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Mergers Acquisitions Davis Anonymous Outline

M&A Full Outline
Assume Delaware Law applies
Main Actors in a Corporation
a. (Board of) Directors
i. Manage and direct business and affairs of corporation
ii. Responsibilities include:
1. Deciding long term business plans
2. Investments
3. Choosing officers
4. Deciding how to maximize the corporation’s profits
b. Officers (Mangers)
i. Run the day-to-day operations of the corporation
ii. CEO is often both a director and an officer
c. Shareholders
i. Owners of shares of the corporation
ii. Generally do not manage or control the corporation UNLESS they are also
officers or directors
d.  Directors and Officers generally owe a fiduciary duty to the corporation AND its
Consideration of Other Constituencies
a. May include:
i. Employees
ii. Suppliers
iii. Customers
iv. Creditors
v. Communities in which the corporation operates
b. Statutes can also provide that directors may also consider both long-term and shortterm interests of the corporation or other relevant community and society
i. Illinois is constituency state  see 805 ILCS 5/8.85
1. Allows you to take into account interest of other constituents
ii. Delaware IS NOT a constituency state
1. Delaware law only cares about maximizing shareholder value (nonconstituency states)
A. Directors’ Fiduciary Duties of Care and Loyalty
Duty of Care
a. Requirements
i. Be careful, exercise reasonable diligence and be well-informed
ii. Take steps a reasonably prudent director would take under similar
iii. OK to rely on opinions or reports from management or experts as long as
directors ultimately make decisions
b. Exculpatory Charter Provisions
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i. Protects directors from damages for breach of duty of care if the corporation’s
charter so provides
1. Doesn’t prevent injunctive relief
2. Only protects directors and NOT officers
a. Doesn’t protect directors acting in their capacity as officers
ii. Virtually all charters (certificate of incorporation) of public companies have such
a provision
1. Ex. Delaware General Corporation Law 102(b)(7)
iii.  Directors are not liable for breach of duty of care, BUT can still be liable for
breach of the duty of loyalty (includes good faith)
1.  Directors off the hook for gross negligence, but not for bad faith
Duty of Loyalty
a. Directors must:
i. Be disinterested
1. Cannot have material conflicts of interest, engage in self-dealing, or be
on 2 sides of a transaction involving the company
a. Ex. director is the owner of the company that wants to buy the
company he a director for
2. Not all conflicts are material
ii. Be independent
1. Cannot be dominated by the controlling shareholder, the CEO, or
anybody else
2. Have to be able to make decisions involving the company on the basis of
the merits rather than on the basis of extraneous factors
iii. Act in good faith
1. Grossly negligent conduct, without more, ≠ lack of good faith
a. Distinction matters for liability
2. Different definitions of bad faith
a. Intentional dereliction of the directors’ duties or a conscious
disregard of their responsibilities (WALT DISNEY)
b. Sustained or systematic failure of a director to exercise
reasonable oversight (CAREMARK)
i. Liability under criminal law DOES NOT automatically
mean bad faith
c. Decision so egregious or irrational that it could not have been
based on a valid assessment of the corporation’s best interests
b. Issues can be addressed by appropriate remedial measures
Duty of Disclosure (derivative of 2 main duties—state law)
a. Overview
i. Sometimes interpreted to require more than federal securities laws would
ii. Not all material facts have to be disclosed
iii. Merger negotiations?
1. Material
2. Common practice: don’t have to be disclosed
3. BUT doesn’t mean you can deny existence of merger talks
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4. Leak?  Best course of action: confirm discussions but don’t need to
commit to merger
iv. Requirements when merger agreement signed
1.  Immediate press release
2. 8-K rules require public company to disclose signing of deal
a. Form that contains announcement of event
b. Attach press release and merger agreement
3. Other filings required
a. Proxy statement
b. Soliciting materials sent to shareholders
b. Proxy Statement
i. Why do you need a proxy statement?
1. Shareholders must vote to approve deal and proxy statement gives
them relevant info
2. Notice of shareholder meeting (sent with proxy) must be sent out at
least 20 days before mtg. (DE law)
3. If you don’t go to shareholder mtg., can vote with proxy card, over
telephone, or online
4. Opponents of deal can solicit info to shareholders also
ii. Who files proxy statement in merger?
1. Target public company
2. Buyer if it buyer is public and needs shareholder approval
3. Both sides if soliciting proxies  joint proxy
4. If buyer is issuing shares, then need to register shares and proxy will
also serve as prospectus for buyer
iii. Procedure for Filing Proxy Statement
1. Start working in proxy early, even before deal signed
2. Preliminary proxy usually filed with SEC within 20 days of public
announcement of merger
a. SEC requires filing preliminary proxy at least 10 days before
mailing proxy to shareholders
3. SEC has 10 days to decide if it will review proxy
a. Has right to review proxy but does not have to
b. Difficult to predict if SEC will review
c. If SEC reviews, staff will send target comments (about 30 days
after initial filing) and target will revise proxy—this process can
repeat multiple times until SEC has no further comments
4. Once SEC clears proxy statement, target will:
a. File definitive proxy with SEC
b. Mail proxy to shareholders
c. Schedule shareholder mtg.
i. Usually set between 25-30 days after proxy mailed
ii. Why would you NOT want to have a shareholder
meeting right after mailing a proxy?
1. Gives proxy solicitors time to get vote out
2. State law usually requires period of waiting (DE
law requires 20 days between mailing and
shareholder meeting)
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iv. Information Contained in Proxy Statement
1. Summary of the transaction at the beginning
2. Background of the transaction
a. Tells the story of what happened
b. Difficult to draft b/c you can’t include all conversations and
emails BUT you can’t leave out any material info
i. Material = something a reasonable shareholder would
want to know
c.  Lawsuits often filed in mergers alleging background section
left out material info
3. Recommendation of the board of directors on whether deal advisable
4. Fairness Opinion and Analysis of Financial Advisor(s)
a. Fairness Opinion
i. 2 pages
ii. Describes deal with lots of disclaimers
iii. Concludes whether merger is fair from financial point of
view to shareholders of target
b. Analysis (more helpful than the opinion)
i. Summary of board book (i.e. financial advisor
presentation to board)
ii. Description of what financial advisors looked at and the
numbers used
iii. Could be 6-7 different analyses
1. Ex. DCF, comparable companies, comparable
c. *Rare for an opinion or analysis to say whether a deal is a “good
idea”  just determines whether deal is within range of
5. (Material) Conflicts of interests of directors, officers, or financial
6. Financial data (i.e. financial statements)
a. Examples
i. Audited financial statements
ii. Pro forma financial statements
b. Required info varies
c. Lawyers need to ID required financial statements
7. Description of equity and debt financing
a. Especially important if target merging with “shell” company
8. Anything necessary to prevent document from being materially
9. Summary of the merger agreement
a. Schedules of merger DO NOT have to be disclosed
b. Purpose for Inclusion
i. Allows competing bidder to look at legal landscape
ii. Allows shareholders find out about deal protection
c. Standards of Disclosure
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i. Must disclose all MATERIAL information within its control that would have a
significant effect on the stockholders’ decision
1. Omitted fact = material IF there is a substantial likelihood that the
omitted fact would have assume actual significance in the deliberations
of the reasonable stockholder
2. Omitted fact ≠ material just b/c a shareholder would consider the fact
3. Materiality = objective test
ii. Disclosure cases are very fact-specific
iii. Don’t need to disclose opinions or theories
iv. Don’t make partial disclosures
v. No bright line rule for management projections
1. Conservative approach: disclose but that state projections may not be
2. Management projections include:
a. Valuation analyses
b. Key assumptions
B. Mergers
a. Transaction in which two companies combine by operation of state corporation law
i. Typically, one of the companies (usually the buyer) will survive the merger, and
is referred to as the surviving corporation
ii. The separate existence of the non-surviving corporation ceases to exist upon
consummation of the merger
b. Dominant party = buyer
c. Other party = target
Effects of a Merger
a. All of the rights and obligations of the constituent corporations become, by operation of
law, the right and obligations of the surviving corporation
i.  Surviving corporation in the merger has the combined assets and liabilities of
both merging corporations
b. Shares of the target are converted into:
i. Cash
ii. Shares of the buyer at a fixed or variable exchange ratio
iii. Shares of the new company created by the merger at a fixed or variable
exchange ratio
iv. A combination of shares and cash OR
v. Something else
c.  Former shareholders of target may or may not have an equity interest in the
surviving entity or its parent company
Different Ways to Structure a Merger (see diagrams)
a. Direct Merger
i. Target merges directly with the buyer
ii. One of the two entities (usually the buyer) survives the merger and the other
entity ceases to exist by operation of law
iii. Surviving entity has all the assets and liabilities of each of the two companies
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b. Reverse Triangular Merger
i. First, buyer creates a wholly-owned new subsidiary
ii. Subsidiary then mergers with and into the target, with the target surviving the
merger and the subsidiary ceasing to exist as a separate entity
iii. The surviving company (not the buyer) assumes all of the target’s and all of the
subsidiary’s assets and liabilities by operation of law.
iv. Following the consummation of the merger, the target becomes a whollyowned subsidiary of the buyer
v. Shareholders of the target usually receive cash or shares of the buyer, or a
combination of both, as a consideration
vi. The buyer is not a party to the merger and maintains the shield of separate
incorporation against the liabilities of the target
c. Forward Triangular Merger
i. Similar to reverse triangular merger, but merger subsidiary survives and the
target ceases to exist
ii. Subsidiary (not the buyer) assumes all of the target’s assets and liabilities
iii. Following the consummation of the merger, the subsidiary remains a whollyowned subsidiary of the buyer
iv. Shareholders of the target usually receive cash or shares of the buyer, or a
combination of both, as consideration
v. Buyer it not a party to the merger and maintains the shield of separate
incorporation against the liabilities
d. “Double Dummy” Merger
i. The parties (“Party 1” and “Party 2”) create a new holding company (“Holdco”)
along with 2 new subsidiaries of Holdco (“Sub 1” and “Sub 2”)
ii. Sub 1 merges with Party 1 and Sub 2 merges with Party 2, with Party 1 and Party
2 surviving
iii. Party 1 and Party 2 become wholly-owned subsidiaries of Holdco
iv. Shareholders of Party 1 and Party 2 usually receive Holdco stock in exchange for
their Party 1 stock and Party 2 stock, respectively, with different exchange ratios
for each group of shareholders
v. Holdco maintains the shield of separate incorporation against the liabilities of
Party 1 and Party 2
Availability of different merger structures  Flexibility to structure a transaction to best fit
parties’ needs:
a. Maintaining the shield of separate incorporation against the target’s liabilities
b. Optimizing tax treatment
c. Minimizing need for 3rd party consents
d. Eliminating need for approval by buyer’s shareholders
i. ex. reverse/forward triangular mergers
e. Maintaining separate subsidiaries for regulatory purposes
Requirements for Approving a Merger
a. Shareholder with 90% or more of the outstanding shares of each class of stock entitled
to vote on merger?
i. Shareholder can effect a “short form” merger WITHOUT approval of the board
or any vote by shareholders
b. No shareholder with 90% or more of the outstanding shares of each class of stock
entitled to vote on a merger?
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i. Approval of the board of directors of the target
ii. Approval by the shareholders of target
1. DE: majority of outstanding shares
c.  Securities laws require the target to send a proxy statements to its shareholders in
advance of a meeting at which the shareholders vote on the merger
i. Because the proxy statement may be vetted by the SEC, the meeting generally
takes place 60-150 days after the merger agreement is signed
ii. This gives the target and its shareholders a valuable option because a competing
bidder can make a higher bid during this period
iii. Voting
1. Institutional shareholders subscribe to proxy advisors (ISS and
GlassLewis) for advice when deciding how to vote on merger
2. Record Date
a. Date you need to own shares on in order to vote in
shareholderapproval mtg.
b. Must be no earlier than 60 days before vote
c. Dead Share
i. Share that isn’t going to get voted b/c it was sold after
record date
ii. Prior holder before record date still has right to vote
even if it doesn’t own share after record date, but
usually doesn’t
Advantages of Mergers
a. Many potential buyers of a public company won’t proceed UNLESS they can buy all of
the outstanding shares (the more shares, the better)
i. Having minority shareholders
1. reduces the upside benefits from the transaction
2. may lead to conflicts of interest
ii. Lenders often want the buyer to have 100% ownership so that lenders can
obtain a lien on the assets of the target
iii. Margin rules may restrict borrowing for tenders offers
b. Facilitates deals because they generally don’t allow the holders of a minority of the
shares to stop the transaction
c. If the holders of a majority of the shares do vote to approve the merger, that majority is
benefitted by the general ability to force the minority to go along with what the
majority wants
d. Need for board approval of a merger allows the board to act as a bargaining agent and
often obtain a higher price for all shareholders
e. More orderly than hostile takeover
f. Controlling shareholder buyout rules (i.e. entire fairness standard) don’t apply
Possible Disadvantages of Mergers
a. Can force opposed shareholders to sell or exchange their shares against their will
b. Shareholders holding the majority of the shares usually required for approval may have
reasons to vote for the merger that don’t apply to the opposed minority
c. Board of directors may allegedly be influenced by factors other than the best interests
of the public shareholders
Remedies Available to Shareholder Opposed to Merger (assuming shareholder outvoted)
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a. Lawsuit alleging that the directors breached their fiduciary duties or that there was
some other violation of law
b. “Appraisal” proceeding under Delaware law seeking the fair value of its shares
i. Disadvantages
1. Appraisal case can’t be brought on behalf of a class, which means that
each claimant has to pay his own attorney’s fees
a. With a class action, fees are paid by entire class or by defendant
2. Claimant can end up with less value than if he didn’t seek appraisal
a. Judge can decide stock it worth less than originally valued
3. Claimant can’t get anything for its shares until the case is over
a. Claimant will receive interest at a higher rate
ii. Despite disadvantages, # of appraisal cases have increased that had found
higher fair values
C. Tender Offers
An offer by a buyer to shareholders of a corporation to purchase their stock in that corporation
a. Consideration is often cash and is frequently at a premium to market price
b. Each shareholder has the right, but no obligation, to sell its shares at the tender offer
For a buyer, tender offers can serve as an alternative method to acquiring a substantial equity
stake in a company
a. Tender offers can close faster than mergers
i. Under SEC rules, tender offers can close 20 business days after they are
ii. Tender offers permit the acquirer to bypass the board and deal directly with
iii.  Important tool in support of hostile takeovers – buyer takes over company
w/o needing approval of board
b. Possible disadvantages of Hostile Takeovers
i. Takeover may fail because:
1. Target deploys a poison pill
2. Target finds another buyer
3. State takeover laws
ii. Buyer and its lenders can’t perform a “due diligence” investigation of the target
iii. Lenders to the buyer can’t obtain a lien on the assets of the target at the closing
of the tender offer
iv. Management of the target may be alienated from the buyer
Agreed Tender Offer + Merger (2-step merger)
a. Top-Up Option
i. Trigger: typically the minimum tender offer condition of 50% of the target’s fully
diluted (all options exercised) shares
ii. Once triggered, allows the buyer to purchase an amount of new shares of the
target company that, when combined with the stock acquired in the tender
offer, equal enough shares to meet the 90% ownership threshold for merger
w/o board or shareholder approval
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iii. Reaching the 90% ownership threshold permits a buyer to complete a short
form merger with the target almost immediately after the close of the tender
b. Delaware Section 251(h)
i. If preconditions applicable, merger can be immediately completed, without the
need for a shareholder vote, if following the consummation of the tender offer
the buyer has acquired enough shares (usually a majority of the outstanding
shares) to obtain shareholder approval of the merger
ii. If applicable, merger can be completed w/o need to reach the 90% ownership
threshold or waiting for shareholder approval
c. *Doesn’t eliminate the issue of forcing an objecting shareholder to sell if the holders of
a majority of the shares favor the transaction
D. Standards of Review
Business Judgment Rule
a. Presumption that in making a business decision the directors of a corporation acted on
an informed basis, in good faith, and in the honest belief that the action taken was in
the best interests of the company
i. Defense for directors against allegation that they breached their fiduciary duties
(when applicable)
ii. BUT Plaintiff can rebut presumption by showing that the directors did not
comply with their duties of care or loyalty, including the duty of good faith
b. Rationale
i. Courts don’t want to substitute their business judgment for that of directors
ii. An important protection for directors
c. Applicability:
1. Prerequisites of Rule satisfied
2. Consideration given to shareholders is all stock
3. No controlling shareholder following the merger
ii.  Directors have wide latitude of freedom
1. It has been observed that directors usually win once the court concludes
that the business judgment rule applies
1. Shareholders receive cash
2. There is a controlling shareholder following the merger
Revlon Standard (enhanced scrutiny)
a. Applies when:
i. Shareholders receive all cash
1. Doesn’t apply to all-stock deal b/c shareholders can still get control
ii. Sale
iii. Break-up
iv. Change in control
1. Ex. controlling shareholder following the merger
b. Requirements
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i. Directors must take reasonable steps to obtain the best deal reasonably
available to the shareholders (duty of loyalty)
ii. In pursing the sale objective, the directors must be especially diligent and
should take an active and direct role in the sale process
iii. Board should be adequately informed in negotiating a sale of control
iv. Role of outside, independent directors becomes particularly important because
of the magnitude of the sale of control transaction and the possibility, in certain
cases, that management may not necessarily be impartial
c. REVLON (General Duties in Change of Control Transactions)
i. Supreme Court of Delaware, 1986
ii. Pantry Pride began a hostile takeover of Revlon at an inadequate price for the
company. Revlon employs defensive measures, share repurchase and, poison pill.
In the meantime, Revlon accepts alternative offer from Fortsmann, which
included partial sale of Revlon businesses, waiver of Notes covenants, a lock-up,
and a no-shop. Pantry Pride seeks preliminary injunction to halt deal.
iii. Directors must take reasonable steps to get best deal reasonably available for
its shareholders (duty of loyalty)
1. “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”
2. Highest price isn’t dispositive as best deal  board can take into
account risks and choose lower price if reasonable
3. Application to Defensive Measures
a. OK to drive up purchase price
b. NOT OK once sale of company is inevitable
i. Ex. approval to negotiate merger with third party
a. Company to engage in hostile offer
b. Company to initiate process to sell company
5. Extension of Unocal standard
iv.  Directors of Revlon breached their fiduciary duty of care to the company and
its shareholders
v. Analysis of Revlon’s Defensive Measures/Deal Protections
1. Poison Pill (chief tactic)
a. At time directors adopted Rights Plan, it was OK b/c meant to
protect shareholders against grossly inadequate tender offer
b. Poison pill NOT OK when directors redeemed Rights plan as
condition with merger with Forstmann
2. Company’s $10 million share exchange
a. OK at time
3. Lock-Up
a. Allows buyer to buy businesses of company at below market
prices (no longer common)
i. OK to draw bidders into battle to benefit shareholders
ii. NOT OK to end an active auction and foreclose further
bidding that hurts shareholders
b.  NOT OK here b/c Fortsmann was already in auction and the
lock-up destroyed Pantry Pride as competition
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4. No-Shop
a.  NOT OK here b/c Fortsmann’s no shop provision ended any
competition with Pantry Pride
d. How Does Revlon Apply to Deals that are Part-Cash, Part-Stock?
1. Delaware Chancery Court, 2011
2. Proposed merger between target Smurfit-Stone and subsidiary of RockTenn with consideration split between 50% stock and 50% cash. SmurfitStone would own about 45% of the surviving entity. Shareholders of
Smurfit-Stone, as class action, oppose merger as violation of Revlon for
failing to maximize shareholder value because there was no pre-signing
market check. Shareholders sought injunction to delay deal for 45-60
days to allow Smurfit-Stone to seek higher bids.
3. Revlon applies to merger with 50% cash and 50% stock consideration
a. Revlon does not require board to get perfect deal, but
reasonable deal
4.  Smurfit-Stone Board met Revlon standard
a. Board took its time and negotiated 2 separate price increases
and the deal-protections (no shop, matching rights, breakup
fee) were reasonable
5. Reasons behind not doing a pre-signing market check
a. News could leak
i. Jeopardize relations with customers and employees
ii. If sale doesn’t happen, indicates issues with company
b. Highest bid likely would emerge between signing and finalizing
c. Unexpected economic downturns
1. Revlon DOES NOT apply to merger with 67% stock and 33% cash
1. Revlon applies to merger with 62% cash consideration
iv.  Takeaway: Revlon likely applies when consideration for deal > 1/3 cash
Unocal Standard (enhanced scrutiny)
a. Applies to:
i. Defensive measures to repel a hostile takeover
ii. Deal protection measures in friendly merger
1. Cannot be preclusive or coercive in the aggregate (see Omnicare)
b. Requirements
i. The board reasonably perceives that the proposed hostile takeover represents a
threat to corporate policy and effectiveness AND
ii. The defensive measures represent a reasonable response to the threat posed
1. CANNOT be preclusive or coercive (see Airgas)
Entire Fairness
a. Applies to:
i. Controlling shareholder buyout of minority shareholders
b. Requirements
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i. Controlling shareholder will need to prove that transaction is entirely fair to the
corporation and its shareholders both as to process and price
ii. Fair dealing focuses on process—how the transaction was timed, structured and
iii. Fair price focuses on whether the minority shareholders are receiving fair
monetary compensation for their shares
c. Rationale
i. Controlling shareholder buyouts usually present significant conflicts of interest
E. Change of Control when Acquirer NOT Affiliated with Target’s Directors
or Officers
a. Delaware Supreme Court, 2014
b. Merger between C&J and subsidiary of Nabors, which is domiciled in Bermuda. C&J
would control 47% of new entity and Nabors would control 53% (new controlling
shareholder). New entity would be incorporated in Bermuda for tax benefits. Dealprotections included no-shop with fiduciary out, fiduciary out to terminate in favor of
better proposal, and 2.27% break-up fee. Class action plaintiffs, shareholders of C&J,
allege failure of Revlon duties.
c. Plaintiff’s arg for violation of Revlon duties
i. No pre-signing market check
ii. Conflicts of interest
1. CEO of C&J, Comstock, was influenced by lavish employment package
2. Financial adviser, Citi, had previously advised Nabors in other deal
iii. Lack of acknowledge on change of control.
d. Defendant’s arg: Highly favorable, strategic transaction
i. C&J shareholders received all stock b/c board expected new entity value to
increase with its present management
ii. Board not self-interested and was apprised of the process throughout
1. Comstock had 10% share in company so no incentive to harm
shareholder value
2. PE firm that had 10% share had designee who frequently communicated
with Comstock
e. Chancery Court Judgment
i. Board did not have conflict of interest and was fully informed on company’s
value BUT
ii. “Plausible” violation of board’s Revlon duties because board did not
affirmatively shop C&J either before or after signing
iii. Enjoined stockholder vote for 30 days and ordered C&J to shop itself in violation
of Nabors no-shop provision
f. There is no single blueprint a board must follow to fulfill its Revlon duties
i. Pre-signing market check NOT required under Revlon
ii. Revlon DOES NOT require a board to set aside its own view of what is best for
the corporation’s stockholders and run an auction whenever the board
approves a change of control transaction
iii. Board only needs to make a reasonable decision, NOT a perfect decision
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iv. A board can pursue a transaction it reasonably views as most valuable to
stockholders so long as the transaction is subject to an effective market check
under circumstances in which any bidder interested in paying more has a
reasonable opportunity to do so
g.  Delaware Supreme Court reversed injunction and found C&J board satisfied its
Revlon duties
i. Merger package wasn’t binding on new board
ii. Board sufficiently informed and understood transaction
iii. Comstock and PE firm each 10% shareholders
iv. Period of time between announcement and commencement of deal gave
sufficient time for alternative offer to surface
v. Deal protections were reasonable
vi. Shareholders have the chance to vote on deal
vii. Money damages against Comstock still available b/c court only decided
injunction issue
h. Takeaway: Case gives boards more freedom over what process to follow to achieve
reasonable best deal (Xmas present for boards)
i. Other Notes
i. Why would C&J agree to give Nabors majority control?
1. Benefits of Bermuda tax incorporation required Nabors to have majority
ii. There was no pre-signing market check b/c C&J didn’t want news of deal to leak.
iii. Why would shareholders oppose the 30-day stay on deal?
1. Economic downturns are unpredictable
2.  injunctions create risks
a. Delaware Chancery Court, 2013
b. Netspend’s largest shareholder, JLL, wants to sell its shares, but Netspend didn’t want its
shares on the open market. Netspend signs confidentiality agreement with 2 PE firms
that contained “standstill” agreements that prohibited the firms from seeking an
acquisition of Netspend. “Standstills” also contained “don’t ask, don’t waive” provisions
that prevented the firms from asking Netspend to waive any provisions of agreement.
Simultaneously, Netspend engaged in merger discussions with Total Systems, but it
insisted company was not for sale and refused to do market check. Concerned over
whether Revlon duties triggered, board contacted one strategic bidder about potential
change of control transaction and bidder never responded. Eventually, Netspend and
Total Systems arrived at a deal for $16 per share.
c. Revlon DOES NOT require boards to conduct a pre-signing market check, but a singlebidder process puts the board’s other decisions under even greater scrutiny
i. Directors here were financially sophisticated
ii. Reasonable not to conduct market check here b/c it put Netspend in strong
position with Total Systems
d. A weak fairness opinion is a poor substitute for a pre-signing market check
i. DCF analysis showed that Total System’s offer was grossly inadequate compared
to BofA fairness opinion
e. Standstill provisions ONLY OK to produce auction-like pressures on bidder
i. Standstills with PE firms were remnants of previous deals and should have been
waived here when Netspend entered negotiations with Total Systems
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 Netspend board likely did not act reasonably, but no injunction against merger b/c
the magnitude of the potential harm to the plaintiff, would not exceed the potential
harm of an injunction and not closing the deal
i. Pendency of litigation effectively created a remedy
ii.  waiver of standstills and other concessions eventually made
g. Other Deal protections were reasonable:
i. 3.9% break up fee
ii. No shop provision with fiduciary out
iii. Matching rights for buyer if 3rd party
iv. Voting agreements that effectively locked up 40% of Netspend’s shares
h. Is NETSPEND consistent with C&J?
i. 2 cases can be reconciled
ii. Weak fairness analysis and standstills not present in C&J
iii. Facts and individual circumstances matter
a. Supreme Court of Delaware, 2009
b. Basell acquires 8% ownership in Lyondell and Lyondell discloses info in required Schedule
13D filing, suggesting that Basell may want to acquire Lyondell. Instead of conducting
market check, Lyondell board uses wait and see approach. Basell had existing merger
with Huntsman, but Huntsman received better proposal, so Basell has limited time to
decide between Huntsman and Lyondell. Lyondell board authorizes merger negotiations
and then accepts offer from Basell that gives 45% premium on market price. Deal
protections include 3% breakup fee, no shop provision, and 3-day matching rights with
fiduciary out.
c. Any board action before sale negotiations begin is NOT subject to Revlon standard
BUT rather to the business judgment rule (i.e. business judgment rule applies prenegotiations)
i. Revlon duties only arise after board embarks on transaction that would result
in change of control
d.  Lyondell board did not violate fiduciary duty
i. Board’s wait and see approach after Schedule 13D filing was within board’s
discretion under business judgment rule
e. Damages?
i. Plaintiffs seeking damages and not injunction b/c deal complete once case
reached supreme court
ii. Need to demonstrate breach of duty of loyalty (good faith, disinterestedness,
and independence) to get damages
1. Bad faith =utter failure to seek highest price
f.  Lyondell Board did not demonstrate bad faith
g. Why didn’t Lyondell conduct pre-signing market check?
i. Board wasn’t planning on selling when Basell acquired 8% ownership
ii. Board is likely under Revlon duties once it conducts a market check
1. Even if you’re not selling b/c market check indicates to public that
you’re selling and you might get pressured to sell.
a. Delaware Chancery Court, 2014
b. Calix bought Occam at 60% premium to market price. Deal was 49.6% cash and 50.4%
stock. Plaintiffs allege that Occam board breached their fiduciary duties by not pursuing
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other bidders due to conflicts of interest (breach of duty of loyalty). Occam board had
exculpatory charter provision that protected them from breach of duty of care.
c. Cash to stock ratio implicated Revlon enhanced scrutiny but NOT entire fairness
d. In addition to obtaining the best value reasonably available under Revlon, board
CANNOT allow an improper motive to influence sale process (duty of loyalty)
e. Distinguishing from Lyondell
i. Lyondell required that board utterly fail to attempt to obtain best sale price
ii. Lyondell is only dispositive with respect to duty of loyalty claim in which
plaintiffs allege that directors consciously disregarded known obligations
imposed by Revlon
iii.  There was NOT sufficient evidence to infer Lyondell directors were
improperly motivated
1. Even if they were, it would be at most a breach of duty of care and the
exculpatory charter provision protects them
2.  However, there was sufficient evidence to infer that Lyondell officers
were improperly motivated
f. Other Notes
i. What is a post-signing market check?
1. Seeking offers between board signing of deal and shareholder vote
2. Delaware law requires some type of period between signing and
shareholder vote to allow other bidders
ii. Why shouldn’t you do a pre-signing market check?
1. Initial buyer doesn’t want you to
2. News can leak  bad for customers and employees to know about
potential sale
iii. Why are injunctions worse than damages?
1. Hurt shareholders, especially if deal at market premium
F. Controlling Shareholder Buyouts of the Minority Shares
Be careful to distinguish merger cases vs. tender offer cases
a. Delaware Supreme Court
b. Bershad, a minority shareholder in Dorr-Oliver, challenged a cash-out merger of DorrOliver minority shareholders by Curtiss-Wright, the 65% owner of Dorr-Oliver. Bershad
argued that the majority shareholder owed the company minority shareholders a
fiduciary duty to auction the entire company under Revlon.
c. Revlon does not apply when a controlling shareholder seeks to buy out the minority
i. There is no affirmative duty on majority shareholders to auction the corporation
when they seek to cash-out the minority
ii. Stockholders in Delaware corporations have a right to control and vote their
shares in their own interest
iii. A stockholder is under no duty to sell its holding in a corporation, even if it is a
majority shareholder, merely b/c the sale would profit the minority.
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a. Delaware Supreme Court
b. Alcatel owned 43% of Lynch and wanted to buy out the other shareholders. Lynch
formed a committee of independent directors to negotiate with Alcatel. Alcatel raised its
offer to $15.50 but committee refused. Alcatel threatened to commence a tender offer
directly to the shareholders at a price lower than $15.50, and the committee reluctantly
accepted Alcatel’s $15.50 merger offer.
c. In a merger between a controlling shareholder and the company it controls, the
merger must be entirely fair to the minority shareholders
d. Rationale:
i. Controlling shareholder has more info than minority
ii. Controlling shareholder can time offer when market price is low
e. Entire fairness standard requires fair dealing and fair price
i. Fair dealing focuses on process—how the transaction was timed, structured and
ii. Fair price focuses on whether the minority shareholders are receiving fair
monetary compensation for their shares
f.  Even though Alcatel only owned 43% of Lynch, it owed the other shareholders
fiduciary duties.
i. It is possible to be a controlling shareholder without holding the majority of the
shares if you exercise control over the company’s business affairs.
g. Burden of proof shifts and the minority shareholders must prove the transaction failed
the entire fairness standard IF:
i. The record shows that a well-functioning and truly independent committee
approved the transaction OR
ii. The merger was conditioned on the approval of a majority of the minority
shareholders of the target corporation
h.  Alcatel had burden of proof to show entire fairness b/c Lynch committee of
independent directors was coerced by Alcatel into approving the transaction
a. Delaware Chancery Court
b. Vishay owned 80.4% of Siliconix and announced a tender offer at $28.82 for the minority
shareholders. Special committee representing Vishay and Siliconix concluded
price=inadequate. Vishay then switched from cash tender offer to a stock exchange offer
of 1.5 Vishay shares for every Siliconix share. Vishay’s offer contained a non-waivable
“majority of the minority” condition providing that Vishay would not proceed with the
offer unless a majority of the shares owned by the minority were tendered. Vishay also
intended to effect a short-form merger at the same exchange ratio following the tender
offer. Special committee of independent Siliconix directors stayed neutral on offer.
Minority shareholders sought injunction against Vishay’s offer, claiming entire fairness
not met.
c. A controlling shareholder’s tender offer to the minority shareholders is exempt from
entire fairness IF there is full disclosure and no coercion
i. Entire fairness would be applicable if Vishay had negotiated a merger
agreement with independent directors on Siliconix’s board rather than
proceeding unilaterally through a tender offer
ii. Rationale
1. Accepting or rejecting a tender offer is a decision to be made by an
individual shareholder
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2. Board of the acquired company in a merger enters into a merger
agreement, but in a tender offer the board is not required to enter into
an agreement b/c the target in a tender offer is the shareholders (not
the corporation or the directors)
iii. Delaware imposes specific duties on directors of corporations entering into
merger agreements, but it does not impose comparable statutory duties on
directors of companies that are targets of tender offers
d.  Entire fairness NOT applied to Vishay’s tender offer
a. Delaware Supreme Court
b. Unocal owned 96% of UXC and wanted to acquire the remaining shares. Unocal
executed a short-form merger with UXC in which the minority shareholders received 0.54
Unocal shares for each UXC share. Although Unocal reached an agreement on the
merger with a committee of independent directors, Unocal, as the owner of more than
90% of UXC’s shares, had the power to act unilaterally under the short-form merger
statute. Minority shareholders claimed the transaction was not entirely fair.
c. If the controlling shareholder acquires 90% of voting control of the target, the backend short form merger is exempt from entire fairness IF there is full disclosure and no
d.  UXC merger not subject to entire fairness test b/c the transaction was consummated
under the short-form merger statute.
i. Realized this result was at odds with the settle principle that the controlling
shareholder owed a fiduciary duty to the minority shareholders, but the result
was mandated by the statute
ii. By enacting a statute that authorizes the elimination of the minority without
notice, vote, or other traditional indicia of fairness, DE law circumscribed the
parent corporation’s obligations to the minority in a short- form merger b/c it
does not have to establish entire fairness
iii.  Appraisal is the exclusive remedy, absent fraud or illegality, available to a
minority shareholder who objects to a short-form merger
Siliconix + Glassman = weird logic for standards in controlling shareholder buyouts
a. A 2-step controlling shareholder buyout (tender offer + short-form merger) is exempt
from the entire fairness standard
b. A controlling shareholder buyout effected through a negotiated merger is reviewed
under the entire fairness standard even though it produces the identical economic
outcome in a 2-step transaction
a. Unocal made stock-for-stock tender offer for the 35% of Pure Resources stock that
Unocal didn’t own. Pure’s board formed a special committee of independent directors
that asked for all of the powers of the board (including poison pill), but Unocal refused to
give special committee more authority than to hire advisors, study the offer, negotiate,
and make recommendations to shareholders. Minority shareholders oppose claiming
that transaction fails entire fairness due to timing, lack of special committee authority,
and lack of adequate disclosures.
b. Requirements for tender offer to be non-coercive
i. (1) the offer must be subject to a non-waivable condition that the holders of a
majority of the shares owned by the minority agree to tender
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ii. (2) the controlling shareholder must guarantee to promptly execute a shortform merger at the same price if it obtains 90% or more of the shares in the
tender offer
iii. (3) the controlling shareholder has made no retributive threats AND
iv. (4) the independent directors have had free rein and adequate time to react to
the tender offer by hiring their own advisors, providing the public
shareholders with a recommendation about the offer and disclosing adequate
information for the public shareholders to make an informed judgment
c.  Unocal’s tender offer NOT subject to entire fairness as long as offer not coercive and
full disclosure
i. Despite frustration with Delaware precedent, court did not want to upset it
ii. Declined to give independent directors the right to use a poison pill against the
controlling shareholder’s tender offer
d. Court noted that lack of logic in Delaware law on controlling shareholder buyouts
i. Kahn – in negotiated merger, entire fairness applies
ii. Siliconix – in tender offer by controlling shareholder, deal exempt from entire
fairness if full disclosure and non-coercive offer
iii. Glassman – in tender offer allows controlling shareholder to reach 90%
ownership, controlling shareholder can unilaterally implement a short-form
merger and achieve same economic outcome as negotiated merger with
exemption from entire fairness standard
iv. *Tender offers are, if anything, less protective of the rights of minority
shareholders than negotiated mergers are
1. Negotiated mergers give minority assurance they’re receiving fair price
2. Tenders offers make it easier for minority shareholders to sell their
shares at above-market prices
v. Reason for distinction in legal treatment between mergers and tender offers
1. DE law heavily regulated mergers and the conduct of directors but did
not regulate tender offers, which did not require the intervention of
2. DE law permits the board to intervene against hostile tender offers by
using poison pills
a. No such right when tender offer made by controlling
a. Delaware Chancery Court, 2010
b. CNX formed by its parent CONSOL who owned over 80% of CNX shares. The largest
minority shareholder was T. Rowe Price. CONSOL and T. Rowe Price agree to tender
agreement in which T. Rowe Price would tender its shares to CONSOL at 48.5% premium.
CNX board limited authority of special committee to evaluating the tender offer and
engaging advisors. Board retroactively grants committee authority to negotiate, but
CONSOL declines to increase price so committee remained neutral. Other minority
shareholders want to enjoin tender offer b/c T. Rowe Price doesn’t care about the price
of the tender offer since it has just as much stock in CNX as in CONSOL.
c. Unified Standard of Review: Business judgment rule applies ONLY when the
transaction is conditioned on BOTH the:
i. Affirmative recommendation of a special committee with appropriate
authority AND
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ii. Approval of a majority of the unaffiliated stockholders under un-coerced and
well-informed circumstances
d.  No preliminary injunction granted b/c deal did not qualify for business judgment rule
so entire fairness review applied
i. Special committee did not affirmatively recommend the tender offer.
ii. Special committee did not receive appropriate level of authority
iii. Agreement with T. Rowe Price might have undercut the majority of the minority
tender condition
a. Delaware Supreme Court, 2014
b. M&F owned 43.4% of MFW holding company (court assumed M&F was controlling
shareholder). M&F proposes to purchase remaining MFW shares at 47% premium in
proposal to MFW board. 2 non-waivable conditions: approval by special committee and
approval of the majority of the remaining shares. MFW formed special committee that
had complete veto power (poison pill power unnecessary).
c. Controlling shareholder buyouts will receive the business judgment standard IF:
i. (1) controlling shareholder conditions the transaction on approval of both a
special committee AND a majority of the minority shareholders (2 procedural
ii. (2) special committee is independent
1. Davis: tough to know
iii. (3) special committee is empowered to freely select its own advisors and to
say no definitively
iv. (4) special committee meets its duty of care in negotiating a fair price
1. Davis: tough to know
v. (5) vote of the minority shareholders is informed
vi. (6) no coercion of the minority shareholders
vii. Rationale:
1. Following the 6-part test replicates when you’re negotiating at armslength with a 3rd party
2. Better guarantee minority shareholders will get higher price
3. No incentive to use entire fairness standard if both procedural
protections used
d. To show that a director is NOT independent, a plaintiff must demonstrate that the
director is beholden to the controlling party or so under the controller’s influence that
the director’s discretion would be sterilized (must satisfy materiality standard)
i. Same social circles and past business relationships are NOT enough to rebut
presumption of independence
ii. Director must have ties to person whose proposal he is evaluating that are
sufficiently substantial that he could not objectively discharge his fiduciary
duties (ties affect director’s impartiality)
1. Ex. a poor person receiving a lot of money is material but a director’s
company receiving a sum of money may not be material to the
individual director
iii. Application to special committee
1. The 3 directors in questions were generally wealthy on their own and
any payments receive from M&F related to other transactions were not
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e.  Claims against M&F must be dismissed “unless no rational person could have
believed that the merger was favorable to MFW’s minority stockholders”
i. Special committee was independent and exercised due care (considered selling
the company)
ii. Majority of the minority vote was full informed and not coerced
f. Suspicion over timing of tender offer b/c MFW wasn’t doing well at the time
i. P: waiting for low point they knew would be followed by high point
ii. D: giving them a deal at a low point
g. At what stage in the procedural posture will the court be able to determine whether the
6-part test has been met?
i. Unlikely at motion to dismiss stage
1. Court said M&F case would have survived at MTD stage
ii. Can’t try and prove standard at trial b/c judge only decide fair value at trial
iii.  likely motion for summary judgment stage
h. Is protection of minority shareholders a good idea?
i. Yes—controlling shareholder has lots of power and could subject minority to
unfair behavior
ii. No—makes it harder to complete controller buyouts
i. If D can’t establish compliance with 6-part test after discovery (i.e. MTD or MSJ), D
won’t get business judgment at trial but rather entire fairness review
i.  Taking on business risks by trying to abide by 6-part test and may not get
benefit of business judgment rule
j. Why so much emphasis on procedural safeguards, such as special committee and
majority of the minority vote?
i. Judges are uncomfortable trying to determine fair value b/c that’s not what
they’re trained to do  favor procedural approach
G. Management Buyouts (MBOs)
a. Manger of company takes company private by pairing with private equity firms
i. Not all PE purchases are MBOs (ex. buying division of company)
ii. Strategic buyer vs. financial buyer
1. Strategic buyer is in the business
2. Financial buyer is looking to flip the business (ex. PE firm)
b. How MBO differs from controller buyout?
i. Management doesn’t have control
ii. More potential for conflict of interest
1. Manger has duty to maximize shareholder value but wants to minimize
price as buyer
iii. Easier for the board to say no
1. Manager usually not controlling shareholder
2. *However, controlling shareholder buyouts CAN be a management
iv. Greater possibility for competition
c. Why PE buyouts work:
i. PE firms can borrow and debt placed at target level
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ii. PE firms more skilled (better mgmt) and more willing to take on debt
iii. Less worry on short-term (quarter or year)  focus on medium term
iv. PE owners who are on the board now have skin in the game like the
v. Eliminates cost of being public
d. Potential Risks
i. Managers often friends with directors (board) and can use this influence to push
through a buyout
ii. If board says no, board might effectively be firing treasured management
iii. Managers usually plan buyout at a low point in the company’s stock price
e. Benefits
i. Private company can be more efficient than a public one due to:
1. Capacity for an increased debt load
2. Lower regulatory costs
3. Diminished public scrutiny
4. *Management reaps all these benefits
ii. Shareholders may want MBO due to premium
f. Procedural Safeguards
i. Special committee of independent directors to negotiate buyout
1. Key question: can directors act independent of managers or controlling
ii. Go-shop provision to allow target to solicit other bidders after announcement of
1. However, potential bidders may not bid b/c they believe the current
management is necessary to run the company
g. Are MBOs a good thing for shareholders or society?
i. Good for shareholders if they get premium and later stock price falls
ii. Investors can benefit from efficient allocation of resources
iii. Society? – unclear
h. Effect of Increased Shareholder Activism on MBOs?
i. Ready to spend resources and push back on MBO
i. Who’s usually the buyer?  Reverse triangular merger
i. PE firm creates both buyer and subsidiary of buyer who merges w/ target 
buyer will own 100% of target and PE funds own the buyer
ii. Buyer usually borrows a substantial amount of money and target is obligor
j. How does MBO deal close?
i. PE funds of will provide equity if debt comes through
ii. PE funds will NOT be on hook if deal falls thru, BUT will be responsible for
reverse breakup fee
HCA Proxy Statement
a. Oct. 17, 2006
b. Buyer/Parent = Hercules Holding. Sub of buyer = Hercules Acquisition. Target = HCA.
Merrill discusses with HCA management various acquisition opportunities and then Frist,
founder of HCA, speaks to Bain about taking HCA private. Sub of buyer will merge with
HCA and HCA will survive. Buyer owned by PE funds sponsored by Bain, KKR, and Merrill.
Sponsors put up $4.5 B and Frists (family of founder of HCA) put up $800 million in
equity. Special committee of independent directors, given broad range of powers,
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formed to negotiate deal and they hire financial advisors Morgan Stanley and Credit
Suisse. Frist and other manages stood to make $334 million from the deal.
Why does HCA want buyout?
i. Debt and equity commitments make HCA feel good about deal
Standard of Review: Revlon
Factors Considered by Special Committee
i. Merger was more favorable to shareholders in terms of potential value than
other alternatives, such as stock repurchase or spin-off
ii. Company has low performance expectation for the short-term
iii. Financial advisors were very reputable institutions
1. Metrics used include: DCF analysis, comparable companies, and
comparable transactions
2. $51 purchase price within metrics ranges
3. Why EBITDA better than earnings for deal analysis?
a. Looks at company performance in purer way
4. Success Fee
a. Fee paid to financial advisors if deal goes through
b. Purposes:
i. Incentive to complete deal
ii. People hate paying lots of money if deal falls thru
iv. No pre-signing market check to avoid public distraction if deal fell thru but
conducted post-signing market check:
1. 50 day go-shop provisions followed by no-shop provision
2. Financial advisors contacted 23 other parties but received no proposals
3. Critic of post-signing market check: no bidder wants a deal that
alienates management b/c the bidder would want the management to
stay with the company
v. Employees protected with one-year guarantee that salary and wages would not
be decreased
vi. Conflicts of interest: Frist and other managers who received compensation plans
from deal
1. Restrictions placed on who they could discuss deal with
Stockholder Approval:
i. DE law: majority of the outstanding shares (NOT majority of shares voted)
ii. 72.9% of HCA shares approved
iii. No majority of the minority condition here
Conditions of Deal include:
i. No financing condition? (typical)
ii. Reverse breakup fee (fee buyer pays target to get out of deal): $500 million
(2.4%) guaranteed by Funds and Frists
1. Typical reverse breakup fee: 6%
6 litigations filed related to the merger
i. Solution:
1. Buyer agreed to asset appraisal filings were not untimely
2. Reduction in breakup fee
ii.  inconsequential
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H. Hostile Takeovers
How is hostile takeover different from a friendly deal?
a. No consent from board
b. Bidder goes straight to the shareholders
a. Tender offer (implying a good price)
b. Proxy contest/fight + tender offer or merger
i. Proxy contest/fight = bidder seeks to replace all or a majority of the target
company’s board with directors that support the bidder’s objectives
ii. Commonly initiated when target company has takeover defenses in place which
could frustrate a tender offer (ex. poison pill)
iii. Method for bidder to get 100% of shares if it does not already have 90%
iv. If board realizes it will lose proxy fight, it might take back defensive measures
and turn hostile takeover into a friendly deal
v. Why include tender offer with proxy fight?
1. Gives bidder credibility in eyes of target shareholders
vi. Stand-alone proxy fights have become more frequent due to activists
c. Lawsuit?
Main Takeover Defenses
a. Poison Pill (shareholder rights plan)—most significant
i. Gives all stockholders of the target company, other than the hostile bidder, the
right to buy additional stock at a substantial discount
ii. Trigger = certain % of shares acquired or proposed to be acquired by single
1. Common: 10-15%
2. Lower threshold = more defensive of a pill
3. Shareholders favor higher threshold (20%) to give bidder an opportunity
to gain a significant stake in the company w/o foreclosing on proposal
that could be valuable to shareholders
iii. Effect
1. Dilutes the potential bidder’s ownership interest  discourages
triggering the pill
2. Increases acquisition cost
3.  makes hostile takeover prohibitively expensive
iv. Functions
1. Bargaining chip to increase price
2. Delay deal to see if there are other potential offers
3. NOT OK to use to just “say no” as a way to protect management or
remain independent
4. DOESN’T prevent proxy fights
5. In practice, rarely ever triggered; the threat is enough
v. Shadow Pill (Pill-on-the-Shelf)
1. Pill in place and ready to be implemented quickly in response to a
specific threat
2. Company has ability to authorize necessary preferred stock
vi. Dead-Hand
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1. Provides that only continuing board members can redeem poison pill
(i.e. newly elected directors can’t take back poison oil)
vii. Today: fewer poison pills b/c proxy advisors don’t like them
b. Staggered Board
i. Board structure comprised of directors that have different overlapping, multiyear terms so that not all of the directors’ terms expire in the same year
1.  Entire board cannot be replaced in one year even if you win proxy
ii. Unless charter provides otherwise, board members can only be removed for
cause (i.e. serious transgression) (DE law)
iii. Rationale
1. Provides stability and consistency to help company achieve long-term
iv. Non-staggered board can be removed by stockholder vote without cause
v. Example:
1. board divided into 3 classes with the terms of directors within one class
expiring in a different year from directors in another class
c. State Anti-Takeover Statutes
i. Constituency Statutes
1. Gives target’s board the discretion to favor a deal that is better for the
company’s employees, the community, and local economy over a deal
with a higher purchase price
2. DE: No, IL: Yes
ii. Control Share Acquisition Statutes
1. Prohibits a person from holding a stated percentage of the target
company’s stock from voting its shares unless a certain percentage of
the other disinterested stockholders (i.e. majority) first approve that
stockholder’s right to vote those shares
2. DE: No
iii. Business Combination Statutes
1. Generally restricts a business combination between the target company
and the interested stockholder for a stated period of time
2. DE statute: Restricts business combination between target company
and interested stockholder who holds at least 15% of target’s stock for 3
years UNLESS:
a. Target’s board approved the business combination before the
stockholder became interested (i.e. accumulated the shares
triggering the statute)
b. Target’s board approves the business combination after the
interested stockholder accumulated the stock AND 66 2/3% of
the disinterested stockholders approve the transaction OR
c. Interested stockholder owned 85% of the target’s outstanding
stock (through a tender offer) at the time it became
“interested” under the statute
iv. Fair Price Statutes
1. Requires that all of the target’s shareholders receive the highest cash
price paid by the bidder to any other stockholders
a. Can’t squeeze out shareholders
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2. DE: No; IL: Yes
Defensive Charter and By-Law Provisions
a. Charter Amendments vs. By-Law Amendments
i. Charter (certificate/article of incorporation) amendments
1. Must be approved by both the company’s board AND stockholders
ii. By-Law Amendments
1. Only need approval from company’s board
b. Advance Notice
i. Requires that a certain period of advance notice be given before a stockholder
makes director nominations or certain other stockholder proposal
1. Reasonable deadline: 60 days
2. The longer the advance notice period, the more
controversial/aggressive (ex. 120 days)
ii. Purpose:
1. Gives the board adequate time to develop a strategy to manage a
takeover attempt and respond appropriately
c. Staggered board (see above)
d. Special Meeting Limitations
i. Requires that only the board members and not the stockholders have the right
to call a special meeting
ii. Purpose:
1. Prevents dissidents or hostile bidders from voting on a takeover
proposal or initiating a proxy contest at any time other than the
company’s annual meeting
e. No Expansion of Board
i. Prohibits stockholders from having the ability to increase the size of the board
 only board can increase its size
ii. Purpose:
1. Prevents hostile bidder from proposing an increase to the board with a
view to have its own board members elected and eventually gain
control of the board
f. Eliminate Action by Written Consent
i. Prohibits shareholders form taking any action by written consent  stockholder
cannot approve any proposal unless it is part of the stockholder meeting
1. Default: shareholders can act by written consent unless the charter
provides otherwise (i.e. shareholders don’t need a meeting to act)
ii. Purpose:
1. Prevents a hostile bidder from launching a campaign to remove existing
directors and replace them with bidder-friendly directors without
having a stockholder meeting that gives the board an opportunity to
respond in person
Additional Defenses
a. White Knight
i. Target’s board solicits and encourages a competing bid from a friendly 3rd party
who is considered by the board to be a better acquirer than the hostile bidder
ii. Includes:
1. Superior offer from a financial perspective
2. Buyer that will promote success of the company
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3. Board-friendly buyer
b. Employee Stock Option Plan (ESOP)
i. Issuing stock to a new employee stock option plan
ii. Plan’s trustee, usually an officer or director of the target, is charged with voting
the ESOP shares in best interest of plan’s participants
c. Pac-Man Defense
i. Target attempts to acquire the hostile bidder before the bidder can acquire the
ii. Only available if target has sufficient cash or access to capital
d. Restructuring
i. Spin-off: company separates out a division of line of business
ii. Split-up: company transfer certain assets of the parent to 2 or more newly
formed corporations, dividends the shares to the parent’s stockholders, and
iii. Asset sale: outright sale of certain assets to a friendly buyer
iv. Stock buyback (repurchase plan): company buys its own stock back from existing
stockholders or from treasury shares
e. Golden Parachute
i. Lucrative severance contracts for management
Reasons Why Bidder Wouldn’t Do Hostile Takeover
a. Company’s takeover defenses
b. Negative publicity
c. Opposition form anti-trust regulators
d. Can’t do due diligence
e. Possibility of alienating target’s management or customers
f. Target shareholders might not think bid is high enough
Reasons for Bidder to Do Hostile Takeover
a. Strategic need to takeover (ex. target has IP you don’t have)
b. Perception target is undervalued
c. Synergies (ex. cost-saving from consolidating distribution systems, combing assets yield
greater value)
d. Tolerance for risks
e. Pressure from stockholders to use excess cash
f. Knowledge about target stockholders
g. Moves faster than mergers
i. Don’t need SEC approval
ii. Tender offer only has to stay open for 20 business days
How do Hostile Takeovers Begin?
a. Bear hug letter— goes to target CEO/board with offer + threat to take deal to
shareholders if not accepted
i. Offeror will often announce bear-hug letter
b. Initiate tender offer to shareholders
c. Starting buying stocks of target
i. Must file Schedule 13D after stock ownership > 5%
Required SEC Filings
a. Schedule TO
b. Offer to purchase
c. Letter of transmittal
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d. Registration statement (if stock deal)
e. Schedule 14D9
i. Target board takes position on tender offer
ii. Must be filed within 10 business days of tender offer
iii. Target board can issue “stop, look and listen” to its shareholders asking them to
wait on their board’s opinion before voting
a. Lay groundwork for what boards can do when encountered with hostile takeover
i. Conflict of interest: management might want own deal to succeed or not want
any deal to succeed
ii. Management had more power 30 years ago
b. Unocal Test
i. Requirements
1. Show reasonable grounds that danger to corporate policy exists
2. Defensive measures must be reasonable
ii. Applies to:
1. Poison pills and other defensive measures
2. Deal-protection measures in friendly mergers
c. MACMILLAN (only case that deals with conflict of interest)
i. Supreme Court of Delaware, 1989
ii. Macmillan management recognizes company likely takeover target so it
engages in restructuring as defensive measure that would split up Macmillan
into Information and Publishing. Senior management came up with plan and
board just went along with it. Bass emerges as 1st hostile bidder and chancery
court enjoins restructuring since Bass offer was “clearly superior.” Macmillan
management enters management buyout discussion with KKR. Maxwell first
proposes a merger and then makes all-cash tender offer. Lots of back and forth
between Maxwell and KKR raising bids, but senior management clearly favored
KKR and there was lots of shady business. Unbeknownst to management’s shady
actions, Macmillan board agrees to KKR deal that had lockup provision allowing
KKR to purchase Macmillan subs if deal fell thru.
iii. Entire fairness applied because management acted self-interestedly and
deliberately concealed material information from one of the bidders.
iv. 2 Part Test for Analyzing Board Action Unequally Treating Competing Bid
1. Whether directors properly perceived that shareholders were enhanced
2. Board’s action must be reasonable in relation to the advantage sought
or to the threat to which a particular bid allegedly posed to the
v.  Macmillan’s lockup agreement with KKR enjoined b/c management did not
act in the interest of its shareholders
1. Macmillan senior management gave tip to KKR about Maxwell’s bid
2. Macmillan withheld information from Maxwell for much longer than it
did with KKR and did not give equal info
3. Advisor acting as auctioneer misled Maxwell about its position in the
auction and told KKR how to tailor its bid to win
4. Auction clearly skewed in favor of KKR
vi. Problem with Macmillan’s financial advisors
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1. Both were brought in by management initially and then become the
special committee’s advisors.
2. Lazard though $64 restructuring value was fair but then thought
Maxwell’s $80 tender offer was inadequate.
vii. Lockup provision
1. Allows bidder to purchase subs of target in case deal falls thru
2. Effectively reduces the value of the target for other potential bidders
viii. Takeaway: How should advisors for independent directors be hired?
1. Hired by the independent directors and not management
2. Look into advisors’ past relationship with management
i. Supreme Court of Delaware, 1990
ii. Time began planning its long-term plan to move into the entertainment industry
in 1983 and had its first meeting with Warner about the possibility of a joint
venture in 1987. Time wanted to remain in control after the merger to maintain
its culture and journalistic integrity. Proposed stock-for-stock deal was reverse
triangular merger where Warner merged into sub of Time and Warner survived.
DE law only required Warner shareholder approval, but NYSE rules also required
Time shareholders to vote. Paramount submits all-cash offer of $175/share
(stock trading at $126/share) for Time, but board rejects. Board wants NYSE to
alter its rules to allow the Warner deal to proceed without Time stockholder
approval b/c Time worried shareholders would prefer stock premium, but NYSE
refused. As a result, Time restructures Warner deal into a tender offer for 51% of
shares + back end merger for 49% of shares. The restricted deal takes the deal
below the NYSE threshold that required stockholder vote. Paramount’s 2nd offer
rejected so it files suit to enjoin Warner deal. Time shareholders join Paramount
as plaintiff.
iii. Shareholder arg: Deal triggered Revlon duties that board did not meet
1. Paramount didn’t have standing to bring Revlon claim b/c Revlon only
protects shareholders and not competitors
iv.  Revlon duties NOT triggered by Time-Warner deal
1. Time did not abandon long-term strategic plan
2. No evidence that Time wanted to break up company or put it up for sale
v. Paramount arg: Unocal standard not met
vi.  Under Unocal, the board is not limited to thinking about value and is
allowed to consider other factors (such as constituents, corporate objective,
timing of the offer, impacts of defensive actions, etc.)
1. “Directors are not obliged to abandon a deliberately conceived
corporate plan for a short-term shareholder profit unless there is clearly
no basis to sustain the corporate strategy”
vii.  Time’s long-term strategic plan to merge with Warner satisfied the Unocal
standard and its Revlon duties were not triggered
viii. Takeaways:
1. Should directors be able to act against what the holders of the majority
of the shares want?
2. If Warner deal was responsive to a hostile takeover rather than part of a
long-term strategic plan, outcome of case would have been different
a. Long-term plan was key for court
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b. Lack of conflict of interest among board compared to
Macmillian case
e. QVC
i. Supreme Court of Delaware, 1994
ii. Paramount begins merger discussions with Viacom in 1990 and continue until
1993. QVC’s interest in Paramount + Viacom’s nonvoting stock price increase =
deal where Paramount merges into Viacom. Paramount stockholders would
receive some Viacom voting stock, some Viacom nonvoting stock, and $9.10 in
cash. Deal contained 3 controversial deal protections: (1) no shop provision, (2)
$100 million termination fee, and (3) stock option agreement that allowed
Viacom to purchase 19.9% of Paramount’s common stock if triggering event
occurred. QVC proposes merger with Paramount and proposes cash tender offer
with a back-end merger. Back and forth between Viacom and QVC amending
their deals. Paramount board goes with Viacom offer and did not communicate
with QVC at all regarding their deal b/c they thought Viacom’s no shop
prevented them from doing so.
iii. Distinguishing from TIME
1. TIME did not involve a change of control b/c the company would be
owned by a fluid aggregation of unaffiliated stockholders before and
after the merger
iv. When a corporation undertakes a transaction that will cause a change in
control or a breakup of the corporate entity, the target board is subject to
Revlon duties.
1. The change in control subjected the Paramount board to Revlon duties
2. Nobody in control of Paramount at start of deal (fluid aggregation of
unaffiliated stockholders)  Viacom would be in control
v. Deal protections may not define or limit the directors’ duties under Revlon
1. The stock option agreement coupled with the no shop prevented the
Paramount board from seeking the best value reasonably available to
the Paramount stockholders
vi.  Paramount board violated their Revlon duties
1. Court did not expressly find that Paramount board favoring Viacom
vii. Takeaways:
1. Purchase price premium often colors probability as to whether dealprotection measures will be upheld
2. Today, stock option agreements and not common
Can Boards Veto a Hostile Takeover (Use a Poison Pill)?
a. Lucian Bebchuk View: No
i. Leading Advocate of Shareholder Rights
1. Wants to diminish board and management rights
ii. Wants to slow down hostile takeover process to allow for shareholders to
consider alternatives
1. Concedes use of poison pill to solicit alternative offers is good
2. Ideally would like process to be 3-6 months
iii. Wants Shareholders to have Undistorted Choice
1. Tender offers are inherently coercive b/c if you don’t tender you don’t
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a. Ex. Could get paid $20 now or might get squeezed out for $12
2. Puts shareholder in tough position to risk not tendering if everyone else
iv. Solution:
1. Use 2 Step Voting Mechanism
a. Does shareholder prefer the takeover to take place?
b. Does shareholder prefer that its shares be acquired in the event
that a takeover takes place?
2. Rationale:
a. Voting against the tender offer would impose no penalty on the
voting shareholder in the event of a takeover
b. Shareholder votes would solely reflect their preferences
concerning whether a takeover should take place
c. Ensures shareholder doesn’t lose if out he doesn’t want to
tender initially
i.  If it seems that a majority of shareholders prefer the
takeover in the first vote, then shareholder can
confidently vote to have his shares acquired.
v. Arguments Against Board Veto/Poison Pill
1. Shareholders own the shares and the board shouldn’t interfere with
their property rights
a. Who says board knows better?
b. Shareholders know what’s best for their economic well-being
2. Better for economy b/c assets of company used efficiently
3. Agency Problems
a. Ex Ante
i. Managerial slack, consumption of private benefits,
empire-building, etc.
ii.  This is our board mentality and we don’t want to be
kicked out
b. Ex Post
i. Board might block a beneficial acquisition in order to
retain independence
ii. Board might use their power not to extract a higher
premium but instead for personal benefit
vi. Rejection of Arguments that Support Board Veto/Poison Pill
1. Delegation to the board works in other contexts, such as investment
decisions, so the board should have control in the takeover context
a. Rejection  Board can be in control of business decisions b/c
the possibility of takeover provides a safety valve and source of
2. Inefficient Capital Markets: Board veto can address situations in which a
company’s stock is trading at a “depressed” lever below its fundamental
a. Rejection  Shareholders would vote down any premium offer
if they believed it fell below target’s fundamental value
3. Eliminates bargaining power
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a. Rejection  Shareholders can decide if board should negotiate
deal better
4. Board has superior information, putting them in a better position to
estimate target’s independent value
a. Rejection  such information can be used as basis for board’s
communication and recommendation to shareholders
b. Shareholders would never have reason to reject an offer that
they view as benefit to them
c. Shareholders can recognize board is better informed
d. Directors might be self-serving in their view of what’s “best”
5. Serves best interests of all constituents
a. Rejection  connection between board and constituents is too
i. Buyer might move operations
b. Martin Lipton View: Yes
i. Leading advocate of board power and defending against hostile takeovers when
board doesn’t think it’s best
ii. Delaware Statutory Pill: Section 203
1. Directors can block potential transfers of control to substantial
shareholders by refusing to approve the transaction
2. Director power can be OVERRIDEN ONLY by vote of 85% of shareholders
iii. Arguments Supporting Poison Pill/Board Veto
1. Information gap between board and shareholders
a. Board can’t tell shareholders everything due to confidentiality
issues (See Airgas)
2. Conditionality
a. Before tender offer put to vote, you need to know
i. Buyer can get the $$
ii. Buyer won’t add more conditions to deal
iii. Deal will pass antitrust regulations
b.  Can’t find out this information without pill b/c shareholders
lack info revealed by due diligence
3. Weyerhaeuser-Willamette deal
a. Willamette used pill and staggered board to put up 14-month
resistance to Weyerhaeuser takeover, but after a 1st round
proxy fight loss, Willamette gave in, but achieved a 16%
increase in the bid
4. Hostile takeovers are unresponsive to non-shareholder constituents
iv. Problems with Bebchuk’s proposal
1. Would put up a “for sale” sign on all public corporations to receive
unsolicited bids
a. Disrupts long-term planning
i. Lipton wants to give management 5 years to develop
long-term plan
b. High costs of operating as if company always up for sale
2. Timing: vote would move things too quickly
a. It is difficult to be sufficiently certain when vote should occur
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3. Would put corporate raiders in charge of corporations, using high
leverage and junk bonds
4. Proxy fight is the better solution
a. Agrees that if opponent wins proxy fight, they can redeem the
b. Even with staggered board, if proxy wins first round, board
likely to give in
c. Is Bebchuk v. Lipton Argument Still Relevant?  Yes
i. Companies still have staggered boards
ii. Bebchuk’s proposal would lead to faster takeovers
iii. Involves larger debate of whether hostile takeovers are good or bad
d. Hypos About Board Action
i. Should board be able to veto takeover offer that shareholders want to preserve
corporate culture (i.e. Time Warner case)?
1. There is attractiveness to culture with certain institutions
2. More difficult to defend corporate culture than long-term value for
ii. Does board have to sell to buyer who wants to borrow a lot and create a likely
future bankruptcy
1. Under Revlon, board doesn’t even need to consider this
iii. Should company close US factories if it’s cheaper to manufacture abroad
1. Thinking about shareholders  yes
2. Thinking about constituents  no
i. Delaware Chancery Court, 2011
ii. Air Products starts friendly offer with Airgas but turns into hostile takeover that
lasts for a year. Initial Air Products offer is $60 all cash (structurally non-coercive
due to back-end merger at same price) with conditions: (1) majority of shares
tendered and (2) Airgas board needs to give approval to get around Delaware
Section 203. Airgas continually rejects Air Products offers and maintains
defensive measures: (1) poison pill, (2) staggered board but directors can be
removed w/o cause by 2/3 outstanding shareholder vote, and (3) shareholder
who owns 20% stock needs 2/3 vote approval. Airgas board recommends
shareholders vote against tender offer because price has been depressed by
recession and 3 financial advisors gave inadequacy opinions. At annual
shareholder meeting, 3 of Air Products’ independent director nominees get
elected to Airgas board. Delaware Supreme Court rejects shareholder by-law to
move up next annual shareholder meeting. Air Products makes “best and final”
offer to Airgas board of $70 and Airgas board, including 3 Air Products
independent directors, reject offer b/c they think company worth $78.
iii. Standard of Review: Unocal
1. Requirements:
a. Reasonable grounds for believing a danger/threat to corporate
policy and effectiveness
b. Board defensive measures are reasonable in relation to threat
2.  Puts burden on Airgas (target) board
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a. Airgas argued that business judgment applied b/c the presence
of the 3 new independent directors extinguished the
omnipresent specter that the board is acting in its own selfinterest
i.  Court rejected b/c Unocal always applies when
board takes defensive measures in response to hostile
3. Unocal standard doesn’t let you predict how cases will be decided
4. Distinction: Decision not to pursue a merger judged by business
judgment vs. decision not to redeem poison pill judged by Unocal
a. Rationale: Poison pill interferes with shareholder rights to
control their own property
iv. Application of Unocal:
1. (1) Must have reasonable grounds that threat existed
a. Structural coercion – risk that disparate treatment of nontendering shareholders might distort shareholders’ tender
i. Often occurs when back-end of merger gives less
consideration to shareholders than front end
ii. Air Products offer not structurally coercive b/c backend was same price as front-end
b. Substantive coercion – risk that target stockholders might
accept inadequate offer b/c of ignorance or mistaken belief
regarding the board’s assessment of the long-term value of the
i. Threat that half of Airgas shareholders = merger arbs –
those who buy stock when offeror announces interest
in target at low price and who would be willing to
tender into an inadequate offer b/c they still make a
profit on investment even if offer low
c. Threat that merger arbs will tender is legitimate only if offer is
d.  Airgas board acted in good faith in determining that Air
Products offer was inadequate by relying on advice of 3
financial advisors and their legal advisors
2. (2a) Defensive measures must not be preclusive or coercive
a. Preclusive – makes a bidder’s ability to wage a successful proxy
contest realistically unattainable
b. Combination of poison pill + staggered board is NOT a
preclusive defense
i. Combination will only delay and not prevent bidder
from gaining control of bidder as long as obtaining
control as some point in future is reasonably attainable
c.  Airgas defensive measures NOT preclusive
i. Air Products already won the first round and it is
reasonable for Air Products to have to wait to next
shareholder annual meeting to gain control of board
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3. (2b) Defensive measures must be reasonable (must have reasonable
basis not to redeem pill)
a. Pill only redeemable at discretion of board
i. Response by Offeror: use proxy fight
1. Threat of proxy fight could cause board to
b. Directors can follow plan designed to achieve long-term value
even at cost of immediate value
c.  Airgas defensive measures fall within range of
i. No conflicts of interest
ii. Consistently showed improved financial results
iii. 3 “independent” directors that Air Products installed
turn on Air Products and joined view of Airgas board
v.  Board can’t just say “never” but can say “no” if Unocal standard met
1. Importance of Airgas board containing 3 new independent directors
nominated by Air Products rejecting Air Products best and final offer
a.  not all info that board knows can be communicated outside
of the board
2. Interests of constituents did not play role in court’s decision
Recent Examples of Hostile Takeovers
a. Roche Attempted Takeover of Illumina (Jan-Mar 2012)
i. Illumina makes machines that maps a person’s genetic makeup and Roche’s
gene sequencing business had been struggling. Started as friendly offer with
Roche offering $44.50/share for Illumina (18% premium to stock price but 64%
premium before speculation surfaced). After Illumina board rejects, Roche
launches hostile takeover and Illumina employs a poison pill.
ii. Why had Illumina’s share price dropped from $70/share in the last 6 months
1. Uncertainty of government funding, which provided 80% of revenue
2. Global repercussions
iii. Roche’s Takeover Tactics
1. Elect 4 new members to current 9-member board (need plurality of
shareholders to achieve)
2. Propose by-law that expands board to 11 members and implement 2
new members (need 2/3 of outstanding shares to achieve)
3.  Roche win gets majority control of board if takeover tactics succeed
4. *Problem with “Naked voting”
a. Record date = March 8
b. Shareholder meeting = April 18
c. Shares of Illumina bought after March 8 = dead shares/votes b/c
it takes significant paperwork to pass vote from previous
shareholder to new shareholder
iv. Roche increases price to $51/share  Illumina stock price increases to over $51
1. Significance:
a. Illumina shareholders won’t want to tender b/c the market
price > tender price
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b. Roche proxy fight less likely to succeed b/c election of Roche’s 6
directors to Illumina board will end pressure on Roche to
increase offer
v. Roche presentation to Illumina shareholders
1. Illumina still facing revenue headwinds
2. Deal moves the risk from the Illumina shareholders to Roche
3. Roche better position for long-term
4. Stock premium is 81% on price before speculation
vi. Illumina Response
1. We’re the “Apple of Genomic Sciences”
2. Don’t sell to Roche
3. We have big upside
4. Proxy advisory services side with Illumina and urged vote against
vii. Result: Shareholders at annual meeting re-elects all of Illumina’s directors by a
large margin, giving Illumina the victory
1. Bebchuk would say:
a. Shareholders CAN vote no
b. Don’t need board veto
2. Today: Illumina $194/share
b. Glaxo Takeover of HGS (April–July 2012)
i. Glaxo and HGS split profits of a lupus drug Benlysta and are co-developing 2
other drugs to treat heart disease and diabetes. Glaxo offers HGS $13/share in
cash which is at an 81% premium. HGS share price has dropped 75% in last 12
months and HGS has reported $381 million in losses in 2011 and $233 million in
losses in 2010. HGS adopts a poison pill and starts looking for other buyers due
to lack of defensive measures. HGS invites Glaxo to participate in sale, but Glaxo
declines and launches tender offer at $13/share.
ii. HGS Lack of Defensive Measures:
1. Eliminated its staggered board
2. Board member can be removed without cause by majority vote of
3. Shareholders can act by consent with no formal meeting
4.  Shareholders can vote out entire board without notice (very
vulnerable to proxy fight)
a. Even if current board deploys poison pill, new board can
redeem it
iii. Why might Glaxo lose in short term?
1. HGS can use vulnerability as tool to build confidence in shareholders
that their current plan is working for them
2. Allow HGS some time to pursue alternative options and increase price
offer from Glaxo
iv. Why didn’t Glaxo participate in HGS sale process?
1. Pros:
a. Can’t control timing
b. Avoid standstill provisions that would prevent purchase of more
2. Con:
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a. Won’t be able to do due diligence
b. If HGS makes deal with 3rd party, Glaxo would have to deal with
about a $100 million breakup fee, 3rd party matching rights, and
a bidding war
v. Result:
1. HGS conducts sale process reaching out to 33 companies but receives
no bids. HGS reaches out to negotiate with Glaxo and parties arrive at
vi. Hindsight: Why didn’t HGS negotiate earlier with Glaxo?
1. By the time HGS began negotiating, it had no bargaining power
2. HGS should have negotiated when Glaxo made initial offer in
confidentiality and could have gotten better offer
3. Get a good deal locked in and avoid getting a lower bid if there’s no
market interest
c. Is there a decline in hostile takeovers?
i. Solomon in Summer 2013: Hostile takeover is on life support
1. Only 3 hostile offers by midsummer
2. Why?
a. Activist investors and institutional investors pushing
aggressively for better stock performance
b. Shareholders much more willing to say no
c. Effect to undertake a hostile bid distracts bidder’s mgmt.
3. Effect for Corporate America?
a. Shareholders prefer to be passive
b. Hostile takeover disciplined the poorly performing boards
c. Hostile raider replaced by activist shareholder
ii. Summer 2014: Hostile Bids reach 14-year high
iii. Davis:
1. 2013 decline was a short-term blip
2. Trend of hostile takeovers difficult to predict
I. Deal Protections for Public Mergers
Placed into contract by buyer to discourage or prevent competing bids
a. Courts look at deal protection measures in the aggregate in applying Unocal standard,
especially when determining whether measures are preclusive or coercive
Voting Lockups
a. Requires significant stockholders (and in some case directors) to vote their shares in
favor of the transaction
i. Delaware Supreme Court, 2003
ii. NCS struggling financially and seeking to sell off assets. 2-year market check
resulting in some 50 prospects. Special committee of independent directors
formed. In June 2002, Genesis proposes stock-for-stock merger with NCS and
offered to pay off creditors and give stockholders $1/share. Committee wants
Genesis to be stalking horse to induce higher bid from Omnicare but Genesis
refuses. Omnicare proposes cash merger for $3/share and payment of creditors,
but deal extremely conditional (lots of due diligence conditions). Genesis
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responded with an improved deal, but included 2 key conditions: force-the-vote
provision and 2 board members (owning 65% of shares) must vote in favor of
merger = voting lockups. Omnicare announces cash tender offer at $3.50/share
and NCS requests and obtains from Genesis waiver of no shop. Omnicare
commits to $3.50 per share and full payment of debt, causing NCS board and
financial advisor to withdraw support for Genesis merger. However, NCS board
couldn’t terminate deal due to force the vote, where the 2 board members with
65% share were required to vote in favor of Genesis deal.
iii. Unocal standard applies when there are deal protection measures even if
there isn’t a hostile takeover
1. If deal protection measures are preclusive or coercive, then the
measures are not reasonable under the Unocal standard
2.  Are deal protections by Genesis preclusive or coercive?
iv. Force-the-vote provision + voting lockups + no fiduciary out = 100% locked up
deal = Invalid under Unocal
1. Precluded ability to consider any other offer
2. Coerced shareholder approval through the voting lockups
3. Prevented board from discharging its fiduciary duty
4. Apparently no conflict of interest present
v.  The shareholder vote was fait accompli, making the Genesis deal protection
measures invalid
vi. Dissent:
1. Need to look at deal in real time instead of with hindsight
2. Omnicare’s hostile offer didn’t come until NCS locked up the deal with
Genesis, and at the time, Genesis was the only available option and NCS
had to provide some deal protections to get its only potential offer
i. Delaware Chancery Court, 2004
ii. Cullman family owns substantial block of Class A stock and voting control over
company in ownership of Class B stock (converts to 74% ownership) of General
Cigars. Swedish Match proposes merger with General Cigars, resulting in 64%
ownership for Swedish and 36% ownership for the Cullmans who would retain
control. Deal contained an 18-month voting lockup prohibiting the Cullman from
selling or voting their shares for any alternative proposal. Deal was also subject
to majority of the minority approval—majority of holders of Class A stock
needed to approve the deal and Cullmans vote pro rata in accordance.
iii. Despite the 18-month voting lockup, the required “majority of the minority”
approval did not coerce the shareholder vote
iv.  General Cigars and Swedish Match merger did not violate Unocal
1. Distinguishable from Omnicare b/c NOT fait accompli
2. Voting lockup was permissible b/c the deal would not have occurred
without it
v. Some view Orman as distinguishable from Omnicare and others view Orman as
limiting Omnicare
i. Delaware Chancery Court, 2011
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ii. Openlane was target of merger and its charter required board to seek
stockholder approval within 24 hours of execution of merger agreement by
consent. Deal contained a no-shop without a fiduciary out.
iii. Requiring shareholder approval by consents within 24 hours after deal closes
is a reasonable deal protection measure
1. Boar could terminate merger agreement simply if the stockholders
didn’t consent to merger within 24 hours
iv.  Openlane merger was not fait accompli
1. Distinguishable from Omnicare
a. No agreement forcing transaction on board
b. Could terminate without paying breakup fee if consents not
gained within 24 hours
v. Can be squared legally w/ Omnicare b/c facts are different but the cases
advocate different views on deal protections and requirements of board
e.  Omnicare isn’t dead b/c it hasn’t been overruled but likely only applies in very
narrow situations of a totally locked up deal
Breakup Fees (Termination Fees)
a. Fees payable to the buyer if the purchase or merger agreement is terminated as a result
of certain actions by target
b. Payment often turns on whether board changes its recommendation of deal
i. Other triggers: violating no shop or entering into deal with competing bidder
ii. NOT payable if no competing offer and shareholders simply turn down deal
1. Would be seen as coercive
c. Does buyer confer benefit to shareholders by including breakup fee in agreement?
i. Puts floor on deal
ii. Ameliorates risk of leaks
iii. Higher price for stockholders
d. Limits: 2-4% of equity value of deal
e. Reverse Breakup Fee
i. Fee payable to the target if agreement is terminated as a result of certain
actions by buyer
ii. Median = 6% of equity value of deal
iii. Typical situations
1. Buyer = PE firm or financial buyer
a. Payable if deal doesn’t close for some reasons
2. If buyer doesn’t get antitrust approval
a. Covenant in a purchase or merger agreement that restricts the seller of the target
company from:
i. Soliciting competing bids
ii. Providing information to competing bidders
iii. Encouraging or negotiating a competing transaction
b. In private deals
i. Deal protections in general less important
ii. No talk as violation of board’s fiduciary duties not an issue b/c stockholders of
private companies usually involved in the sale
c. Exceptions
i. Modern no-shop (in public deals): Window-shop
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1. Allows target to discuss and negotiate unsolicited bids if it could
reasonably be expected that doing so would lead to a “superior
a. Definition/standard of “superior proposal” is deal-specific
ii. Fiduciary Out
1. Permits target board to negotiate and complete a transaction with a
competing bidder or changes its recommendation if failing to do so
would breach its fiduciary duties
2. “Gold Under the Headquarters” (very rare)
a. Expanded fiduciary out that allows target board to change its
recommendation if, after the merger agreement is signed, it
becomes aware of some event or circumstance that makes the
merger not advisable
iii. Go-Shop
1. Allows target company to actively solicit and negotiate competing bids
and provide confidential information for a specified period following
execution of the merger agreement
2. Target may prefer to pre-signing market check b/c potential uncertainty
involved with a market check (for example, no bids made)
3. Typical duration: 40-50 days
a. After duration expires, go-shop  window shop
b. May permit target to continue negotiations with competing
bidders identified during go-shop period after it expires
4. Primarily found when buyer = PE firm
5. Why controversial?
a. Looks like fake attempt at good governance b/c they rarely lead
to higher offers
b. Management buyers have significant advantage over other
potential buyers
c. Potential buyers don’t want to work with a CEO who wants to
work with 1st buyer
Force the Vote (atypical)
a. Requires target board to submit proposed transaction to stockholders even if board no
longer considers transaction viable (prevents target board from unilaterally terminating)
b. Board still free to give opinion on deal
c. Buyer has option to receive payment of breakup fee from target in exchange for waiving
the force the vote provision
Matching Rights (typical)
a. Target board can’t change recommendation on deal or terminate agreement in favor of
3rd party buyer without giving 1st buyer a period of time to respond (prevents target
board from unilaterally terminating)
b. Target has duty to keep 1st buyer informed
Confidentiality Agreements
a. Potential buyer must sign with target in order to access target’s confidential information
i. Signed at start of deal-making process
b. Purposes:
i. Don’t want confidential info public
ii. Don’t want competitor to use confidential info against you
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iii. Don’t want the fact that you’re speaking with potential buyers to get out
Standstills (included in confidentiality agreements)
a. Prevents potential buyers from publicly announcing a bid for the target, without the
target’s prior consent, for a period of time (usually a year) from the conclusion of the
sales process or auction
b. Duration: 1-3 years
c. Rationale
i. Helps target control bidding process
ii. Prevents potential buyers from using confidential information obtained during
due diligence to make a bid outside the formal sales process
iii. Assures potential buyers that if they ultimately “win” the auction and execute a
deal, any potential buyers who “lost” can’t overbid
iv. Helps avoid hostile 3rd-party bids after an acquisition is underway
i. Delaware Chancery Court, 2007
ii. Target board cannot refuse to waive a standstill to favor one bidder over
1. Would be breach of fiduciary duties
e. Don’t Ask, Don’t Waive
i. Provision prohibiting bidder who signs standstill from asking target to waive
standstill to allow bidder to submit a bid
1. Delaware Chancery Court (bench ruling), 2012
2. Enjoined “Don’t Ask, Don’t Waive” standstill provision that prohibited
bidder from privately seeking release from standstill
3. Rationale:
a. Would have same effect as a no-talk
b. Impermissibly limited target’s ongoing statutory and fiduciary
duties to properly evaluate a competing offer, disclose material
info, and make a meaningful merger recommendation to
1. Delaware Chancery Court (bench ruling0, 2012
2. “Don’t Ask, Don’t Waive” provisions are not per se invalid but target
should disclose effect of provision and circumstances surrounding
provision to shareholders
3. Rationale
a. Can serve as value-maximizing by forcing potential bidders to
put their highest bid forward or risk being shut out of the
opportunity to top the winning bidder after a definitive
agreement is reached
4.  Ancestry eventually waived “Don’t Ask, Don’t Waive”, mooting the
iv.  Takeaways from Bench Rulings
1. “Don’t Ask, Don’t Waive” provisions will be carefully scrutinized by the
courts and might be struck down
2. Board must understand impact of decision to include these provisions in
agreement with bidders and eventual “winner”
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a. Key for bidders to understand the impact of the finality of the
auction process
b. Virtue: will force bidders to actually give the “best offer” during
the auction process
3. No clear consensus on issues
Stock Option Agreements
a. Gives buyer the right to buy a certain % of target’s outstanding stock on occurrence of
certain events, such as termination of agreement or entering into competing transaction
Asset Option Agreements
a. Gives buyer the right to buy a particular asset of target on occurrence of certain events,
such as termination of agreement or entering into competing transaction
J. Antitrust (Competition Law) and Timing Issues
Government Review
a. Hart-Scott-Rodino (HSR) Review Process
i. M&A transactions are viewed at the federal level either by the Antitrust Division
of the DOJ or the FTC
1. Deals meeting certain dollar thresholds must be disclosed to these
agencies under HSR (generally if deal > $70-80 million)
ii. Each party must submit copies of premerger notification form to both DOJ and
1. Timing: anytime after execution of letter of intent to agreement
2. Information required: financial statements, SEC filing central index key
number, revenue by sector, lists of subsidiaries and minority
shareholder interests
3. Items 4(c) and 4(d): require submission of documents prepared by or for
officer or directors that evaluate proposed transaction with respect to
competition, markets, synergies, and other similar issues
b. State Merger Review
i. State attorneys general may investigate merger even if it is subject to HSR
ii. Occurs particularly when merger:
1. Raises issues of local concern
2. Has significant impact on consumers
3. Involves politically “hot” industry (hospitals, health insurance,
supermarkets, oil refineries, gas stations)
iii. Generally federal agencies will take lead, but state can play pivotal role if local
issues prevalent
c. Managing Global Merger Review Process
i. About 70 countries have obligatory pre-merger filing requirements
ii. 100+ countries have merger control statutes
iii. Even if a pre-merger filing is not required, the competition authority in some
countries may still be able to review and/or challenge the transaction if it has
reason to believe that the impact on competition will be substantial or meets
the jurisdictional thresholds
1. More likely to occur in countries where pre-merger notification is
voluntary (Australia, New Zealand, and the UK)
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iv. In the EU, if premerger filing is not required, merger laws of individual member
countries might apply
1. U.S. companies required most often to file in Germany
v. Most international pre-merger filings require more detailed and comprehensive
information on the parties’ businesses, finances, sales, assets, product overlaps,
and market shares, customers, competitors and suppliers, imports, barriers to
entry and transportation costs than U.S. HSR filings
d. Purpose:
i. To determine whether the combination of two businesses that compete with
respect to certain products or services will enable the merged entity to exercise
“market power” (the power to raise prices about competitive levels or exclude
ii. If the review agency determines the transaction is likely to result in such
“anticompetitive effects”, it:
1. May oppose the transaction altogether, OR
2. Condition not opposing the transaction on the parties agreeing to
“remedies,” such as divestitures of certain assets or businesses or other
restrictions on the merger business (ex. require licensing of certain IP)
a. Parties to a transaction for which there is a significant possibility
that such divestitures or other remedies will be required
typically include a provision in the merger agreement to allocate
the risk of such remedies between them
Investigation Process
a. Once filing made, DOJ and FTC determine whether a preliminary investigation is
i. About 1 in 5 HSR filings result in preliminary investigations
b. Factors going into decision:
i. Agencies’ familiarity with industry
ii. Role played in that industry by merging parties
1. Degree of overlap that appears to exist between parties and degree of
competition they face based on HSR filings
iii. Information included in Item 4(c) and 4(d) documents, including statements
indicating an anticompetitive intent
1. Ex. “If we do this deal, we can raise prices 20% and high entry barriers
will prevent new competition”
c. Early Termination
i. Parties can request early termination (ET) of 30-day waiting period
1. Generally granted in 2-3 weeks if no substantive issues
ii. Disadvantage:
1. Names of parties published on FTC website, Federal Register, making
deal public knowledge
2.  Regardless, ET requested about 80% of time
iii. If not requested, 30-day waiting period expires if no substantive issues without
public disclosure
d. Second Request
i. If at end of 30-day period and agency continues to have concerns  agency will
issue “request for additional information” (subpoena requesting broad range of
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1. Issued in about 3.5% to 4% of HSR filings
ii. Responding to Second Request is very burdensome, time-consuming, and
1. Why?  Proliferation of email and other electronic documents/data
2.  Increases production costs significantly and may require engaging
electronic discovery consultant
iii. Compliance can take between 1-2 months and 6-8 months or more
1. Depends on complexity of parties and transaction
iv. Parties usually negotiate to narrow request
1. Ex. limit number of custodians or time period covered
v. Substantial Compliance
1. Once parties believe they have provided reviewing agency with
sufficient information, they can certify “substantial compliance” with
2. Agency decides if parties have complied and may lead to disputes
3. Triggers a second statutory waiting period (usually 30 days)
vi. Reviewing agency’s attorneys and economists may request additional
information not covered by request or depose company executives
vii. Parties may make additional submissions (ex. white papers), presentations, or
meet with agency attorneys and economists
viii. At end of Second Request waiting period, agency can:
1. Conclude no problem and grant ET or allow waiting period to expire,
enabling parties to close
2. Ask for more time
a. Required to go to court but parties usually agree to extension
(agree not to close without prior notice)
3. Recommend challenging transaction
a. Can appeal up the line
i. DOJ—front office, Assistant Attorney General
ii. FTC—Bureau of Competition Director, Commissioners
b. If appeal fails, agency will go to court to seek preliminary
injunction (PI usually ends deal) or parties may abandon
4. Litigate for permanent relief (may be combined with PI)
a. DOJ—must seek PI in court
b. FTC—can use administrative process
5. Come back and challenge transaction later (very rare)
Antitrust Risk Allocation Provisions
a. Generally
i. Buyer wants to minimize its contractual obligations to make divestitures, hold
businesses or assets separate pending divestiture, or agree to any other
restrictions on the post-merger business
ii. Seller wants buyer to do whatever is necessary to eliminate antitrust objections
as quickly as possible
1. Including agreeing to any divestitures or other restrictions requests by
the reviewing agency
b. Covenants to the transaction process included detailed provisions regarding required
consents under antitrust and competitions laws
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i. Where and when must filings be made?
ii. What clearances or consents should be conditions to closing?
iii. What level of effort must the parties take in trying to obtain clearances, and
what commitment is the buyer willing to make to overcome agency objections?
c. Common Risk Allocation Provisions
i. Buyer takes all actions required (“hell or high water”)
1. Agreeing to do anything necessary to eliminate objections could reduce
the buyer’s bargaining power with the reviewing agency
ii. Divestiture obligation limited by “Material Adverse Effect”
1. Consider how MAE is defined
a. e.g. does it measure impact on combined business or just the
target business or the buyer’s business?
iii. Divestiture up to a certain dollar amount
1. Could establish a minimum threshold required by the reviewing agency
iv. Disclaimer of any obligation to agree to divestitures or restrictions
d. The type of provisions that parties agree on depends on factors:
i. Degree to which the transaction raises substantive antitrust concerns
ii. Relative bargaining power of the buyer and seller
iii. Type of remedy likely to be required by the reviewing agency
iv. Importance of other issues that may cause a party to trade off its preferred type
of clause
e. Implications of Different Provisions/Practical Tips
i. For transaction that doesn’t raise substantive antitrust concerns:
1. Don’t include detailed provisions regarding divestitures of other
a. May cause reviewing agency to believe there is a problem
where none exists
2. Better to limit language to “plain vanilla” provision
a. Ex. agree to cooperate in making HSR filings and to submit
filings and answers to follow-up questions promptly
ii. As buyer  avoid “hell or high water” clauses
1. Telling the reviewing agency the buyer is required to do anything
necessary to eliminate objections reduces the buyer’s bargaining power
with the agency
2. May be to seller’s disadvantage too as buyer may spend more time
trying to persuade the agency no remedy is required to avoid a material
adverse divestiture or other remedy
iii. Avoid provisions that require divestitures of specific products lines or assets
1. Divestitures are supposed to be no broader than what is required to
address the competitive concerns raised by the transaction
2. As a practical matter, however, the parties should assume that any
divestiture or other remedy specified in the agreement (ex. license of
specific IP) will become the minimum required by the reviewing agency
3. Provisions that include specific dollar amounts raise similar concerns
iv. MAE provisions are more favorable to the seller if based on a broader definition
of the affected business
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1. No divestiture required that will result in an MAE on the combined
businesses of the buyer and seller—makes it more difficult for the buyer
to avoid a divestiture
2. No divestiture required that will result in an MAE on either the relevant
business of the buyer or sell
v. Best Efforts
1. Many antitrust risk allocation provisions include language that the
parties will use their “best efforts” or “reasonable best efforts” to
eliminate antitrust objections
2. Parties should try to define with some specificity what constitutes best
efforts or what is not required to meet this standard (ex. divestitures,
hold separate licenses) without identifying specific assets or product
lines for the reasons discussed above
vi. Reverse Breakup Fees
1. If antitrust is significant, the buyer may propose a reverse breakup fee
to compensate the seller if the deal fails for regulatory reasons
2. Carefully consider appropriate triggers for payment of a reverse
breakup fee
a. Ex. Should “drop-dead” date be extended to allow the buyer
additional time to overcome reviewing agency objections?
3. Usually very high: 15-20% of deal
Are Antitrust Risk Allocation Provisions Privileged?
i. It is well accepted that a “joint defense” or “common interest” privilege exists
with respect to pre-closing communications between merger parties for
purposes of addressing potential antitrust issues
1. Parties often memorialize their intention to rely on the joint defense
privilege, and the rules they agree upon governing exchange of
information pursuant to this privilege, in a written joint defense
agreement (JDA) which is itself privileged
ii. Can the parties avoid disclosure to the government of what they would be
willing to divest to eliminate regulatory objections by inserting their antitrust
risk allocation provision in the JDA and claiming privilege?
1. The antitrust agencies have indicated that they do not consider such
provisions to be privileged
a. Review agency could assert that such provisions are terms of
the merger agreement on which the parties have adverse, not
common, interests that do not support a joint defense privilege
2. Alternative 1: insert risk allocation provision into a schedule to the
merger agreement (parties usually submit only the body of the merger
agreement with the HSR filings and not the schedules)
a. Reviewing agency could take position that risk allocation
provision is a material term of the merger agreement and HSR
filing is not complete without it
b. Withholding provision suggests to reviewing agency the parties
have something to hide and may raise disclosure doubts
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3. Alternative 2: include provision in merger agreement but avoid types of
provisions and language described above that may disadvantage the
parties in dealing with the reviewing agency (best practice)
g. Conclusions about Risk Allocation Provisions
i. They address an important issue that can have a material effect on the interests
of parties to a deal
ii. What a party wants the provision to say will depend on a number of factors
including, most significantly, whether the party is the buyer or seller
iii. Both parties should be aware, however, that the type of provision used may
have implications for how the reviewing agency deals with the transaction
iv.  Talk to your antitrust colleagues!
Antitrust Restrictions on Pre-Closing Conduct (Prohibition Against Gun Jumping)
a. Pre-closing covenant
i. Gun jumping prohibitions limit scope of covenants restricting target’s preclosing conduct—shouldn’t restrict actions in the ordinary course of business
b. Exchange of competitively sensitive information
i. Prohibitions on gun jumping also restrict competitors from exchanging certain
information prior to consummation of the transaction (ex. pricing, strategy)
ii. Applies to info exchanged both for due diligence and integration planning
1. Integration planning is OK but implementation is NOT
c. Significance of Gun Jumping
i. Can violate the HSR Act and/or Sherman Act
1. HSR fines $16,000 per day
ii. Can delay or even derail the transaction
iii. Agencies can:
1. Pursue gun jumping claims if deal approved
2. Can sue to unwind the transaction
a. Unlikely in the absence of a substantive issue with transaction
iv.  Need careful coordination with counsel regarding pre-closing conduct
covenants and to permit proper due diligence and integration planning without
violating competition laws
d. Applicability
i. Gun jumping rules under the HSR Act NOT LIMITED to cases where the
combination would reduce competition
ii. Agencies could also challenge conduct whether or not there is competitive
overlap between the businesses
e. Avoiding Gun Jumping During Due Diligence and Integration Planning
i. Due diligence—exchange of detailed, sensitive info regarding prices, strategy,
etc. may raise issues
ii. Integration—the businesses must remain separate prior to expiration of HSR
waiting period and closing
1. Buyers desire to start planning for integration in order to immediately
realize anticipated efficiencies
iii. Antitrust authorities’ general concerns:
1. Premature integration of operations
2. Exercise of control/influence
3. Information exchange that restrains pre-closing competition
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i. Limit covenants so that target can operate in ordinary course of business
ii. Redact (pricing, customer info, etc.)
iii. Clean Teams
1. Conduct due diligence while complying with Antitrust laws
2. Consist of transacting parties’ employees and/or outside counsel,
professionals in accounting, investment banking, consulting, etc.
3. Members manage their receipt and review of competitively sensitive
info, including:
a. Any info regarding pending customer bids or negotiations
b. Customers specific prices, revenues, and cost info
c. Future pricing plans
d. Current non-public pricing, discounts, or other terms of sale
e. Current individual product margin or cost data
f. Disaggregated current, and/or future data on costs of inputs
g. Strategic plans or forecasts, not including projected revenue
that are not customer specific
h. Information regarding future acquisitions, expansion plans,
marketing initiatives, product development plans, or other
similarly sensitive, confidential competitive info
4. Communications regarding integration planning with the seller and its
employees take place only through the Clean Team
5. If transaction NOT consummated, Clean Team members CANNOT have
responsibility for making decisions regarding competitive info (e.g.
pricing, product development, marketing) for up to 2 years
i. 2006
ii. Challenged conduct of business provisions in merger agreement:
1. Restricted ability to license or dispose of IP, receive or make payments in
excess of $75,000 ($200,000 in the aggregate), to hire employees,
present business proposals, and deployment of technology in specific
iii. Challenged conduct of parties
1. Clearing new hires, discouraged and denied pursuit of business, change
of pricing policies, and restricted provision of pricing info to customers
iv. Permitted: normal “ordinary course of business” and “material adverse
change” clauses that protect the value of the transaction and prevent the
seller from wasting assets
v.  DOJ settlement of gun jumping claim, requiring payment of $1.8 million
penalty, but merger itself not challenged.
K. Model One-Step Merger Agreement for Public Deal
Public vs. Private
a. Public
i. Target = public company
ii. Shareholders get consideration but are not involved in negotiations
iii. BUT shareholders retain power to vote
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iv. Competitors can bring in higher bids
v. Deal protections
vi. Reps and warranties
1. Generally don’t survive closing of deal
a. Rationale:
i. Impractical for buyer to sue shareholders since
shareholders didn’t make the reps and warranties
ii. Can’t sue target b/c buyer acquired target
b.  Can’t be basis for post-closing lawsuit
2. Functions:
a. Conditions to closing
b. Help buyer get info about target (disclosures)
c. Could give rise to lawsuit if deal doesn’t close
vii. Purchase price usually NOT contingent
viii. Antitrust laws and regulatory approval more significant due to general size of
b. Private
i. Target = private company or subsidiary of public company
ii. No agency problem due to single seller
iii. Deal protections not important
1. Rationale: limited # of shareholders  usually agree to deal at time of
signing instead of having stockholder approval meeting down the line
iv. Competing bidders usually don’t emerge
v. Representations and warranties (much more extensive)
1. Survive closing of deal
a. Can give rise to post-closing lawsuits for breach
2. Often cap on recovery for breach
vi. Purchase price contingent on post-closing adjustment clauses
vii. Earn-outs = if business does better over certain threshold over period of time in
the future, buyer pays seller more money
Relevant Provisions from ABA Model Merger Agreement (Public)
a. Article 1: Description of Transaction
i. Reverse triangular merger: Parent creates sub and target company merges with
sub and target survives, becoming wholly owned sub of parent
1. Advantages of Parent not merging
a. Parent doesn’t need consent from counterparties parent has
contracts with
b. Don’t need shareholder vote of parent
ii. Filing of certificate of incorporation  makes merger effective
1. All outstanding shares of target are converted into right to receive
merger consideration (cash or stock)
2. Buyer owns 100% of target
iii. Certificate of incorporation of target, bylaws of target, and board of target are
subject to change by parent
b. Article 2: Reps and Warranties of Target
c. Article 3: Reps and Warranties of Parent
i. Less extensive than target’s
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1. The greater the share of the surviving company that the target
shareholders will own in stock as a result of consideration, the more
reps there will be
2. Even less reps when consideration = cash
ii. Purpose:
1. Shows buyer is who he says he is
d. Article 4: Certain Covenants
i. Promises for the duration of time between signing and closing
ii. Purpose:
1. Buyer wants assurance target won’t change in significant way between
signing and closing
iii. Limit target’s activity between signing and closing
1. Examples
a. Can’t pay out dividends
b. Can’t pay out shares
c. Can’t amend certificate of incorporation
d. Can’t acquire another business
e. Can’t acquire material assets outside ordinary course of
f. Can’t terminate leases of real property
g. Can’t make loans
iv. No-Shop
1. Restricts target from soliciting offers but allows target to provide info or
negotiate with bidder who has made offer if reasonably likely to lead to
Superior Proposal (can be defined in agreement)
2. Can’t release person from company who has signed a standstill
v. Registration Statement and Proxy Statement
1. Mutual promises to promptly prepare joint proxy statement which will
likely serve as prospectus and registration statement with the SEC
vi. Matching Rights
1. Target board has to give parent certain amount of days to match
competing bid
2. If parent doesn’t match, board can change recommendation to
shareholders to support new bid
3. Normally, target has right to terminate prior to shareholder vote
meeting if parent doesn’t match and pursue new offer
4. Sometimes deal contains a force to vote provision requiring a
shareholder vote once deal signed (allowed in DE)
vii. Cooperation and Regulatory Approvals
1. How to get consents from 3rd parties (parties to contracts) and
regulatory approval
2. Reverse breakup fee—buyer pays target if buyer can’t get required
regulatory/gov approval
a. Rationale: compensating target for being strung along deal that
did not get done
viii. Expansion, replacing, or keeping board in place
ix. Keeping poison pill in place
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1. Strong arguments on both side for whether target board should be able
to contract to keep poison pill in place
x. Employee benefits
1. Surviving corporation will provide employee benefits not materially less
favorable, in the aggregate, than the employee benefits provided by the
2. Not necessarily to the benefit of the shareholder but rather to the
benefit of constituents
a. Would be controversial if it cost the shareholders
xi. Survival of Indemnification of target’s officers and directors
1. Very important for target officers and directors
2. Employees cannot invoke this right
e. Article 5: Conditions Precedent to Obligations of Parent and Merger Sub
i. Conditions that need to be satisfied or waived by parent/acquirer prior to
ii. Examples
1. Accuracy of representations (to a specified degree)
a. As long as parent is pretty close to satisfying most reps and
warranties, then closing will occur
2. Compliance with covenants
3. Effectiveness of registration statement
4. Stockholder approval
5. No material adverse effect (MAE or MAEC)
a. Defined term
6. Antitrust waiting periods need to expire
7. No pending litigation challenging the merger
a. Davis: this is atypical
f. Article 6: Conditions Precedent to Obligations of Company/Target
i. Similar to obligations of parent/acquirer
g. Article 7: Termination Rights
i. Normally, extremely complex and will refer back to no-shop and other
ii. Examples of effective termination rights
1. Mutual written consent
2. By parent, if not consummated by “End Date” (“Drop Dead Date”)
3. By parent, If shareholder vote fails
4. By parent, if target board fails to recommend agreement to
h. Article 8: Miscellaneous
i. Exclusive jurisdiction in DE federal or state courts
1. DE courts are neutral and experts so neither party has an advantage
ii. Disclosure schedules
1. Used to modify, add detail, and create exceptions to agreement
2. Effectively part of contract
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M. Model Stock Purchase Agreement
Private Deal between buyer target
a. Agreement to sell all of target company’s stock
b. Target becomes wholly owned sub of buyer (same effect as reverse triangular merger)
c. Usually target has < 10 stockholders
i. Stockholders are parties to the agreement and involved in negotiations
ii. Stockholders will be bound to sell stock if all conditions to closing are met
iii. No shareholder vote
d. Simpler and preferable for buyer compared to merger
i. Why don’t buyers always choose stock purchase?
1. If there’s too many shareholders  not feasible
e. Materiality, MAE, and knowledge qualifiers are often most negotiated terms
Pertinent Provisions (assumption: single-shareholder target and pro-buyer form)
a. Article 1: Definitions
i. Contracts would be even longer if they couldn’t define terms
ii. Don’t agree to defined terms unless you understand them
iii. Commonly defined terms
1. “knowledge of seller or seller’s knowledge”
2. “material adverse effect”
a. Uses as a materiality threshold to measure the negative effect
of certain events on the seller or target company
b. Often carve-out for economic downturn
3. Material or materiality
b. Article II: Purchase and Sale
i. Must be gap between signing and closing
1. Why?  need time for governmental or 3rd party consents, completion
of financing, or transition period
ii. Purchase price
iii. Purchase price adjustment (“money point”)
1. Based on target’s estimated closing working capital (key definition)
a. Can be based other items, such as net worth or EBITDA
2. Used by buyers to protect themselves against any decreases in the value
of the target company between date of most recent financial
statements and closing
3. Resolution of disputes handled by independent accounting firm
c. Article III: Reps and Warranties of Seller (“money point”)
i. Helps buyer with due diligence by forcing target to turn over certain info
ii. Qualified and supplemented by disclosure schedules
iii. Survive closing
iv. Pertinent Promises by Seller
1. No conflicts or consents  signing and closing of deal will not result in
default of material contracts with 3rd parties (except as described in
disclosure schedules)
a. Protects buyer
b. Forces seller to describe contracts in schedules (due diligence
2. Accuracy of Financial Statements
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a. Very common
b. Usually requires audited financial statements of last 3 years and
unaudited financial statements of most recent quarter (“stub
financial statement”)
i. Audited = prepared by 3rd party auditor and in
accordance with GAAP
3. Undisclosed liabilities (pro-buyer)
a. Buyer wants to know about all liabilities, even unknown
b. Seller will try to limit to “known” liabilities
4. Absence of Certain Changes, Events, and Conditions
a. Promise by seller that there hasn’t been significant changes to
business or any MAE since Balance Sheet Date (date of last
audited financial statement)
b. Exception: ordinary course of business
5. Condition and Sufficiency of Assets
a. Promise that company’s assets are in good shape
b. Seller will want materiality qualifier
6. Accuracy of Inventory, Accounts Receivable, Customers and Suppliers
a. Sellers hate these b/c it’s easy to argue that these numbers are
not correct since they change often
b. Seller will want materiality or knowledge qualifier
7. Environmental matters
a. Compliance with all environmental laws
b. Sellers don’t like these b/c it’s hard to know when exactly in
compliance and regulators have discretion when to bring
environmental claims
8. Employee benefit matters
a. Very complicated
b. Get benefits expert to negotiate
9. Taxes
a. Very complicated
b. Get tax experts to negotiate
10. Full disclosure (10(b)(5) rep)
a. Allows buyer argue about omissions of any material fact after
b. Seller will want non-reliance clause that prevent buyer from
relying on any statements or fact not promised
d. Article IV: Reps and Warranties of Buyer
i. Much shorter
ii. Sufficiency of funds
e. Article V: Covenants
i. Conduct of Business Prior to Closing
1. Assures buyer that target company will be operated in the ordinary
course of business and will be in the same condition at closing as it was
when the buyer conducted its due diligence
ii. No shop
1. Not as significant in private deal
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iii. Notice of Certain Events
1. Requires seller to alert buyer of any MAE, inaccuracies or breaches
2. Allows buyer to terminate transaction if it is clear closing conditions
won’t be met
iv. Non-compete; Non-solicitation
1. Prohibits seller from competing with the target company after the
closing for certain duration
2. Prohibits seller form soliciting employees from target company after
closing for certain duration
v. Governmental Approvals and 3rd Party Consents
1. Requires both parties to use “reasonable best efforts” to obtain all
necessary approvals and consents
a. Higher stand than “commercially reasonable efforts” in public
f. Article VI: Tax Matters
g. Article VII: Conditions to Closing
i. Failure by either party to satisfy gives the other party a right to refuse to close
or terminate
ii. Conditions to Obligations of All Parties
1. HSR filings and expiration/termination of waiting period
2. Governmental approvals
iii. Conditions to Obligations of Buyer
1. Buyer wants right to walk away form deal if any of the seller’s
representations are inaccurate
a. Seller wants materiality qualifier
2. Buyers wants seller’s 3rd party consents b/c buyer doesn’t want to buy
business unless its contracts come with it
iv. Conditions to Obligations of Seller
h. Article VIII: Indemnification
i. Allows buyer to seek compensation from seller for any breaches, inaccuracies,
or misrepresentations
1. Buyer will want holdback = request that part of purchase price be held
in escrow in case seller needs to satisfy indemnification obligations
ii. Survival
1. Most reps survive 1-2 years after closing
a. Buyer will want to bring in auditor to check target business
which may give rise to claims against seller
2. Covenants survive indefinitely
iii. Basket
1. Provides that indemnifying party (seller) is not liability for inaccuracies
or breaches until a specific minimum amount is exceeded
a. Once losses meet the minimum, seller is liable for entire
2. Can also be structured as deductible (similar to insurance) where buyer
is liable for losses until minimum reached
iv. Materiality scraper
1. Buyer doesn’t want materiality qualifiers to limit indemnification
a. Basket and materiality serve similar purposes of limiting costs
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2. Seller will argue that it bargained for materiality qualifies in reps
regardless of basket
v. Indemnification procedures
vi. Pro-Sandbagging provision
1. Reserves buyer’s right to bring an indemnification claim against the
seller for breach even if buyer knew about the breach before closing
and proceeded to close anyways
2. Rationale
a. Buyer wants to close deal as quickly as possible
b. It’s seller duty to meet all reps and covenants
3. Silent in most agreements
vii. Exclusive remedies
1. Right to indemnification under stock purchase agreement is only
remedy available to the parties for any breach
Article IX: Termination
Article X: Miscellaneous
i. Governing law/jurisidiction
N. Model Asset Purchase Agreements
a. Private deal
b. Why better than stock purchase?
i. If business can’t be conveyed through stock
1. Ex. assets held by natural person or combination of parent and sub
ii. Buyer doesn’t want to assume all the assets or liabilities of the business
1.  customize which assets and liabilities it takes on
a. Buyer doesn’t take on certain liabilities at all
b. Seller indemnifies buyer for certain liabilities
iii. Tax advantages (“money point”)
1. Can increase basis?
2. BUT seller might be subject to double taxation
c. Key in most purchase agreements: how parties define “Business”
i. Seller may be selling asset but might be remaining in related business
ii. What is buyer getting?  don’t want obscurity
d. General Rule:
i. Buyer wants broad definition of assets and narrow definition of liabilities
ii. Seller wants narrow definition of assets and broad definition of liabilities
Pertinent Provisions (Pro-Buyer vs. Pro-Seller)
a. Purchase and Sale of Assets
i. Pro-seller: Assets that are specifically listed AND exclusively/primarily relate to
the Business
ii. Pro-buyer: All assets, other than the excluded asset, which related to or
connected with the Business, including, without limitation, the following: [list of
1. Seller will make sure asset it doesn’t want conveyed is listed on the
“Excluded Assets” list
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2. Why list if provision says “all assets used”?
a. Buyers gets all asset used AND all asset on list
b. BUT caution against super long laundry list
i. May forget something
ii. Buyer may now know about every important asset
iii. Excluded Assets:
1. Buyer wants narrow and seller wants broad
b. Assumed Liabilities
i. Pro-seller: buyer shall assume any and all liabilities arising out of or relating to
the Business or the Purchased Assets
ii. Pro-buyer: buyer assumes specific list of liabilities and seller must pay for any
excluded liabilities
iii. Excluded Liabilities
1. Buyer wants broad and seller wants narrow
c. 3rd Party Consents
i. Contracts that come with assets and/or Business that may require the
counterparty to consent to the asset purchase for contract to remain valid
ii. Pro-seller:
1. Seller and buyer shall use commercially reasonable efforts to obtain all
2. Sellers shall not be obligated to pay for any 3rd party consents
3. Obtaining consents = NOT a condition to closing
iii. Pro-buyer:
1. Seller must use reasonable best efforts to obtain consents
2. Seller must continue to act as Buyer’s agent after closing if unable to
obtain all consents to obtain benefits it would have received under
3. Condition to closing
O. Earn-outs
a. Used in private deals (stock purchase and asset purchase) to calculate part of purchase
price in reference to performance of target company or business over period of time
after closing
b. Typically structured as one or more contingent payments of purchase price after the
closing which are payable when certain specified targets are satisfied within certain
specified periods
c. If target company fails to achieve these specified targets within the specified period, the
buyer is relieved from making the contingent payments
Earn-out is used when:
a. Buyer and seller cannot agree on the value of the target company because target
i. Has little operating history but significant growth potential
ii. Has a new product or technology that may increase its profitability or value
iii. Has experienced a drop in earnings that may be temporary OR
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iv. Is operating in a volatile economy or industry that can adversely affect the
target company’s profitability or cause its value to fluctuate widely
b. Buyer has limited access to funds (often when debt financing not readily available)
a. Helps parties deal with uncertainties and share in risks
b. For the seller:
i. Provides opportunity to get a higher purchase price for the target company than
it would have otherwise received
1. Without an earn-out, the price the buyer is prepared to pay may be
discounted as a result of doubt about the actual profitability or value of
the target company
2. This is particularly helpful for distressed sellers who may need to sell
3. Provides seller with some immediate cash while preserving some of the
upside of the target company
ii. Provides opportunity to benefit from synergies achieved by the target company
being integrated with the buyer’s business
1. Synergies may cause the target company to perform better than it
would have on its own and enable the seller to achieve the earn-out
targets and earn a greater payout
c. For the buyer:
i. Values target company more accurately and protects buyer from overpaying
1. Target company can be valued at actual future performance rather than
based on past performance or predictions of future performance
ii. Defers payments of part of purchase prices for a period after closing
1. Particularly useful for private equity buyers when credit markets are
tight and debt financing is limited
2. Reduces the buyer’s dependence on 3rd party financing b/c less capital is
required up front and the buyer may be able to use the target
company’s earnings during the earn-out period to make some of the
earn-out payments
iii. Motivates sellers, who are key to the success of the target company, to stay on
and maximize profitability of the target company
a. Generally
i. Often lead to disputes between buyer and seller
ii. Profitability of target company after closing can be affected by many factors
unrelated to its performance or intrinsic value, which are difficult to exclude
from earn-out calculations, such as:
1. Buyer may make other acquisitions or changes to its business plan after
the closing which can cause the target company to be more profitable
and achieve an earn-out target it may not otherwise have been able to
2. A downturn in the economy that causes the target company to be less
profitable and fail to achieve an earn-out target it would have been able
to achieve in a better economy
iii. Negotiating and drafting earn-out provisions can be difficult and require
additional time and cost
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iv. Earn-outs require post-closing monitoring and measuring of the target
company’s performance
1. Can distract the parties from effectively running their other businesses
v. May lead to adverse accounting and tax treatment
1. Inaccurate estimates of the fair value of earn-out payments required to
be recognized by the buyer at closing under applicable accounting
standards can lead to earnings volatility
2. Earn-out payments may be taxed to the seller at the higher rate as
compensation income rather than capital gains
b. For the seller:
i. Prevents a clean break
1. Sellers can’t move onto something else b/c the earn-out arrangement
keeps them invested in the target company’s success
ii. Makes the seller vulnerable to the buyer’s actions
1. If seller does not want to stay on to run the target company through the
earn-out period, it needs to rely on the buyer to operate the target
company effectively enough to achieve the earn-out targets
iii. Can be used by the buyer to offset indemnification claims it has under the
purchase agreement against the seller
c. For the buyer:
i. Restricts its control of the company
1. Seller usually seeks to limit buyer’s ability to make significant changes to
target company’s business
a. Limited ability to direct target company and fully integrate
target company with rest of its business
2. Seller may continue to manage throughout earn-out period
ii. May be detrimental to target company in long term
1. If seller is managing target during earn-out, it could attempt to manage
the business solely to achieve the earn-out targets, which could have an
adverse effect on the long-term performance of the target
d. Some of the disadvantages can be eliminated if the parties carefully consider the various
issues and problems that can arise in connection with an earn-out and negotiate and
draft the purchase agreement to address them
i. Does buyer have duty to use reasonable efforts to make earn-out work?
1.  courts split
Financial Target vs. Non-Financial Target
a. Financial Targets
i. Examples:
1. Revenue
2. Net income
4. Earnings per share
5. Net equity
ii. Seller generally prefers revenue-based targets b/c they are less affected by costs
and expenses, giving buyer less chance to manipulate results
iii. Buyer generally prefers net income targets, which factor in costs and expenses
iv.  generally compromise and use EBITDA
b. Non-Financial Targets
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i. Operational targets (ex. minimum number of new customers)
1. It may be difficult to set financial targets for new developing companies
or target companies with a new technology/development b/c there is
no historical info to use as basis
2. Operational targets may be easier to identify
3. Operational targets place the focus on improving the operational
effectiveness of the target and are harder to manipulate by altering
accounting practices
ii. Milestone payments
1. Contingent payments based on occurrence specific events that
significantly affect the profitability or value of the target company (ex.
litigation decision in favor of target company)
2. Easier to structure and negotiate b/c events usually:
a. Easily definable
b. In the common interest of both parties
c. Outside the direct control of the parties
Earn-out Period
a. Typical: 1-3 years
b. Shorter Periods
i. Preferred by seller if they want to receive their payment sooner and reduce the
amount of time they are exposed to the credit risk of the buyer
ii. Preferred by buyer if they want to minimize the amount of time they are subject
to restriction on their post-closing operation of the target company
c. Longer Periods
i. Preferred by seller if they want to stay on to manage the target company after
the closing so they have more time to achieve the earn-out targets
ii. Preferred by buyer if they want more time to make the earn-out payments or to
reduce the risk of the seller taking actions in the short-term to achieve the earnout target at the expense of the long-term if the seller is managing the target
Earn-out Payment
a. Usually paid in cash but can also be paid with buyer’s equity
b. Acceleration Provision
i. Requires all of the earn-out payments to become immediately due upon the
occurrence of certain events (see PLC article for examples)
ii. Protects seller from changes that can adversely affect the target company’s
ability to satisfy earn-out targets or the buyer’s ability to make the earn-out
payments when they become due
Dispute Resolution
a. For financial targets, parties should include a detailed description of how to measure
b. Since buyer can negatively affect the earn-out post-closing, the seller needs to retain
certain rights and impose certain covenants on the buyer (see PLC article for examples)
c. Liquidated Damages
i. Sellers should specify what the damages should be if the buyer breaches any of
the operational covenants
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P. Non-Reliance Clauses
Fraud Claims for Alleged Misstatements or Omissions in M&A Transactions
a. Fraud claim
i. May be possible even if a contract claim is not b/c of the lack of a rep and
ii. May be more attractive than a contract claim because:
1. Can be satisfied by recklessness
2. Caps and collars on contract claims in the agreement don’t apply
3. Punitive and consequential damages available
4. Judges and juries tend to give bigger awards
b. How do they arise?
i. At some point after the closing, the buyer may believe it has been misled during
the due diligence or negotiation process
ii. Sometimes the alleged misstatement or omission won’t be covered in the reps
and warranties that the seller provided in the purchase agreement
iii. Buyers sometimes turn to fraud theories that don’t require of a breach of rep
and warranty
c. Buyer’s Point of View
i. Believes that it never would have entered into the agreement in the absence of
the alleged misstatement or omission
d. Seller’s Point of View
i. Believes that it’s unfair for the buyer to be able to “end run” the limits of the
carefully-negotiated reps and warranties in the agreement and the limits on
recovery for breaches by claiming fraud
ii. If buyer wanted a certain rep or warranty, it should have been brought up
during negotiations
iii. May not want to be responsible for alleged promises that weren’t subject to any
vetting by the deal team
Non-reliance Clauses
a. May offer sellers protection against both kinds of fraud claims by impairing buyers’
ability to demonstrate the reasonable reliance element of fraud claims
b. May include:
i. Disclaimer by seller of any reps other than those made in the acquisition
ii. Statement that seller will have no liability to buyer for any info provided or not
provided to the buyer in due diligence (other than liabilities resulting from
breach of specific provisions of agreement)
iii. Acknowledgement by the buyer that is has not relied on any reps not contained
in the acquisition agreement
2 Kinds of Fraud Claims and Effect of Non-Reliance Clauses
a. 10b-5 Claims (federal sale of securities)
i. Makes it unlawful, in connection with the purchase or sale of a security, to make
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading
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ii. Conditions, stipulations, or provisions binding a person to waive compliance
with the Exchange Act, or the rules promulgated thereunder, are void under
29(a) of the Exchange Act
iii. Would enforcement of non-reliance clauses to bar 10b-5 claims be inconsistent
with Section 29(a)?  Split among federal circuits
1. 3rd Circuit: Giving preclusive effect to non-reliance clauses (i.e. barring
10b-5 claims when non-reliance clauses apply) is inconsistent with
Section 29(a) (more-buyer friendly)
a. A non-reliance clause is only one of the factors to be considered
in determining the reasonableness of a party’s reliance
b. While non-reliance clauses may impair buyers’ ability to assert
10b-5 claims, they will not immunize sellers against those claims
2. 2nd Circuit: Non-reliance clauses may bar 10b-5 claims based on
representations outside the contract (more seller-friendly)
a. “Weakening” of buyer’s ability to recover under 10b-5 is not a
prohibited waiver under Section 29(a)
b. Decision in principal 2nd Circuit case was predicated on the
sophistication of parties and the “exhaustive nature” of the
representations included in the acquisition agreement
b. Common Law Fraud Claims
i. Delaware
1. Norton v. Poplos
a. Delaware Superior Court, 1982
b. Non-reliance clause did not preclude buyer’s fraudulent
misrepresentation claim
c. Recent Chancery Court decisions have distinguished Norton on
the basis that it involved relatively unsophisticated parties, a
standard form real estate sale contract and an unbargained for
non-reliance provision
d. A recent Delaware Supreme Court case addressed the
enforceability of nondisclosure agreements between
sophisticated parties in these situations
2. RAA v. Savage
a. Delaware Supreme Court, 2012
b. RAA entered negotiations to purchase Savage, and the parties
signed an NDA prior to RAA conducting due diligence. NDA
stated that Savage was not making any representation about
the accuracy or completeness of information or materials
obtained during due diligence and that the only representations
would be located in the sales agreement. After signing a letter
of intent, RAA alleged that it learned of significant liabilities of
Savage and terminated negotiations. RAA claimed that Savage
had committed fraud by concealing those liabilities and filed suit
against Savage for the costs of due diligence and negotiations.
c. The NDA, entered into by 2 sophisticated parties, precluded
RAA’s fraud claims b/c Savage was not making any
representations as to the accuracy or completeness of
information or material provided in due diligence
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d. Decided under NY law, but the Court noted that the result
would have been the same under DE law
3. Transdigm v. Alcoa
a. Delaware Chancery Court, 2013
b. A non-reliance provision will not bar extra-contractual
fraudulent concealment claims if the language of the nonreliance provisions does not effectively bar such claims
ii. New York
1. In cases involving sophisticated parties, NY law is generally favorable to
the enforcement of non-reliance provisions
2. In these cases, an explicit non-reliance provision will usually defeat a
buyer’s claim that it reasonably relied on extra-contractual
a. General integration clauses are not sufficient
b. “Peculiar knowledge” exception to the general rule may apply if
it was impractical for the buyer to detect the alleged fraud
because the relevant information was within the seller’s
peculiar knowledge
3. RAA v. Savage
a. Delaware Supreme Court interpreting New York law
b. “Peculiar knowledge” exception does not apply where a
sophisticated party could have insisted on written contract
terms to protect itself
Advice for Seller’s Counsel
a. Draft with Care
i. The degree of clarity in contractual language may affect the extent to which it
precludes fraud claims
b. Consider Effect of Choice of Law
i. For example, NY and DE have well-developed case law on enforceability of nonreliance clauses
c. Keep in Mind Different Approaches of Circuits when Selecting Venue for Disputes
i. Jurisdiction in federal courts in NY would allow the seller to take advantage of
the 2nd Circuit’s more seller-friendly view of the enforceability of non-reliance
clauses under Section 29(a)
Advice for Buyer’s Counsel
a. Draft Specific Reps to Address Significant Concerns
i. Include specific reps and warranties covering matters of concern identified in
due diligence
b. Understand Effect of Clauses and Eliminate if Possible
i. To preserve ability to bring fraud claims based on statements or omissions not
covered by the acquisition agreement, resist inclusion of a non-reliance clause
and consider requesting a 10b-5 representation
c. Location of Clauses
i. Do not assume that non-reliance clauses will be included, if at all, only in the
acquisition agreement
ii. Non-reliance clauses often appear in confidentiality agreements that survive as
a result of an integration clause
d. Consider Impact of Choice of Law and Venue Provisions
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i. See Advice for Seller’s Counsel
Q. Preliminary Agreements
Set out the key terms of a transaction agreed on in principle by the parties (a.k.a. term sheets,
letters of intent, or memoranda of understanding)
a. Sometimes signed, sometimes not
b. Sometimes a single email can create a binding contract
c. Parties don’t always do preliminary agreements and prefer to move straight forward to
the definitive agreements
a. Facilitates deals w/o committing to anything just yet
b. Identifies deal breakers and threshold issues early on in the negotiation
c. Enhance deal stability and commitment
i. Creates a moral commitment between parties to observe the terms agreed to
ii. Provides parties with the confidence to proceed with the deal and commit the
time and resources necessary to complete the transaction
d. Can be used to submit applications to the relevant authority for deal approval (ex. HSR
e. Can contain binding obligations
i. Exclusivity period
ii. Confidentiality
iii. Payment of costs and expenses
a. *Courts may impose a duty to negotiate in good faith under certain circumstances (see
b. One extra document to prepare that costs time and money
c. If one of the parties is a public company, can create a disclosure obligation under
applicable securities laws
d. Can stall deal discussions over unnecessary points of detail
Big issue: are they binding and to what extent?
a. Reference to final agreement does not prevent preliminary agreement from being
b. Primary issue: whether parties intended to be bound by the preliminary agreement
c. Two types of binding preliminary agreements
i. Type I (TX, MA, DE, & NY)
1. An agreement obligating the parties to consummate the transaction
based on the agreed material terms
ii. Type II (DE & NY)
1. An agreement obligating the parties to negotiate in good faith towards
a definitive statement based on the material terms described in the
letter of intent
2. How can you tell if parties agreed to negotiate in good faith
a. Sometimes clear and explicit and sometimes not
Duty to Negotiate in Good Faith (even if non-binding)
a. Mass:
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i. No duty exists where , even though there was an express provision to do so,
that provision was not clearly identified as one of the binding provisions of the
term sheet
3rd Cir:
i. Duty exists even though it was not expressly stated in the term sheet but
circumstances supported a finding that the parties intended to be bound by an
agreement to negotiate in good faith
Parties do not need to complete the transaction to fulfill their duty to negotiate in good
Remedies for breach of duty to negotiate in good faith
i. Reliance damages (ex. expenses incurred in negotiations)
ii. Expectation damages (ex. lost profits form the failed transaction)
a. Delaware Supreme Court, 2013
b. SIGA and Pharmathene discuss collaboration to develop a new
drug and produce licensing agreements term sheet (LATS) that
neither party signs and contains footer that terms non-binding.
SIGA needs funds so the parties reach a merger and bridge loan
agreement that both parties sign but that also attaches the
LATS. The agreement provides that if merger terminated, parties
agree to negotiate in good faith with the intention of executing
a definitive licensing agreement in accordance of the terms in
the LATS. The drug wins big money so SIGA doesn’t need
Pharmathene anymore so it terminates merger, but
Pharmathene still seeks to negotiate terms of licensing
agreement and SIGA refuses.
c. Where the parties have a Type II preliminary agreement to
negotiate in good faith, and the trial judge makes a factual
finding, supported by the record, that the parties would have
reached an agreement BUT FOR the defendant’s bad faith in
negotiations, the plaintiff is entitled to recover expectation
i. Parties’ incorporation of the LATS into enforceable, fully
integrated contracts reflected the parties’ intent to
negotiate a licensing agreement on terms substantially
similar to the LATS if the merger were terminated.
d.  Cases remanded and Pharmathese awarded $113 million in
expectation damages
iii. Specific performance NOT available
1. Difficult for courts to detect when there has been a violation because
qualitative evaluation of the negotations would be needed
Key to Negotiating Preliminary Agreements
i. Clearly identify the binding and non-binding provisions