Mergers and Acquisition Outline

Section 1a
Types of M&A transactions: Freezeout, Takeover, Merger of equals .
Constitutional Documents
Creation of constitutional documents:
Charter [DGCL 101(a)]: incorporator
Bylaws [DGCL 109]: Until stock is issued board; after SHs (charter
may also allow board)
Amendment of constitutional documents
Charter [DGCL 242(b)]
First, board must adopt the proposed amendment
Then, SHs approve the proposed amendment (in some circumstances,
SHs vote in separate groups [DGCL 242(b)(2)])
Bylaws [DGCL 109]
SHs always allowed to amend
By default board cant amend bylaws, but charter may allow board
to amend
When a majority of directors are tainted, a good way to cut them out of the
loop is to create a board committee of independent directors and authorize
the committee to handle the transaction
Best practices of such delegation to an independent committee are:
Transaction negotiated & approved by a special committee or an independent
board majority
-Committee is independent
-Committee satisfied its duty of care
-Committee authorized to freely select its advisors (& theyre independent)

-Committee authorized to use firms full bargaining power (e.g., implement

takeover defenses) & to consider all of the firms options

FD Analysis
1. Negligence
(1) Negligent act---BJR rebutted ?---if yes,---if gross negligence---if yes--FD breached
(2) Neg. Inaction---BJR automatically rebutted--- FD breached if gross
negligence.

2. Bad faith
(1) Bad faith act---Illegality? Or Corporate waste---if any of the two yes---BJR
rebutted---FD automatically breached.
(2) Bad faith inaction---BJR automatically rebutted---Disregard of duty? Or
failure to disclose?---if any of the two yes---FD breached.

3. Self-dealing
Conflict of interest / unauthorized benefit form fiduciary position---entire
fairness test. ( Beam )
Entire fairness test:
1.Was undertaking the act (e.g. hiring CEOs spouse) in the firms interest?
2.Were the terms of act (e.g., employment contract) similar to what firm would have
received in an arms length transaction?
Fair process (for determining price/other terms) indirect assessment
Fair price (valuation/comparison) direct assessment of the terms

Enhanced Scrutiny
-Applies when A deploys corporate power against B, (allegedly) to achieve
greater good for the firm
A adopts takeover defenses (Unocal)
A limits ability to sell shares, to preserve tax benefits (Selectica)
A runs SH meeting in way that interferes with SHs vote (Blasius)

-The test: quasi-BJR (did actor make a business judgment, was actor independent &
did actor act in good faith?) + reasonableness (is act a reasonable way to address
threat?)

Approval: ()
1

Identity : Appropriate approver:

Beneficiary
Person who has authority to approve on behalf of B & doesnt have CoI
with B regarding the behavior that is approved.
Authority may be assumed if person has authority to conduct on behalf of
the beneficiary the same behavior that is subject to approval (unless
specifically prohibited from approving or delegating that behavior)

Attributability:

A must have acted or purported to act on Bs behalf [Rest. 4.03]

B must exist at the time of the act [Rest. 4.04]
No public policy reasons to prevent B from approving.

3
4

Capacity:

Approver must have legal capacity at time of approval [Rest. 4.04]

Unambiguous:
B approves an act by: Manifesting assent that the act shall affect Bs legal
relations; or Conduct that justifies a reasonable assumption that B consents
(Rest. 4.01(2)) But if B ratifies to avoid a loss, B is liable to T, but A may be
liable to B (Rest. 4.02(2)(b))

Informed:
Approval is valid only with knowledge of [all] material facts involved
in the original act [Rest. 4.06, 8.06(1)(a)(ii)], so ratification is ineffective
in favor of a person who causes it by misrepresentation or other conduct
that would make a contract voidable (duress, undue influence) (Rest.
4.02(2)(a))

Timely:

Ratification ineffective if circumstances that would cause the ratification

to have adverse and inequitable effects on the rights of [T] occurred [Rest.
4.05]
T withdraws from the transaction

Material change of circumstances that makes it inequitable to bind T

Ratification after rights have crystallized (ratification timed so that T is
deprived of a right or subjected to liability)

Appropriate scope:

Ratification (but not prior consent) must encompass the entirety of an

act, contract or other single transaction [Rest. 4.07]
Approval of self-dealing (ratification/prior consent) must address a specific
act/transaction or acts/transactions of a specified type that could
reasonably be expected to occur in the ordinary course of the agency [Rest.
8.06(1)(b)]
Approval of authority cannot exceed the authority the approver has

Ownership structures
1. Sole ownership: one person has all firms control & economic rights
2. Concentrated ownership: Firm has C (SH with enough control rights to force a SH
vote on an issue & then win the vote), as well as MSHs.
3. Dispersed ownership: Firm does not have a C; only MSHs.

From Concentrated/dispersed to sole ownership: freezeout

-short form merger (SFM): if C owns 90% of shares, law allows C to force
MSHs to sell to her, but MSHs can petition court to determine fair price
-C can also freezeout without first owning 90% of shares in that case
(illustrated on the next slide) transaction is called a long-form merger
(LFM)
LFMs require approval by majority of SHs (SFMs dont require SH approval)
How to ensure a fair price of MSHs in a Freezeout transaction? (Step 1 + step 2)
1. Transaction negotiated & approved by a special committee or an independent
board majority
-Committee is independent
-Committee satisfied its duty of care

-Committee authorized to freely select its advisors (& theyre independent)

-Committee authorized to use firms full bargaining power (e.g., implement takeover
defenses) & to consider all of the firms options
2. Transaction approved by majority of MSHs
-Approval is informed (all material info was disclosed to MSHs)
-There is no coercion of the minority (specifically, MSH approval must be an
unwaivable condition to the transaction)
-Majority of all MSHs, not just those present at the meeting

Controller
SH owes a FD only if it owns a majority interest in or exercises control over
the business affairs of the corporation (Ivanhoe Partners v. Newmont Mining
Corp. [Del. 1987]),that means, this kind of SH is considered as Controllers.
Cs unilateral act: (Cs self-dealing is allowed)
1. C votes her shares
-No duty to MSHs
2. C buys shares from MSHs
-Solomon v. Pathe Comm. Corp. [Del. 1996]: no duty to offer a fair price; duty
only to provide full disclosure & not coerce the sellers
In re Siliconix Inc. Shareholders Litigation [Del.Ch. 2001]: court confirms entire
fairness does not apply to freeze-out via tender offer
3. C executes a SFM (freezes out MSHs)
Glassman [Del. 2001]: No duty to offer fair price in a SFM; only duty is to provide
full disclosure of facts required for MSHs to decide if they should opt for
appraisal
4. C sells her shares

Harris case:
C breaches DoC to MSHs when selling to a looter, if C knew of looting plans or if a
reasonably prudent person would have suspected buyer is dishonest & C didnt
conduct a sufficient investigation

But when firms charter has a 102(b)(7) exculpatory provision, DoC breached only
if C knew of looting plans (otherwise, no liability for negligence)

C act on behalf of the firm (Cs self-dealing is not allowed)

Most common cases are:
1. Transactions in which C is on both sides of the deal (Kahn)
2. Transactions in which C receives different terms than MSHs (Frank)
In either of these cases:
- If robust procedural protections (RPP) is implemented, BJR applies
- otherwise, entire fairness applies.
In some cases a firms act isnt a transaction in which C can be on the other
side or receive different terms than MSHs, (Sinclair)
if C receives something to the exclusion of & detriment to MSHs --entire fairness
otherwise --- BJR

Frank case has two practical meanings:

1. Multiple SHs considered as a single control group when connected in some
legally meaningful way (e.g., contract to work together towards a shared
goal)
2. When an acquirer who is not affiliated with C gives different terms to C
and to the MSHs
- RPP: BJR
- otherwise: entire fairness
Either in Kahn or in Frank: if the C can show that special committee element
or majority of MSHs is met, the BoP are shifted to the plaintiff.

Section 1b: SH Voting

Mechanics of SH voting
- Call
Who has authority to call a SH meeting
Appropriate notice
- Quorum
If a share is present for any issue at the meeting, it counts towards the
quorum for the entire meeting
Who is entitled to vote --- depends on the record date
By default: Notice --- Day before notice is given to the SHs; If notice was
waived by SHs, record date is day before meeting
Voting --- Same date as notice record date
- Voting
Vote required to pass (see ppt 1b page 12)
An abstention counts as part of the voting power present
*Special voting rules:
1. When an issue is aiming at certain group of SHs, this group of SHs is
entitled to vote in their group. Both groups (all SHs and certain SH) need
majority favor.
2. Cumulative voting
3. Staggered boards

Board influence on SH voting

Blasius case

Enhanced scrutiny SoR applies when the board deploys corporate power
against SHs to achieve greater good for the corporation. When the BoD runs
SH meeting in way that interferes with SHs vote like in Blasius, the enhanced
scrutiny applies:
Quasi BJR (in good faith + investigation) + reasonableness
Purpose: board must identify a legitimate threat/purpose justifying its
act
Good faith: duty of loyalty analysis (no self-dealing or bad faith)
Reasonable investigation: duty of care analysis (no negligence)
In Blasius case, the reasonableness standard is the BoD has a compelling
justification. But in other enhanced scrutiny cases, the standard for
reasonableness is reasonable justification.

Proxy solicitation
Rules (see ppt 1b from page 40~43)
Exchange Act 14(a)-9: prohibits false or misleading statements in connection with
soliciting proxies
Elements:
1. Violation
For Rule 14a-9: Material misleading statement or material omission
Standard for materiality (TSC Industries [US 1976]): Substantial likelihood that a
reasonable shareholder would consider the statement/omission important in
deciding how to vote
2. Injury
3. Causation
Causation exists if:
There was a material misrepresentation; and
The solicited proxies were essential to approve the merger

Controlling the agenda

Proxy contest: solicit from other SHs proxies to vote their shares on the desired
issue or for the desired candidate --- too expensive
Proxy access: ask the board to include the desired issue/candidate on the agenda
(and on the boards proxy card)
Meeting showdown: attend SH meeting, make a motion to amend the agenda, get
another SH to second the motion, then win a SH vote on amending the agenda
Proxy access:
Electing directors (proxy access) limited access
DGCL 112: Bylaws may contain a proxy access provision, allowing SHs to
nominate their candidates for directors on the boards proxy card, and create
certain limitations on this right
Other SH decisions (SH proposals) broader access
The BoD must contain the SH proposal into its proxy card as long as it is a
legitimate proposal. But BoD may write an objection to the proposal (exclusion).
Procedure: see page 56
Grounds:
1. Improper under state law (SHs can recommend)
2. Relevance (issue has very minor impact on the firm) --- relates to operations
which account for <5% of total assets, net earnings & gross sales, and is not
otherwise significantly related to the companys business
3. Absence of power/authority
4. Management functions (Proposal deals with a matter relating to the firms
ordinary business operations).

Section 1c
Litigation procedure
Plaintiffs complaint commences the lawsuit; must allege:
-Jurisdiction

-Claim (facts showing that plaintiff is entitled to relief)

-Relief (a demand for an appropriate remedy)
Remedy
-TRO (temporary restraining order): issued before opponent can respond
-Preliminary injunction: issued after opponent responds (but before trial)
Standard (for both): (a) reasonable probability of success on the merits; (b)
reasonable likelihood moving party will suffer irreparable harm absent the
provisional remedy & that harm outweighs harm to non-moving party from granting
the provisional remedy.

Pre-answer motions (motion to dismiss)

Can be based on procedural flaw (lack of jurisdiction, improper venue,

faulty process or service) or substantive flaw (failure to state a claim)

Standard for dismissal for failure to state a claim (Rule 12(b)(6))

Federal courts: a complaint must contain sufficient factual

matter, accepted as true, to state a claim to relief that is
plausible on its face (Twombly [US 2007], Iqbal [US 2009])

Delaware: complaint dismissed for failing to state a claim only if,

accepting plaintiffs factual allegations as true, plaintiff would
not be entitled to recover under any reasonably conceivable set
of circumstances (Central Mortgage [Del. 2011])

Derivative suits
Rules:
1. contemporaneous ownership requirement: Plaintiff must have been a SH at
time of the alleged wrong & maintained that status throughout the litigation.
(exception: if a transaction was made merely to destroy a plaintiffs derivative
standing, court will not recognize the loss of ownership resulting from that
transaction. )
2. demand requirement: SH must ask board to sue before suing derivatively
Standards:
-Derivative: Looking at the body of the complaint and considering the nature of the
wrong alleged and the relief requested, has the plaintiff demonstrated that he or
she can prevail without showing an injury to the corporation?

Who can sue derivatively?

-Common SHs - Yes
-Preferred SHs Yes, unless this right was specifically limited in charter or
another appropriate document [Maginn (Del. Ch. 2010)]
-Creditors [Gheewalla (Del. 2007)]

Yes, when firm is insolvent

Unclear, when firm is in the zone of insolvency

No, in all other situations

-Directors No (though courts may allow in future if needed to prevent

complete failure of justice) [Schoon (Del. 2008)]
Demand:
MBCA (universal demand): see page 25 of 1c
Delaware (excusable demand): demand must be made unless it is futile

-Primary test: Aronson v. Lewis [Del. 1984]: Demand requirement is excused

if plaintiff shows reasonable doubt that either:

Majority of the board is independent for purpose of responding to the

demand (@ time complaint is filed)

Challenged action is protected by the BJR

Alternative test: Rales v. Blasband [Del. 1993]: test includes only 1st prong
(board independence in responding to demand); applies when:

Ps claim arises out of board inaction

Ps claims arise out of transaction not involving a board decision

A majority of directors that decided on underlying transaction was

replaced by independent directors

When a majority of the BoD is not independent while the firm has to make decision
on this time, the Firm could form a Special Litigation Committee (SLC) to avoid
get involved in the futile test:
Firm asks court to apply BJR (i.e., defer) to a decision of an SLC (composed of
disinterested directors) that the derivative action lacks merit - Unlike demand

futility litigation, in SLC litigation plaintiff is entitled to limited discovery (as to the
independence of the SLC members)
Delaware applies two steps (Zapata Corp. v. Maldonado [Del. 1981]) in SLC
litigation:

Quasi-BJR analysis to SLCs decision

SLC independence

SLC good faith

Reasonable bases for the SLCs recommendations

Court may apply its own independent business judgment as to

whether to dismiss the suit

SH inspection rights

Proper purpose (DGCL 220(b))

SH must make a written demand, presenting a proper purpose (i.e., a

purpose reasonably related to such persons interest as a
stockholder)

Who has BoP whether purpose is proper? (DGCL 220(c))

If SH seeks access to the SH list, BoP on the firm to show that SH does
not have a proper purpose

If SH seeks access to other corporate records, BoP on the SH to prove

proper purpose

Conditions for SH inspection right:

1. Written demand from a shareholder (record owner or beneficial owner)
2. Proper purpose
-Purpose is proper if it is reasonably related to ones interest as a SH
-That purpose must be SHs true/primary purpose
-SH must have evidence establishing a credible basis for that purpose

3. Proper records
-Requested records are necessary & essential for the purpose
-Safeguards may be imposed to protect confidentiality of the records

Section 2a Acquisition mechanics

Share acquisition methods

Y buys Xs shares from XS, until Y accumulates enough shares to control X

Market share acquisition: Y buys X shares on the stock exchange

Bilateral share acquisition: Y negotiates with individual X S to purchase

X shares

Tender offer: Y makes public offer to XS to buy their shares

Share acquisitions are regulated under federal law by the Williams Act which apply
only to registered securities.
-

Disclosure of share holdings

- Beneficial owner of 5% of a registered security must file a disclosure
(Schedule 13D) within 10 days of crossing the 5% threshold [13(d)(1)]. 5%
threshold includes aggregate purchases by several people as part of a single
plan [13(d)(3)]
Changes in holdings: Schedule 13D must be amended promptly in the event
of any material change in the facts set forth in the statement (Rule 13d-2)
Acquisition/disposition of at least 1% of a class of securities is material

Enforcement: X can sue a 5% beneficial owner for failing to file a Schedule

13D or for filing a misleading statement
Has standing to seek equitable relief (injunction, rescission of securities
purchases, divestiture of the securities, suspension of voting rights), but not
damages.
- Disclosure/process of tender offers
Rules triggered when a tender offer is made for more than 5% of Xs equity
securities

An offer commences when the bidder provides security holders with means to
tender their securities
- A transmittal form; or
- Information regarding how the transmittal form may be obtained
Bidder may communicate intent to acquire shares without commencing the
tender offer if communication
- does not include means to tender the securities, and
- all written communications re tender offer are publicly filed
[Rule 14d-2(b)]
By the date tender offer commences, Y must file a Schedule 14D-1 disclosure
statement
Same info must be disseminated to SH via newspaper publication or mailing
XB must then file a Schedule 14D-9 form, in which the management states, with
reasons, whether they:
- Support the offer
- Oppose it
- Are unable to take a position
Tender offer must be open for at least 20 biz days [Rule 14e-1(a)]
If Y changes amount of shares acquired or price offered, offer must be open for 10
biz days after change [Rule 14e-1(b)]
If tender is over-subscribed (i.e., more shares are tendered than Y offered to
purchase), Y must accept shares on a pro-rata basis [14(d)(6)]
Any Y who raises his price during the term of the tender offer must raise it for any
shares already tendered [14(d)(7)]

Structural acquisition methods

-

Long-form merger (LFM)

Short-form merger (SFM)
Asset sale

LFM procedure
- Parties sign a merger agreement
- Board approval of merger agreement (each party) [DGCL 251(b)]
- SH approval of merger agreement (each party) [DGCL 251(c)]
- Approval by majority of shares entitled to vote
- No vote required (subject to some conditions) in mergers preceded by tender
offer, after which Y owns enough shares to approve the merger [DGCL 251(h)]
- Filing [DGCL 251(c)]
-Merger becomes effective when Articles of Merger are filed
-At that point, all merging parties cease to exist except for one surviving entity; all
property & liabilities of merging parties vest in/attach to surviving entity [DGCL
259(a)]
- Appraisal [DGCL 262]
- SH who opposed the merger (but lost) may petition the court to determine the
fair price to be paid to them (rather than accept the price Y offered)
- DGCL 262(h): Appraisal value is the fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger

SFM procedure
- Y notifies all other SHs that it is merging with X in a SFM, specify the terms of the
merger & provide all info material to a decision whether to seek appraisal
- Only allowed if Y owns 90% of Xs shares
- Filing
- Merger becomes effective when owner files a certificate of merger (certifying
that Y owns 90% of Xs shares & that Ys board approved a SFM
- Appraisal [DGCL 262]
- Any MSH may petition the court to determine the fair price to be paid to them
Statutory authority

DGCL 253 allows SFM with corporation

DGCL 267 (2010 amendment) allows SFM with non-corporate entities
(partnerships, LLCs, and other unincorporated associations)

Asset sale procedure

- Parties sign an asset sale agreement
- Buyer receives all of sellers assets, pays seller agreed consideration
- Board approval of agreement (each party)
- SH approval of agreement (seller only) [DGCL 271]
- Required if seller is selling all or substantially all of its property and assets
- Approval by majority of shares entitled to vote
- Seller dissolves, giving its SHs the consideration it received
- Appraisal rights to sellers SHs (in some jurisdictions; e.g., MBCA)
- DGCL does not provide appraisal rights to SHs of seller

Triangular merger

Mergers generally require SH approval of both parties, and create appraisal

rights for SHs of both parties

However, a form of merger called a triangular merger allows Y to bypass these

SH rights

The trick: Y forms S, and S merges with X

Ss SHs get voting & appraisal rights, but S has just one SH: Y, which is
controlled by YB (who supports the deal)

Called triangular merger because there are three parties: Y, S, X

Appraisal rights
- Conditions

- SH must perfect his appraisal right by sending a written notice to the firm prior
to the SH vote, informing that he intends to exercise his appraisal rights [DGCL
262(d)]
- SH must not vote in favor of merger, consent to it in writing or accept the
benefits of the transaction
- SH must hold shares continuously through mergers effective day

If: stock is publicly traded or held by over 2,000 SHs [DGCL 262(b)(1)]; and
the consideration to the SH is publicly held stock [DGCL 262(b)(2)]---no appraisal
rights.
No class procedure for appraisal rights

Remedies for faulty LFMs

Remedy for breach of FD in a LFM is usually limited to appraisal (receiving the fair
value of plaintiffs shares)
Reason: if merger was approved by majority of SHs, plaintiff did not have the power
to block the merger, and shouldnt get this power as a remedy
However, in cases of fraud, misrepresentation & corporate waste other remedies are
available, such as rescission of the merger or rescissory damages

Remedies for faulty SFMs

Glassman : appraisal is exclusive remedy for a faulty SFM
Exceptions: fraud, illegality & inadequate disclosure
Remedy?: not clear, hahaha~~~

Section 2b Acquisition Interactions

M&A is a complex game between YB, XB & XS

Y + XB alliance: friendly deal (one that is supported by X B)

Y + XS alliance: hostile deal (a transaction that doesnt require X Bs

approval)

XB + XS alliance: no deal

Arbs are investors who identify companies that they expect will be taken over, buy
shares, and sell to Y @ premium.
leveraged buyout (LBO) borrow the cash used to pay X S
Financing the LBO:
- Bridge financing: creditor lends to Y for short time & at high interest rate (at same
time, parties may agree on terms of long-term loan (step 3))
- Y uses bridge financing to pay XS for 100% of X
- Once Y owns 100% of X, Y either:
- Negotiates long-term loan using Xs assets as collateral (lower interest rate)
- Causes X to take a long-term loan & transfer the money to Y as dividend
(Either way, Y uses new money to repay the bridge financing)

Friendly Approach (Nothing to talk about, just see the slides)

Hostile Approach

Why would XB resist?

- Entrenchment: XB resists either because they think Y will fire them, or they want
to force Y to give them a side-payment to allow the deal to go through: If this is XBs
motivation, its not in XSs interest.
- Long-term plans: Allow contrarian, innovative strategies (but also inefficient ones)
- Holding out for a better offer: XB resists to force Y to offer a better price which is
in XSs interest.

Common takeover defenses

Takeover defenses reduce Ys ability to acquire X without support of X B (even

if XS support Y)

PR / appeasing SH dissent

Leveraged recapitalization

Voting plans

Staggered board

Statutory defense

White knights (lock-ups)

Poison pills

PR / appeasing SH dissent

This defense changes allies/enemies tally by reducing the # of shares in weak

hands (SHs who are most likely to sell to Y)
Arbs & other short-term investors
SHs who think XB cant increase Xs value above Ys offer
PR campaign aims to persuade SHs that:
- Ys takeover attempt will fail (so arbs dont buy shares)
- X will be worth more in foreseeable future than Ys offer
XB may also reach out to activist SHs and take steps these SHs would like to see
- Pay dividends
- Make corporate governance changes
- Sell unattractive businesses
- Cancel unpopular business plans
Leveraged recapitalization

X borrows money & eliminates low-profit assets (less profitable operations &
excessive cash)
X then uses this money to repurchase shares (Raises share price (increasing cost of
share acquisition & makes XS happier), Takes shares away from weak hands, Makes
X less attractive for LBO (less cash & more debt))
Voting plans

Voting rules or share rights that hinder a takeover; examples:

Limiting voting rights of large SHs, Limiting voting rights of new SHs (tenure voting
plan), Supermajority voting provision.
Staggered boards

Takes longer to control XB

Statutory defense
- Business combination statutes (DGCL 203)

Y is prohibited from having a business combination with X for 3 years after

Y owns 15% or more of X

Exceptions

Y has 85%+ interest in X

Not counting shares owned by directors/officers/employee stock

plans

Prior approval by XB

Subsequent approval by XB + 2/3 majority of disinterested SHs (written

consent not allowed)

Opting out of the statutory defense

Original charter rejects the statutory takeover defense

Subsequent opt-out via charter or SH bylaw amendment by majority of

shares entitled to vote (usually only effective after 12 months)

DGCL 203 doesnt apply to close corporations (no shares listed & fewer than
2,000 SHs), unless

The interested SH caused the corporation to go private; or

Charter specifically adopts the statutory takeover defense

White knights

In a white knight defense, XB gets potential acquirer (Y2) to outbid Y, and

signs an acquisition agreement selling X to Y 2

Variation of this is a white squire: Y2 (who supports XB) buys a

minority position in X, thwarting majority SH support for Ys hostile bid

Purchases of Xs stock by Xs Employee Stock Ownership Plan (ESOP)

has the effect of a white squire

XB can encourage Y2 to outbid Y by

Preferential access to info about X (XB allows Y2 to conduct due

diligence), resulting in Y2 having more certainty than Y regarding Xs
value

Lock-ups in the acquisition agreement (terms that shift value from

X to Y2 if Y2 does not acquire X)

lock-ups:

Termination fee

X pays Y2 specified liquidated damages if X terminates acquisition

agreement

So if Y acquires X, X has to pay damages to Y 2 reducing Xs value to Y

Crown jewels provision

Allows Y2 to acquire (at an attractive price) assets of X that Y

particularly wants, if X terminates acquisition agreement

Shifts value from X to Y2 like a termination fee, plus possibly

eliminating the reason Y wants to acquire X

Similar defense: when Microsoft bid for Yahoo (wanting to consolidate search
engines to counter Google), Yahoo negotiated with Google a joint venture providing
Google with control of Yahoos search operations
Poison pills
Poison pills are contingent rights given to XS or T (third party), which if exercised
make takeover less feasible.
Types:
1. flip-over plans (p38)

Vehicle: equity securities (e.g., blank-check preferred shares)

Trigger: executing a freezeout merger

Poison: right to purchase common stock of the merged firm (either Y or S,

merged with X) at below market price

How can X cause S (controlled by Y) to issue shares?

Antidote: usually, shares are redeemable by board for a nominal amount

(e.g., 1)

2. flip-in plans (p40)

Similar to flip-over plans, except:

Trigger: exceeding a certain share ownership threshold (rather than

freezeout)

Poison: right to purchase shares in X (rather than in S)

3. back-end plans (p41)

Vehicle: equity securities (e.g., blank-check preferred shares)

Trigger: executing a freezeout

Poison: XS may convert Xs shares into Xs bonds

Bonds can include terms (covenants) that make it difficult to shift

bridge financing to X (see poison debt in a later slide)

This sets a minimum price for the acquisition

Y has to offer higher back-end price (if Y offers a freezeout price lower
than the value of the bonds, SHs will convert & receive the bonds)

Higher back-end requires Y to also offer a higher front-end

4. poison debt (p43)

Vehicle: debt securities

Trigger: change of control (CoC) covers various method to change control

of the firm

Poison: vehicle includes terms (covenants) that make it difficult to shift Ys

bridge financing to X

Forbidding X from assuming additional debt

Forbidding X from selling/mortgaging its assets

Restricting ability to distribute dividends

Macaroni defense: upon change of control, X must redeem bonds at

premium price (e.g., 200% of face value)

Called macaroni defense because debt expands like macaroni

Antidote: XB allowed to waive covenants or redeem debt (before CoC

occurs) for a nominal price

5. poison contracts (p44)

Vehicle: contract with a third party (e.g., employees)

Trigger: CoC

Poison: transfer of value from X to third party

FD in the M&A context

Fiduciary duties: same analysis as any board/controller FD challenge

Challenges to board behavior: framework in Section 1a1 (e.g., Van

Gorkom)

Challenges to controller behavior: framework in Section 1a3 (e.g.,

Kahn)

Special rules for XBs FD analysis in the M&A context

When XB deploys corporate power against XS to achieve greater good

for the firm (e.g., by deploying takeover defenses), use enhanced
scrutiny SoR rather than BJR (Unocal)
Conditions

Interference in SH voting (Blasius)

Board implements takeover defenses (Unocal)

Board implements poison pill designed to prevent any SH from

owning >15%, to preserve tax advantages for firm (Selectica
[Del. 2010])

Board embarks on a transaction that will result in a change of control

(Revlon)

Unocal analysis
1. Did the board find, in good faith & after a reasonable investigation, that the
firm faced a threat that warranted the defensive action?

Good faith: DoL analysis (similar to BJR)

Reasonable investigation: DoC analysis (similar to BJR)

Purpose/threat: what constitutes a legitimate threat? [Airgas, Del. Ch.

2011]

Structural coercion (e.g., 2-tier front-loaded tender offer)

Opportunity loss: offer preempts other offers that are better for
SHs

Substantive coercion: essentially, a price that the board deems

inadequate (justification: subject to Revlon, board gets to
choose long-term plans)

Losing the corporate culture as result of takeover may

be an acceptable threat (Paramount)

2. Was defensive action a reasonable response proportionate to the threat

posed?

Unitrin [Del. 1995]: presumed unreasonable if coercive/preclusive

Coercive: [A]ctions which have the effect of causing [SHs] to vote in

favor of the proposed transaction for some reason other than the
merits of that transaction [Williams v. Geier, Del. 1996]

Preclusive: making an acquisition by Y realistically unattainable

Selectica [Del. 2010]: preclusive if Ys ability to wage a

successful proxy contest & gain control is realistically
unattainable; but a combo of staggered board + poison pill is
not inherently preclusive

Airgas [Del. Ch. 2011]: defense is not preclusive as long as

election process (proxy contests) would allow bidder to get the
deal done

Evaluate threat-response proportionality even if response is not coercive or

preclusive

Revlon analysis:

Condition: When the Board embarks on a transaction that will result in a

change of control, Revlon applies. [Lyondell Chem. Co. v. Ryan, Del. 2009]

When does Revlon not apply?

- Board does not support a sale (just say no defense)

- Board decision not to sell T analyzed under BJR

- But if board negotiates with Y1, it has embarked on a transaction that

will result in [CoC], so Revlon applies

- Stock transaction that does not create change of control (Paramount)

- under this circumstance: 1. If its a stock transaction, Revlon doesnt

apply. 2. Cash transaction, Revlon applies. 3. Half cash half stock: Revlon
applies. (In re Smurfit-Stone)

Revlon duties:
1. enhanced scrutiny applies
2. Board must act to maximize SHs short-term wealth (e.g. takeover defenses
allowed only if they increase the expected offer to X S) See: In re Dollar Thrifty
[Del. Ch. 2010]
a. Process needs to be a reasonably way to achieve the interest, not
necessarily the best way the court would have picked
b. Need to pick offer thats best for XS in short-term, but not necessarily
highest price