Module VII – Fiduciary Duties
Chapter 22
Duties within Corporate Groups
• Control within corporate groups
Bar
exam
– Definition of control
– Possible abuses of control: intra-group activities,
squeeze-outs of minority shareholders
• Dealings with subsidiaries
Corporate
practice
– Sinclair Oil case
– Comparison to director duties
• Cash outs of minority shareholders
Law
profession
Citizen of
world
– Weinberger – entire fairness standard
• Nature of fair dealing
• Nature of fair price (exclusivity of appraisal)
– Lynch II - effect of disinterested approval
– Short-form merger
• Appraisal exclusive
• Pure Resources: review of tender offer + SO merger
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 1
of 29
Review of fiduciary duties …
(directors)
Corporations:
A Contemporary Approach
Chapter 21
Executive Compensation
Slide 2
of 27
Fiduciary duties
(directors)
Best
interests
Oversight
Decision-making
Business Judgment Rule
Shlensky v Wrigley
Inattention
102(b)(7)
Waste
Illegality
Corp
opp
Aronson /
Miller v AT&T
VogelsteinVan Gorkom Remillard (Allis-Chalmers) Farber
Illegality Malfeasance
Caremark (bad faith)
Francis
Corporations:
A Contemporary Approach
Gross Conflict
negl interest
102(b)(7)
Bad faith
Disney
Disinterested
independent
Benihana
Chapter 21
Executive Compensation
Slide 3
of 27
Corporate groups
Shareholders
Affiliate?
Wholly-owned vs.
Partially-owned sub?
Public
shareholders
Subsidiary
Company
Corporations:
A Contemporary Approach
Parent
Company
Subsidiary
Company
Chapter 22
Duties within Corporate Groups
Subsidiary
Company
Slide 4
of 29
Corporate groups
Shareholders
Parent
Company
Difference between
division / sub?
Division Division
Subsidiary
Company
Corporations:
A Contemporary Approach
Subsidiary
Company
Chapter 22
Duties within Corporate Groups
Subsidiary
Company
Slide 5
of 29
Corporate groups
Shareholders
How much necessary
for control?
Public
shareholders
Subsidiary
Company
Corporations:
A Contemporary Approach
Parent
Company
Subsidiary
Company
Chapter 22
Duties within Corporate Groups
Subsidiary
Company
Slide 6
of 29
Law of corporate groups …
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 7
of 29
Sinclair Oil v. Levien (Del 1971)
Issues
• Dividend policy
• Intra-group dealings
• Allocation of business
opportunities
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 8
of 29
Shareholders
Dividend
policy
Sinclair Oil
Minority public
shareholders
Sinclair
Venezuelan
Corporations:
A Contemporary Approach
Sinclair
International
Chapter 22
Duties within Corporate Groups
Sinclair
Alaska
Slide 9
of 29
Dividend Policy
If a plaintiff can meet his burden of
proving that a dividend cannot be
grounded on any reasonable
business objective, then the courts
can and will interfere with the
board's decision to pay the
dividend. The dividends resulted
in great sums of money being
transferred from SinVen to
Sinclair. However, a proportionate
share of this money was received
by the minority shareholders of
SinVen. ..
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Delaware Supreme Court
Slide 10
of 29
Shareholders
Sinclair Oil
Minority public
shareholders
Sinclair
Venezuelan
Sinclair
International
Sinclair
Alaska
Intra-enterprise
Contract
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 11
of 29
Dealings between subs
Sinclair caused SinVen to contract
with International whereby SinVen
agreed to sell all of is crude oil and
refined products to International at
specified prices. The contract
provided for minimum and
maximum quantities and
prices. .... International's payment
lagged as much as 30 days after
receipt. International did not
comply with the [fixed minimum]
requirement. Under the intrinsic
fairness standard, Sinclair must
prove that its causing SinVen not
to enforce the contract was
intrinsically fair to the minority
shareholders.
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Delaware Supreme Court
Slide 12
of 29
Shareholders
Business
opportunity
Sinclair Oil
Minority public
shareholders
Sinclair
Venezuelan
Corporations:
A Contemporary Approach
Sinclair
International
Chapter 22
Duties within Corporate Groups
Sinclair
Alaska
Slide 13
of 29
Allocation of opportunities
Sinclair made no real effort to
expand SinVen. [While] Sinclair
actively pursued a company-wide
policy of developing new sources
of revenue through its
subsidiaries, SinVen was not
permitted to participate and was
confined in its activities to
Venezuela. .... with which
subsidiaries should these
opportunities have been
shared? No evidence indicates a
unique need or ability of SinVen to
develop these opportunities. The
decision .... was one of business
judgment. ...
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Delaware Supreme Court
Slide 14
of 29
Cash-out mergers
• “Cash out” merger?
• Reasons for squeezing out minority?
• Standard of review?
• Remedies?
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 15
of 29
Cash-out merger (Weinberger)
Shareholders
Signal
Companies
Minority
shareholders
50.5%
49.5%
Get rid of minority?
(legally)
UOP
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 16
of 29
Cash-out merger (Weinberger)
Shareholders
Shareholders
Cash
Signal
Companies
=
Minority
shareholders
+
Signal
Companies
What protection?
100%
UOP
Merger Merger
Sub
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
UOP
Slide 17
of 29
Standard of review …
Business purpose
Fair price (intrinsic fairness)
Entire fairness
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 18
of 29
"When directors of a Delaware
corporation are on both sides of
a transaction, they are required
to demonstrate their utmost
good faith and the most
scrupulous, inherent fairness of
the bargain..... There is no
dilution of this obligation where
one holds dual ... directorships,
as in a parent-subsidiary
context.
Delaware Supreme Court
What is
• Inherent fairness?
• Entire fairness?
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 19
of 29
Weinberger blueprint
"The concept of fairness has
two basic aspects: fair dealing
and fair price
•
•
"... The former embraces
questions of when the
transaction was timed, how it
was initiated, structured,
negotiated, disclosed to the
directors, and how the
approvals of the directors and
the stockholders were
obtained."
"... The latter aspect of fairness
relates to the economic and
financial considerations of the
proposed merger, including ...
assets, market value, earnings,
future prospects ...
Corporations:
A Contemporary Approach
Structure a squeeze-out
(1) Who and when initiate?
(2) How structure?
(3) Who negotiates?
(4) What sub directors told?
(5) How sub Ds approve deal?
(6) How sub SHs approve deal?
•
Business purpose?
•
What about appraisal?
Chapter 22
Duties within Corporate Groups
Slide 20
of 29
Independent directors
Footnote 7:
"Although perfection is not
possible, or expected, the result
here could have been entirely
different if UOP had appointed
an independent negotiating
committee of its outside
directors to deal with Signal at
arms' length.
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 21
of 29
How much $$ …
(which valuation method?)
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 22
of 29
Delaware black method
Court
Proportion
Weight
Avg earnings
$120
55%
$66.00
Book value
$100
35%
$35.00
Market value
$75
10%
$7.50
TOTAL
$108.50
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 23
of 29
"... the discounted cash flow
method [ie - earnings potential
of UOP] was essentially the
focus ... of Messrs. Arledge and
Chitiea in the evaluation of the
merger.
"We believe that a more liberal
approach must include proof of
value by any techniques or
methods which are generally
considered acceptable in the
financial community ... "
Corporations:
A Contemporary Approach
Delaware Supreme Court
Chapter 22
Duties within Corporate Groups
Slide 24
of 29
WONDERFUL NEWS
(or slightly less wonderful than you thought)
You have just won
$1,000,000 in the state
lottery. You will be able to
repay some of your
student loans!
Discount rate:
Year 1:
Year 2:
Year 3:
Year 4:
.....
Year 19:
Year 20:
10%
5%
$45,455 $47,619
$41,322 $45,351
$37,566 $43,192
$34,151 $39,176
.....
.....
$ 8,175
$19,787
$ 7,432
$18,844
TOTAL
$425,678 $623,111
You will receive your prize in
installments -- $50,000
each year for 20 years
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 25
of 29
Discounts in appraisal …
(remember minority lacked control)
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 26
of 29
Discounts in appraisal
At what price?
• What is Corporation’s “going
concern” enterprise value?
• What is Minority’s pro rata
interest in the company?
– “lack of control” discount?
– “lack of marketability”
discount?
Corporations:
A Contemporary Approach
$120
million
Chapter 22
Duties within Corporate Groups
Enterprise
Value
Slide 27
of 29
Discounts in appraisal
At what price?
• What is Corporation’s “going
concern” enterprise value?
• What is Minority’s pro rata
interest in the company?
– “lack of control” discount?
– “lack of marketability”
discount?
Corporations:
A Contemporary Approach
$50
million
Chapter 22
Duties within Corporate Groups
Pro rata
(minority)
Slide 28
of 29
Discounts in appraisal
At what price?
• What is Corporation’s “going
concern” enterprise value?
• What is Minority’s pro rata
interest in the company?
– “lack of control” discount?
– “lack of marketability”
discount?
Lack of
control
$35
million
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 29
of 29
Discounts in appraisal
At what price?
• What is Corporation’s “going
concern” enterprise value?
• What is Minority’s pro rata
interest in the company?
– “lack of control” discount?
– “lack of marketability”
discount?
Lack of
control
Lack of
marketability
$20
million
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 30
of 29
The end
Corporations:
A Contemporary Approach
Chapter 22
Duties within Corporate Groups
Slide 31
of 29