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M&A Outline

M&A Outline
O’Hare – Spring 2018
Economic rationales for M&A:
Eliminating competition
Gaining economic scale
Accessing human capital
Defensive M&A
Developing synergies through combination
Building management’s ego
Regulatory/tax motivations
Trends in M&A:
When stock prices inflate, it is more likely that deals will be financed by equity
When stock prices deflate, it is more likely that deals will be financed by debt
Benefits for Targets  T often gets a premium
Risks for Acquirer:
Risk of overpayment (largely due to overoptimistic board/CEO/I-bankers)
Deal may be based on a business plan that doesn’t pan out
Deal may involve unforeseen business risk
Failure to efficiently integrate
Culture shock may inhibit transition and synergies
Relevant Laws:
DE Law (DGCL & DE Chancery Court – trial court below DE Supreme Court)  governs the
o M&A Procedures
o Board’s fiduciary duties
o Corporate takeover defenses
Federal securities laws  regulate the following:
o How a tender offer must be conducted
o Disclosures shareholders must get in connection with
 Stock/debt issued in M&A transactions
 Votes on matters relevant to M&A transactions
o Proxy rules for shareholder voting
o Disclosures that must be made by those acquiring >5% of a public company
o Insider trading
Antitrust laws
Industry specific regulatory approvals
Tax laws
Contract law
Deal Structures
Key terms:
Seller/target: target of the bidder
O’Hare – Spring 2018
Merger of equals: acquirer and target are relatively balanced
Constituent corporation: corporation involved in a merger
Surviving corporation: corporation that is still around post-merger
Disappearing corporation: corporation that is not still around post-merger
Operation of law
Statutory Long-Form Merger
DGCL §251: any two or more corporations existing under the laws of this state may merge into a single
corporation, which may be any one of the constituent corporations, pursuant to an agreement of a
merger, complying and approved in accordance with this section
251(a): allows for consolidation merger – two existing corporate entities merging into one
new corporate entity (“resulting corporation” or “new corporation”)
Consideration: may include cash, A’s stock, another C’s stock, assumption of indebtedness, etc.
Required procedure:
o 251(b): Board Action
 BOD of each constituent corporation MUST:
 Adopt resolutions approving merger/consolidation
 Declare advisability of Merger Agreement  Agreement approved by
BOD must include:
o Details about transaction terms
o Consideration
o Method of implementing merger
o Conversion of stock, if any
o Whether A’s certification of incorporation will be amended in
conjunction with merger
 Since s/h vote is required in merger anyway, this is a
method for BODs to “bundle” in other desired, yet
unrelated, changes to certificate
 Authorize execution of agreement
o This is usually signed and announced simultaneously
 * not sufficient for special committee to approve merger  BOD itself
must approve
 251(b): Execution of Agreement of Merger
 Merger agreement must include:
o Terms and conditions
 Including that the merger is subject to shareholder
 May be dependent on outside facts (e.g. antitrust approval)
o Mode of carrying out merger  who survives, who disappears
 Converting shares into securities of surviving or resulting
corporation; OR
 Cancelling shares; OR
O’Hare – Spring 2018
Exchanging securities for cash, property rights or securities
of another corporation/entity
 *really important when determining what is
permissible  very broad
o Requisite charger amendments, if any
 When companies go from public to private, or vis versa,
charter will need changes
 Companies will just restate charters with many
amendments for simplicity
 Doesn’t apply to consolidations because you would
always need a new charter
251(c): Shareholder Approval  agreement shall be presented to
shareholders of each constituent corporation at annual or special meeting’
 20 day notice: time, place and purpose of meeting must be sent
to shareholder at least 20 days prior to meeting
o Notice should include copy or summary of the merger agreement
 Most companies require shareholder vote of majority of outstanding
shares as specified in 251(c) but could also allow approval through written
consent if bylaws allow pursuant to §228
o Charter could provide for a class vote  preferred s/h sometimes
like to have the ability to object to a transaction
 251(f): s/h vote of surviving corporation NOT required if following
conditions are met:
o Certification of incorporation isn’t amended
o No changes in characteristics/terms of outstanding stock
o Surviving corporation doesn’t issue >20% of outstanding stock in
connection with transaction
 *issuance of an additional 20% of stock
 NYSE Rule 312  20% Rule
o s/h vote required for issuance of securities convertible into shares
if number of shares of voting power exceeds 20% of outstanding
shares prior to issuance
o *particularly applicable to parent in triangular merger  not a
constituent corporation
o Vote is on issuance of shares, not the merger itself
o Applies regardless of need for a vote under DGCL
o This is an issue primarily with triangular mergers
o Requirement: majority of shares voting
 This is whoever shows up for the vote
 Lower standard than DGCL
251(c): Certificate of Merger
 Content: identifying constituent corporations; statement that transaction
was approved by s/h; statement that copies of merger are available for
inspection by former s/h
 Purpose: puts state authorities on notice re merger
o Legal effect of statutory merger only comes into effect after filing
251(c): Filing
 Certify shareholder approval on Merger Agreement
 Must file either:
o Certified Merger Agreement that has been approved by majority of
outstanding stock entitled to vote OR
O’Hare – Spring 2018
Certificate of Merger
 Filing a certificate of merger keeps the agreement more
private but still have to have a copy of the MA at PPOB
103(d): Effectiveness – termination and amendments
 103(d) allows you to make the merger effective at a future date, not more
than 90 days from filing
 Termination before filing: any agreement of merger or consolidation
may contain a provision that at any time prior to the time that the
agreement (or a certification in lieu thereof) filed with the Sec. of State
becomes effective in accordance with §103 of this title, the agreement may
be terminated by the BOD of any constituent corporation notwithstanding
approval of the agreement by the s/h of all or any of the constituent
 Termination after filing: in the event the agreement of merger or
consolidation is terminated after the filing of the agreement (or a
certificate in lieu thereof) with the Sec. of State but before the agreement
(or a certificate in lieu thereof) has become effective, a certificate of
termination or merger or consolidation shall be filed in accordance with
§103 of this title
 Amendments: any agreement of merger or consolidation may contain a
provision that the BODs of the constituent corporations may amend the
agreement at any time prior to the time that the agreement (or certificate
in lieu thereof) filed with the Sec. of State becomes effective in accordance
with §103 of this title, provided that an amendment made subsequent to
the adoption of the agreement by the stockholders of any constituent
corporation shall not:
o alter or change the amount or kinds of shares, securities, cash,
property and/or rights to be received in exchange for or o n
conversion of all or any of the shares of any class or series thereof
of such constituent corporation
o alter or change any term of the certificate of incorporation to be
effected by the merger of consolidation, or
o alter or change any of the terms and conditions of the agreement if
such alteration or change would adversely affect the holders of any
class or series thereof of such constituent corporation; in the event
the agreement of merger or consolidation is amended after the
filing thereof with the Sec. of State but before the agreement has
become effective, a certificate of amendment of merger of
consolidation shall be filed in accordance with §103
§259: Effect of Merger
 Existence of constituent corporations ceases (except for survivor)
 Survivor possesses rights, powers, privileges, etc.
 Survivor subject to restrictions, disabilities, duties, etc.
o E.g. litigation claims
 Survivor poses rights, property, debts of constituent corporations
 Title to real estate not impaired (remain subject to liens)
o Everything goes  can’t pick and choose what liabilities and privileges
you want
 Risk of spreading obligations
 Look for contract obligations that are not contained to the
target corporations
O’Hare – Spring 2018
Ex) Fitzsimmons v. Western Airlines: survivor
must assume obligations of the constituents under
§259 survival provision. Where target contracts are
silent with respect to merger, target contracts
become the acquirers’ after the merger
Non-assignable or restricted assignment contracts
o Silent: generally assignable (except for personal
service contracts)
 In an asset sale  this contract would be
 In a merger  see §259 this contract just
goes as a matter of law
o “No assignment without consent of a counterparty”
 In an asset sale  generally not assignable
 In a merger  contract just goes as a matter
of law but still a little fuzzy
o “no assignment by operation of law”
 In an asset sale  contract is not assignable
 In a merger  prevailing view: this would
still require counterparty consent
o Addressed by “reverse merger” T’s contracts
aren’t going anywhere so don’t need to be assigned
and no consent is required.
Shareholder Meeting
o Laws of State of Incorporation generally apply (also securities laws, exchange laws, and
o Corporation’s organizational documents also influence process if more stringent than
other laws
o Can be at annual or special meetings (most happen at special meetings)
o Meeting requirements:
 222(b): notice at least 10 and no more than 60 days prior to the
 SEC requires 40 calendar days before meeting date (14a-16)
 251(c): notice to each holder of stock
 of record at least 20 days prior to meeting  this trumps §222
o must be given notice whether its voting or non-voting stock
 213: record date: cut off date established by company to determine which s/h
are eligible to receive dividend or distribution
 At least 10 and no more than 60 days prior to meeting date
 NYSE recommends 30 days between record date and meeting date and 10
days notice before record date is set
 Can set a record date for notice and voting
o Mitigates “empty voting”: a person having a legal right to vote
but has no economic interest in the company
o Record date can impact voting  early date can lead to empty
voting; late record date signals to market about votes and impairs
ability to solicit votes
o Changing meeting date
 May want to change date if you don’t have the votes required for approval, or
don’t have quorum, or there is a change in circumstances
 Three ways to change a meeting date:
 Adjournment: existing meeting that you take a break from
O’Hare – Spring 2018
o §222: no new notice required, unless bylaws say otherwise
 Postponement: happens before meeting has been commenced
o May need a new notice depending on date of new meeting
o §251(c): new notice at least 20 days prior to date of meeting
o §213: need to look to see if the record date is still good
 Recess: taking a break before closing the voting polls
o §231(c): announce the polls will close in a specified amount of
time (like a couple of weeks)
 This was done in Blackstone’s purchase of Dynergy
 When changing meeting date, you need to look at above statutes, corporate
bylaws, notice that was sent out, terms/language of proxy, merger agreement, etc.
(Cedar Fair)
o Additional requirements
 Broker request forms  20 days before record date (SEC)
 Proxy materials  filed with SEC 10 days prior to definitive proxy
 E-proxy options  at least 40 calendar day notice of availability before meeting
Proxy Solicitation  Solicitation of s/h votes, so s/h can vote in a fully informed manner
o Proxy: paper that allows a person to vote shares on the s/h behalf
 Why is this necessary?
 Most s/h don’t attend s/h meetings
 Individuals won’t spend money
o Governed by:
 Securities law  govern the process by which a board is permitted or required to
communicate with s/h re voting
 State Corporate Law  requires the vote itself (either because of the merger itself
or because of the issuance of stock or to amend certificate of incorporation to
authorize more stock)
o Solicitation:
 Any request for a proxy, whether or not accompanied by or included in a form of
 Any request to execute or not to execute or to revoke a proxy
 The furnishing of a form of proxy or other communication to security holders
under circumstances calculated to reasonably result in the procurement,
withholding or revocation of a proxy
 Any communication calculated to result in procurement, withholding, or
revocation of a proxy
 Very broadly applied  this almost means any communication
 DOES NOT INCLUDE communication by s/h, who does not otherwise solicit,
explaining how he will vote and why (Rule 14a-1(1)(2))
 Also doesn’t include statement of intent to vote
 Also doesn’t include ordinary course communication
o Proxy Regulation:
 Rule 14(a)-3: no solicitation of proxy unless you furnish a filed proxy statement to
person solicited
 The proxy statement should clearly state the matter intended to be acted upon
 Exceptions from the rules:
 Not seeking to act as a proxy holder
 Not more than 10 shareholders  does not include issuers, affiliates,
officers, directors, etc.
 Internet forums
O’Hare – Spring 2018
 Bona fide media forums
Proxy Statement for Merger: Content – Schedule 14A
 Merger agreement description
 Background of merger
 Recommendation/reasons for merger
 Valuation
 Conflicts and executive compensation
 Comparison of rights
 Other times as required by 14A (materiality)
Filing, Review, and Timing
 Rule 14a-6: preliminary filing 10 days before mailing proxy statement but
don’t have to wait for SEC to sign off
o May want to make sure the SEC approves before mailing
o Definitive proxy filed as of date of first use
 Review sequence:
o Negotiate merger agreement
o BOD approval
o Sign MA
o Prepare proxy statement
o Submit to SEC for review
o Mail solicitation
o Obtain s/h approval
o Submit certificate of merger
o Close
Rule 14a-3: once proxy statement is furnished, you may use other soliciting materials
Other soliciting materials must also be filed with the SEC which can’t be done until proxy
statement is filed
 Exception to Filing Requirement  solicitation before filing proxy statement
O’Hare – Spring 2018
Parties can communicate with constituency before formal proxy process
 important for customers, suppliers, employees to know what is going
 Rule 14a-2: permits parties to engage in solicitation before furnishing a
proxy statement and without SEC preclearance so long as written
o Identify participants, their interests and contact info
o Contain a legend and
o Are filed on date “used”
 Personal solicitation: permitted before and after proxy statement
o Because it is not written, there is no filing requirement
o But written instructions, transcripts, etc. need to be filed if they
were distributed to the public  14a-6(c)
If securities are involved, filing gets much more complicated
 Requires registration statement (33 Act)
 Joint filing: buyer  registration and proxy; seller  proxy
o Stock for stock deals
 Must wait for SEC approval before sales or “going effective”
 Rule 145: business combinations involve sale of securities so require
registration statement, even though they don’t involve a “sale” of a
Who Gets the Proxy?
 Owner of record  almost always the broker
 Beneficial owner  the s/h
 Record holders vs. beneficial holders
o State law: record holders vote BUT broker can’t vote unless
customer instructs them on how to vote
 NYSE doesn’t allow brokers to vote without furnishing
information to s/h
o Federal law (’34 Act): how you do the voting process
 Issuer solicits record holders
o Must be done 20 business days before record date
o List of non-objecting beneficial owners (or request distribution)
 Brokers forward materials
 Beneficial owners must instruct brokers on how to vote
O’Hare – Spring 2018
Proxy Statement - Electronic delivery: 14(a)-16
 Access = delivery
 Consent not required BUT conditions must be met
 Notice of availability (40 days before meeting)
o Legend
o How to request paper copies
o How to execute a proxy
o Details of meeting
 Issuer must provide paper copy upon request
 Still much more likely to be done by paper
Truth in proxy:
 No solicitation shall be made by means of any proxy statement that is
false or misleading with respect to any material fact or which omits to
state any material fact necessary in order to make the statements therein
not false or misleading
 TSC: substantial likelihood that a reasonable s/h would consider it
important in deciding how to vote  significantly alter the total mix of
information available
 Basic v. Levinson: balancing indicated probability that the event will
occur and the anticipated magnitude of the event in light of totality of
company activity
 No comment policy  need to be consistent
Triangular (Subsidiary) Merger
O’Hare – Spring 2018
§251: target merges into parent’s subsidiary shell  target becomes separate subsidiary 
consideration comes from parent
Assets and liabilities of target are kept separate
Voting: §251(c): parent vote not required unless they issue more than 20% of outstanding stock (NYSE
rule) or vote to amend Parent’s charter to authorize additional shares
Only need approval of P which purely administrative because P owns 100% of sub’s shares
Reasons for using Triangular merger:
Avoids buy-side vote  way to get around approval of Parent’s s/h
Protects Parent from Target’s liability
Separates the labor forces of the two businesses
o Prevents union agreements from affecting acquirer’s workforce
Allows 50% of consideration to be something other than buyer’s stock
More flexible means of accomplishing a tax-free reorganization
Fewer operation complexities/integration
Brand value maintained through separate existence
Less need for integration of entities operations
Forward triangular mergers are more preferred for tax benefits and to kill the target’s brand
o E.g. Dynergy’s attempt to acquire Enron but kill its brand
Forward triangular merger:
Sub survives
T’s assets assigned by operation of law
More cash is permitted tax free (50%)
Reverse triangular merger:
T survives; subsidiary merges into T
No assignment of T’s assets but change in control
o Important for non-assignable contracts or other sensitive assets
Cash is limited to 20% tax free
O’Hare – Spring 2018
Tender Offers + Back-End Merger
Buyer offers directly to T’s s/h
Benefits of tender offer over merger:
TO is a quick way to acquire control and avoid s/h vote process
o But, Rule 14(e)-1 requires TO to be open for minimum of 20 business days from date
first published and sent to s/h
 Contrast with merger which takes 2-3 months for full s/h approval process
In cases of hostile bids or fear of third party interloper, a TO gives acquirer control at faster rate
o Also used when target BOD objects
Unless buyer receives 100% of shares in TO, back-end merger is required
O’Hare – Spring 2018
Type of merger depends on level of acceptance of tender offer
o One of three options:
 §251 direct or triangular merger but this involves delay for vote and proxy
 §253 Short Form Merger
 Requires that purchaser has 90% of shares to avoid s/h vote
 Requires BOD resolution
 Minority is cashed out and do not have right to vote on transaction, but do
have appraisal rights if they think price was unfair
o Appraisal under §253(d)
 Can also use §253 if you own 100% of shares (corporate internal
o §253(b) allows changing of parent’s name through merger without
s/h vote
 Done through a board resolution
o Cash paid for shares not owned by parent
o Parent shares remain outstanding
 Top-Up Option + §253 Short-Form Merger
 Purchaser isn’t able to get 90% on open market
 T agrees to issue extra shares to Purchaser so purchaser can get to 90%
 This may run up against NYSE limits triggering a s/h vote
 Top-up Option: company agrees to issue more shares to get buyer to
90% threshold
o Need to make sure you have enough authorized shares
o Widely accepted  100% in 2008
o Need for s/h vote under NYSE rules if issuing more than 20% of
target’s shares
 Remedy for violating s/h vote is being unlisted from NYSE
 Who cares? Target will not be listed on exchange
o Slight risk if delisting occurs prior to closing
potential risk of injunction
o Almost all tenders include top-up options
Recent Alternative (§251(h))
Can use long form if you receive 51% s/h approval
But regular §251 merger involves delay for s/h vote and proxy solicitation
Short form  no target approval
§251(h): no s/h vote required if received 50% plus it eliminates the need for
top-up option
 Conditions:
 Target must be listed or held of record by 2,000 s/h
 Merger agreement must expressly permit a §251(h) merger
 Those squeezed out get same consideration as given in TO
 Effective ASAP after consummation of TO
 Tender must be for any and all outstanding shares
 In practice, most leave option for “top-up” just in case
O’Hare – Spring 2018
Available only in conjunction with acquisition, only in TO preceding a
merger and only in a friendly agreement
Holding Company Mergers - §251(g)
Parent merged into Sub 2  Sub 2 shares remain  Sub 1 shares are cancelled  parent shares
exchanged for Sub 1 shares  s/h have to vote
o Authorized by §251(b)(5)
§251(g): creation of holding company and merger with direct or indirectly 100%-owned
subsidiary  no vote required of a constituent corporation; no proxy solicitation
o Shares converted into identical shares
o Constituent corporation becomes wholly-owned sub of holding co.
o Charter and by-laws identical (other than corporate name, etc.)
o Same directors
Liability isolation
Ease of divestiture
Line of business-based financing
Tax benefits
Regulatory separation
Interjurisdictional and Inter-species Mergers - §252
§251: DE corporations only
§252: “foreign corporations”
You can do the same thing as §251  make sure you follow the laws of the foreign corporation’s
o Foreign jurisdiction has to permit foreign mergers
o Local law governs approval
o If surviving corporation is not a DE corp., must consent to service of process in DE
 Must appoint DE Sec. of State
§264: merger with LLC’s (domestic or foreign)  approval per LLC Agreement
§265 and §266 govern “conversions” of LLC to corp.
Dell Merger Agreement
Reverse triangular subsidiary merger
O’Hare – Spring 2018
Dell survives, merger sub disappears
Blocker corp. is often used for tax considerations  sets up corporation for exit if target is
LLC (public would rather buy a corporation)
Treatment of shares:
Public shares are converted into cash
 Shares are cancelled and subsequently replaced with the right to receive cash
Treasury shares = shares that have been issued but not outstanding (typically,
repurchased shares)
 These are also cancelled
Dell’s subs that owned Dell shares were converted into surviving company shares (keeps
corp. structure the same)
Dissenters’ shares are cancelled and they are cashed out for appraisal value
Restricted stock is cancelled and cashed out, regardless of vest
Exchange fund: way to administrate payment of shares
Group of s/h that get paid are the s/h on the effective date of the merger
Directors and Officers: the officers stayed, but the directors of Dell were out and the directors of the sub
become Dell’s directors
Usually board of target, including officers and directors, is replaced by board of acquirer
Asset Deals
Asset Sale vs. Merger
o Everything goes by operation of law
o All assets and liabilities transfer
o Subsidiary can retail liabilities
O’Hare – Spring 2018
o Taxable as a capital asset
Asset transactions:
o Consent to transfer  K’s that are silent on assignment are assignable
 But, if K is not assignable, you may have a major problem with an asset sale
o Taxability varies by asset class
o s/h vote only required with sale of substantially all assets
Asset Purchase Documentation:
No transfer by operation of law  must transfer each asset individually
Transfer documentation:
o Deed  real estate
o Bill of sale  personal property
o Assignment  contracts
o Transfer of title  vehicles
o Assumption of liabilities  whether drafted narrowly or broadly will depend on type of
asset sale
Sale of Entire Business:
Alternative to merger  equivalent to §259
Sale of all or substantially all assets transferred to buyer, seller receives consideration, seller
pays off liabilities, then distributes remaining money to s/h as dividends
Step 1: transfer of all assets under §271
o Requires BOD authorization  must use words “expedient and in the best interest of the
o Requires s/h approval by majority of outstanding shares entitled to vote
o Notice, record date, delay of meeting, proxy solicitation all the same as with merger
Step 2: dissolution under §275
o BOD approval finding that dissolution is advisable – will often approve liquidation plan
at same time
 Need majority of whole board
 Dissolution is a legal concept establishing a company’ status
 Liquidation is distributing assets and settling liabilities
o Obtain s/h approval
o Certificate of dissolution
o Liquidation – disposition of liabilities and distribution
 §277: franchise taxes payable before filing
 §278: existence continues for three years but operation is limited to winding up
 §280: notice to claimants
 §281: payment of claims and liquidation of s/h
“Substantially All”
o Gimbel: not just sale of a major asset or trophy – must be substantially all or
quantitatively vital
 Includes assets of subs
o Must be both quantitative and qualitative
 Quantitative
 Not a percentage (high as 80%, low as 51%)
 Retain significant other assets?
 Strong profitability from retained assets?
 Expectation of future profit growth?
 Qualitative – focus on economic aspects
 Radical departure from historical success
O’Hare – Spring 2018
 Unable to conduct business for which business was formed
 Fundamental business purpose was destroyed
Hollinger: “substantially affect the existence and purpose of the corp.”
 Selling the Telegraph was not quantitatively vital to the corp.  still owned the
Jerusalem Post and Tribune
 *very fact dependent
De Facto Merger Doctrine:
Essentially a doctrine under which state will recognize an asset sale of entire company as a
o DE does not follow the de facto merger doctrine because it treats asset deals differently
with regard to appraisal and voting rights
o In contrast, DE says that each statutory provision that has equal weight  Equal Dignity
 Each transaction has “independent legal significance” and validity is not
dependent on other section of the Act (Hariton)
 Because all transactions are treated equally, mgmt., Board, and advisors can
choose from a broad range of options
o Though DE rejects de factor merger doctrine, it allows it in form of a successor liability
doctrine where s/h might be abused and where the assets that were the sources of
repayment have gone elsewhere and where liabilities have not been assumed
 Hence, if planners are structuring a transaction as an asset sale to avoid
successor liability of §259, then DE courts might look through that and assign
liability to the successor entity
 Countrywide: “DE is reluctant to find an asset sale to be a de facto merger in the
absence of fraud”
o Successor Liability in Asset Deals:
 The general rule is no successor liability  this is the attraction of asset structure
 Most states permit exceptions:
 Express/implied assumption
 De facto merger/mere continuation (same people are in control of
ownership and operations)
 Continuity and seller’s termination
 Fraudulent intent
 DE – only in very limited context
 Intent to harm, fraud, or bad faith
 Product, environmental, and lender liability usually have successor liability
 Environmental: when you buy an asset, you become an owner
 Product: you become responsible for the assets you are buying
Fraudulent Conveyances: transactions that extract value without giving reasonable value in return
Anyone who benefited potentially may be found liable for the fraudulent transfer and would
need to return assets/capital
o *creditors of T would bring the fraudulent conveyance claim
Often seen in LBOs
O’Hare – Spring 2018
Requirements  intent to defraud OR not reasonably equivalent value
o If you’re doing a deal with the potential for fraudulent conveyance, you need to be
 i.e. get fairness opinions, etc.
Conditions to recovery:
o Target must be insolvent immediately after transfer; OR
o Unable to pay debts in ordinary course
o Injunction
o Damages from Buyer or Seller board or s/h
o Invalidation of liens securing debt (seen in LBO)
Bulk Sales:
UCC Article 6 provides a specific kind of protection for creditors of businesses that sell
merchandise from inventory
Creditors of these businesses are vulnerable to a “bulk sale” in which business sells all or a
large part of inventory to single buyer outside the ordinary course of business, following which
the proprietor absconds with the proceeds
Original Article 6 of the UCC requires “bulk sale” buyers to provide notice to the seller’s
creditors and to maintain a list of seller’s creditors and a schedule of property obtained in a
“bulk sale, for six months after the bulk sale takes place.”
o Unless the procedures are followed, creditors may void the sale
Auctioneers, who handle merchandise in bulk, are given a similar burden to that of bulk sale
o Notice to creditors if acquire “significant portion” of inventory
o Failure to comply – buyer liable to creditors
o Repealed by most states
o Where not repealed  buyers waive if seller agrees to discharge
o Indemnity  buyer should try to get indemnity from the seller but if the seller liquidates
and is no longer around strategies may include escrow and diligence
 At the end of the day, buyer assumes risk
Tax Considerations:
Taxable v. Non-Taxable Considerations:
O’Hare – Spring 2018
o Seller/target taxed on gain
o Potential double tax
o Buyer’s basis = purchase price
o If stock (and no “boot”) is received, no current gain or loss to seller/target on sale
o Buyer’s basis usually equals Seller’s old basis – buyer wants basis as high as possible so
there will be less gain on future sale
Sale of stock (for cash):
Good for buyer  gets basis = consideration paid (no gain/loss for buyer)
o Basis in stock = purchase price
 When selling in the future, Buyer has higher basis  less future taxable gain
o Basis in assets = target’s old basis
 When selling in the future, Buyer has lower basis  more future taxable gain
Bad for seller  taxed on gain in share price (holding period determines ordinary v. cap gains
Sale of assets (for cash):
Seller pays tax on gain
o Holding period determines ordinary v. cap gains treatment
o Purchase price allocation becomes important
o Double tax if s/h receive dividend from liquidation following asset sale
 Taxed on asset sale then taxed on liquidation
 Exceptions: S-corps, LLCs, partnerships, subsidiaries in consolidated group
 They are pass-throughs
 This is a large downside for seller
Buyers like asset sales because they have less gain on sale (basis = purchase price paid) + larger
depreciation deductions
Forward cash merger:
Cash consideration for seller shares  treated as purchase of assets
o Money goes straight to s/h but is treated like it is going through the corporation then to
the s/h
o Don’t see many of these because of double tax problem
 Target s/h are taxed on gain
No gain or loss for buyer
Buyer’s basis in target assets equals consideration paid (basis step up)
Reverse sub. cash merger:
Treated as a purchase of stock (e.g. Dell transaction)
o Seller’s s/h are taxed on gain
Buyer’s basis in target assets = old basis
Tax objectives for buyer and seller:
Seller  minimize current taxes (eliminate, get taxed at lowest rate, defer)
o Prefer stock sale
 Can obtain cap gains rate
 Avoid double tax
 Pass liabilities
Buyer  maximize future tax benefits
o Prefer asset sale
Provides step-up in depreciable tax basis to FMV
Permits limitation of liabilities
O’Hare – Spring 2018
Structuring Transactions w/ Tax to Meet Both Parties’ Objectives
Impact of NOLs (deferred tax deductions)
o Target
 Can offset target corporate level gain on asset sale, and if significant, eliminate
the double tax
 Easier for target to agree to asset sale (buyer should be willing to pay more for
“step up”)
o Buyer
 Assets: target keeps NOLs but step-up for buyer
 Stock: no step-up but buyer can use NOLs
 Must compare value of NOLs to value of step-up
 Buyer may prefer stock depending on amount of NOLs and target’s
existing basis in its assets – is the step-up worth more to the Buyer than
the NOLs?
Methods for seller to defer tax:
o Tax-free reorganization – must use stock as consideration (i.e. buyer paying with stock)
 Available for purchase of either stock or assets
 Target and buyer must both be taxed as corporations
 At least 40% of consideration must be stock
 If any cash (“boot”) received, s/h taxed on lesser of gain realized and cash
o s/h may have varying tax positions
o several different transaction forms can be used with each having different requirements
o different types of tax-free reorganization
 statutory mergers
 direct
 triangular
o reverse – most common, restrictive  only 20% can be boot/80%
has to be stock
o forward – 50%+ cash is permitted
 stock purchase
 purchase of assets
§351 Transaction – transfer of property to a corporation
o Transfer solely for stock is tax free if transferor is in control after transfer
 control = ownership of 80% of stock by vote and value
o If cash + stock is received, transferor taxed on lesser of the gain realized and cash
(transferor is “cashed out”)
Installment sale
o Gain deferred until consideration received
o Gain recognized in proportion to amount of total consideration received in year of
 Ex) seller sells target stock with basis of $50 to buyer for $100, $80 of which is
paid in year of sale and $20 of which is paid in the following year
 Overall gain is $50 ($100-$50)
 Seller will recognize $40 of gain in year of sale (80/100*50) and $10 gain
(20/100*50) in following year
Common Step-Up Transactions
O’Hare – Spring 2018
Taxable asset purchase
Stock purchase with §338(h)(10) election  treated for tax purpose as a sale of assets
o Avoids paperwork complexities
o Avoids consents from s/h
o Passes liabilities
o Provides step-up
o Target is treated as having sold assets followed by a liquidation without asset sale
 Doesn’t eliminate the double tax problem so works great with pass-throughs
o Same buyer benefits/seller detriments as asset sale
 Buyer gets stepped-up basis in target assets
o Maybe gets NOLs?
 Seller taxed on gain inherent in assets of targets
o Requirements
 Taxable purchase of target stock
 At least 80% of Target stock acquired during a 12 mo. period
 Buyer must be unrelated to target
 Target must be U.S. corporation or either
 Owned at least 80% by U.S. corporation or
 Subchapter S corp.
 Has some sort of relief from double tax
 Joint election by buyer and seller
Appraisal: dissenting s/h to a merger can go to court and get “fair value”
No right to prevent a merger  alternative to merger consideration
o Historically, mergers required consent
o This is the modern compromise between veto power and forced acceptance of a deal
§262: appraisal rights are available to s/h of constituent corporations in a statutory merger
o But no ARs available for any publicly traded shares (listed on national securities
exchange or held of record by >2,000 holders)
O’Hare – Spring 2018
But ARs are restored to s/h of constituent corporations if they are required to accept
consideration in merger of anything other than stock of surviving corporation or publicly
traded stock of another corporation (cash deal)
Appraisal Rights Apply in Following Transactions
§262(b) DGCL
o s/h of constituent corporations in §251 long form merger
o s/h of target in §253 and §251(h) short-form mergers
 minority s/h don’t have a vote in these mergers
similar inter-jurisdictional and inter-species mergers
other states may offer ARs for asset sales and de facto mergers but DE does not
Appraisal Rights do not apply (unless Charter provides otherwise):
asset sales
tender offers
market out  §262(b)(1)  this occurs when s/h have publicly traded stock of a corporation,
as they do not need court’s protection if public market exists where they can sell their stock
o the public market provides a valuation that might be better than the court’s valuation
o for surviving corporation where s/h vote is not required (§251(f))
o exceptions to market out:
 No ARs if accepting:
 Shares of survivor (continuing interest in business)
 Public shares of any corporation (not just parent)
 Cash in lieu of fractional shares
 Cash option merger; not “required” to accept cash
 Anything else confers ARs
 Cash, notes, rights, property
 Market-out is not a defense for buyer in short-form mergers (§253 or §251(h))
Strategic considerations
Too many dissenters can change economics – if you’re repping the buyer, keep track of how
many dissenters there are because their rights are triggered so long as the merger is approved
o If you are the buyer, and you’re paying $100/share to 51% of s/h and have no idea what
you’ll pay for the other half of the company, that introduces a lot of uncertainty
o Can create unacceptable uncertainty
o Condition in merger agreement?
 You can say no more than 5% of s/h can exercise dissenter’s rights otherwise deal
won’t go through, and this can be highly negotiated
o Asset sale as alternative?
Appraisal Rights Decision Tree:
Step 1) Grant
o Is the dissenting s/h a s/h in a constituent corporation?
 (NOT parent)
o does s/h have a right to vote in merger?
 Even non-voting shares can vote in a merger
o If no to either  no appraisal right; if “yes” go to step 2
Step 2) Limitation
o Does s/h hold public stock?
o If yes  no appraisal right, unless Step 3
Step 3) Restoration
Is the s/h required to accept non-qualifying consideration (cash)?
 If no  no appraisal right
 If yes  appraisal right
O’Hare – Spring 2018
Perfecting Appraisal Rights
Notice to s/h re appraisal rights must be given 20 days before the meeting where s/h will vote on
the merger and the notice must include a copy of §262 (§262(d)(1))
The s/h must make written demand  §262(d)(1) identify the s/h and the intent to demand
o Express appraisal intention at least 20 days before the vote is taken
o Cannot vote for the merger
 May abstain, not vote at all, or vote no
Must be a s/h at time of demand (262(a))
o Remain a s/h through closing  §262(a)
o Must remain a s/h through pendency of the appraisal action and cannot pursue the
appraisal action if you sold the share shares or accepted the merger consideration
o At closing, your rights limited to appraisal  stuck
Dissenter or corporation may petition court for determination of fair value within 120 days of
closing - §262(e)
o After 60 days, cannot withdraw petition without the approval of the judge, to prevent
class litigation
If total appraisal shares are not in excess of total no votes and abstentions, then no tracing of
votes requires
Who can dissent:
Record holder entitled to notice
Record holder entitled to vote
Record holder vs. beneficial owner
o §262(a) limits appraisal to recordholders (brokers) – except for 262(e)
 Recordholders are responsible for perfection
 Must be owners at time of demand and through closing
o §262(e) permits beneficial owners to pursue appraisal directly
 But recordholder must have perfected the shares
o What this means re ownership and arbitrage:
 Can buy after record date, after vote, even on the day before closing and still have
Appraisal arbitrage:
Why do it:
o Speculation that s/h can do better in an appraisal proceeding (FMV > deal price)
o Purchase after deal announcement, bet on positive post-announcement events:
 Example: Transkkaryotic Therapies case – company announced deal, then
announced “extraordinarily positive” results for experimental drug
 Share price shot up, but deal price remained the same
o Interest rate impact: statute provides that when dissenting s/h does get its money, then
the s/h also gets an interest payment (5% above fed. rate)
 Thus, the arbitrager can make above-market interest on the deal
Lower deal premiums attract appraisal  more likely that FMV > deal price
There has been a dramatic increase in appraisal proceedings (both in number and value)
o Driven by repeat players (e.g. sophisticated hedge funds)
 2016 amendments:
O’Hare – Spring 2018
Nuisance arbitrage: court can dismiss an appraisal proceeding if
everyone participating represents in the aggregate <1% of shares or if the
value of the merger consideration is <$1M
 Interest rate arbitrage: 5% over fed rate
o Amendments allows company to pay uncontested portion of the
value up front and company has to pay above-market interest rate
only on the portion in contention in the proceeding
Transkaryotic Therapies: great results released after record date  merger price no longer fair
o Icahn and others saw opportunity in the Dell merger  bought and demanded appraisal
o Company defenses:
 These were not s/h on record date
 Failed to vote “no” on the merger
o Court:
 Only have to be a s/h at the time of demand and thereafter
 Not required to vote no  just can’t vote in favor of the merger and must make a
written demand
 But how do you know how the shares were voted?
o Cede was record owner
 Commingled with many others
 Some voted yes, some no, some abstained
 Couldn’t prove Icahn’s shares voted yes
 Burden is on Icahn
o Appraisal was not precluded by Cede “yes” votes  if total
appraisal shares are not in excess of total no votes and
abstentions, then no tracing required
 s/h are not obligated to trace, but company can defend
itself with tracing
 Don’t need to be a stock owner prior to record date, only before the written
demand before s/h meeting and need to hold the stock through effective date
Fair Value in DE:
Court makes independent determination based on “all relevant factors”
o Market value, asset value, dividends, earnings, prospects, nature of entire process
o Excludes value arising from merger (e.g. synergies) and minority s/h discount
o Valued at closing date this allows for more certainty
 *not found in §262
 Pre-closing improvements benefit dissenter; back-end merger delay can
exacerbate this effect
Fair value challenges:
o Typical proceeding: “battle of the experts”
o Deal value vs. fair value  CKx and Ancestry.com
 Court unpersuaded by experts, found deal to be fair value
 Full market canvas and auction
o If the courts have a high level of comfort regarding the process
used to arrive at the deal price, more likely to find it to be fair
 Limited evidence re: synergies
 No comparable companies
 No normal course management projections
 But, Dell Deal  fair value was found to be 28% above deal value
 Declined to rely heavily on deal price as an indicator of fair value
O’Hare – Spring 2018
Seemed concerned about management buyout and Michael Dell’s
influence on the deal
o Dell did accept limitations on his influence  these conformed
with best practices
Reversed by DE supreme court  may not ignore deal price
o If process is good, you must give the deal price
significant weight
§253 or §251(h) remedy is exclusively appraisal right
o Minority s/h can’t claim FD because there is inherently a conflict
o All info needs to be disclosed, otherwise quasi-appraisal remedy
o In long-form mergers, appraisal rights are not the exclusive remedy
Berger: court found that s/h were not provided with full disclosure so could not make a fully
informed decision on whether to seek appraisal
o §253 short form merger
o Failure to disclose triggered a right of recovery
 Sent outdated version of appraisal statute
 “career limiting move”
 No information about deal value
 Limited information about company and operations
o Take away:
 Failure to adequately disclose creates a fiduciary duty claim
 Notice requirement is not perfunctory (mechanical)
Deal Process
Types of sellers and buyer:
o Strategic: operating companies  expansion and synergies
o Financial: PE funds, hedge funds, VCs, financial investors
o Public
o Private
o Divestitures
o Strategy: lack of fit with business plan, underperformance
o Financial: liquidity, exit strategy
o Strategic buyers
 Make vs. buy
 Game changer
 Industry consolidation/reducing horizontal competition
 Synergies
 Considerations for strategic buyers: investment horizon, synergies,
private value, antitrust
o Financial buyers
 Investment driven
 Portfolio building
O’Hare – Spring 2018
Considerations for financial buyers: viable as a standalone (cash flows,
debt support, competitive position, management), return (growth
prospects, expense reduction, investment horizon), transactional
efficiency, common value
Pre-sale considerations:
Identify goals/determine sale process
Identify buyer universe
Seller diligence
Obtain retention agreements, if applicable
Restructure if necessary  segregate businesses to be divested
Prepare marketing materials
Ways to Conduct a Sale
*There is no single blueprint
More potential buyers
More control of process, especially in a controlled auction
Competition maximizes price
Can satisfy Revlon duties
Works well for companies in bankruptcy (stalking horse and termination fee) and the court can
commit to the sealed-bid auction process
Not all businesses are suitable
Can deter interested buyer
Takes longer (maybe)
More expense and distraction
Confidentiality can be challenging
Competitive risk
Buyers might place a low bid in auction process if the corporation’s fiduciary duties to s/h
require them to consider late offers/bids after the closing process
Financial buyers are less interested in auctions due to the bidders who may overestimate the
objective value of the targets
o Strategic buyers are also known as common value buyers
Auction process:
Identify potential bidders – perhaps use a teaser (brief description of company)
Negotiate and execute NDAs
Distribute CIM (“confidential information memo”) and bid process letter  “rules of the game”
o Establishes timeline and that all bidders are treated the same
o Defines timelines of each “round” and requirements
o Identifies sequence of access to information and materials to be distributed
o Informs re availability of stapled financing
o Est. that contact is only through I-banker
o Generally prohibits “clubbing”  collusion between bidders
o Sets valuation guidelines
o Sets structure and consideration requirements
o Financing, regulatory approvals, etc.
o Future plans (e.g. what will happen to employees)
Solicit preliminary indication of interest (in larger auctions)
Bidders get data room access
o Mostly done online now
Management presentations
Deadline for round 1 non-binding bids  bid evaluation and rejecting
Distribute draft transaction document
Expand diligence
Deadline for round 2  binding bid and mark-up
Selection of finalists
o Exclusivity
o Negotiation
o Signing
O’Hare – Spring 2018
Auction bidder tactics:
Preemptive bid
o Can occur at any stage
o Shift from auction to negotiation
o Often conditioned on requirement for exclusivity
Bid price subject to conditions
o Sellers wants “best and final” bids
o More difficult in final rounds
Keep agreement terms ambiguous
o Submit concepts instead of detailed markups
o Wait and submit a topping bid
Negotiation – One-on-One
Easier to maintain confidentiality
Fewer moving parts and participants
May attract bidders unwilling to participate in a full auction
o More efficient – market-based negotiations
o Could be completed over a weekend or could drag on for months
Good for strategic buyers (“private value bidders”) as they value the target according to their
priorities, including costs and synergies
Absence of real competition
o How to create a sense of urgency?
 Could use a parallel negotiation
No competitive price check – Revlon (so they don’t know if they are making the best deal until
the “post market signing check”)
o Combat Revlon issues through
 Pre-market check
 Independent valuation/experts
 Go-shop
Less control of process
Sample negotiation process:
Buyer performs internal exploration of M&A targets
Buyer approaches target for strategic combination
Draw out back and forth
Price discussed in general terms
o Prefer other party to make first offer
Diligence once some level of comfort
o Remember: they are competitors
No alternative bidder  no objective comparison
After six months  sign and announce
O’Hare – Spring 2018
Deal-making situation in which competitive pressure is coming both from interactions between the
buyer and the seller and from interactions among bidders
Sample process:
Target part of larger company
Bidder had long-standing interest in bolt-on
Attempt to divest through auction but stringent terms  no takers
Two years pass, on the market again  rumors
Engage in discussions; purportedly talking to others; no real evidence
Discussions lead to indication of interest
Non-public target, need information
Important to get to diligence stage
Drawn out negotiations
Key Players in M&A
Corporate lawyer – “deal quarterback”
o Coordinate with inside counsel, bankers, executives; and
o Specialists: tax, antitrust, regulatory, benefits, IP, enviro, litigation, labor, real estate
Issue spotter: diligence, structure, taking into account tax, accounting, and other business
Document drafter: acquisition agreements, voting agreements, employment agreements, etc.
Negotiator: deal-maker, counselor, and ring master
o Manage/organize sale process
 Identify potential buyers, targeted process, or a “broad” process, where the
buyers are requested to bid, typically through an auction
 Process intermediary, using contacts and knowledge to connect bidders and
 Negotiation
o Support target board’s duty of care
 Valuation
 Provide data for valuation and negotiation (sometimes the target board
uses this to negotiate sales price)
 Issue fairness opinion  delivered to target board prior to approval
 Addressed to BOD to show that deal is “fair from a financial point of view”
 Not an appraisal or valuation and no definition of fairness
 But can help to satisfy Van Gorkom process, though not required
o They are used in almost all deals post-Van Gorkom
o DGCL §141(e): directors may rely on reports from experts
o Conflicts:
Sell-side role is always a one-off
Majority of comp is conditional
Services to other parties even if unrelated
Affiliate investments
Stapled financing
O’Hare – Spring 2018
o Primary role is to provide financing, may also influence negotiation and valuation
 Limited interaction with lawyers
 Fairness opinions are rare on buy-side
 The advisory role can mostly be done by in-house bankers so financing is
the most lucrative opportunity
o Conflicts  industry concentration leads to dual representation of buyer and seller or
related and unrelated matters
 Majority of compensation is conditional, so might not get paid if no
 Affiliate investments in parties
 “Stapled financing” -- banker represents seller in traditional manner and
agrees to finance buyer
Why? Quicker close, avoids need for financing condition, puts all buyers
on level playing field in terms of cost
 Why not? Conflicts may be enhanced, contingent compensation is
magnified, preference for certain bidders
o RBC: manipulated process to favor buyers that were going to hire
them to do the stapled financing
 Conflicts typically addressed through disclosure or second opinions
Conflicts cases:
 Del Monte
 BOD “misled by Barclays”
 Secretly and selfishly manipulated the sale process
 Advised KKR on financing with Del Monte consent but without disclosing
they had previously pitched the deal to KKR (when Del Monte was not
 Paired Vector and KKR in violation of NDA and clubbing prohibition
without Del Monte’s knowledge
 Barclay’s motive: get financing assignment
 Perella Weinberg delivered second opinion
 $89M settlement
 El Paso Corp – acquisition by Kinder Morgan
 Goldman Sachs inherent conflict while representing El Paso
 Basically sitting on both sides of the deal
O’Hare – Spring 2018
Advised Kinder Morgan re unrelated spin-offs
PE arm of Goldman held 19% interest in Kinder Morgan and two board
 Disclosed to El Paso board
 Morgan Stanley hired for second opinion
 Morgan’s fee was contingent on closing (giving more incentive to
approve the deal terms as-is)
 No fee if alternative spin-off: Goldman only  if MS was going to
get paid at all, they needed to approve this deal, not any
 Harsh rebuke but no injunction
 Rural Metro
 case brought against I-bankers based on aiding and abetting board in
violating their duties based on RBC (the I-bank) conflicts
o Running Rural sale at same time as the EMS sale limited buyer
interest in Rural
 EMS was Rural’s biggest competitor
o Rural process designed to facilitate EMS buy side financing work
for RBC
 Inadequate valuation information to board
 Pushed Warburg to buy Rural in order for RBC to get the stapled
financing work
o Lowered valuation to facilitate
o Effort to get Warburg financing disclosed
 Aiding and abetting requires board liability
o Here, the board lowered valuation in violation of FD in which RBC
aided and abetted
Conflicts Takeaways:
 BOD’s Duty of Care
 Thoroughly vet financial advisors for conflicts  discussions, engagement
letter + ongoing review (things change)
 Control stapled financing – reduced advisory fee if stapled financing
 Document considerations  not all conflicts disqualify
 Second banker can help BUT
o Ensure authority and independence
o Avoid inappropriate incentives or restrictions
 Financial advisor conflicts (for I-bankers)
 Potential for aiding and abetting liability
 Full disclosure is first level of defense for conflicts
 Contingent fee – likely won’t change but need to be careful
 Stapled financing – be sensitive to conflict issues
 Work for counter-party, even if unrelated needs to be disclosed and
segregated to the extent possible
 Investments by affiliates
Biggest role: financial statements and due diligence
o Public companies  periodic audited statement requirements
o Private companies  audited financial statements need to be required
O’Hare – Spring 2018
If private company is target, their financial statements will need to be audited
post-deal so they can be incorporated into buyer’s statements
Disclosure statements
o S-4 if stock deal
o Comfort letter
 Should ask for comfort letters to verify things outside of audit information
o Pro forma financials
Public relations  communication plan; important role in both hostile and friendly deals
Proxy solicitors  identify beneficial owners and solicit; track vote and follow up; assess need
for postponement
Proxy advisory firms
o Analyze and recommend voting; consult with firms re executive comp and voting; etc.
o Concerns with advisory firms
 Conflicts of interest: advise investors and issuers on issues
 Should institutions make their own judgments?
 Governance ratings are not high quality
 Largely unregulated (not subject to existing proxy regulation)
Preliminary Matters
Lawyer engagement letter:
Client is the company (essentially the board) – not the management
o It also not board members in their individual capacity
Conflicts may exist with banker representation or if there are multiple bidders in an auction and
you represent lots of VCs or PE firms
o Disclose conflicts
Define scope of work  often other firms will represent on tax or regulatory matters
o Make sure M&A work is included
o Co-counsel and other professionals should be clarified
o Can represent more than 1 bidder in an auction but set up a firewall
I-Banker Engagement Letter (between seller and I-bank)
Sometimes negotiated in-house before lawyers get involved, but other times, the company will
use its outside M&A counsel
The I-bank’s in-house counsel presents standard form engagement letter and typically resists
changes, arguing that the letter is standard
o But be sure to evaluate:
 Fees
 Retainer/down payment sometimes structured to be paid against certain
 Success fee is typically calculated as % of price for which company is sold
o Can negotiate what this means (assumed debts? Deferred
amounts? Break up fee?)
 Should not include assumed debts because company only
wants to pay a % of the actual money it is making
 Break up fee  seller has to give a portion of the break up
fee to I-bank if it receives one
o Can tweak to give bank incentive to get the best price
O’Hare – Spring 2018
Reverse Lehman Formula (a progressive fee schedule)
where the success fee % increases as the sale price crosses
certain thresholds
 Milestone payment should be earned upon the achievement of legally
meaningful and objective events
o Unattractive for target because it indicates the deal may not get
o Resist milestone payments for signing LOI because LOIs are nonbinding
 Fees may also include success fees, opinion fees, impact of financial work,
Carve-outs from definition of “transaction”  typically I-Bank is entitled to fee
upon consummation of transaction
 Transaction usually defined to cover the sale of all or part of the capital
stock, a merger, or a substantial asset sale, sale of sub or division, stock
purchase, etc.
 BUT company may want to carve out a number of activities from the
definition of transaction
o Not uncommon to list parties with whom the company has already
had sale-related discussions  if company sells to one of those, IBank would not receive fee
Services that I-Bank will provide
 Typically include reviewing financials and comparing to industry data,
identifying and approaching potential purchasers, coordinating potential
buyers, due diligence, negotiations, valuation, fairness opinions
 Need to carve out services you don’t want I-bank to render
Conflicts Disclaimer
 Sell-side/buy-side financing
 Representing multiple sellers in same industry (Rural Metro)
 Multiple bidders
 Investment and/or board positions
Term, Termination, and Tail
 Fixed term vs. renewable term
 Usually structured to perpetually renew term of engagement, absent some
affirmative action by company to terminate
o Remember to affirmatively terminate post-consummation
 I-bank will insist that letter include a tail period
o Tail: period of time after termination during which, upon
completion of a transaction, it would still be entitled to its fee
 Length: 1 year is customary
 Scope-specified buyers
 Carve outs
 Little room to negotiate this
 I-bank will insist on being indemnified for any liability it incurs in
connection with or as a result of the engagement other than liability from
its own willful misconduct or gross negligence
NDA (between target and bidders)
Targets may not want those working for or dealing with them to know that it may be for sale or
the information it is providing to buyers to become more generally known
O’Hare – Spring 2018
o Bidders/buyers may not want their interest in the acquisition to be public
NDA ensures that exchange of information is confidential
o Also can be a vehicle for a non-solicit provision and standstill
Unilateral vs. bilateral
o Unilateral protects seller only
o Bilateral protects buyer and seller
 Stock deals tend to be bilateral
Who is covered?
o Defines who provides information that is confidential and who is bound by the NDA
o Representative  affiliates (defined under SEC rules), officers, directors, employees, Ibanks, financial advisors, accountants, legal counsel, consultants
o Principals are responsible for their subordinates as representatives
What is covered as confidential?
o General information about the companies: anything furnished, marked, or not marked
as confidential, in any form (written, oral, electronic) before or after the date of the NDA
and any derivative materials
o Transaction information  keeping secret that the parties are doing a deal including
existence and terms of NDA, consideration of possible transaction, existence of
discussion, terms of possible transaction, other identifying information
What should not be covered as confidential?
o Information received from a third party, publicly available, previously in possession,
independently developed or privileged information
NDA Best Practices
o Definition of Confidential Info
 Providers of information should:
 Confirm that the definition of confidential information sufficiently covers
the information and materials that will be provided
 Consider removing legending requirements (i.e. marking materials as
confidential) to avoid accidental failures to legend leading to unprotected
confidential info
 Considering carving out extremely confidential info and address this info
in a special NDA implementing careful controls and procedures to limit
distribution and access to this info
 Remove any residual clauses which allow recipient to use, in future, all
info retained in memory of recipient’s employees from confidential info
 Recipient should:
 Confirm that the exclusions from what is considered confidential info
properly reflect that info should not be protected if it was created or
discovered by the recipient prior to, or independent of, any involvement
with the disclosing party
o Use of confidential info and limitations
 Providers should:
 Confirm that there exists language limiting use of confidential info 
“keep confidential, no impermissible disclosure”
 Confirm that the recipient isn’t being granted a license to use the info
except for the purpose of evaluating the transaction
o “no use detrimental to disclosing party”, “only evaluate, negotiate,
 Confirm that the recipient will not use info to trade  acknowledgement
of insider trading restrictions
O’Hare – Spring 2018
Confirm that the recipient is liable for reps’ proper use of the info
o Representatives that “need to know”
 Set controls limiting procedures for extremely confidential info  special
arrangements for competitively sensitive information
 Confirm that information does not constitute rep or warranty  no reps
or warranties re confidential info
 Recipients should:
 Not disclose info to any actual or potential financing source or coventurer without prior consent of provider
o No “clubbing”
 Not restrict the ability of its potential financing sources to provide
financing to any other party with respect to a transaction
o i.e. no exclusive financing agreements
non-disclosure of discussions
o providers should confirm that the NDA clarifies the existence of a conversation is
o recipients should confirm that the NDA clarifies the above, including the identity of the
legally required disclosures – permitted exceptions
o “required by applicable law”  laws, regs, stock exchange rules, reg and admin. Process,
oral questions, interrogatories, requests for info in legal proceedings
 Exception for voluntarily becoming subject to required disclosure
o Providers should  confirm that the NDA provides for return/destruction of info and
derivative materials
o Recipients should  confirm the existence of an exception to allow them to make legally
required disclosures
Return or destruction of materials (note: confidentiality obligations still remain)
o Provider should  confirm that NDA provides for return/destruction of info and
derivative materials
o Recipient should  ensure the right of outside counsel to retain copy for
evidence/archival purposes
o Prohibits solicitation/hiring of employees
o A separately negotiated term usually covering senior executives but may also cover all
employees (within certain income ranges, perhaps)
o Exceptions may include public solicitations or search firms, employment where there
was no solicitation or inducement, and terminated employees
o Providers should  confirm that the NDA provides for protection against recipient’s
solicitation of the provider’s employees for some amount of time and against solicitation
of former employees recently departed
o Recipients should  consider limiting provisions; confirm carve-out for general
solicitation not directed at P’s employees; consider removing provision all together
Term and termination (usually limited to two years for public companies)
o Provider should  include language providing that the NDA doesn’t expire + unlimited
term for trade secrets
o Recipient should  limit NDA to specific time period (usually 1-5 years)
o Provider should  confirm that recipient acknowledges and agrees that monetary
damages are insufficient to remedy a breach of NDA + equitable relief + other remedies
Martin Marietta v. Vulcan: hostile bid for Vulcan with pre-existing NDA
o Martin used info received from Vulcan to facilitate its tender offer and disclosed it in its
SEC filing
O’Hare – Spring 2018
Martin argued disclosure was permitted because disclosure was legally required
Court: there was no external demand for this info
 Disclosure was self-inflicted
 Even if it was legally required, Martin was obligated to vet with Vulcan
Standstill Agreement (common condition to entry into auction)
Only applicable where target is publicly traded (or soon to be)
If bidder receives confidential info, it can’t use it offensively
o It is common for some bidders to be subject to standstills while others are not
A potential acquirer who is bound by a standstill is typically obligated to refrain from various
actions that relate to acquisition of control of the Target, such as making proposals to acquire
Target, buying shares, and launching a proxy contest
o Prohibited actions may include: acquisition of securities, proposal for business
combination, recap, board rep, soliciting proxies etc.
 This can be to the board or encouraging third parties
Agreement can also include a Don’t Ask/Don’t Waive provision which prohibits bidder
from requesting that the Target board waive the standstill
o Combination of two separate provisions:
 Request for waiver (“don’t ask”)
 Contained in NDA standstill provision
 Bidding outside the auction process is prohibited  must submit best bid
in final stage
 Don’t let other bidders off the hook of standstill once you’ve reached an
agreement (“don’t waive”)
 Contained in merger/purchase agreement
 Designed to protect winner from topping bids by limiting potential
 Losing bidders bound by DADW provisions are prevented from
submitting post-signing bids
o But fiduciary duties of the target board may be implicated
 Board still needs to stay informed of alternative proposals even after signing
 This is an ongoing duty
Exclusions (actions that would not violate the standstill provision) – bidders like a hedge fund
or PE would probably lobby for these
o Acquisitions up to X%
o Portfolio companies or affiliates in the ordinary course
o Non-controlled affiliates
o Ordinary course recommendation of Rep. as investment advisor
o Acquisition of companies holding target stock
Often contain “Most Favored Nation” provisions  if you let in another bidder, I want my
standstill agreement to be at least as weak as anyone else’s
o Need to have leverage to get these
Fall-aways: events that might trigger a fall-away of the standstill provision, allowing bidders the
opportunity to try to acquire target outside the formal auction process
o Ex) entry into a definitive agreement, announcement of a sale, third party hostile bid,
proxy contest, bankruptcy or reorg.
Normal terms: 1-3 years
Don’t Ask/Don’t Waive Cases
o In re Celera
 DADW provisions restricted potential bidders from acquiring proxies of Celera
securities in any manner w/o Celera’s express invitation
O’Hare – Spring 2018
Bidders also agreed not to request Celera to waive the provision
The DADW foster legitimate objectives, ensure that confidential info isn’t
 No-shop provision prevented Celera from contacting with potentially interested
parties and had a fiduciary-out if strict compliance with merger agreement
violated fiduciary duty to maximize s/h vote
 Together however, the DADW and non-solicit are problematic
 They block a handful of once-interested parties from informing the Celera
Board of their willingness to bid and the no-shop blocks the board from
inquiring further into those parties’ interest
o No-shop: board can listen to topping bids but can’t solicit them
 These constraints collectively operate to create an info vacuum and would
leave the board willfully blind and outright lacking adequate info to
determine whether continuing with the merger would violate the FD to
consider superior offers  contracting into such a state would be a breach
of FD
o Complete Genomics
 DADW is impermissible because it has the same disabling effect as a
no-talk clause
 Impossible for board to properly evaluate a competing offer, disclose
material info and make meaningful merger recommendations to s/h
 A DADW provision resembles a no-talk provision; potentially violates the
Board’s FD because it disables itself from engaging in a dialogue with a
potential acquirer under any circumstances
o Violates FD to take care to be informed of all material info
reasonably available
 Board has a duty to provide current, meaningful candid and accurate merger
recommendation to s/h regarding the advisability of a merger
 A DADW provision would create problems to negotiate and would
interfere with the Board’s ability to determine whether to change its
merger recommendation because the provision absolutely precludes the
flow of info to the board
o In re Ancesstry.Com (clarifies Complete Genomics)
 Recognizes DADW as not per se illegal but “potent”
 Emphasized that because of the potency of the DADW provisions, a target board
would need to establish a clear record that it consciously and carefully employed
the provision to maximize the target’s sale price; and
 Here, the board was not informed of potency of standstill
o Need to inform board of the consequences of provision
 Ruled that the use and effect of DADW provisions are material to s/h in
determining how to vote on a proposed merger and thus should be publicly
disclosed, especially where the restrictions potentially account for why no
superior offers have been made
 Duty of candor: s/h not informed that potential bidder excluded postsigning
Current state of the law
o Board should be educated re provisions
o Enforcement is not assured
o Consider interplay with no-shop
 Still valuable at the bidding stage (w/ NDA)
 But resist in merger agreement
O’Hare – Spring 2018
Exclusivity Agreements: common request for Bidder that wins the auction or preemptive bid
Buyer wants it at the earliest point possible
Limited duration (2-60+ days)
Restrictions on target:
o No-shop
o Terminate discussions with others
o No confidential info given to others
Buyer will want to impose an obligation to negotiate in good faith  seller should be wary
Fiduciary outs are uncommon unless long duration
Term Sheet/LOI  between buyer and seller following completion of first phase of negotiations
Content: generally describes purchase price/formula, key economic and procedural terms, will
be later superseded by merger agreement
o What is being acquired
o Price/consideration
o Indemnities, escrow, survival
o Conditions
o Financing
o Social issues
Reasons for LOI:
o Stalking horse for exclusivity agreement or standstill  test the waters before incurring
the negotiation costs of coming to a definitive agreement
o Calibrate expectations before committing
o Create moral obligation (no legal right)
o Expedite reg. compliance
 Starts clock on applicable waiting period under HSR
o Negotiating dynamics
 Buyer
 Facilitate financing discussions
 Often includes exclusivity provision
 Often permits buyer to perform due diligence
 Seller
 Establishes critical deal terms
Is an LOI binding?
o Clearly state intention of parties
 Courts may impose terms if intent is unclear
 “non-binding, no obligation to negotiate, may terminate discussions at any time
for any reason”
 Parties typically clearly make confidentiality and exclusivity provisions
Is LOI recommended?
o Time and cost  can be distracting
o Unanticipated legal effects
o Limits negotiation flexibility
o Potential for contention if changed
o Disclosure obligations
Due diligence: the process by which the potential bidder confirms its understanding of the business of
the target and the lawyers explore potential issues that may affect the transaction and terms of
Two areas of focus:
O’Hare – Spring 2018
Obtaining info concerning the company, including about its cap structure, material K’s
and outstanding debt
o Examining agreements for anti-assignment and change of control provisions
Business diligence:
o Should confirms assets and liabilities of company
o Confirm value of target company
o Learn more about operations of company
o Identify synergies
o Confirm info provided by target company in its disclosure schedules
Legal diligence:
o Key legal diligence categories:
 Organizational docs (E.g. incorporation certification, bylaws, etc.)
 Capitalization and equity  s/h control or stake in company, outstanding
 Consent issues  votes or consent required for transaction
 Special s/h rights  poison pill? What’s required to amend the plan?
 Dividends  dividend policy? Possible to change?
 Unusual provisions  provisions that could impact the transaction or
future operations
o E.g. s/h guaranteed a spot on BOD
 Minutes
 Contingent liabilities  any discussions regarding claims against target
 Corporate compliance  similar to above
 K’s including financing docs of target
 Parties, change in control provisions, assignment, termination
 Economic terms, contingent obligations
 Liens, third party rights
 Unusual provisions that could impact transaction or operation
o Special legal diligence categories
 Litigation  identification and evaluation
 Reg. compliance
 IP
 Employee benefits/ERISA
 Antitrust  combination and compliance
Buyer’s diligence
o Buyer uses info obtained to decide whether to continue transaction or more commonly,
to improve its negotiating position or adjust pricing
o Can use info to identify risks and opportunities
o Forms the basis for negotiations with seller
o Can use to prepare for integration
Seller’s diligence (stock deal)
o Confirm the value of buyer’s stock
o Assess the economic risk of receiving buyer’s stock
o Identify any impediments to issuance
o Identifying impediments to closing
Significance of due diligence:
o Merger consideration – amount & form  due diligence finding can affect valuation of
target and so buyer can adjust merger consideration
o Reps & warranties  buyer often uses the reps and warranties as protection against
unknown liabilities
O’Hare – Spring 2018
Disclosure schedules  buyer uses its due diligence review to verify the disclosure
 Buyer should have opportunity to investigate anything the target lists on the
 If schedules do not agree with the buyer’s due diligence findings, buyer can
negotiation to add or remove certain disclosures
Deal termination  due diligence findings can cause a party to terminate a deal
Pre-closing covenants  findings can raise issues that the buyer wants the target to
correct before the closing
Deal structure  based on diligence parties may come to find that different structure is
better than original plan
 Particularly important when considering anti-assignment provisions
Deal Process – Purchase Agreement
Types of agreements: merger agreement, tender offer merger agreement, asset purchase agreement,
stock purchase agreement
Basic structure of all forms of agreements:
Transaction mechanics  merger, stock purchase, assets, tender offer, etc.
Seller R&W/Buyer R&W  parties each make statements about themselves which serve to
convey info to each other and to allocate risk
Pre-closing covenants
o Covenants to continue operation in a manner largely consistent with previous practice,
to preserve assets until closing of transaction
o Deal protections
Post-closing covenants
Conditions to closing  conditions, such as reg and s/h approval, which are conditions
precedent to parties’ obligations to close
Termination  terminable pursuant to terms under certain conditions
o Most commonly, target receives a better bid during period b/w signing and closing (due
to fiduciary out) or failure to receive reg approval
o Termination fees payable be terminator
Indemnification  payments by seller’s s/h if, post-closing, seller’s R&W turn out to be false
(only included in private company sellers)
o For public companies  these die at closing
Disclosure schedules  often qualifies R&W with an exception
Key issues in private vs. public deals
Public  certainty of closing, indemnification rare, diligence critical, public announcement,
proxy solicitation
o Diligence is critical because indemnification (post-closing) is so rare  there is no one to
bring an action against post-closing
Private  certainty of closing, post-closing indemnification
Asset Purchase Agreements
Must identify assets to be sold (Cash, receivables, inventory, contracts, IP, real property,
permits, rights of action, warranties/indemnities, books of record, etc.)
Must deal with liabilities to be assumed (funded debt, taxes, product liability claims, insurance,
environmental costs, liabilities incurred with APA itself)
Must deal with “shared assets”
O’Hare – Spring 2018
Standard Agreement Provisions
Reps and Warranties:
- Purpose: supplement due diligence by turning DD discussions into a legal obligation; allocating
risk; may create walk-away right if not true at closing; benchmark for indemnification
- Representation = backward-looking w/ rescission remedy
- Warranty = forward-looking guarantees w/ damages remedy
- Seller reps and warranties:
o Validly organized and power and authority to do business
o Power and authority to enter into this deal
o Board approval of agreement
o No conflicts  performing deal won’t result with conflict with other agreements
o Third-party consents
o Financial statements
o No undisclosed liabilities
o 10b-5 representations  tell the buyer that the SEC documents don’t contain any
misstatements or omissions
 To get a claim under 10b-5, maker of the claim must have had scienter and buyer
must have relied
 This contractual statement is easier to show a violation of than a 10b-5 claim
o Absence of material adverse change
o Representation re the business
 Compliance with laws
 Specific real estate, IP, K’s
 Permits, litigation, enviro
 Employees and benefits
 Insurance
 Tax
o Deal-related reps
 Required vote under applicable law
 Fairness opinion
 No broker that is going to demand a commission
 Proxy statement and other materials  no material misstatements
 Compliance with anti-takeover restrictions  either you have complied or will
- Common buyer reps and warranties:
o If cash deal, reps and warranties are limited
 Corporate organization, power and authority, capitalization
 No consents or conflicts (buyer doesn’t need anyone’s permission to do the deal)
 Financing
 Solvency
 Brokers
o If stock deal, then buyers reps and warranties are similar to the seller’s
 This is because the seller is getting an interest in the buyer  they will be owners
of the buyer and want to know the same info
 It is a bilateral purchase
- Common reps and warranties qualifications:
o Time: putting temporal boundaries on statements you’re making (“as of the date hereof”)
 this qualification is important for the bring down
 If you include it, then in the bring down, you are still only talking about what was
true as of the date of the initial signing
 If you don’t include it, then you are making two statements  one as of the date
of signing and another as of the date of closing
O’Hare – Spring 2018
Three levels
 There has not been at anytime
 There has not been since X date
 There is no ___ as of the date hereof
o Knowledge:
 Actual v. constructive
 Actual knowledge is what you know, constructive knowledge is what you
should know
 Whose knowledge
 Ex) “no proceeding to the knowledge of the company”
o Materiality  there is a substantial likelihood that a reasonable investor would consider
it important or significantly affect the total mix of info (TSC)
 Alternative formulations: “no material violation of an agreement” vs. “no
violation of material agreement”
 Also used in material adverse effect clauses
o Disclosure schedule  “except as disclosed in the disclosure schedule, no litigation
Filing disclosure schedules (for public deals)
o Merger agreements – Forms 8-K, 10-Q, 10-K
 Item 1.01 – material contracts
 Item 2.01 – completion of acquisition or disposition
 S-K item 6.01(2) and (10) – plan of acquisition, material K’s
o Typical practice  sign, announce, file 8-K
 Material terms, file entire agreement
 Not required until consummation
 Also required in periodic reports
o Schedules are not required unless they contain info material to an investment decision
and which is otherwise not disclosed in the agreement or disclosure document
o Whether to disclose or not:
 In many cases, parties will not want to disclose much of the info on the schedule
because it is sensitive commercial info and also confidential info that might be
 But such info may be material, so must disclose limited amount
o What if non-disclosed exceptions are material?
 Titan: any rep, warranty, covenant, or other K provision in a filed document may
be a disclosure that implicates the antifraud provisions generally
 Antifraud provisions may apply to statements that can reasonably be
expected to reach investors, regardless of to whom the statements are
made or the purpose for which they are made
 Merger agreement contained a rep that to Titan’s knowledge, neither
Titan nor any of its EE’s had taken any action that violated the FCPA
o The merger agreement was included as an exhibit to Form 8-K
filed by Titan just after public announcement of the merger and
also was attached to Titan’s Feb. 2004 proxy statement soliciting
approval of the merger
 Titan meanwhile had settled an FCPA enforcement
 Practice point: include general disclaimer that R&W are made simply for
purpose of risk
 BoA-Merrill Lynch: relief from filing schedules does not relieve obligation to
disclose material info
O’Hare – Spring 2018
SEC proceeding claiming BoA should have filed schedule showing $5.8B
in discretionary bonuses it allowed Merrill to pay staff prior to merger
 Omission of the schedule showing $5.8B paid in bonuses made the jointproxy statement contradictory and misleading
 BoA represented that Merrill was prohibited from making such payments
were materially false and misleading because contractual prohibition
payments nullified by undisclosed contractual provisions expressly
permitted them
 Practice points
o Issue in BoA was that it was materiality, not schedules themselves
 relief from filing schedules does not relieve obligation
o Disclosure claim doesn’t get investor right to sue on the K
Reps and warranty insurance
o Insures either party against R&W claims
o Can cover or be arranged for either party  sell-side reimburses seller for claims; on the
buy-side, replaces seller indemnity (because the buyer no longer has to go after the seller
for claims)
o Benefits to seller when buyer gets buy-side insurance  excludes certain risks up front;
reduces escrow obligations; provides clean exit
o Benefits to buyer for getting buy-side insurance leverage position in auction; provides
recourse when no seller indemnity
o Structure  costs to parties:
 Premium is 3% or less of policy limits
 Deductible: 1% or less of deal value
 Buyer and seller can share retention of the insurer
 Limits often tied to indemnity cap but no survival deal
 You owe coverage in excess of cap
 Knowledge of buyer team excluded even if buyer is entitled to sue on the rep
Material Adverse Effect/Change Clause
Addresses and allocates unidentified residual risk (other than those specifically covered in other
provisions) to seller – gives buyer ability to no close in MAC event
Company MAC definition: any change that would reasonably be expected to have a material adverse
effect on financial condition and operations or prospects to prevent the ability of the Company and its
subs taken as a whole to perform its obligations under the MA in any material respect (subject to carve
Common carve outs: adverse effect arising in connection with economy generally, in the
industry, or in the law, force majeure, etc.
Can be in form of bring down R&W or a condition to closing
Strategic difference: in R&W, will likely be qualified by Seller’s disclosure schedules
o In condition to closing, qualifications may be in definition of MAC
Buyers want less exclusions to keep an “out” – can use MAC to force a price renegotiation
But the more expansive the carve-outs, the better position a seller will be in to resist
renegotiation based on MAC
Buyer’s counter-strategy: attempt to include in the MA specific, objective closing conditions
and/or termination rights that clearly, unequivocally express when the Buyer has the right not
to close, with MAC as a backstop
What constitutes a MAC:
O’Hare – Spring 2018
IBP v. Tyson: activity consistent with company’s historical performance does not constitute
o Economic downturn for both companies, buyer sought to terminate MA, claiming it was
entitled to do so because seller (IBP) had suffered a MAC
o Agreement rep provided that no MAC since balance sheet date but MAC clause was
unqualified (no exclusions/carveouts)
o Court ruled for seller (IBP) because no MAC – analyst evidence showed that IBP was a
consistently but erratically profitable company and although it had economic trouble
recently, it was in good enough shape to deliver results of operations with company’s
recent historical performance
Hexion v. Hunstman: buyer must meet burden of showing the occurrence of unknown events
that threaten overall earnings potential of the target in a durationally-significant manner
o From opinion: “The important consideration therefore is whether there has been an
adverse change in the target's business that is consequential to the company's long-term
earnings power over a commercially reasonable period, which one would expect to be
measured in years rather than months. A buyer faces a heavy burden when it
attempts to invoke a material adverse effect clause in order to avoid its
obligation to close. Many commentators have noted that Delaware courts
have never found a material adverse effect to have occurred in the context of
a merger agreement.”
Heavy burden to establish MAC
Language will impact strength of argument: seller wants broad carve-outs; buyer wants limited
DE courts usually reject claim (IBP/Hunstman) but settlements are common  MAC presents
negotiation opportunity; sellers are reluctant to risk deal failure; buyers willing to compromise
to lower initial deal price
Covenants & Additional Agreements
Usually commitments made by both parties with respect to the deal or usual business operations
Pre-closing covenants: maintain business intact; deal-related commitments  in cash deal with
public target, primary objective is getting to closing
Conduct of business covenant: regulates seller’s management of the business from signing to
Covenants that say operations in the ordinary course and preserve the business intact
o Certain actions are generally prohibited, even if in the ordinary course  amending
charter or bylaws, reclassify, issue stock, declare dividends, make acquisitions, make
loans, incur debt, settle litigation, transfer assets, increase compensation, tax election,
GAAP change, etc.
Access to confidential information  buyer is entitled to reasonable access
o Exclusions: perhaps confidential info that is competitively sensitive or trade secrets
Notice of certain events covenant
o Notice from gov/third party consent
o Claims involving transaction
o Fact or circumstance reasonably expected to result in MAC, misrepresentation, failure of
Proxy statement (Dell §5.4)  prepare, right to review, file, notice of comments
S/h meeting (Dell §5.5)  obligation to hold meeting, solicit proxies, board recommendation
Financing (Dell §5.12)  reasonable best efforts to obtain
Public announcement (Dell §5.9)  none without consent of other party
O’Hare – Spring 2018
Takeover statutes (Dell §5.8)  take action necessary to comply with DGCL §203
s/h litigation (Dell §5.14)  notice, right to participate, no settlement
post-closing covenants: no hire, no solicit  in private deal or asset sale, seller may have continuing
employee matters (Dell §5.6)  maintenance of compensation and plans; credit under new
plans for past service
indemnification and insurance (Dell §5.10)  maintain existing indemnification; obtain “Tail”
insurance for D&Os
non-competition  seller to refrain from competing with transferred business
post-closing cooperation regarding assumed liabilities, litigation, and access to employees and
negotiating tension:
seller  try for maximum flexibility in covenants as a consideration for what happens if parties
fail to close
buyer  limit flexibility to ensure it gets what existed at signing, but don’t want covenants to be
too strict -- could damage ongoing business operation or be deemed as an antitrust violation
buyer and seller make certain commitments regarding steps needed for transaction to close  getting
regulatory approvals, filings, s/h meetings, etc.
efforts to consummate including:
obtaining consents and approvals
defending legal challenges
executing and delivering instruments
“Efforts” Standard  hierarchy, but little specific guidance
o Best efforts
o Reasonably best efforts  typically used
o Commercially reasonable efforts
Closing Conditions
HRS Premerger Notification Reg. Requirement:
Act requires that parties to certain M&A notify FTC and DOJ before consummating transaction
Parties that meet certain size criteria must report their intentions to enforcement agencies
o If transaction is reportable, then both parties must submit confidential info about their
respective business operations to enforcement agencies and wait specific period of time
before consummating
o Transactions covered:
 Entire business; stock or assets
 Partial interest: voting securities or assets
o Size of person test
 One party with $157M in sales or assets AND
 One party with $15.2M in sales or assets
o Size of transaction test
 §75.9M or less  no filing
 Less than $303.4M  filing required only if size of person test is met
 > $303.4M  filing required
Other gov. approvals
o Parties will cooperate to resolve objections
o No limitation on efforts  “hell or high water”
o Litigate adverse gov. order
O’Hare – Spring 2018
Common conditions: s/h approval, majority of the minority, absence of litigation, performance
of covenants, reg. approvals, no injunction, bring down, no MAC
Bring down condition  condition that seller’s R&W made at signing remain true and correct as
of closing
o Allocates risk of changes to seller
o Different qualifications for different R&W
 Some must be true and correct
 Others except for de minimis deviation
 Others in all material respects
 Others “except where the failure to be true and correct does not individually or in
the aggregate constitute a MAC”
 Types of R&W brought down
 Approval  no qualifier
 Capitalization  de minimis errors
 Authority  in all material respects
 Others  must be true unless cumulative breaches amount to MAC
o Strategy: the more that is required for a breach of rep (qualifying a rep as being true in
“all material respects”, e.g.), the harder it will be for buyer to avoid closing if a rep is no
longer true at time of closing
 Buyer will have most difficulty avoiding closing if what is required that the breach
of rep, together with other breaches, constitutes a MAC
Materiality/Double Materiality/Materiality Scrapes
o Qualifying bring-down condition with materiality, presents problem of double
 Many underlying reps are qualified by materiality, and so if there are a series of
immaterial inaccuracies, they could, in the aggregate, result in a MAC even
though none of them on their own could be inaccurate because of materiality
 Buyer would therefore not be permitted to avoid closing despite the
 Materiality scrape
 To avoid this double materiality problem, at closing each of the individual reps is
read without regard to any qualifications as to materiality of MAC
o E.g. of scraping:
 “There is no suit, claim, action or proceeding pending or, to the knowledge of the
Company, threatened against the Company…, that, individually or in the
aggregate, if determined adversely to the Company…would reasonably be
expected to have a Company Material Adverse Effect.”
Typical triggers:
Mutual consent
Drop-dead date reached – mutual
Gov. prohibits deal – mutual
s/h vote down – mutual
change of recommendation – buyer
acceptance or availability of competing bid (fiduciary termination right) – seller
breach of reps (MAC) – bilateral
termination fees:
compensation to buyer if:
O’Hare – Spring 2018
o competing bid accepted
o change of recommendation
o drop-dead date with tail
o failure of s/h vote with tail
compensation to seller (“reverse termination fee”) if:
o failure to obtain reg. approval or failure to comply with gov. requests, such as for
o failure of financing
o buyer’s breach or refusal to close
o failure to obtain s/h vote
different levels of fees payable
o cash shortfall fee (unique to Dell deal): payable to buyer, if principally, seller does not
have target amount on hand when transaction would have otherwise closed
termination fees often scrutinized by courts because they are liquidated damages – more likely
to enforce if negotiated at arm’s length
Brazen v. Bell Atlantic: termination fees must be reasonable
o court applies two part analysis in determining $550M termination fee legitimate
 damages were uncertain
 amount agreed upon was reasonable (co. value was ~$24B)
o factors considered: opportunity costs, expenses incurred in negotiating transaction,
likelihood of higher bid, size of termination fees in other transactions
appropriate size
o rule of thumb  3% of the transaction value
 recently an upward creep but don’t lose sight of unreasonableness
o lower for party going to do “go-shop”
o higher for reg. failure
What is it?
Protects buyer after closing for breaches of reps and covenants
Protects against undiscovered liabilities
Possible only if someone is still around
Private target
Public parent divesting a business unit
Contractual only unless secured by escrow
Obligation of all (or some) s/h’s
o Liability can be joint and several or just several
Not qualified by MAC, which is an issue for the seller
Exclusive remedy for breach of agreement if closing occurs
Private targets and indemnities:
Limited number of s/h’s (easy to find)
Active participants; familiar with operations
Parent divesting a business unit
Info less available, less reliable
Not public with liability for misstatements
Greater risk of undiscovered liability
Reps more frequently used to allocate risk
Key indemnity issues:
Who is responsible?
O’Hare – Spring 2018
Who is entitled to indemnity?
Scope of indemnity:
o Triggering events (must be clear whether this covers direct and third party claims)
o Financial obligation
o Survival: how long does a party have to make claims?
Seller triggering events: breach of reps, breach of covenants, special indemnities, tax, enviro, EE
Excluded assets or liabilities that should have never come to buyer
Tax, enviro, EE benefits
Cap, basket, mini-basket
Proxy for immateriality  buyer assumes risk
o As seller, be careful because you don’t want non-basketed items to have be materiality
Cap: maximum liability
o Exclusions:
 Fundamental reps: the heart of the deal which you don’t want capped
 Sensitive reps (e.g. enviro): special, valuable asset or part of business that goes to
the heart of what you’re buying where capping the operating representations
might give you the protection you need
 Covenants (if breach not intentional): best practice is to exclude covenants from
cap since it isn’t a function of the condition of the business you’re buying, its what
you agreed to do
 Excluded liability: when you’re selling part of the business and the seller keeps
some liabilities, seller is supposed to stand behind all of them
o Current market: 10%
Basket: no liability until exceed threshold
o Tipping basket v. deductible
 Tipping basket: no liability until you reach X dollar amount, and then when
you reach that dollar amount, you pay the whole claim
 Buyer preference
 Deductible: no liability until you reach X dollar amount, and then you pay for
anything over and above that amount
 Seller preference
 Surrogate/substitute for materiality
o Materiality scrape common if deductible
 If no scrape, possible double materiality requirement
o Individual claims below threshold disregarded for purposes of basket
o Current market: 1%
o Nuisance threshold, too small to bother  hybrid between tipping basket and deductible
o No current market
o Whatever the two parties agree to their negotiations
Indemnification as an Exclusive Remedy:
Worked hard to negotiate caps/baskets/limitations  if you can sue under K for the same
things, then the limitations you negotiate for are no longer meaningful
Waive of claims based on K, misrepresentation, negligence, strict liability or tort, violation of
law or otherwise
o To the extent permitted by law
Excludes fraud, criminal, willful
O’Hare – Spring 2018
Residual Importance of Materiality Qualifiers in Rep
Failure of conditions  relief from closing
If closing occurs  indemnification
Survival of Indemnity:
Generally 1-2 years (where market is now)
o Tends to be exceptions to this (driven especially by PE firms who don’t want to be liable)
Fundamental reps: indefinite (not subject to cap)
Special reps: statute of limitations
Covenants: indefinite (not subject to cap)
Non-reliance clause
o No other rep express or implied except as expressly set forth herein
 Seller says don’t rely on anything I said that isn’t in the 4 corners of this
Scope of Financial Obligation: how much do you get?
Losses: damages, injuries, harm, diminution in value, expense, expenditure and disbursement of
every nature, fines, fees and expenses of litigation, costs, and costs of court
Exclusions: consequential, special, indirect, punitive, lost profits, diminution in value, loss of
Process: Notice/Control
Process is important: at the end of the day, process should not be under total control of either
Notice of claim – tolls survival period
Process for resolution – mutual agreement or final judgment
Third party claims – who controls?
o Notice and full info
o Right to control, selection of counsel
o Cooperation, right of participation
o Restrictions on settlement
Deal Process - Post-Signing Deal Protection
Courts must balance competing interests in the event that a better offer turns up after an Agreement is
Seller has fiduciary duties even after the Agreement is signed:
o Staying informed re: alternative proposals
Entertaining alternative proposals
o Changing recommendation if appropriate
o Seek the best price for S/H; treat multiple bidders comparably (Revlon)
The Buyer wants certainty that deal will consummate
o Buyer won the auction
o Buyer wants contract to be enforceable, even if interlopers come forward.
Standard Applied to Deal Protections
Defensive measures (deal protections) are permissible if BOD can show that threat exists and response
was proportional. (Unocal)
O’Hare – Spring 2018
THREAT  reasonable belief that danger to corporate policy and effectiveness
o Determination must be made in good faith after a reasonable determination.
o Threat is not limited to S/Hs.
PROPORTIONALITY  BOD response is reasonable in relation to the threat
o Price, timing, other constituencies, risk of non-consummation, etc. can all affect
o Cannot be preclusive or coercive
Unocal Corp. v. Mesa Petroleum Co. Supreme Court of DE (1985)  Concerns the area between
the Business Judgment Rule and the Entire Fairness Standard.
o ISSUE: Whether a corporation’s self-tender for its own shares which excludes from
participation a stockholder making a hostile tender for the company’s stock is valid?
 Mesa Petroleum attempted a hostile, coercive takeover of Unocal. Offer consisted
of two tiers: $54 of cash for first tier, $54 face-value junk bonds for second tier.
 Unocal disinterested directors advised the full board that the Mesa offer was
inadequate. Board responded with self-tender: If Mesa acquired 51% Unocal’s
shares through its own offer, Unocal would buy the other 49% for an exchange of
debt securities at $72 par value. Mesa would be excluded from purchasing
Unocal offer.
Types of Deal Protection
No-Shop: Exclusivity provision imposed on the Seller to limit the Seller’s dealings with other potential
Analogous to pre-signing exclusivity agreements
Typically allow Seller to respond to unsolicited offers, but not initiate discussions or use signed
Agreement to shop for other offers.
Provisions are heavily negotiated—most allow seller to engage in negotiations if certain
conditions are met. (Example: if BOD determines that that not engaging in negotiations would
breach BOD’s fiduciary duties.)
No-Shops and Fiduciary Duties
o Board has fiduciary duties to S/Hs notwithstanding the contractual deal protections
o No-shop provision does not provide BOD with a right to breach—Directors can still be
liable for failing duties.
o Contractual provisions may not validly define or limit the BOD’s duties (Paramount)
o To the extent provisions purport to require BOD to act/not act in such a way that limits
exercise of duties, it is invalid and unenforceable (ACE Ltd.)
o Fiduciary Out: Most deal protection provisions are subject to a “fiduciary out” allowing
BOD to shop if needed to satisfy duties. Components to Fiduciary Out
 Triggers for exception to No-Shop
 Example: If Company has received an unsolicited bona fide written
Acquisition Proposal from a third party…the Board determines in good
faith that the Proposal could reasonably be expected to result in Superior
 Extent of allowed engagement with bidder
 Example: furnish information, engage in discussions, etc.
 Providing notice to Buyer including
 Notice of acquisition proposal, request for non-public information, or
 Notice of identity of bidder and copy of acquisition proposal
O’Hare – Spring 2018
Keep Buyer informed of status of Acquisition Proposal and any material
developments, discussions, and negotiations
 Notice of intention to terminate or change recommendation
 Commitment to negotiate with Buyer in good faith to adjust terms of
original deal (upheld in Toys R Us)
 Seller’s right to proceed with other bidder.
Mechanics of using Fiduciary Out to terminate Agreement
 IF
 Seller receives alternative Acquisition Proposal
o E.g. Any inquiry, offer, or proposal concerning (a) any business
combination involving the Company, (b) any disposition of assets
of the Company representing 20% of more of the assets of the
company (c) disposition of 20% or more of the equity interests of
the Company (d) transaction in which any Person will acquire
beneficial ownership of equity interests of 20% or more of the
 Seller’s BOD concludes it constitutes a “Superior Proposal”
o Is reasonably likely to be consummated in accordance with its
terms and
o Would result in a transaction that is more favorable to the
Company’s stockholders, from a financial point of view.
 Seller’s BOD concludes that failure to “Shop/Talk” is inconsistent with
fiduciary duties AND
 Seller complies with Buyer’s matching rights procedures
 THEN Seller may
 Change BOD recommendation and/or
 Terminate Agreement and enter into alternative agreement
 BUT Seller must pay termination fee.
No-Talk: More limiting than No-Shop—Seller cannot share proprietary, non-public information or
even engage unsolicited bidders.
May be found unenforceable—ties hands of BOD beyond what should be permissible under
balancing of considerations.
They shut down a potential bid by denying a subsequent bidder the information it needs to
make a competitive bid.
This could prevent BOD from meeting duty to make an informed judgement about considering
whether to negotiate with 3rd party.
Matching Rights: gives Buyer right to match offer in the event another bidder presents a topping bid.
Matching rights may be either
o Explicit: granted directly in a contract provision; or
o Implicit: to the extent that parties draft delays in Seller’s BOD to change their board
recommendation or accept superior proposal, combined with contractual rights to
receive information about subsequent offers create implicit matching rights.
Matching rights provisions may also include an obligation for seller to negotiate with buyer in
“good faith” for a period of time—gives buyer ample opportunity to match competing bid.
Court: Matching rights are a valid exclusivity measure, despite their strong effect of deterring
subsequent bidders (In re Toys “R” Us, Inc. Sh’lder Litig.)
O’Hare – Spring 2018
Change of BOD Recommendation: The BOD has the right to change its recommendation should
Merger Agreements often include a Seller representation or covenant that the Board has/will
recommend the deal to its S/Hs.
Under §251, the BOD must resolve that the merger is advisable and in the best interest of S/Hs.
BUT board may later determine that deal is not in S/H’s best interests.
§146 allows board to hold vote even if it has changed its recommendation  Buyer will typically
require board to do so.
Parties have essentially agreed to “force the vote”  hold S/H vote, even if BOD changes
o Allows board to meet FD and allow the vote but pass the baton to s/h
o The issue for litigation is going to be where the s/h are adequately informed and not
whether one proposal is superior to the other
Parties can limit circumstances of forced vote to
o Superior proposal and/or
o Intervening events.
A §146 vote provision is often paired with Buyer’s “matching rights” or “right to renegotiate”
Force-the-Vote: contractual provision saying that, in the event that a superior offer comes along (and
board changes recommendation), the Seller’s S/Hs must have the opportunity to vote on initial
Seller BOD must call for vote before terminating Merger Agreement.
Go-Shop: Major exception to No-Shop. For a limited period of time, Seller is supposed to look for
other bidders, using existing agreement to generate active auction.
Rationale: method of performing serious market check to satisfy Revlon duties.
Commonly incorporated in No-Shop provision. After limited “Go-Shop” period ends (45 days in
Dell), “No-Shop” goes into effect
Termination fee typically lower for bidders identified during Go-Shop—“Excluded Parties”
Conditions similar to “No Shop”
o Confidentiality Agreement – must be no more favorable to new bidders than it was to
o Information provided to new bidders will be comparable to info provided to Buyer.
o Buyer to receive notice of bidder identity and Acquisition Proposal.
o Buyer has matching rights.
Voting Protections:
Voting Agreements: Seller can use voting agreements to “bank” a high percentage of S/H votes
in favor of transaction prior to an actual S/H vote. Easier to form a majority bloc in a closely
held company. Unlikely with large, publicly held corporations.
Shareholding Meetings: Provisions requiring Seller’s to call S/H meetings or set time limits on
how long BOD can delay calling S/H meeting
“Quick Consent”: Extreme example of voting protections
o Seller’s board can substitute S/H meeting with an action by written consent (pursuant to
DGCL §228).
o Possible to execute Merger Agreement and simultaneously undertake S/H action by
written consent—no notice requirement for written consent actions.
o Only works where controlling/majority S/H are easily accessible to the BOD.
Omnicare, Inc. v. NCS Healthcare, Inc. – Locking Up the Vote
O’Hare – Spring 2018
NCS was in serious financial trouble. Negotiated with both Genesis and
 Signed MA with Genesis containing “No Shop” provision with NO “Fiduciary
Out” to terminate. Also had a “force-the-vote” provision requiring NCS to hold
S/H vote even if BOD changed recommendation. NCS majority block
unconditionally pledged votes for Genesis deal with irreversible proxy.
 Omnicare made superior bid after Genesis announcement. Board changed
COURT: Voting protections, though individually legal, cannot discharge a
board from its fiduciary duties.
 In the absence of Fiduciary Out, the defensive voting measures were preclusive
and coercive—as such, they were invalid as used.
 Threat prong was fine, but defensive measurers were not proportional (totally
Compensatory Measures: meant to protect deal by deterring third parties and compensate original
Buyer. These protections act as a tax on a subsequent bidder and may remove Seller’s incentive to
pursue 2nd bid (because increase in price would just go to initial bidder)
Stock Lock Up: option granted to the Buyer to purchase shares of Seller’s stock upon occurrence
of a triggering event (Seller’s termination of Agreement to pursue subsequent offer)
Termination Fee: cash payment to Buyer in event Agreement with Seller is terminated due to
triggering event.
o Brazen v. Bell Atlantic Corp—finding that a $550m (representing 2% of Bell Atlantic’s
market cap.) termination fee in a Merger Agreement was a valid liquidated damages
provision—not a penalty and not coercive. Court analyzed as a liquidated damage, not
under the BJR as a termination fee.
Topping Fee: cash payment to buyer (often % of excess of topping bid over original deal) in
event seller accepts a topping bid.
o Really rare
Asset Lock Up: Option issued to initial Buyer to purchase division or other asset of the seller
(the “crown jewel”)—may be below market price.
***Note: These measures are still subject to Unocal and Revlon reasonableness
Financial Matters
Types of Accounting
Cash Accounting
o Just like your bank account
o No revenue until you get paid; No expenses until you pay bills
Accrual Accounting
o Match revenues with related expenses
o Realize revenue when it is “earned”  This includes cash in and “accounts receivable”
o Realize expenses with the obligation is incurred  This includes cash out and “accounts
Purchase Accounting Treatment
o Allocate total purchase price to assets purchased up to FMV
o Identifiable (tangible and IP) assets at appraised value
o Remainder allocated to goodwill
O’Hare – Spring 2018
No book amortization of goodwill—doesn’t get ratably deducted from income, but may get
impaired if it is determined at annual assessment that the outlook for the business is no longer
as good.
Financial Statements
- Balance Sheet: Snapshot of the company’s condition at a particular point in time.
Assets = property, receivables, and other items that can be converted into assets.
Current assets are cash or are expected to be converted into cash w/in a year. Fixed
assets are longer term, intangibles, and property.
o Liabilities = obligations that a company is requires to pay such as debt, accounts
payable, and wages. Can also be divided into current and fixed liabilities.
o Shareholders’ Equity = capital of the corporation, including corporation’s
earnings, initial contribution of equity from creation of the firm and equity added in
subsequent security sales.
o Enterprise Value = is the total of the company’s Debt and Equity  metric used to
measure total value of an acquisition.
Income Statement: tracks what has happened to a company over (usually) a year. AKA: profit and
loss statement.
Revenues = Sales
Expenses = costs
O’Hare – Spring 2018
Net income  this value is added to retained earnings on the balance sheet
Depreciation = “wear and tear”
 Rather than deducting the full cost of a long-term asset when it is first acquired,
the “useful life” (period of time asset is expected to be used) is computed and the
asset is “depreciated” over time
o there is no depreciation for land  it is held as an asset at its purchase
price, as part of long-term assets on balance sheet
EBITDA Valuation: earnings before interest, taxes, depreciation, and amortization
 Common metric used in valuation
 Reflects “core” business value
 Disregarded items (such as tax and interest) may apply to Buyer differently, or not apply
 Better measure of company’s cash-generating ability than net income
Earnings Per Share: how much of the income “belongs” to each s/h (net income/# of shares)
 goes up if shares stay the same and company earns more money
 goes up if company earns the same but shares go down (as when stock repurchases are
used for financial engineering)
 price/earnings ratio: a key comparison to other companies
 an indicator of how the market values your earnings
o high-growth businesses have higher price/earnings ratios
Cash Flow Statement: tracks company’s use of cash over time
o Cash flow differs from net income because 1) some expenses do not use cash – they use
depreciation instead and 2) you can pay expenses by “dipping into savings”
o Cash flow statement shows:
 Where the cash came from (issuance of stock or bank loan; collection of A/R; payment of
accounts payable)
 How the cash was used (purchase of a factory; repayment of a bank loan)
Notes to financial statements: integral part of financial reporting because they speak to the story behind
the numbers. Notes can include discussions of:
o Business combinations
o Contingencies (potential future liabilities)  estimating the amount (and likelihood) of a
contingency is impossible
 Accrual is required if:
 It is probable that a liability will be incurred AND
 The amount of the loss can be reasonably estimated
 When a reasonable estimate cannot be made, footnotes disclosure is preferable
 Disclosure is required if there is at least a reasonable possibility that a loss may have
been incurred and must include
 The nature of the contingency AND
 an estimate of the possible loss or range of loss OR
 a statement that such estimate cannot be made
o long term debt
o acquisitions
o capitalization
Value on Financial Statements:
- Book Value: assets are sometimes recorded at a value different from FMV (the price at which a willing
buyer and willing seller would transact today)
o What company pays for an asset for appreciation, depreciation, and amortization
O’Hare – Spring 2018
Ex) if an asset appreciates in value, its accounting (or book) value may be less than its
FMV today
Goodwill: excess of deal price over FMV of acquired assets – the intangible asset which is created
when an acquirer acquires a target
o Goodwill cannot be created; it is only acquired (in a transaction)
Additional Accounting Terms and Concepts:
- Enterprise value: value of the whole business
o Equity + debt
o Metric used to measure the total value of an acquisition
- Net book value: assets – liabilities
- Accretive/dilutive: terms that refer to the effect of the transaction on the company’s earnings (EBITDA)
per share
o When a transaction is accretive, the acquisition has the effect of increasing the post-merger
firm’s EBITDA/share
o When a transaction is dilutive, the acquisition has the effect of decreasing the post-merger firm’s
- Pro-forma Financial Statements: historical representation of what financial statements would look like
if the businesses were combined
o This can be challenging if two sides used different accounting methods
Options  there is no true value – it is always relative to what the parties can agree on
Some options include:
o Book value: generally isn’t same as what company is really worth today
o Fair value: most closely approximates real value but negotiated price based on what buyer is
willing to pay
o Going concern value: the value of the company if it is capable of going forward in business
(as opposed to if that same business were liquidated)
o Stock market price: this is only the price for individual shares and doesn’t incorporate “control
premium”; also doesn’t reflect what other management could do with the company
o Value to seller: value to buyer includes synergies
o Whatever the market will bear
Things besides valuation that can dictate deal price
o Competition, special value to buyer, seller pressure to get a deal, egos
o Tools give you stakes in the ground by which to gauge reasonableness
Fairness opinion  opinion that I-bankers deliver to BoD
o Not a valuation or appraisal and includes no specific value or range
o Only that the contemplated transaction is fair from a financial POV
Common valuation techniques:
o Discounted Cash Flow: calculates the present value of the future unlevered free cash flows of
a company by discounting its cash flows at a particular discount rate
 Unlevered: doesn’t take debt into consideration
 Free (liquid) cash flows: money coming into business after you reinvest what you need to
in the business
 Discount rate: value at a discount rate to figure out what its worth in the future
 Based on weighted avg. cost of capital (WAC)
 Includes the cash you get from operating the business minus the capital expenditures
you anticipate during the same period
 Steps of DCF Analysis:
O’Hare – Spring 2018
Estimate future cash flows  estimate the future cash flows of the company;
include operating cash flows; assume no debt burden
 Compute discount rate  this is the company’s weighted average cost of capital
for each of the company’s various financing components (debt, equity, preferred
securities) weighted by the proportion of each the company has assumed
 Discount future cash flows  estimated cash flows of the company are
discounted at the WAC to obtain the present value of those cash flows
 Estimate terminal value  value of the cash flow beyond the estimated projected
must be estimated
o Use an exit multiple (such as EBITDA multiple) to estimate a terminal
value of the company
 Discount terminal value  compute the present value of the terminal value using
the WACC
 Calculate the DCF value  add together the present value of the future cash flows
and the terminal value
Uncertainties in DCF analysis: cash flow, termination value, and discount rate are all
 It is wise to calculate a range of possible scenarios
Comparable Company Analysis: estimates value by comparing similar companies using
multiples of various metrics
 Enterprise Value (market value + debt)  calculates the ratio of Enterprise Value to
Revenue (or EBITDA) and applies ratio to comparable metric for the company
 Ex) if a company’s enterprise value is $1B and the EBITDA of the company is
$200M then the enterprise-to-EBITDA ratio is 5x
 Trading value  calculates ratio of market price to earnings per share and applies ratio
to the company
 Market value/book value  but remember: market value doesn’t take into
account control premium
 Ex) if a company earns $2/share and the share trades at $18/share, then price to
earnings multiple is 9x
 Determining comparable companies
 Best to select companies in the same industry, but may need to make adjustments
if other companies do not have the same capital structure (adjust so each
company has a similar debt and equity profile)
 Downsides of comparable company analysis
 Doesn’t take into account controlling interest  based only on market price
 Does not consider synergies
O’Hare – Spring 2018
Can produce wide ranges
Difficult to find truly comparable companies (in the same industry with same
capital structure)
o LBO Analysis
 Used only when evaluating attractiveness to a financial buyer (Van Gorkom)
 Financial buyers typically
 Fund purchase with debt
 Require minimum internal rate of return (IRR) after debt service
 LBO analysis estimates future cash flow and maximum supportable debt while still
producing minimum IRR
 Attractive if predictable cash flow, room for more debt, limited foreseeable capital
expenditure requirements, and there’s quality assets for collateral
o Premiums Paid Analysis  compares premiums being paid in a transaction with historical
premiums paid for selected, similarly situated companies
 premiums are amounts paid above the market price for the control the acquirer will get
in the transaction
 premiums are calculated as of various times prior to announcement
o Break Up Analysis  assumes that different businesses of the corporation will be parceled
out separately and sold as going concerns
 then values each of these businesses on a stand-alone basis to derive value for entire
o Liquidation Analysis  assumes that the company’s assets will be sold separately in an
orderly liquidation
 Assumes little or no value of goodwill
o Technology start-up valuations  require unique valuation methods
 Not enough revenue to do a DCF analysis
 In fact, losses are likely increasing for a start-up
 Typically have no real peers, so can’t do a comparable company analysis
 Could consider market share – how much of the market a company can capture (or in
the instance of Uber, how much of a new market a company can create)
 Eyeball counts or daily active users are sometimes used for tech companies  this
measures how many users an internet site or app gets over a period of time
 But it is difficult to know what multiple to use to monetize this figure
 Supply and demand may be a good indicator of value
o Merger price: may be accurate because they are what a willing buyer and willing seller will
transact at
 but, is accepting deal price just an admission that courts are incapable of arriving at truer
 Dell  Laster didn’t think the merger price was better
 Mgmt. buy-outs should be viewed more skeptically, esp. if go-shops are minimal
 Merion Capital  Laster though merger price was good valuation
 This was a non-affiliated transaction with a pre-signing market check and
meaningful competition
 but, Laster said value could be higher if parties could demonstrate synergies,
continued to be skeptical of LBO pricing model
appraisal actions and valuation
o in a statutory appraisal action under §262, the Court will determine fair value of a dissenting s/h
o this value can be determined by any number of accepted valuation methods, but is often a battle
of the experts
o Duft v. Travelocity
 Facts: Travelocity merged to become a wholly owned sub of Sabre
O’Hare – Spring 2018
s/h got $28/share
dissenters exercised appraisal rights
o Dissenter’s expert Purcell: DCF analysis  33.70-59.95
o Travelocity expert Gompers  11.38-21.29
o Both experts used DCF analysis and comparable company analysis
(comparing Expedia only)
 Court:
o Expert DCF values are not useful because underlying data/projections
were not reasonably reliable
 There was too much uncertainty and speculation about
Travelocity’s future to conduct a proper DCF analysis
 Expedia is clearly a comparable company, but parties apply wildly
divergent discount values
 Court relies on neutral party’s discount range
 Court applies a control premium of 30% - a number completely
chosen by the court, not supported by either side’s experts
- Lawyers’ role in valuation
o Responsible for meaningful disclosure – must understand financials to provide adequate
o FINRA regulates compensation and conflicts of interest in fairness opinions
 Lawyers advise here
o Litigation will likely result from a merger – lawyers must counsel the board regarding its duties
Easiest consideration to calculate, translate into merger agreement and execute
Each of seller’s shares is converted automatically into the right to receive $X in cash
Possible to do a mixed consideration deal or a cash election deal (where s/h’s of selling company have
option of getting cash, stock of buying company, or stock of third party)
o This helps accommodate s/h’s differing tax positions
Stock: seller’s s/h exchange their shares for shares of Buyer’s company (or third party company)
This exchange can be based on two different types of ratios
o Fixed exchange ratio: formula specified a fixed amount of buyer stock in exchange for target
 Ex) each seller s/h gets 2 buyer shares for every 1 target share she holds
 Pro: the buyer knows how many shares it will have to issue at closing
 Con: the value floats with the market
 If stock goes up, the buyer overpays (buyer is at risk)
 If stock goes down, the target gets compensated less for the sale (seller is at risk)
 Ex language) “each share of company stock shall be converted into the right tor receive
2.8750 (the “Exchange Ratio”) shares of Parent Class A common stock
O’Hare – Spring 2018
Floating exchange ratio (fixed price)  the monetary value of consideration is fixed, but the
number of shares issued to achieve that price floats based on the price of shares at closing
 Number of shares to produce fixed value
 Number of shares issued to seller’s s/h is based on the price of the shares at
 Pro: buyer is certain about how much the deal will ultimately cost; seller gets the same
monetary value at closing
 Con:
 If the stock price goes up, the seller gets fewer shares (risk for seller)
o Buyer likes it when stock price goes up because there is less dilution
 If stock price goes down, the buyer has to issue more shares – more dilution (risk
for buyer)
 Example language: “Each share of Class A common stock shall be automatically
converted into the right to receive that number (the “Exchange Ratio”) of shares of
common stock of Parent equal to the number determined by dividing $5.50 by the
Average Parent Stock Price.”
O’Hare – Spring 2018
Fixed ratio v. fixed price
 Fixed exchange ratio (floating value)
 Buyer has more certainty re dilution and level of ownership (voting, tax, control,
 Target bears risk of price fluctuation
 Common in merger of equals or strategic combinations – based on spirit of
 Fixed price (floating exchange ratio)
 Value received by target is certain
 Buyer bears risk of stock price fluctuation
 Common in deals with clear “acquirer” (not merger of equals)
o Seller wants price certainty
o More equivalent to cash deal
Collars  mechanism for mitigating the risk of stock exchange ratios
 If the risk is unlimited, either target or buyer can suffer unreasonably
 Fixed ratio + large price drop = target suffers
 Fixed price + large price drop = buyer suffers
 Collars can limit this risk by:
 Adjusting the amount of stock or value needed in exchange under certain
 Shifting a portion of consideration to cash under certain circumstances
 Give the parties a termination right under certain circumstances
Fixed ratio with value collar (Example)
 1:1 ratio (each seller share is exchanged for 1 buyer share at closing)
O’Hare – Spring 2018
Seller receives less value if price falls
Collar floor: value to seller may not drop below $X
Collar cap: value to seller may not exceed $X
Once collar limit is reached, the seller’s risk/reward shifts to the buyer (buyer assumes
dilution/ownership risk)
 May have to issue more shares to meet seller’s valuation
Fixed price with share collar
 Fixed value to seller  buyer shares are worth $X for each seller share
 The buyer must issue more share if the price falls
 Collar cap: buyer shares given to seller may not exceed X # of shares
 Collar floor: shares issued to seller may not be below X # of shares
 Once the cap is reached, buyer’s risk/reward of issuing shares shifts to seller (seller
assumes downside value risk)
Exchange ratio and collar issues
 Value and exchange can be hard to control/predict (even with collar) if companies’
shares don’t trade in tandem
 Determining the range of the collar is highly negotiated
 A fixed price ratio without a collar can result in a large ownership exchange (due to high
dilution) – this is a significant issue where there is clear acquirer
 Cash election  Potential for arbitrage depending on movement of stock price shifts s/h
base who want to recognize short term gain and elect for cash
 If stock price falls out of relationship with cash after the signing, you may end up
having to pay more cash or give away a bigger portion of company than expected
Contingent Value Rights (CVRs) and Earn-Outs
- An earnout provision creates a contingent payment obligation for the buyer if the business exceeds
certain performance milestones
- Helps to overcome parties’ valuation differences – parties agree to defer ultimate valuation question
until uncertainties have been resolved
- Allocates risk of mistaken valuation to the seller instead of the buyer
O’Hare – Spring 2018
Most common in private deals, pharma, and life sciences
General structure of earnouts:
o The payment of additional consideration to accomplishment of specific targets/goals -two
main categories:
 Financial: revenue, cash flow, EBITDA, net income, etc.
 Non-financial (a proxy for financial target): unit sales, regulatory approvals, successful
clinical trials, etc.
o Set payment metrics
 Unitary – specified event triggers specified payments
 Most suitable for regulatory or operational milestones, achievement of sales
 Percentage payments – share of performance in excess of threshold (financial
performance exceeding buyer’s model)
o Set earnout timing: typically varies anywhere between 1 to 5 years
 Length should be long enough to resolve uncertainty that caused fundamental
disagreement about valuation
o Consider size of earnout in relation to overall consideration  size will vary depending on
degree of valuation uncertainty and parties’ ability to allocate risk in negotiation
o Allow parties to consummate transaction that may not otherwise be able to agree on (due to
valuation differences)
o If seller’s management stays in place after merger, earnout can give incentive to make resulting
business successful
o Just buying a lawsuit or disappointment
o Seller takes the risk of the earnout, but buyer typically has control over resulting business
o May lead to issues re: computation of earnings, how will corporate overhead, non-recurring
extraordinary items, R&D, goodwill, etc. be accounted for?
 This should be specified with sufficient detail in the earnout provision
 Should also specify whether the seller has a right to contest buyer’s financials and how
disputes should be resolved
Covenants that can help earnout be successful
o Define specific actions buyer must take
o Impose an efforts covenant – some courts imply this obligation but not DE
o Define minimum commitments for investment, staffing, etc.
o Require seller consent for certain actions
o Specify accounting principles
o Specify the earnout will be binding on a successor in the event of a change in control
Purchase Price Adjustments
- Can apply to either stock or asset deal
- In an asset purchase, there is a risk that the seller will prepay expenses, manipulate inventory to its
advantage if the sale price is a fixed amount
- Asset purchase agreements often require the seller to deliver a certain agreed level of normal working
capital at closing
o Focuses on current assets – buyer wants a minimum level
o Can also include a covenant that the seller operate the business in the ordinary course until
- The parties will agree on target working capital based on a historical avg. of normal working capital
- At closing, the parties adjust price based on the actual working capital as compared to the pre-closing
agreed target working capital
- Westinghouse: WH was trying to litigate GAAP principles used by Chicago Bridge
O’Hare – Spring 2018
As long as a company utilizes the same form and methodology of GAAP pre and post closing,
you can’t litigate the appropriateness of the method of GAAP used
Fiduciary Duties
Judgment Rule
Entire Fairness
Van Gorkom—
Standard of Care
in Deal Process
Where a director is
BOD decision to
Presumption can be
independent and
engage in an M&A
challenged and
disinterested, there
transaction or decline rebutted if facts show
can be no liability for an unsolicited offer is BOD was uninformed
corporate loss, unless afforded presumption (breached duty of
the facts are such
of BJR.
care) or acted in bad
that no person could
possibly authorize
such a transaction if
Does NOT apply to
she were attempting
defensive actions or
in good faith to meet
preference to one
their duty
offer over another.
Board must prove
Applies if (1) BOD
both fair price and
failed uninformed or
fair dealing.
bad faith prongs of
BJR or (2) if directors
are conflicted and
transaction has not
been “cleansed.”
To meet duty of care
Deal Process
§102(b)(7): directors
in M&A deal, BOD
may be exculpated
must decide on fully
from monetary
informed basis, with
liability for breach of
all available
duty of care.
information, active
§141(e): directors
and deliberate
protected if they
participation and
relied in good faith on
only after adequate
Defensive measures
Defensive Measures
(deal protections) are
permissible if BOD
can show that threat
exists and response
was proportional.
Directors’ role is to
When break-up of
get highest price for
company is inevitable Combinations: If
S/H, NOT to defend
(Revlon) OR there is a when company
the corporation. Not
change of corporate
continues to exist as
appropriate to
control (from fluid
part of strategic
consider other
aggregation of S/Hs
combination, Revlon
to minority position)
does not apply (no
change of
Directors must
actively engage and
Will always apply to
(Paramount v. Time).
confirm best price.
cash deal. Will only
Duties don’t apply
Auction/marketapply to stock deal if
simply because
check not required,
but recommended,
especially if there is
there is change of
O’Hare – Spring 2018
company is “in play”
Board Fiduciary Duties in General
BJR: presumption that the BoD acted on an informed basis, in good faith, and in the honest belief that the
action taken was in the best interest of the corporation
Where a director is independent and disinterested, there can be no liability for corporate loss, unless
the facts are such that no person could possibly authorize such a transaction if she were attempting in
good faith to meet her duty
Application to M&A:
o BoD decision to engage in M&A transaction or decline an unsolicited offer is afforded
presumption of BJR
o Presumption can be challenged by s/h and rebutted if facts suggest that BoD was uninformed or
acted in bad faith
o *if BoD takes defensive actions against unwanted offers or shows a preference for one offer over
another, their conduct is subject to more scrutiny
Duty of care: requires that BoD inform themselves prior to making a business decision of all material info
reasonably available to them – then act with requisite care in the discharge of their duties
Liability only in instances of gross negligence (in Van Gorkom)
§102(b)(7): corporation can include in its certificate of incorp. a provision exculpating (declaring not
guilty) directors from monetary liability for breach of duty of care
Elements: 1) fully informed basis 2) all available info 3) active and direct participation 4)
adequate deliberation
Entire fairness: applied where s/h’s allege a breach of BoD duty of loyalty in entering into or rejecting an
M&A transaction and based on the facts, the BoD loses the BJR presumption
BoD must prove both fair price and fair dealing
o Fair price: relates to the financial and economic considerations of the proposed merger,
including all relevant facts (assets, market value, earning, future prospects, etc.)
o Fair dealing: embraces question of when the transaction was timed, how it was initiated,
structured, negotiated, disclosed to directors, and how approvals were obtained
Where directors are conflicted, BoD will bear burden of showing entire fairness, unless transaction is
Good faith: bad faith will be found if a director intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties – basically a duty to not act in bad faith
Nearly impossible for plaintiffs to show this
Fiduciary Duties – the Sale Process
When disinterested and independent BoD decides to engage in merger, courts generally give decision business
judgement deference
Smith v. Van Gorkom (1985): BoD’s failure to adequately engage in M&A process (inquiry, doc review, market
check, etc.) constituted gross negligence (a breach of duty of care)
o Van Gorkom (Transunion Chariman/CEO) sought a buyer with a lot of taxable income that
could take advantage of TU’s large amount of depreciation tax credits
O’Hare – Spring 2018
TU’s stock was trading at $38/share
VG sought out buyer (Pritzker) whom he knew previously and proposed sale at $55/share
(based on VG’s prior calculations)
o Negotiations were limited
 VG presented deal to BoD in 20 minutes one day after negotiations with Pritzker
 BoD did not look at actual deal terms and didn’t know real purpose of the deal
o BoD’s recommended deals/h’s overwhelmingly approved
o BoD’s rationale for process:
 Consistent with BJR
 They had engaged in previous deliberations
 The premium was significantly higher than the share price
 Collective experience of the board
 s/h could decide for themselves whether deal was good
 they did seek legal advice
o Dissent s/h’s claimed BoD violated their FD
Court: BoD was grossly negligent in that it failed to act with informed reasonable deliberation  this
constitutes a breach of duty of care so BoD loses presumption of BJR
o Main issue: did the BJR apply in this case?
o BoD’s failures in VG:
 Complete deference to VG – not informed re: VG’s role or value of company
 Did not factor in tax credits when considering value
 Short meeting without notice (and without merger agreement)
 Board was too passive, didn’t inquire
 Senior mgmt. was not involved
 No doc review or term sheet
 Inadequate support for price
 Failure to shop during “market test”
o Court imposed personal liability on the directors
Director Protections Post-VG:
- Standard of liability  directors don’t incur personal liability for breaching duty of care unless they
have been grossly negligent
- §102(b)(7) exculpatory charter provision: corporation’s certificate of incorp. may contain provision
limiting personal liability of a director for monetary damages for breach of FD of care not for:
o Breach of duty of loyalty
o Acts or omissions not in good faith or which involve intentional misconduct or knowing
violation of the law
o Unlawful payment of dividends
o For any transaction from which director derived an improper benefit
o *most corporations adopt exculpation provision
- Reliance on experts:
o §141(e): the BoD is fully protected if it relies in good faith on:
 Records of the corp.; and
 Such info, opinions, reports, or statements presented to the corp. by officers, EE’s,
experts, etc.
 Note: experts must be selected with reasonable care
- Purchase agreement provisions
o Parties can agree to include indemnification of D&O (See Dell §5.10(b))
 Can include more corporate EEs but be cautious
 Limited to claims connected to service
 Typically “to fullest extent permitted by law”
 Should make sure directors and officers are entitled to advancement of litigation fees
D&O Insurance Tail
o See Dell §5.10(c)
o Insurance purchased by buyer to cover the outgoing D&O
O’Hare – Spring 2018
Given broad BoD protections, so why worry about process?
- Duty of loyalty and bad faith claims still apply
o More stringent than gross negligence – subjective bad intent, intentional dereliction of duty,
conscious disregard
o A process failure can trigger a duty of loyalty or bad faith claim
o §251(b) requires that the BoD is fully informed
 Not just an issue of director liability or breach of duty of care
 A VG-proof process is required for validity
Standard Process and Practices after VG:
- Providing copies of MA and related docs sufficiently in advance of BoD meeting
- Providing copies of advisor reports at BoD meeting to ensure §141(e) protection
- Holding more than one meeting about transaction
- Ensuring active BoD involvement in negotiation
- Formally retaining financial advisors and obtaining fairness opinion
VG-ized Process: Satisfying Duty of Care:
- Fully informed with all available info
o Set negotiation process with protocols
o Valuation: through valuation analysis, obtain fairness opinion
 Having a premium alone is insufficient
o Summarize and distribute agreements
o Perform due diligence or K issues
o Obtain senior mgmt. input
- Active participation
o Have BoD involvement through entire process
 Approval alone is insufficient
 Show BoD decision to explore
 Engage with advisors
 Question valuation/pricing
o Don’t defer to CEO
- Adequate deliberation
o Multiple meetings, extended discussion
o Advance notice and distribution of materials
o Discussion of specifics  agreement, term sheet, issues list, diligence items
o BoD reputation and experience not enough
- Document entire process
o Factors considered and reasons for decision
o Extent of reliance on advisors
o Methods of conflict resolution
o Process of solicitation of buyers
o Deal protections (i.e. DADW)
o Projections and changes in projections
o Discussions with mgmt.
o Adopt written protocols: Board/CEO (i.e. CEO advise BoD if sale is advisable, etc.)
o Ensure early legal involvement
Rural Metro:
- Involved financial advisor misconduct in an M&A transaction
O’Hare – Spring 2018
o Conflicts included misleading valuation, staple financing and inadequate disclosure
o Board failed to take an active and direct role regarding the conflicts
Lessons learned  board
o Thoroughly vet advisors
o Define scope of the special committee
o Document this relationship in the minutes
Lessons learned  financial advisors
o Potential for aiding and abetting liability
o Buy-side financing creates potential conflict
o Actions will be carefully scrutinized
Fiduciary Duties – Selling the Corporation
Revlon v. Mac Andrews & Forbes
Phase 1)
o Pantry Pride and controller Perelman seek friendly deal with Bergerac (chairman/CEO of
o Revlon adopts poison pill and stock purchase program to block Pantry Pride deal
o PP tender offers at $47.50/share
o Revlon directors advised s/h’s to reject the offer
o Revlon self-tendered own offer for up to 10m shares in exchange for notes (junk bonds); contain
covenants limiting debt, asset sales, and dividends without independent BoD approval
Phase 2)
o PP raises bid 4 times
o Revlon refuses to lift pill
o Revlon negotiations with third party (Forstmann – white knight) and lifts the poison pill for
other buyer
 Still refuses to negotiate with PP
o Market for junk bonds crashes
Phase 3)
o Forstmann offers at $57.25/share
 Deal required no-shop provision
 Deal required that Forstmann would have option to purchase two division way below
value if another acquirer got 40% of Revlon’s shares
 $25M termination fee
o PP offers $58/share and sues to enjoin Forstmann deal, challenging:
 Pill and exchange offer
 Lock-up, no-shop, termination fee
o First applies Unocal standard to poison pill
 Threat existed  hostile offer at grossly unreasonable price
 Response was not unreasonable  permissible to consider other constituencies during
hostile takeover attempt
 But s/h must be considered first
o But when the break-up of the company was inevitable, favoritism for Forstmann to total
exclusion of PP was no longer permissible
The Revlon test:
o Trigger: when the break up of the company becomes inevitable and/or the company is up for
 Once the sale is inevitable, the board has a duty to maximize the sale price
o Directors’ role changes: from defenders of the corporate bastion to auctioneers charged with
getting the best price for s/h
O’Hare – Spring 2018
It is not reasonable for board to end a bidding contest on an insubstantial basis
Concern for non-s/h interest is inappropriate when an auction among active bidders is in
progress and the object is no longer to protect or maintain the corporate enterprise
Paramount v. Time
Time wants to expand into the entertainment industry while maintaining its distinct corporate culture
“merger of equals” requires approval of the boards and shareholders of both Time and Warner
o Parties are worried that someone else will come in and swoop the deal so they install defensive
 Share exchange agreement (a lockup agreement of sorts)
 No-shop agreement  Time can’t consider other deals
 *no shop provisions cannot require that a company consider no other deals
 Commitments from banks not to finance third parties
Paramount announces all-cash, $175 million tender offer for all shares of Time (this is a very generous
o Time’s board worries about Time’s culture
 Restructures deal with Warner to make an all-cash tender offer for $70/share for 51% of
shares followed by a cash-out merger of 49% for cash and securities
 Time recasts this as an outright acquisition of Warner that will be a triangular merger
Time controls merger subsidiary of a corporate parent and Warner is aligned
with Time management
 *s/h of Time don’t have to vote to approve this merger (only Time as a company,
i.e. the board, does)
o Time s/h would have preferred the cash from Paramount
This case shows how the allocation of authority between the board and s/h matters
o Court works hard to let the board do what it wants at the expense of s/h
Applying Revlon/Unocal:
o 1st Question: is this Revlon or Unocal?
 Original Time-Warner deal did not trigger Revlon because there was no “change in
 It was a stock for stock deal
 It was not the s/h last chance to get a control premium
 Stock for stock deal with no controlling s/h before and no controlling
s/h after will NOT trigger Revlon
o SC disagrees with that in this case, but this is how we decide it today
 SC: Revlon applies if 1) board initiates an active process or 2) a board
abandons a long-term strategy and seeks a break-up of the company
 There is a policy question of when the board should have to take into account the
O’Hare – Spring 2018
The court holds that Revlon does not apply because neither of the two conditions
have been met
 The Court agrees with the conclusion that a VG-style BJR applies to the original
o This might not be right today because the board adopted defensive
measures and those measures are usually subject to Unocal
Applying Unocal:
 Any defensive measures will likely be subject to Unocal today
 Analysis:
 1) was the hostile tender offer a threat?
o Court defers to Time’s assessment of threat
 *Favoring board over s/h
 s/h may tender in ignorance or mistaken belief of strategic benefit
of WB deal
 AB doesn’t buy this (you could always use this)
 Conditions attached to Paramount tender made a comparative
analysis difficult
 AB – no, this is straight up finance
 11th hour nature of tender offer may have been designed to confuse
Time s/h
o *none of these are persuasive and would likely not hold up today
 2) were the defensive measures proportional?
o There was a plan in place they wanted to carry out
 AB: ok so why is this proportional?
o Paramount could have made a bid to take over the new Time Warner
 Also doesn’t tell us why cutting out the s/h is proportional
o Additionally, Paramount could have made a bid to takeover the new
Time-Warner entity
 This would have been a massive deal (although the RJR-Nabisco
$26B had recently taken place)
o For these reasons, the responses were reasonable and proportionate
Paramount v. QVC
o Strategic combination of Paramount and Viacom
o After negotiations broke down, QVC expressed interest in acquiring Paramount  Paramount
refused to deal with QVC
o P & Viacom instituted deal protections  QVC jumped in with another offer
o P & Viacom revised deal terms and structure to block QVC
o P refuses to negotiation with QVC and selects sweetened Viacom offer
Opinion: was Revlon triggered?
o P argued this was the same situation as the Time case – a strategic alliance with no break up or
abandonment of long-term strategy
o Court  this case involved a significant diminution of voting power if majority of shares was
acquired by a single person
 Once control shifts, s/h’s have no leverage to demand control premium
 Thus, board had a Revlon obligation to seek “best value reasonably available”
Rule: Revlon duty to seek best value for s/h’s is triggered if there is a change of corporate control (from
fluid aggregation of s/h to a minority position)
Revlon today
O’Hare – Spring 2018
Revlon cases are almost always brought as breach of duty of good faith cases (because of §102(b)(7))
Lyondell Chemical v. Ryan
o Facts:
 Basell suggests acquiring Lyondell at 26.50-28.50 Lyondell is not interested
 Basell acquires 8.3% of Lyondell, but Lyondell still doesn’t thoroughly consider an
 Basell gives cash offer at $48, but gives Lyondell a 1-week signing window
 Lyondell board approves without an auction or seeking other offers
o Opinion:
 Revlon duties aren’t triggered simply because company is “in play”  2 months of
slothful indifference didn’t matter
 Apply only when company begins to engage in a transaction on its
own initiative or in response to unsolicited offer
What is required by Revlon?
o No single blueprint BUT directors must actively engage in sale process
o Confirmation of best price through auction, market check, or impeccable knowledge of the
What would it take to fail good faith under Revlon
o Remember: breach of good faith requires knowing disregard of duties (in this case, duty to get
price for s/h)
o Fail (sort of): Koehler v. NetSpend: seller’s board chose to negotiate with only one patty
 Also had weak fairness opinion, poor negotiations, deal protections, and no post-signing
process for other bids
 Court found failure to satisfy Revlon but did not enjoin sale – reluctant to enjoin vote if
there is a premium price, fair disclosure, and no higher-priced alternative
o Pass: In re Dollar Thrifty: board decided to negotiate with Hertz and not Avis – an alleged
failure to include Avis in pre-signing bidding
 Strine: Revlon is a test of reasonableness  if directors are well-motivated, no
entrenchment motivation, and diligently involved, court should not second guess
o Good process virtually eliminates any chance of a violation
Market Checks:
Acceptable Market Check (C&J Energy)
o Some discretion is given to BoD to decide what is the “best price”  must be reasonable but not
o Auction is not required but some form of market check is highly recommended
o Active solicitation not required so long as
 There is a fair opportunity for other bidders to present higher value
 Board flexibility to terminate original deal and accept higher value (“fiduciary out”)
Market check choices (no single blueprint)
o Auction – helps to demonstrate an impeccable knowledge of the market
o Pre-signing market checks
 Full auction
 Highest bidder after limited pre-signing check and negotiations with multiple bidders
 Single bidder with reliable evidence of best price available
 Single bidder, no reliable evidence, post-signing market check
o Post-signing market checks usually involve:
 Period of time to allow competing bidders to emerge
 A window shop prohibiting target company from actively soliciting bids, but allowing
seller to negotiate superior proposals
 Valid single bidder negotiation with passive post-signing market check – no right
to solicit but not a no-talk
O’Hare – Spring 2018
 Fiduciary right to terminate
 Limited deal protections, unless justified for strategic/competitive reasons
 Broad public announcement
In re Netsmart Tehcnologies
o CEO put in charge of sale process and limited bidders to PE firms (more likely to retain CEO
o Signed deal that contained no-shop, 3% termination fee, and fiduciary out for superior
o No higher bid emerged after signing
o Court:
 The board did not justify the exclusion of strategic bidders from the process
 The post-signing market check was not sufficient in light of this exclusion
 Board must provide equal treatment unless there is justification
 Court enjoined the s/h vote until s/h’s were provided with complete disclosure
Go-shops: not required, but if administered fairly, can go a long way to show they demonstrate knowledge of
firm’s value in seeking to obtain highest price
More common with PEs than strategic buyers
o PEs aren’t likely to compete against each other so they don’t care if there is a go-shop
Lear: adequate post-signing market check
o Permitted post-signing market check for widely traded target
o Period to actively seek other bids
o Reduced break-up fee if bidder emerges
Topps: must treat all bidders comparably – cannot prohibit a bidder form participating in go-shop
Revlon and deal protections:
Market check and deal protections must be balanced
Test under Unocal is reasonableness
Must be justification
o Limited market check AND
o Strong deal protection
Mixed consideration and Revlon
Revlon applies to cash deal, but not to stock deal without controlling s/h before and after  Revlon is
implicated in a change of control
In a mix of cash and stock
o Revlon applies to a 62% cash deal (Lukens)
o Likely applies to a 50% cash deal (Smurfit-Stone)
o Does not apply to a 33% cash deal (Santa Fe)
Overview of types of litigation in M&A Context
Buyer v. target – hostile takeover
o Often coupled with proxy contest to replace some or all of the board and public relations
o Types of litigated claims
 State law breach of FD
 PPs, staggered boards, other defensive measures
 Standing issue – buyer purchases a few shares (but not enough to trigger
reporting requirements)
O’Hare – Spring 2018
 Standards: Unocal or Revlon (and maybe Blasius)
Federal proxy fraud claims involving claims of material misrepresentation in proxy or
tender documents
Buyer v. seller
o Cold feet post-signing claims for breach of purchase agreement
 Ex)
 MACs
o IBP v. Tyson: specific performance granted because no MAC had occurred
 Failure of best efforts or other covenants to closing
s/h class action litigation
o most common from  claims alleged on behalf of all s/h who owned as of a particular date (not
o typical claims focus on process and disclosures
 process
 what standard applies – Revlon or BJR?
o Adequacy of market checks, validity of termination fees and other
preclusive deal protection devices
 Is there a controlling s/h?
o Differential consideration; unfair influence
o Special rules for going private transaction – MFW
 Conflicts of interest
o Conflicted financial advisors – Del Monte, Rural Metro, Zales
 Disclosure
 Background of the merger
 Financial projections
 Fairness opinion
The Pre-Trulia World and the Development of Disclosure-Only Settlements
Disclosure only settlement  case settled on a class-wide basis prior to s/h meeting at which the
deal will be voted on (or, alternatively, before the close of the tender offer) by agreeing to make
additional disclosures to the proxy materials
Form of disclosures:
o In some instances, company will issue a supplemental proxy statement
o Sometimes done via Form 8-K
o Typically provide additional, rather than corrective, info
Release  in exchange for additional disclosures, plaintiffs grant a release of their claims
Role of the court
o Requires court approval if class-wide settlement
o Notice required to be provided to s/h class (but no opp. to opt-out)
o Opportunity to object
Atty’s fees
o Cannot be negotiated until after the deal is reached
o Subject to approval by Court
Typical process of M&A s/h disclosure-only settlement
o Press releases by plaintiffs’ firms upon announcement of transaction
o Placeholder compliant, to be followed by more detailed amended complaint once proxy
materials are publicly filed
o Sometimes filed in multiple jurisdictions (more below)
o Leverage through expedited proceedings and threat of injunction
o Ease of adding additional disclosures (e.g. more detail about fairness opinion analysis;
additional details regarding process)
O’Hare – Spring 2018
o Willingness by plaintiff’s firms to negotiate broad intergalactic releases
o Award of attorney’s fees
Steps by courts facilitating disclosure-only settlements:
o Expedition doctrine
 Very deferential: colorable claims sufficient
 Expectation that parties would voluntarily agree to expedited process and exchange the
usual documents
 In tender offer situations, window could be extremely tight (20 days)
o Limited judicial review of scope of releases content of disclosures
o Fee awards precedent
 The Sauer-Danfoss rate schedule - $400-$700K
 In some jurisdictions, awards for disclosure settlements were even more significant
(upwards of $1M+)
Reform Efforts: Exclusive Forum Provisions
The problem: multiple plaintiff’s firms file simultaneous class actions in different jurisdictions
o E.g. state of incorporation (DE); state where HQ is located (IL); state where company trades
(NY); state of major operations (CA)
o While there are mechanisms in the federal system for transfer and coordination of cases (§1404
transfer; MDL), no such process among state courts
 Most jurisdictions have some sort of filed first rule, but not always consistently applied
 Defense counsel would attempt to seek stays of some cases while seeking to advance
 Problem of inconsistent and duplicative litigation
 Ability of defense counsel to cherry pick who they want to deal with creates reverse
auction concern
The solution (sort of)
o DE supreme court affirms power of company in implement bylaw amendments that require that
any claims brought to enforce breach of FD by D&O may only be brought in DE courts
o DE legislature later codified this authority
o He recommends that clients adopt these
o Continuing problems:
 Enforcement: what if a s/h ignores the requirement, files in another jurisdiction, that
court refuses to apply provisions, and the DE court doesn’t have jurisdiction over s/h?
 This happened (Genoud)
 Solution: consent to jurisdiction provisions in bylaws
 Federal claims: corporation cannot require s/h asserting federal securities claims to file
in a particular jurisdiction
Additional pre-Trulia reform efforts:
Other efforts at legislative reforms
o Fee shifting rejected by DE assembly
Judicial efforts at reform pre-Trulia
o Closer focus on fee awards
o Closer scrutiny of expedition motions
o Closer review of breadth of releases v. claims that were actually litigated
o Appointment of special master to investigate potential reverse auction situation
Impact of Rural Metro
o Came very close to being settled as disclosure-only settlement
In re Trulia, Inc. Stockholder Litigation
O’Hare – Spring 2018
o Stock for stock merger b/t Zillow and Trulia
o Four plaintiffs filed motion seeking to enjoin the merger alleging that the directors of Trulia
breached their FD by including misleading disclosures
The problem as defined by Chancellor Bouchard is a mismatch between get and give  i.e. benefit to
s/h vs. scope of claims released
Opinion: courts will approve a disclosure settlement only where
o The supplemental disclosures address a plainly material misrepresentation or
o The proposed release is narrowly circumscribed to encompass nothing more than
the disclosure claims and FD claims concerning the sale process; and
o The record shows that such claims have been investigated sufficiently
In using the term “plainly material” it means that it should not be a close call that the supplemental info
is material as that term is defined under DE law
o The only way defendant is ever going to agree to a settlement now is if they really screwed up
Trulia and the New World of Mootness and Ratification
o Paradigm: s/h agrees to withdraw request for preliminary injunction in exchange for additional
disclosures; then once the deal closes, they agree to voluntarily dismiss the case
 Key: no class-wide settlement = no release
o Plaintiffs then seek “mootness fees”
 Xoom: “plainly material” disclosure not required to obtain a fee
 A helpful (not material – lower bar) disclosure can still lead to awarding
plaintiff’s attorney’s fees
 Rationale: Trulia concerns about unfairness to other s/h not present
 Keurig: disclosures must be more than merely confirmatory, but must provide a benefit
to s/h
 Fee award = 0
o Why not pursue post-closing damages?
 Lose leverage
 Exculpation of directors
 Ratification doctrine
Trulia and ratification
o Under Corwin, if a non-controlled transaction is 1) approved by a fully-informed s/h vote and 2)
is not coercive then the standard is BJR and a challenge will only be upheld if the transaction
constituted waste
o Courts make clear that disclosure claims should be brought pre-closing
o The new playbook
 By providing supplemental disclosures in advance of a s/h vote on a challenged
transaction – thereby mooting any asserted disclosure claims – can effectively preempt
any post-closing challenge to the fully informed nature of a s/h vote by virtue of burden
shift to Corwin
Walgreens: application of Trulia in the Federal Securities context
o Background of transaction:
 Step 2 of merger b/t Walgreens and Boots Alliance  requires a s/h vote because of
share issuance and corporate reorg.
 s/h meeting set for Dec. 29, 2014
 walgreens
 had been the subject of activist attention earlier in the year
O’Hare – Spring 2018
announced revision to long-term goals in summer of Aug. 2014, resulting in
significant stock drop
 former CFO filed a defamation lawsuit claiming the co. had leaked unflattering
info to WSJ about him
o no state law cases but two federal proxy fraud cases filed several weeks before the s/h vote
 plaintiffs threaten to file a motion for a preliminary injunction
 negotiate additional disclosures; supplemental proxy issued on Dec. 24 and s/h meeting
 limited release
 attorneys’ fees of $370K
 objection field by the Center for Class Action Fairness
 district court holds fairness hearing and approves settlement; CCAF files appeal
 that disclosure may have been helpful to a s/h is not enough  needs to be likely to a
matter to a reasonable investor
 disclosure must be 1) material and 2) actually correcting/adding to original
o end result: Walgreens got the $370K in attorney’s fees back  case dismissed
future of M&A litigation:
o the numbers – claims are down considerably
 64% of M&A deals faced litigation during first 6 mo. of 2016, the lowest rate since 2009
o But, plaintiffs may be moving to federal court
 Plaintiffs filed a record number of federal securities class actions filings in 2016,
representing a 44% increase from 2015
 Growth in filings in 2016 driven by dramatic growth in class actions challenging M&A
Controlling Shareholders
Conflicts of interest:
What can a controlling s/h do and not do?
o Sell shares for a premium  yes
o Vote in self-interest  yes
o Refuse to sell shares  yes
o Mgmt. decisions  maybe, FD applies only where there is control and self-dealing
o Engage in direct transactions  maybe
o Directors with dual loyalties  need to cleanse transaction
Is there a duty?
If there is, what standard applies?
Transfer of control:
Perlman v. Feldman: control premium realized by majority must be shared with minority – control is a
corporate asset
o Based on old case suggestion majority might have FD to minority
H.F. Ahmanson: formation of holding co. and IPO (minority excluded) probable breach
Hangiman v. Green Giant: high vote stock
o s/h approved exchange of high vote stock for increased % of low vote
o control is not a corporate asset
Abraham v. Emerson Radio
o Emerson free to sell majority bloc for premium not shared with other s/h
 Under DE law, a controller remains free to sell its stock for a premium not shared with
the other s/h except in very narrow circumstances
o Exception for looting if aware/known/scienter
O’Hare – Spring 2018
“A controlling stockholder who sells to a looter may be held liable for breach of fiduciary
duty if the looter later injures the corporation and the former controller either (i) knew
the buyer was a looter, or (ii) was aware of circumstances that would ‘alert a reasonably
prudent person to a risk that his buyer [was] dishonest or in some material respect not
But duty of care to inquire about motivation?
 In (2) above, “a duty devolves upon the seller to make such inquiry as a reasonably
prudent person would make, and generally to exercise care so that others who will be
affected by his actions should not be injured by [the] wrongful conduct.”
Strine skeptical: duties of majority s/h, if any, premised on controller exerting its will in the
manner of the board  makes no sense to impose that duty on s/h when it is derivative from
obligation of directors if directors have no liability
 When board is exempt (per §102(b)(7)) from liability, court should not impose greater
liability on majority s/h
Bottom line: in DE, majority s/h can sell its interest for a premium and keep the premium
Decisions of Controlling S/h
Williams v. Geier: s/h (even a controlling s/h) may vote in their own economic interest and are not
disenfranchised because they benefit from corporation action which is normal on its face
No requirement for majority of minority vote
o There is no requirement under the DGCL that a majority of the outstanding
minority shares must vote in favor of a transaction which benefits the majority”
But there are limitations
o Fully informed
o No fraud, waste, manipulative, or inequitable conduct
No obligation to sell:
Bershard v. Curtiss-Wright
o No duty to sell, even if majority s/h just because sale would benefit minority
o Proposal by controlling s/h does not trigger Revlon
 Because there is no change in control
o But must be fair
Books-A-Million  lower bid by controlling s/h may be fair while a higher third party bid may be
o Controlling s/h does not need to buy the control premium
Management decisions
Sinclair v. Levien
o Parent held 97% of Venezuelan subsidiary
o Controlled Board and day to day operations
o Declared dividend rather than reinvesting
o Parent owes fiduciary duty when there are parent subsidiary dealings, but duty
applies only when there is self-dealing and parent exerts domination over
o Parent issued a dividend, Claim was that this dividend was paid for benefit of Sinclair the parent
o This was not “self-dealing”
 This was not a direct transaction b/t Sinclair the parent and the sub, which would have
been self-dealing
 This was simply a transaction where Sinclair the parent got its 97% of the dividend, but
everyone else suffered or benefitted to the same extent as Sinclair
O’Hare – Spring 2018
That proportionality is what distinguishes b/t what is self-dealing and what is a
direct transaction
Parent received nothing to the exclusion of minority shareholders
Officer and director transactions
Common law: void or voidable
o If you have approval from a majority of the disinterested shareholders, a conflicted director
transaction receives the protection of the business judgment presumption
DGCL §144 (covers direct transactions between D&O and company) Contracts with directors NOT
void/voidable if
o DCGL § 144: a conflicted interest transaction shall not be void or voidable solely because of a
director’s conflict or solely because the director is present or participates in the meeting that
authorizes the contract provided:
 (a)(1) approved by a majority of disinterested directors after disclosure of material facts,
 Disclosure does not have to be every minute detail (Benihana)
 (a)(2) approved by good faith vote of shareholders following disclosure, or
 Shareholders need to be disinterested
 Doesn’t let you off the hook with entire fairness – higher standard of review may
 (a)(3) fair to the corporation at the time it is authorized by the board or the shareholders
 This has been construed as the entire fairness test
 *if one of these are satisfied, corporation gets away from close judicial scrutiny
Section 144 v. fiduciary duty
o Cases are confusing at best
 Benihana (Sup. Ct.)
 Compliance with §144(a)(1) provides safe harbor for interested transactions
 Cede & Co. v. Technicolor (Sup. Ct.)
 Compliance with §144 reverts to business judgment rule
 But reference to “disinterested” shareholder approval
 Cinerama (Sup. Ct.)
 §144 addresses self-dealing, but not whether director “interests” will implicate
higher standard of review
Better view: is that 144 may protect from voidability, BUT still need to determine if
approving BOD has satisfied its fiduciary duties
Director “Interestedness” (§144(a)(1))
Party to the transaction (disinterest) or
Relationship that impairs independence (independence – relationship, it’s a subjective concept)
o Must be able to exercise independent judgment
o Is the relationship “bias-producing”? Can the person make a decision that is not biased by the
Beam v. Martha Stewart – social or business  Court held that burden of proof was on π that social
relationship did not constitute an interest in the transaction
Oracle - ties to Stanford
o Interest alleged were relationships with Stanford university
o Couple of the people on Oracle board were professors at Stanford
o Court concluded that there were at least enough circumstances that could lead to a finding of
interestedness that he held against defendants
o Burden was on Δ here
O’Hare – Spring 2018
Objective ties to controller often disqualify
“Disinterest” v. “independence”
o “Disinterest” relates to a specific transaction
o “Independence” relates to a relationship
NYSE has independent requirements for directors – have to have at least majority of directors qualify
under this rule w/r/t independence
o Generally backward-looking test focused on what kind of relationship you have with company in
Freeze-Outs by Controlling Shareholders
What is a freeze-out?
o “Back-end” merger or later elimination of minority
o Controller dominates Board majority; Shareholder vote not meaningful
o Controller can block alternative deal
 Refuse to sell shares
 Vote against
 Revlon not applicable; Minority doesn’t have protection of Revlon standard
o Risk of unfair price to minority  Appraisal right in some circumstances
Minority concerns in a freeze-out
o Inherently coercive – no minority voice at either Board or shareholder level
o Appraisal is no guarantee expensive and not always available
o Is BJR the right standard of review? DE courts have struggled for years
Weinberger v. UOP  Established the “entire fairness” test for freeze-outs
Signal held 50.5%, cash-out remaining 49.5%
Signal “dominated” Board, named 6 of 13
o UOP CEO and Director, Signal employee and director
o Superior negotiating position
Valuation study done by Signal directors only  This was particularly offensive to the court
o Signal willing to pay more than agreed price
o Not shared with independent directors of shareholders
Majority of minority condition
o 76% of outstanding yes; 2.2% no
o But adequate disclosure
Minority shareholders had appraisal rights
Process concerns
o Signal initiated the transaction
o Valuation was not shared with non-Signal directors
o “Discussion” not “negotiation” of price
 Required modification of proxy statement to say discussion instead of negotiation
o Inadequate disclosure (to non-Signal Board and minority)
o Signal directors participated in Board approval process
 Merely recused themselves from vote, but they were in the room and in the discussion
 This contributed to view of court that Signal was dominating the decisions of the Board
o Compressed time frame
o Weak fairness opinion
“Entire Fairness”  When directors on both sides (dominance), utmost good faith and inherent fairness
Entire fairness is required even if the transaction was approved by the independent and disinterested
directors and/or shareholders
O’Hare – Spring 2018
If no “arm’s length” bargaining, dual capacity directors must be “entirely fair” with minority
Entire fairness is a standard of review composed of (i) fair dealing and (ii) fair price
o Fair dealing? Mirror real “arm’s length”
 Timing, initiation, structure, negotiation, disclosure
 At both director and shareholder levels
o Fair Price  Determined by same procedure as appraisal
 Overruled “DE block” where they didn’t use valuation techniques that are now used
 Weighted average of assets, market price, earnings, etc.
 Generally accepted valuation methods
In re Pure Resources, Inc.
Rule: tender offer by controlling s/h non-coercive only when:
o Subject to non-waivable majority of the minority condition
o Controlling stockholder promises prompt §253 merger at the same price if it
obtains more than 90%; and
o No retributive threats made by controlling shareholder
Kahn v. M&F Worldwide (Sup. Ct.)
Get BJR if the special committee 1) is independent 2) is empowered to select its own advisors
and to say no definitively and 3) meets its duty of care AND the majority of the minority vote is
1) informed and 2) not coerced
Consequences of MFW
What is the logic?
o Trying to move toward greater uniformity in the standards of review that the courts will apply to
controller going-private transactions
Must be conditioned on BOTH up front
o Can’t insert committee well into process
o Must apply throughout the process
Does not affect pre-vote injunction
Practical decision – biggest concern?
o Consummation risk
o Litigation risk
Non-Controlling shareholder transactions
Corwin v. KKR (Sup. Ct.)  enhanced scrutiny applied
No controller involved – no entire fairness
o KKR (acquirer) held only 1% of stock
But enhanced scrutiny applied – Revlon
Fully informed, un-coerced vote of disinterested shareholders shifts from enhanced
scrutiny (Revlon) to BJR
o Presumption is irrebutable
o What does this mean?
 If entire fairness is the governing standard of the transaction for any reason, be it a
conflict of interest with a controlling stockholder or a conflicted board of directors, the
business judgment rule cannot apply (absent the factors described in M & F Worldwide)
 Once disinterested stockholders have approved, you’re in business judgment rule land
Post-Corwin Chancery
After Corwin, stockholder plaintiffs alleging post-closing claims for damages must demonstrate that
O’Hare – Spring 2018
The vote of the stockholders was not fully informed due to materially misleading disclosures by
target company, or was otherwise coerced
The transaction is in fact subject to entire fairness review because:
 A controlling stockholder (exerting control either through ownership of at least half of
the outstanding shares or through a combination of significant minority ownership,
contractual rights and personal relationships) stood on both sides of the transaction
MFW and Corwin Summary
o The entire fairness standard of review will apply to a transaction with a controlling shareholder,
or where the controlling shareholder receives different consideration from the minority
shareholders. In these circumstances, the test is “fair price” and “fair process”. In this context,
unfairness is presumed and the board must carry the burden of proof.
 Exception: If transaction has been conditioned ab initio upon, and thereafter (1) is
negotiated and approved by a fully empowered, independent and disinterested board
committee, and (2) is followed by the fully informed approving vote of a majority of the
minority shareholders, then the business judgment standard will apply. But, if only one
of these protective devices is followed, entire fairness remains the standard of review, but
the burden of proving unfairness shifts to the plaintiff.
 Extension: Books-A-Million: plaintiffs claimed MFW not applicable because special
committee failed to pursue higher third party offer because controlling had refused to
sell to third party.
 Court found for defendants: controlling shareholder has no fiduciary duty to sell
to third party and breaches no duty by offering to acquire minority shares even
price is lower than third party offer – Mendel.
 Independent special committee has no fiduciary duty to seek to dilute control
block to facilitate third party transaction
 Therefore MFW applies
o The enhanced scrutiny standard of review will apply to a board decision approving a change of
control (Revlon) transaction that is challenged before any qualifying shareholder vote. In these
circumstances, the court will review reasonableness of the decision making process employed by
the directors, including the information on which the directors based their decision and the
reasonableness of the directors’ decision itself in light of the circumstances then existing (this is
entire fairness). The directors have the burden of proving the reasonableness of their conduct.
 Exception: if a board decision to approve a change-of-control transaction (which is
normally subject to “enhanced scrutiny” review), from and after the time that the
transaction has been approved by a fully informed, uncoerced vote of disinterested
stockholders (“qualifying shareholder vote”), the business judgment standard of review
will apply. The presumption is irrebutable.
 Court indicated the test applied to transactions to which the entire fairness standard did
not apply – controlling shareholder [and disinterested directors(?)]
Management Buyouts
Can be many types:
Member(s) of management initiating and leading buyout
Management, including controlling shareholder(s) leading buyout
o Michael Dell was both
Management joining buyout lead by a PE firm
Legal Issues Raised by MBOs
Weinberger – controlling shareholder
o “Dominance” implicates entire fairness
o Independent special committee with own advisors
Revlon – any change in control
o Management cannot be favored or bias process
o Unequal access to information/inside information
o Influence over decision-makers
Conflicts of management and Board
Shareholder litigation ubiquitous
O’Hare – Spring 2018
Commercial Issues in MBOs
Compromise Seller’s bargaining position
o “Going over to the other side”
Preference for a particular bidder
o Refusal to commit to non-preferred bidders
Controlling shareholder not obligated to sell
Unequal access to information
o Control communication process and keep mgmt. out of process
Are MBOs good for the economy?
o Unclear, probably not relevant. There are two sides to the argument, obviously.
o May get s/h the real value of the company
o But presence of mgmt. discourages other bidders
Standard of Review – Wheelabrator (Ch.)
Waste Mgmt. held 22% of shares, 4 of 11 directors
o Not a controlling shareholder
Board and disinterested shareholders approved
Entire fairness or business judgment?
o Plaintiffs argued shareholder vote merely shifted burden under entire fairness per Lynch
o But Court noted absence of controlling shareholder
o Standard was BJR with plaintiff having the burden of proof
Strine in Dell: Michael Dell not in control (he did not own enough shares to be considered a controlling
o BJR applied since disinterested Board approved (i.e. not a conflicted transaction)
Common Provisions in MBOs
Driven as much by best practices and optics as by strict legal requirements
Special committee – always?
o Unclear on always, but they usually retain their own set of legal and financial advisors to assist
o Ask does mgmt. have the ability to influence decision makers?
 If yes  do a special committee
 If not  maybe don’t do a special committee
Majority of “minority”
o Vote with “minority”
o Generally higher than 50% requirement
o Can be formulated two ways:
 Majority of those voting
 Majority of the entire outstanding minority shareholder base Higher threshold
Reduced lock-ups/deal protection  Low break-up fee, limited right to match
Open bidding (auction)  Goal is to maximize pricing and bidding for the company
O’Hare – Spring 2018
Go-shop  Separate banker to shop
All of these were included in the Dell deal
o 45 day go-shop
o Termination fee of $180M (less than 1% of the transaction value)
o Right to match competing offers only once
o Had to be approved by a majority of shares other than shares held by Michael Dell
o Dell agreed to vote his shares for another accepted bid in the same proportions as other
shareholders voted
o Reverse termination fee of $750 M
Takeovers: Tender Offers
Tender Offer Characteristics  tool for hostile takeover
Offer direct to shareholders
No statutory Board role/Not defined by statute
No shareholder vote (or proxy)
Less process, greater speed
Wellman eight factors
o Widespread solicitation
o Substantial percentage of issuer’s stock
o Premium over market
o Terms firm, not negotiated
o Contingent on certain number of shares
o Limited time offer
o Pressure to accept (through timing and premium)
o Publicly announced
Coercive takeover
Pre-offer purchases + Announce tender offer, no advance warning
Terms generally involve short acceptance period with 2 tiers (back end worthless) creates pressure to
Little/No disclosure of identity or funds
Williams Act—Tender Offer Regulation
§13(d) – Early warning filing/disclosure requirement
Beneficial Ownership – Rule 13d-3(a)
o Intended to be broad concept within context of investment and voting power
o “…a beneficial owner of a security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or shares:
 (1) voting power, which includes the power to vote, or to direct the voting of, such
security; and/or
 (2) investment power, which includes the power to dispose, or to direct the disposition
of, such security
o “SEC intended Rule 13d-3(a) to provide a ‘broad definition’…to ensure disclosure ‘from all those
persons who have the ability to change or influence control” – CSX v. Children’s Fund
o Either the power to vote or the power to sell means you’re beneficial owner – don’t need both
Who, When, What – Rule 13d-1
o Any person who, after acquiring any equity security
 Is the beneficial owner of more than 5%
o Must within 10 days after such acquisition
 File the information required by Schedule 13D
O’Hare – Spring 2018
Equity security
 Includes common stock, convertible securities (options, warrants, convertible debt)
o If convertible, only relevant if they are exercisable or convertible within 60 days of filing date
Rule 13d-3(d)(1)(i)
Group - §13(d)(3)  Must report as if a single person
o Group formed when “two or more persons agree to act” with the purpose of acquiring, holding,
disposing– Rule 13d-5(b)(1)
o Wellman v. Dickinson  Written agreement not required; Also “defines” tender offer
Schedule 13D
o Background, identity, residence and citizenship of beneficial owners
o Source and the amount of funds used in making purchases
o Item 4. Purpose of Transaction
 If the purpose of purchase or prospective purchases is to acquire control, then must
disclose any plans or proposals which purchaser may have to liquidate, sell the assets
of, or merge the issuer
 Very helpful to potential target company
 Example: Valeant and Pershing Square Item 4 disclosures (pg. 104 in textbook):
 Valeant – Strategic buyer
 Current intent to propose merger
 No obligation to do so
 Pershing Square – PE Fund
 Believe stock is undervalued
 Intend to engage in discussions
 May take other actions
 May purchase additional shares
 Valeant intends to propose merger
o Number of shares which are beneficially owned (directly or indirectly)
o Any purchases or sales of securities in the last sixty days
o Information about any contracts, arrangements or understandings with respect to any
securities of the issuer
 Even in the absence of finding a group, their ownership interests are not lumped
together, but once there is a reporting requirement of any one of the companies, you
have to report any arrangements
 In CSX, the two parties that were found not to constitute a group, they would file a
13D and would still have to talk about any understandings they have
Amendment of Schedule 13D
Once you file, have to keep it current
 Whenever you make any material change
o Rule 13d-3
 Promptly amend if material change
 Purchase or sale of additional 1%
 Qualitative matters may also be material
 Change in plans
 Item 4 disclosure is typically drafted to provide maximum latitude for future
actions without requiring and amendment
 Arrangements with others - “wolf pack”
Remedies under §13(d)
- SEC can levy fines and obtain equitable relief for §13(d) violations
- Courts also say that §13(d) provides a private right of action (usually for issuers and security
holders, sometimes also for tender offerors)
O’Hare – Spring 2018
Remedy most readily granted is corrective disclosure
o Sometimes also grant injunctive relief
- Few courts have allowed damages remedy
o Most courts rejected claims for monetary damages in private suits under §13(d)
- §13(e) – going private  Special disclosure regulations w/r/t transactions that are being run by
controlling shareholders to take company private
14(d) and (e) rules
o §14(d)(1) – tender offer disclosure (only applies to tender offer of public company)
o §14(d)(4)-(7) – tender offer process
 Imposes lots of regulations as to how you conduct tender offer
 Many are directed specifically at some offensive elements of coercive tender offers
o §14(e) – Anti-fraud  Essentially insider trading prohibitions  Applies to ALL TOs, even if
o Commencement: Rule 14d-2: A tender offer commences on the date that the bidder has first
“published, sent or given the means to tender to security holders.”
 In practice, commenced by filing Schedule TO with SEC and publishing ad (Rule 14d-4)
o Minimum Offering Period Rule 14e-1: 20 business day minimum offer period
 Primary way to combat Saturday night special
 Roughly equates to a month
o Rule 14e-5: no private purchases during offer – cannot purchase any securities outside of the
offer from the time tender offer is announced until its completion
 Pre-offer toe-hold permitted
 Everyone has to be treated the same
o Rule 14e-1: prompt payment; notice of extension
o Rule 14e-2 and Rule 14d-9: target management must respond on Schedule 14D-9 within 10 days
of commencement of tender offer
Cash settled derivatives
Long = party who wishes to have the economic effect of owning the stock
Short = counterparty
Diagram shows the way the cash flows between the parties
A cash-settled derivative mimics an equity security, but does not qualify as an equity security for §13(d)
Steps to create cash settled derivative:
o Investor makes contract between itself and investment bank
 Contract specifies current trading price for company’s stock
o Investment bank pays investor difference b/t that price and any increase on termination date of
o Investment bank pays investor amount equal to any dividend paid on the stock during term of K
o Investor pays investment bank difference b/t price in K and any decrease below that price
o Investor pays bank interest on price in K (as though it had bought stock from bank and
borrowed $ from bank to do so)
o Net effect is mimicking ownership of stock without actual ownership
Secondary consequences of cash settled derivative
o Bank hedges its side of the transaction by purchasing an equivalent stake in the company’s
shares to make sure they are protected if there is an upturn in the company’s stock
 Bank is exempt from §13(d) requirements because it’s a financial institution engaged in
hedging operation
 They can still vote shares though
What troubled court in CSX case was that bank was taking on risk, which they then had to hedge
Company entered into contractual arrangement that made it a virtual certainty that bank would go out
and buy shares
PE fund basically locked up the shares without having an interest in them
O’Hare – Spring 2018
CSX Courts –Cash Settled Derivatives as Equity?
Question for the courts: do cash settled derivatives qualify as equity securities under §13(d)?
District Court:
o “On this record, TCI manifestly had the economic ability to cause its short counterparties to buy
and sell the CSX shares. The very nature of the TRS transactions, as a practical matter, required
the counterparties to hedge their short exposures.”
o Said PE fund created circumstance that it is a virtual certainty that someone would acquire
those shares and that when you unwind cash settled derivative, the PE fund has the opportunity
to purchase those shares
Second Circuit
o Too divided to rule
o Did not agree with DC’s decision and in effect they rejected the conclusion of district court and
left us hanging as to what is enough
o Judge Winter: lower court decision was "flawed” and "without an agreement between the long
and short parties permitting the long party ultimately to acquire the hedge stock or to control
the short party's voting of it, such swaps are not a means of indirectly facilitating a control
Takeaway point
o In a takeover situation where someone is trying to acquire a toehold and defer the
reporting as long as possible, there are these devices that use sophisticated
derivatives that if you carefully navigate them, there are ways to navigate through
this and defer, if not avoid, having to report this
o Acquiring a toehold is just preliminary step though, so it allows you to accumulate a little bit
greater toehold before you commence your formal takeover
CSX – Conscious Parallelism  “Groups” for §13d purposes
Factual background:
o CSX sued two shareholder activist hedge funds (TCI and 3G), saying the funds violated §13(d) by
failing to file a Schedule 13D after forming a group
o Hedge funds claimed that they were not a group at the time CSX claimed they were
 Said there were no specific arrangements in place for the voting or sale of CSX shares
under their control
District Court
o “Group” found based on circumstantial evidence of informal understanding; analogous to a
charge of conspiracy
o No written or formal arrangement BUT multiple parallel actions
Second Circuit
o Although lower court found a group with respect to CSX securities, it did not find that the group
was formed for the purpose of acquiring CSX securities
o Did not expressly reject the circumstantial analysis, but requires some documented
 Maybe it means emails, something more than conscious parallelism
Even if not a “group” 13D may require disclosure of “arrangements”
Schedule 13G – Rule 13d-1  Institutional Investors; Relaxed Guidelines
Certain institutional investors acquiring securities in the ordinary course of business and not with the
purpose of changing or influencing the control of the issuer…
o File 45 days after the end of the calendar year
o Increase over 10% must be filed within 10 days
O’Hare – Spring 2018
o Requires less information than 13D
Generally limited to institutional investors, broker dealers, and banks
Other less than 20% passive investors
o File within 10 days
o Any acquisition that is more than 5% can be reported on reduced form, but have to file within 10
days of exceeding 5% threshold
More limited disclosure
o No purpose need be disclosed
o Identity of securityholder
o Amount of holdings
Must file 13D if no longer passive investor within ten business days
o No voting until 10 days after filing 13D
Disclosure obligations: Rules 14d-3, 4 and 5
Only applies to tender offers for more than 5% of public companies
Bidder to file Schedule TO as soon as practicable on the date of commencement – Rule 14d-3
o “Commencement” – publish, send or give security holders the “means to tender”
Disseminate offer to security holders – Rule 14d-4
o Short form – newspaper ad followed by mailing
o Long form – publish full offer in newspaper
 Mailing not required, but rare today
 Publishing is generally viewed as less effective
Target must either provide bidder shareholder list or mail on behalf of bidder – Rule 14d-5
o In practice, target usually does mailing so bidder does not get shareholder information
Schedule TO Content
Item 1. Summary Term Sheet
Item 2. Subject Company Information
Item 3. Identity and Background of Filing Person
Item 4. Terms of the Transaction
Item 5. Past Contacts, Transactions, Negotiations and Agreements
Item 6. Purposes of the Transaction and Plans or Proposals
Item 7. Source and Amount of Funds or Other Consideration
Item 8. Interest in Securities of the Subject Company
Item 9. Persons/Assets, Retained, Employed, Compensated or Used
Item 10. Financial Statements
Item 11. Additional Information
Item 12. Exhibits
Item 13. Information Required by Schedule 13E-3
Offer Period
Must remain open for minimum of 20 business days – Rule 14e-1
Right of shareholder to withdraw shares at any time prior to expiration of tender offer – Rule 14d-7
Subsequent offering period after expiration – Rule 14d-11
o May extend for minimum of three business days
o Must accept and pay for share already tendered
o Pay for additional shares as tendered
o No withdrawal rights
End of original period, everyone gets paid
During extension period, if you turn in your shares it’s irrevocable tender and you get paid immediately
Amendment of offer
O’Hare – Spring 2018
Change in consideration offered extends tender offer 10 business days from change
o Rule 14e-1(b)
Other material change extends tender offer five business days from change
o Rule 14d-4(d)(2)
The additional time is not added onto current offer period – only relevant if it would extend beyond the
initial 20 business day period
All Holders/Best Price Rule Pro Ration
Offer must be available to “all holders” on same terms – Rule 14d-10
o Highest (“best”) price paid to any holder needs to be available to everyone during course of
o Executive compensation issues – Rule 14d-10(d)
 As of 2006, payments made as compensation are exempted from best price rule
Pro ration – Rule 14d-8
o Offer need not be for 100% of a company’s shares BUT
o Over-subscriptions must be pro-rated in proportion to the number of shares tendered
 To compute percentage of shares purchased: divide the number of shares sought by the
number of shares tendered
These are fundamental principles – treat everyone the same and no two-tier offers
Tender offer insider trading - Rule 14e-3
Response to abuses of MNPI involving tender offers
Substantial step to commence a tender offer – this triggers rule 14e-3
o If you formulated a plan
o If you’ve arranged financing
o If you’ve started preparing materials
o If you’ve authorized one of your senior execs to engage in negotiations
o If you’ve made arrangements with dealer/manager investment bank that will help you solicit
people to tender into the offer
MNPI re tender offer
o If you are in possession of material, non-public information and you’ve acquired it from the
below people, then you’re charged with the disability of being in possession of non-public
information and you may not purchase or sell affected securities unless there has been public
disclosure of MNPI that you have
Acquired from issuer, offering person or officer, director employee, etc.
No purchase or sale without public disclosure reasonable time prior
This was the provision implicated in Valeant takeover attempt of Allergan
o The issue really was whether or not Pershing Square was offering person b/c of unusual
arrangement b/t Valeant and Pershing Square
o If Pershing Square isn’t an offering person, then all purchases by Pershing Square are in
violation of 14e-3
No need to know there is a tender offer
No duty required
Covers both source and tippee
Does not apply to issuer or person making tender offer
Standard M&A Timeline for closing (Cash deal/tender offer)
Announcement/Form 8-K Filed
Tender Offer documents filed (within 2-5 business days)
First opportunity to close (20 business days after commencement)
Close (>50%)
Squeeze-out merger (typically right after close in DE/other states need 90%)
Appraisal rights exercise period
O’Hare – Spring 2018
Tender offer v. a one-step merger
No Pre-Clearance needed for tender offer
o SEC pre-clearance of cash tender offer materials is not required
o A cash tender offer can be completed relatively quickly – 20 business days in the case of a
friendly deal not involving any regulatory issues
o A tender offer is made directly to shareholders and does not require a shareholder meeting or
board approval
Freeze out
o If sufficient shares are obtained in the tender offer to permit a short form merger entire fairness
review can be avoided
Hostile Takeovers
Hostile takeover – initial approach
Informal contact, conversations
o Refusal to negotiate – go hostile or give up?
o Tender offer only alternative – no Board approval
“Bear hug”
o Letter to Board, public disclosure
o Intent is to put pressure on Board, initiates dialog with shareholders
o Puts company “in play”
 Market reaction
 Start to see change in ownership profile  People who think it’s a good deal will invest
and drive up the price, also will be people who are willing to tender their shares, so it
makes the deal more likely to happen
“Teddy bear hug” – non-public bear hug  Intended to apply less pressure to the board
Hostile takeover – the offer
Direct to shareholders
Triggers substantive regulations
Cash v. other consideration
o If bidder is asking for stock or debt: valuation, PR (you can make it look like a bad deal)
o If it’s stock, gives target opportunity to evaluate the stock and determine what that stock is
“Any and all” shares – all holders rule
o Response to two-tier offers of the 1980s
o Timing issues  No issues with new system – avoid pressure on shareholders from two-tier
offers to tender early
Contingencies  Might be financing condition, minimum tender condition, diligence condition, etc.
Insights from Allergan
Joint approach, Valeant needed Pershing’s funds
They got almost 10% before they had to go public with 13D
o Allowed them to pay a lot less for 10% b/c it wasn’t public yet
Acquisition of near 10% - “toehold”
o Head start; lower cost; profit if offer fails
o Less common today: antitrust, Rule 14e-5
O’Hare – Spring 2018
o Derivatives and HSR
Applicability of Rule 14e-3
o Exempted co-bidder from insider trading liability  if Pershing Square was making an offer in a
joint venture with Valeant, they are exempted from insider trading liability
o “Substantial steps”  Ackman claimed that Pershing Square had no intention of making a
tender offer when it first began acquiring shares
Recent repeal of takeover defenses
o As a result of the trend in corporate governance and shareholder activism, esp. with larger
companies, many of the old-school very strong takeover defenses are going away at the
instigation of major shareholders/shareholder activist organizations
o This is what happened with Allergan
Nature of litigation
o Almost clinical, fewer gray areas
o Institutions don’t want to waste money
Stock as consideration
o Valuation and public relations issues
o Registration process – S-4
o Bedbug letters
 Letters to SEC from Allergan raising questions about deal
 Strategy was to buy some time so they don’t get pressured into the deal and they can
figure out alternatives
Pressure from arbitrageurs?
Proxy contest to replace Board
o Special meeting – lost but bought time
 Trading and other disclosures
 120 days to set date
 Dragged out
Layoffs, R&D cutback to lift stock
o While this is happening, Allergan is taking operational action
 Cut expenses, R&D
 Layoffs
o This tended to lift stock price of Allergan so it looked more expensive with objective of requiring
either Valeant to go away or put more money on the table
o Result of all this is that they had enough time to find someone they liked better
Bought time – “white knight”
Ackman’s profit despite loss
Market for corporate control debate
Imposes discipline on poorly-run companies
Defensive tactics remove shareholders as primary decision makers
Hostile takeovers constrain management
BUT effect of other modes of accountability is understated
Directors best positioned to control takeover decision and defenses
Stock market is an inefficient benchmark
Delaware cases do not adopt law and economics approach
Takeover Defenses
a. Takeover defenses
i. Once a target has said “no,” it can’t just sit there  If bidder commences a tender offer,
target has 20 business days to defend itself
ii. The question is “what defenses will it adopt?”
iii. Strategic responses and structural defenses
b. Strategic responses
O’Hare – Spring 2018
i. “Just say no”
1. Company’s board rejects an offer made by a hostile acquirer and take the position
that shareholders should not accept the offer
2. Reasoning: Inadequate offer, prefer strategy, bidder stock risky
3. Unlikely to succeed if “price is right”
a. At least without other defenses (staggered board and poison pill)
ii. “White Knight”
1. Sale to more desirable buyer
2. Concedes company up for sale
3. Under Revlon could end up with less desirable buyer, even hostile bidder
iii. “White Squire” – place significant stock position with friendly S/H in an attempt to make
it difficult or impossible for an unwanted bidder to acquire a controlling share of the
1. Often combined with other strategic responses
2. Trying to make target less attractive to bidder
iv. “Pac Man” – reverse takeover bid
1. Target responds to the bear hug by making an offer to acquire the bidder
2. Jos. A. Banks/Men’s Warehouse
3. Less common
4. Combination is acknowledged – control is the issue
5. Shareholders of “winning bidder” may be the losers
a. Pay premium rather than receive premium
c. Strategic Responses: Deployment of cash or debt
i. Leveraged recap – borrow and distribute to shareholders
1. Target uses its own cash and also borrows heavily to finance a special dividend to
current shareholders
2. Reduces cash and capacity to borrow
3. Discourages shareholders from tendering shares to the bidder b/c they want the
4. Inhibits a leveraged takeover
5. Often includes a stock repurchase
6. Less common now b/c poison pill is popular
ii. Stock repurchase
1. Often responsive to activist shareholder concerns
2. Reduces cash and capacity to borrow
3. Increases management percentage
iii. Defensive acquisitions – use cash, increase debt
1. “Too big to buy” or antitrust hurdle
2. Unocal likely still applies
iv. Defensive sales – “crown jewel”
d. Poison pills
i. Reallocates authority in a tender offer by making the bidder’s acquisition of
more than a threshold amount of shares prohibitively expensive if not
impossible unless bidder secures target board’s approval
ii. Shareholder rights plans poison pills
1. Board action only – contractual right
2. Dividend of one “right” per common share
a. Cannot be traded independently from common
3. Triggering event: acquisition of, say, 15%
a. Acquisition of additional shares at discount for all other shareholders
b. Acquirer’s rights not exercisable
c. Massive dilution for the acquirer
4. Triggered only once – Inadvertent
5. Board may “redeem” prior to trigger
a. Board can say that it’s okay for bidder to acquire
6. Whole purpose is to dilute the bidder b/c bidder doesn’t get benefit of rights
O’Hare – Spring 2018
iii. Poison Pill Adoption
1. Implemented by resolution of the Board (no S/H approval required)
2. Board issues “Rights” pursuant to resolution
3. Rights attach to all shares
4. Evidenced by:
a. Rights agreement with a “rights agent” sets forth the terms of the Rights
b. Rights certificate issued to the holders of common stock
iv. Poison pill mechanics
1. Shareholders have the right to purchase shares of preferred stock of Issuer
2. Initial purchase price is deliberately set at a price well above the current or
expected market price
a. E.g. – Allergan’s purchase price is $500.00 for one share of Common
b. So there is no economic incentive for any shareholder to execute the
Rights b/c they are out of the money
i. Rights remain unused until they are triggered
3. Rights “triggered” when acquirer’s ownership exceeds a threshold, typically 1020%
a. Then…
v. Poison pill trigger
1. Allergan language:
2. [upon a triggering event,] each holder of a Right, other than Rights that are or
were acquired or beneficially owned by the Acquiring Person (which Rights will
thereafter be void), will thereafter have the right to receive upon exercise that
number of shares of Common Stock having a market value of two times the then
current Purchase Price of one Right.
vi. Effect of poison pill trigger
1. Prior to triggering event, can purchase ten shares on the NYSE $500
a. Right worthless
2. After triggering event, can purchase 20 shares for $500 pursuant to the Rights
a. Each of the Rights are re-priced such that they become “in the money”
3. If all shareholders exercise, an 11% acquirer would have its interest diluted to
vii. Poison pill math
1. 1,000 shares trading at $5
2. Rights issued: 10% trigger; $80 of stock for $40
a. Target not included
3. Hedge fund acquires 10% (100 shares) on NYSE
a. Other shareholders own 900 shares
4. Rights of “other shareholders” when triggered
a. Entitled to buy 16 shares for each share held (80/5)
viii. Moran v. Household Int’l
1. Authorized use of “poison pill” as takeover defense
2. Adopted on a “clear day”
a. Adopted in advance of the existence of a particular takeover attempt
b. Over concern that something like this could happen
c. This cuts both ways b/c there was less conflict of the directors, but this is
evaluated under the Unocal test where you need to evaluate the existence
of a threat and your response has to be proportionate
3. Changed everything – instead of 20 days (tender offer), Board could defer until a
proxy contest could take place
ix. Pill has become primary and most effective takeover defense to this day
1. Changed everything
2. Changed timing, dynamics of tender offer
O’Hare – Spring 2018
3. Triggering event is acquisition of securities
x. Limits under Moran
1. Plan did not unduly restrict ability of shareholders to accept hostile bid
2. Plan did not impede a proxy contest
a. Although proxy contest takes a much longer time
3. Plan not absolute; fiduciary duties if faced with takeover and request to redeem
a. May not arbitrarily reject
b. Didn’t relieve board of their fiduciary responsibilities
c. Pills work to buy time, but they do not relieve you if there are
circumstances where a refusal to waive the pill would violate your
fiduciary responsibilities
4. Also doesn’t relieve you of your Revlon responsibilities
xi. Impact on takeover practice
1. The poison pill empowered target board
a. Target board in control rather than hostile bidder
b. Must still consider waiver/redemption
2. Proxy contest new focus of hostile takeover
a. Can’t block proxy contest – might involve Blasius
3. Roadmap for Board briefing
a. Lipton presentation: concern re: bust-ups, activity in financial services
area, impact on employees, etc.
b. Notebook: summary, plan, articles re: environment
i. Prepared materials (reminiscent of Van Gorkom)
c. Financial presentation
d. Extended discussion
xii. Poison pills today
1. Not an absolute bar, negotiating leverage only
2. Less effective in proxy contest – 10% enough?
a. With consolidation of institutional ownership in many larger companies,
it doesn’t take much of an interest to give you influence and the ability to
attract others to your view in a proxy contest
i. If I’m an activist, I don’t need to acquire actual ownership of
securities at a level that might risk triggering the pill
3. Shareholders and ISS hostile
4. Most larger companies don’t have pills
5. BUT pills may be kept “on the shelf”
xiii. Variations on the poison pill
1. Dead Hand Pill
a. Only continuing directors can redeem pill
i. Prevents any directors of the target, except those who were in
office as of the date of the pill’s adoption or their designated
successors, from redeeming the pill
b. Invalidated by Carmody v. Toll Bros
2. No Hand Pill  also invalid
3. Know that these used to exist and we can’t do them anymore
e. Strategic Defenses: Change in control agreements
i. “Golden parachutes” – senior executives
1. Not a true takeover defense
2. Excessive compensation issue
3. Compensating senior executives in case company is taken over and they lose their
4. Compensating them in such a generous way that the amount we’re paying will
work as a detriment to the bidder b/c it’s so expensive to the business they are
going to acquire
a. Hard to believe though b/c deals are usually so large that this still doesn’t
O’Hare – Spring 2018
5. Can work the other way b/c means executives might be more willing to consider
an acquisition offer, even if it would result in them losing their jobs
ii. “Tin parachutes” – broad based (for more than just execs)
1. Potential deterrent if big enough
2. Really the same thing as golden parachute, but everyone gets some
3. He’s skeptical that these really do much to deter bidders
iii. Change in control agreements – “poison puts”
1. Acceleration of debt
2. Fiduciary challenges
3. Appear in debt instruments
4. Criticized by courts in recent years
a. If board approves this without really understanding what it does, it’s too
self-serving and board arguably has violated its fiduciary responsibilities
Structural defenses
i. Classified board (staggered)
ii. Dual class stock
iii. Written consent
iv. Special meetings
v. Advance notice bylaws
Classified (staggered) board
i. DGCL §141(d)
1. 1, 2 or 3 classes
2. Three year terms
3. Removable only for cause
ii. Charter or shareholder approved bylaw
iii. Effect of staggered board and pill
1. Pill forces focus to proxy contest
2. No removal of directors without cause
a. Must wait for reelection at annual meeting
3. Replacement limited to one-third
a. Two years required to replace a majority – long time!
iv. Staggered Boards today
1. Post-SOX pressure to declassify
2. They are almost a thing of the past
3. Systematic use of 14a-8 proposals
a. Bebchuk and Chevedden
4. ISS support for proposals, impact on governance scores
5. Often preempted by management – slight delay
6. Today rare in DJIA and S&P 500
7. Still found in IPOs
Dual class (high vote) stock
i. Founder/controller has disproportionate number of votes
ii. Historically rare, recent use with tech stocks
1. Google, Groupon, Facebook, Zynga
2. Google IPO prospectus
iii. Actual majority control
Action by written consent
i. DGCL §228 permits shareholder action by written consent
1. UNLESS otherwise provided in charter
ii. Companies commonly eliminate consent right
1. Or require unanimity
iii. Consent permits shareholders to “surprise” management
1. No advance notice
2. No ability to make counter-argument
Right to call special meeting
i. No statutory provision
O’Hare – Spring 2018
ii. Governed by bylaws
iii. Companies commonly limit to Chairman or Board
iv. Forces dissident to wait until annual meeting
k. Advance Notice Bylaws
i. Shareholders have the right to nominate directors and propose action at shareholder
ii. Advance notice bylaws often condition right on
1. 90-120 days advance notice
2. Identity and background information re proponent (and nominee)
3. Ownership, including derivatives
4. Nominee’s agreement to abide by policies
5. Agreements with others (wolf pack)
iii. Don’t necessarily deprive or limit ability to call or act at special meeting, but designed to
give company advance notice of what is to be proposed
l. State anti-takeover statutes
i. 39 states currently have these (including IL and DE)
ii. Business Combination
1. Restricts business combinations with holders of specified ownership for a period
of time unless approved – DGCL §203
iii. Delaware §203
1. This is a default provision – you can opt out either in original charter (private)
or down the road, but if it’s done down the road it has to occur in the form of a
charter amendment, which requires both board and stockholder approval
2. Company may not engage in a “business combination” for a period of
three years after an offeror becomes an “interested stockholder”
a. “Business combination” includes back-end mergers
b. “Interested stockholder” – owner of more than 15% of outstanding shares
3. Exceptions:
a. Board approval prior to exceeding threshold
b. Acquisition of more than 85% in single transaction (excluding inside
directors and employee stock plans)
c. During 3 year period, approval by Board and 2/3 of shares not owned by
d. Board approves “white knight” – frees hostile bidder
i. If a company is resisting bid by bidder A, then company goes out
and finds white knight and approves deal with them, at that point
bidder A is relieved of the restrictions it might otherwise have
under §203 so that it can get into the mix
ii. This is DE §203 and Revlon coming together
o Unitrin: unless action is coercive or preclusive, judicial restraint is required and reasonableness
test applies
 Post-Unitrin it is difficult of in find a violation of Unocal
 All board has to do for prong 1 is decide price is insufficient