blaw chapter 35

List and discuss the three ways to acquire control of a corporation.

Generally the three methods of acquiring a corporation are: a. Buy the company's assets. Such sales must be approved by the acquired corporation's board and shareholders. b. A merger of companies into one new corporation. In a merger, the acquired company ceases to exist and it is absorbed into the acquiring company. This type of acquisition also must be approved by the shareholders and board of directors of the target company. c. Buy the shares of the acquired corporation from the shareholders. This method is called a tender offer. Approval of the board of directors of the target company is not strictly necessary. A tender offer is called a hostile takeover if the board of the target company resists.

Identify the three types of masters corporate managers serve and discuss the goals of each.

Managers serve themselves, shareholders, and other stakeholders. Managers' goals include keeping their jobs and building a company that will survive them. Shareholders are interested in a high stock price in the present. Stakeholders include employees, customers, creditors, suppliers, and neighbors who are affected by the business. Their goal is generally to keep the company operating. The goals of the three groups sometimes conflict, but courts have generally held that managers have a fiduciary duty to act in the best interests of the shareholders.

Major Corporation wants to acquire control of Forte Company. What are some legal steps Forte can take to resist a hostile takeover?

Target companies have a variety of options available to them to assist them in resisting a hostile takeover. The target company can lock up the assets of the company by transferring them to another company or person and/or encumbering them with a variety of liens, making it difficult to obtain the assets of the company even if the bidding company would be successful in taking over the company. By doing this, the company becomes less attractive to the bidder. If the bidder is simply after a quick profit, the management of the target company can engage in "greenmail" and offer to buy back its own stock from the bidder for, say, 30 percent more than what the bidder paid. Additionally, a variety of poison pills can be used and these are as varied as a person's imagination. Usually a poison pill is one or more provisions attached to the acquiring and/or transfer of stock which makes the stock much more expensive or at least less desirable to obtain. Often a company will have its charter changed so that the bidder would have to offer one of its own company shares for every share purchased from the target company's shareholders. The use of staggered board of directors is allowed and the result of this is that it could take several years for the acquiring company to gain total control of the board. The company could require supermajority voting before a transfer could take place and/or the company could elect to sell the company to someone else before the bidding company can complete its buyout.

Discuss the purposes of the "business judgment rule."

The "business judgment rule" is designed to accomplish three primary goals: 1. To allow directors to do their job without constantly being concerned about personal liability. 2. To keep judges out of corporate decision making. 3. To encourage people to become corporate directors by limiting their potential liability.

What is the definition of the business judgment rule?

The business judgment rule is a common law concept that a director or officer who makes a business judgment in good faith fulfills his duty to the company if (1) he is not financially interested in the subject of his business judgment; (2) he is informed with respect to the subject matter involved and to the extent appropriate under the circumstances; and (3) he reasonably believes his judgment is in the best interests of the company. To be protected by the business judgment rule, managers must act in good faith.

One of the directors of Independent Pallet Mill purchases 100 acres of timberland. In order for him to sell the timber from this land to Independent, what must he do? If he does not act properly in this situation, what duty would he violate, and what would be the result?

The transaction will be valid if: the disinterested members of the board of directors approve the transaction, the disinterested shareholders approve it, or the transaction is entirely fair to Independent. If the director does not act properly, he would be violating the duty of loyalty to his company. Self-dealing means that a manger makes a decision benefiting either himself or another company with which he has a relationship. If a manager engages in self-dealing, the business judgment rule no longer applies. This does not mean the manager is automatically liable to the corporation or that the decision is automatically void. It just means a court will scrutinize the deal more carefully.

Jenny is an officer of a corporation. She made a difficult business decision. When challenged about her decision, the court ruled she had acted in good faith and that the business judgment rule applied. As such: a. Jenny will not be held personally liable for a decision that results in money losses to the company. b. Jenny's decision will be reviewed by a court. c. Jenny is immune from a lawsuit. d. Jenny must resign from the board.

a. Jenny will not be held personally liable for a decision that results in money losses to the company.

Which of the following is correct concerning anti-takeover efforts? a. Most states have passed laws to deter hostile takeovers, but these statutes have not totally eliminated hostile takeovers. b. Federal statutes have been more effective than state statutes in eliminating hostile corporate takeovers. c. The most effective federal statute has been the Poison Pill Act. d. Both b and c are correct.

a. Most states have passed laws to deter hostile takeovers, but these statutes have not totally eliminated hostile takeovers.

RayCorp offers to buy out MegaCorp by paying $69 per share. LandCo, who also wants to buy MegaCorp, offers to pay $75 per share. When the bidding process is finally over, RayCorp has offered $85 per share and LandCo has offered to pay $90 per share. MegaCorp agrees to sell to RayCorp on grounds that, all things considered, the takeover by RayCorp would be better for the business. LandCo claims that MegaCorp should have sold the company to it since it was the highest bidder. Is LandCo correct? a. Yes. This is a breach of duty. MegaCorp must sell the company to the highest bidder; it cannot give preferential treatment to a lower bidder. b. No. This is covered by the Williams Act. c. No. The directors have broad discretion in deciding to whom to sell the company. d. None of the above.

a. Yes. This is a breach of duty. MegaCorp must sell the company to the highest bidder; it cannot give preferential treatment to a lower bidder.

The term "corporate manager" refers to: a. directors. b. corporate officers. c. Both of the above. d. None of the above.

a. directors. b. corporate officers. c. Both of the above.

Management's duty to have a rational business purpose, avoid illegal behavior, and make informed decisions refers to its: a. duty of care. b. duty of loyalty. c. duty of openness. d. duty of fairness.

a. duty of care.

In the late 1960s a shareholder of the company that owned the Chicago baseball team sued the company because the directors refused to install lights in Wrigley Field. The court decided that the directors: a. had a rational purpose for not installing lights and were not liable for doing anything improper. b. were not protected by the business judgment rule. c. had not acted with any rational purpose and were liable to its shareholders for damages caused by their actions. d. None of the above.

a. had a rational purpose for not installing lights and were not liable for doing anything improper.

The Williams Act: a. is designed to regulate the conduct of those attempting to take over a company. b. is designed to regulate the conduct of the target company subject to a takeover. c. prohibits corporate defensive tactics. d. None of the above.

a. is designed to regulate the conduct of those attempting to take over a company.

The Lippman v. Shaffer case held that: a. the business judgment rule did not apply to the case. b. the business judgment rule protected the board's decision to make the payments in question. c. there was a contractual duty for the board to make the payments in question. d. the motion for summary judgment was denied.

a. the business judgment rule did not apply to the case.

If a court determines a manager's corporate decision amounted to self-dealing: a. the business judgment rule will not apply. b. the transaction being challenged will be automatically voided. c. the manager is automatically personally liable to the corporation. d. All the above.

a. the business judgment rule will not apply.

Which of the following is not true in applying the Williams Act? a. An individual or group acquiring more than 5 percent of a company's publicly traded stock must file a public disclosure document with the SEC. b. A bidder must keep a tender offer open for at least 30 business days initially. c. If any substantial change is made in the terms of the tender offer, it must be kept open for at least ten business days following the change. d. Any shareholder may withdraw acceptance of the tender offer at any time while the offer is still open.

b. A bidder must keep a tender offer open for at least 30 business days initially.

Which of the following describes the duty of loyalty? a. It requires managers to make decisions they reasonably believe to be in the best interest of the corporation. b. It prohibits making a decision that benefits the decision-maker at the expense of the corporation. c. It requires consideration of the interests of the surrounding community. d. It requires using care that an ordinarily prudent person would take in a similar situation.

b. It prohibits making a decision that benefits the decision-maker at the expense of the corporation.

A board of directors is considering whether to invest a great deal of money into research and development. Such a decision could have a long-term beneficial effect for the company's future. As an alternative, the board could forego the expenditure into research and development and buy back its own shares in order to immediately increase the company's reserves. Which of the below groups would most likely favor the option to increase the company's reserves and not invest in more research and development? a. Management. b. Shareholders. c. Stakeholders other than the shareholders. d. Each of the above groups would probably feel the same way.

b. Shareholders.

On the day a tender offer begins: a. greenmail must be sent to the SEC. b. a bidder must file a disclosure statement with the SEC. c. assets of the target corporation must be locked up until an inventory is completed. d. the SEC issues a binding order to the target company to file audited financial statements to the bidder.

b. a bidder must file a disclosure statement with the SEC.

Alex is a director of ABC, Inc. Alex wants to personally make a major purchase from Bravo Co. If it knew of the opportunity, ABC might be also interested in making that same purchase. Alex must: a. advise the boards of both corporations of his conflict of interest. b. first offer the opportunity to make the purchase to the disinterested directors of ABC or its shareholders. c. resign from the board of directors. d. abandon the idea of making the purchase himself.

b. first offer the opportunity to make the purchase to the disinterested directors of ABC or its shareholders.

Anti-takeover tactics include all EXCEPT: a. staggered board of directors. b. negative tender offers. c. greenmail. d. chewable poison pills.

b. negative tender offers.

In the Unocal Corp. v. Mesa Petroleum Co. case, the court: a. found the issuance of a preliminary injunction against Unocal's offer was proper. b. ruled that a board of directors may not act primarily out of a desire to keep itself in office. c. issued a permanent injunction against a selective exchange offer. d. applied the Williams Act to analyze the target company's actions.

b. ruled that a board of directors may not act primarily out of a desire to keep itself in office.

Amy is on the board of directors of Computers Plus. Computers Plus is looking for a warehouse to purchase. Amy owns a warehouse. In order for Amy to sell her warehouse to Computers Plus: a. the transaction must be fair to both Amy and Computers Plus. b. the disinterested members of the board of directors may approve the transaction. c. she must resign her position on the board of directors of Computers Plus before any negotiations for the warehouse begin. d. a court must review the opportunity to determine its favorability.

b. the disinterested members of the board of directors may approve the transaction.

Which of the following statements is correct with respect to state efforts to offer protection to companies targeted for hostile takeovers? a. Courts offer the only legal protection to companies targeted for hostile takeovers. b. Statutory law offers the only legal protection to companies. c. Both statutory law and the state courts have provided some degree of protection for companies. d. State courts and state statutes have offered no protection for companies targeted for hostile takeovers.

c. Both statutory law and the state courts have provided some degree of protection for companies.

Which of the following is the most appropriate term to use when describing management's duty to its shareholders? a. Official duty. b. Light duty. c. Fiduciary duty. d. Statutory duty.

c. Fiduciary duty.

Which of the following is NOT a method to acquire control of a company? a. Buy stock from the shareholders through a tender offer. b. Buy the company's assets. c. Make an initial public offering. d. Merge with the company.

c. Make an initial public offering.

A corporate board's refusal to remove a "poison pill" was held reasonable in: a. Lippman v. Shaffer. b. Unocal Corp. v. Mesa Petroleum Co. c. Moore Corp. Ltd. v. Wallace Computer Services, Inc. d. Anderson v. Bellino.

c. Moore Corp. Ltd. v. Wallace Computer Services, Inc.

The Model Business Corporation Act states: "All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of its: a. shareholders." b. officers." c. board of directors." d. executive committee."

c. board of directors."

A manager used her position in the company to develop a new business the company might have pursued. This is a breach of the: a. duty of care. b. duty of non-competition. c. duty of loyalty. d. duty of recognition.

c. duty of loyalty.

For the business judgment rule to apply: a. there must be a conflict of interest. b. the director must exercise extraordinary care. c. the director must act in the best interests of the corporation. d. All of the above.

c. the director must act in the best interests of the corporation.

Which of the following must be approved by the shareholders if a company is attempting to avoid a hostile takeover bid? a. White knights. b. Staggered board of directors. c. Supermajority voting. d. All the above.

d. All the above.

A finding by a court that a manager's decision had a rational business purpose does not necessarily protect the manager from a finding that he breached a duty of care. t/f

false

Corporate managers serve only one master, which is the shareholders. t/f

false

Corporate responses to takeover attempts are largely governed by federal law. t/f

false

Courts are sympathetic to managers acting in the best interests of the corporation, even when the acts are illegal. true/false

false

In the Unocal Corp. v. Mesa Petroleum Co. case, the court said the board of directors could act with the primary goal of keeping itself in office. t/f

false

Tender offers are regulated on the federal level by the National Labor Relations Act. t/f

false

The "business judgment rule" has been abandoned in most states. t/f

false

The Williams Act regulates the conduct of the target company in a takeover situation t/f

false

A director violates the corporate opportunity doctrine if he or she competes with the corporation, unless the disinterested directors approve of the director's actions. t/f

true

A manager who first offers an opportunity to disinterested directors or shareholders who turn it down has the right to take advantage of the opportunity herself. t/f

true

A manager who has engaged in self-dealing has violated the duty of loyalty to the corporation. t/f

true

A speculator plans to acquire control of Kelp Corporation and then resell it at a profit. A speculator is sometimes known as a corporate raider. t/f

true

Directors have the authority to manage the corporate business t/f

true

Generally, managers that make informed decisions will not be liable even if their decision turned out badly. t/f

true

When establishing takeover defenses, shareholder welfare must be the board's primary concern. t/f

true