) who suffered the harm in question?
• (2) to what extent there is a remedy, who will receive it? (benefit to corporation or stockholders individually?)
• Demand Requirement, Futility Rule, Special Litigation Committees
• Piercing Corporate Veil
• Going after owners through statutory veil of limited liability. Never happened with public company. Think of the cab case.
• Two steps for piercing the corporate veil:
• (1) There must be unity of interest and ownership such that separate personalities of the corporation and the individual or other corporation does not
exist.
• failure to maintain adequate corporate records, commingling funds/assets, etc.
• (2) circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice
 Questions
• Know the cases that Bean listed today.
• Reread your briefs or the cases. It’s hard to make up facts
• Questions are very likely to follow facts in cases
• You know the topics that he is likely to test