chapter 34

On the day a tender offer begins,

a bidder must file a disclosure statement with the SEC

The business judgment rule is

a common law concept that has achieved national acceptance

What is a "scorched earth strategy"?

a defensive takeover strategy where the target sells off the assets that the takeover company most wants

Ocean View Inns recently purchased 5 percent of Seaside Resorts' stock. Seaside Resorts' board of directors fears that Ocean View Inn is going to attempt to take control of the company in order to acquire Seaside Resorts' hotel in California; it is the only Seaside Resorts location that directly competes with Ocean View Inns. Although it takes a considerable amount of business away from Ocean View Inns, it accounts for only five percent of Seaside Resorts' earnings. The Seaside Resorts' board suspects that Ocean View Inns would retain the California location and sell off the rest of the Seaside Resort assets in pieces. Although the Seaside Resorts' board has a good faith belief that a takeover by Ocean View Inns is not in the shareholders' best interests, it does not believe that a majority of the shareholders will work with them to resist a takeover. What antitakeover device is the board's best option?

asset lockup

Which of the following statements is correct with respect to state efforts to offer protection to companies targeted for hostile takeovers?

both statutory law and the state courts have provided some degree of protection for companies

Which of the following takeover defenses is evidenced by the target buying back the shark's stock at a premium price?

greenmail

For the business judgment rule to apply, the manager must

have acted in the best interests of the corporation

If a company is using a scorched earth strategy to defend against a hostile takeover, it will

sell of the assets that the shark most wants

The Anderson v. Bellino case held that

the defendant did not act in good faith and violated the corporate opportunity doctrine

The formation of larger manufacturing enterprises during the Industrial Revolution required greater capital investments, leading to

the separation of business ownership and management in many cases

Which of the following is a fundamental goal of shareholders?

to have an immediate increase in stock price

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.

true

A manager may take advantage of business opportunities in the same type of business as her corporation if she offers the opportunity to disinterested directors and shareholders and they turn it down.

true

Directors and officers are both corporate managers.

true

Directors have the authority to manage the corporate business.

true

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

true

In order to use poison pills, staggered boards of directors, and supermajority voting as takeover defenses, they must first be authorized by the shareholders.

true

Sometimes target companies will simply buy back a shark's stock in the target at a premium price to regain control of the company.

true

The Williams Act regulates tender offers to shareholders of companies

with publicly traded stock

An appraiser valued a subsidiary of Signal Co. at between $230 million and $260 million. One month later, Burmah Oil offered to buy the subsidiary at $480 million, giving Signal only three days to respond. The board of directors accepted the offer without obtaining an updated valuation of the subsidiary or determining if other companies would offer a higher price. Members of the board were sophisticated, with a great deal of experience in the oil industry. A Signal Co. shareholder sued to prevent the sale. Is the Signal board protected by the business judgment rule?

yes, because they acted in good faith

Sammy's, Inc. is a publicly traded company. Sammy's board of directors appointed Jeb as CEO. Jeb has made a number of blunders, which drove Sammy's deeply into debt. In its first meeting in six years, the board of directors votes for Sammy's to file for bankruptcy. Has the board committed any violations?

yes, the board has breached its duty of care

In which of the following situations is a self-dealing transaction valid:

1. a special committee of disinterested directors approve it 2. disinterested shareholders approve it 3. it was entirely fair to the corporation

Which of the following are common scenarios in a hostile takeover?

1. a speculator plans to resell all or part of the target at a profit 2. the target has assets that the bidder genuinely wants

Which of the following are goals accomplished by the business judgment rule?

1. encourages directors to serve 2. keeps judges out of corporate management 3. permits directors to do their jobs

Courts generally allow directors to take defensive measures against takeovers, as long as which of the following is true?

1. in cases where the company will ultimately be sold, the board considers factors other than price alone when selecting a bidder 2. shareholder welfare is the board's primary concern

Defensive measures that companies take to protect themselves from hostile takeovers are called which of the following?

1. shark repellents 2. anti-takeover devices

Which antitakeover devices did Airgas use in Airgas, Inc. v. Air Products and Chemicals, Inc.?

1. staggered board of directors 2. supermajority voting

Which of the following are holdings of the court in Anderson v. Bellino?

1. the defendant breached his duty of loyalty 2. a corporate officer or director may compete with his corporation under certain circumstances 3. a corporate officer or director has the burden of establishing that his competition with the corporation was done in good faith and did not harm the corporation or deprive it of business

A shareholder rights plan, or poison pill, protects a company from a takeover by

diluting the value of shares once an outsider acquires more than a certain percentage of company stock

Generally, courts will protect managers who make informed decisions

even if the decision ultimately harms the company

A manager who engages in self-dealing is automatically liable to the corporation and the shareholders.

false

Courts will protect managers who engage in illegal activity if they did so to benefit the corporation and their actions were entirely fair to the shareholders.

false

Only directors of corporations incorporated in Delaware may consider the interests of stakeholders when making business decisions.

false

States are not involved in the regulation of corporate takeovers.

false

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

false

The "business judgment rule" has been replaced by "good faith statutes" in most states.

false

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

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

Hostile takeovers have been a feature of American corporate life

for more than 30 years

The Williams Act

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

Which of the following describes the duty of loyalty?

it prohibits managers from making a decision that benefits them at the expense of the corporation

The business _______ rule protects both the _______ and her ______. If a manager acted _______ , a court will not hold her ________ for any harm her decision causes the company, nor will it ______ her decision. If the manager breached her_______ , then she ________ her decision was ________ to the _______.

judgement manager decision in good faith personally liable rescind fiduciary duty has the burden of proving that entirely fair shareholders

Which of the following is NOT a method to acquire control of a company?

make an initial public offering

Which of the following is correct concerning anti-takeover efforts?

most states have passed laws to deter hostile takeovers, but these statutes have not totally eliminated hostile takeovers

Anti-takeover tactics include all EXCEPT

negative tender offers

Carly is a director at Dazzle, a corporation that operates a chain of stores that sell fancy shoes and handbags. Zeb approaches Carly about partnering with him in his new business selling leather handbags with large buckles and other metal accents. Carly brings Zeb's offer to the Dazzle board of directors and shareholders, but they turn it down because Zeb's bags are too casual and do not fit in with the rest of their stores' merchandise. Carly loves Zeb's bags, though, so she decides to personally invest with him. Has Carly violated her fiduciary duty to Dazzle?

no, because Dazzle turned down the opportunity to work with Zeb

Data Management, Inc. is interested in acquiring DocuWorld Corp., but the DocuWorld board is not interested in selling or merging. DocuWorld's shareholders authorized blank check preferred stock in the corporate charter. Will Data Management be able to bypass the resistance of the DocuWorld board by making a tender offer to DocuWorld shareholders?

no, because the DocuWorld directors can issue the preferred stock as a poison pill

Frank, the CFO of Springer, Inc., concealed temporary financial losses the company suffered early in the fiscal year in Springer's annual report submitted to the Securities and Exchange Commission (SEC). It is illegal to submit fraudulent SEC filings, but Springer's financial situation had already improved greatly by the time the annual report was filed and Frank did not want to unnecessarily alarm shareholders. When news that Springer submitted fraudulent financials to the SEC broke, the company's stock price dropped by 15 percent and shareholders sued Frank under applicable securities laws. Frank defended on the basis that his actions were protected by the business judgment rule because he was acting in the company's best interests. Was Frank correct?

no, because the business judgment rule does not protect illegal activities

The Unocal decision is significant because the Court:

permitted directors to consider the interests of stakeholders when making business decisions, whereas previously directors could only consider the corporation's shareholders' interests

The board of directors of Athletic Stride, a successful sneaker company, votes to have the company purchase a professional basketball team for $500 million dollars. The directors are all knowledgeable about the professional sports industry, and none of them have a conflict of interest in the deal. When the shareholders oppose the purchase as being unrelated to the company's business, the board argues that, as the team's owner, Athletic Stride will have invaluable marketing and sponsorship opportunities. Would a court likely uphold the board's decision to purchase the basketball team?

probably yes, because courts generally will support a board decision if there is even a remotely rational business purpose and no other breaches of the managerial fiduciary duties

A tender offer is an offer from an acquirer to

purchase a the stock of a target company's shareholders

________ occurs when a manager makes a decision ________ either ________ or another company __________.

self-dealing benefiting herself with which she has a relationship

The ______ is designed to prevent managers from _______ their companies into ______ deals. The _______ achieves the opposite, prohibiting managers and _______ from ________ their companies from _________ deals.

self-dealing rule forcing unfair corporate opportunity doctrine controlling shareholders excluding favorable

________ must authorize new classes of stock, but many companies have ________ preferred stock in their charters, which is ________ with its _______ left blank, to be filled in by ________ upon issuance.

shareholders blank check authorized characteristics the board of directors

________ elect _________ who set ________ and then directors appoint _________ to ________ these corporate goals.

shareholders directors policy officers implement

Kurt owns 55 percent of the New England Lumber Company (NELC) stock and is also the CEO. Kurt also owns two percent of the Boston Homes stock. Boston Homes is a construction company that builds houses throughout New England. Kurt wants NELC to provide Boston Homes with all of the lumber Boston Homes needs and to give Boston Homes a ten percent discount on all of its large orders. Four NELC board members who have no interest in Boston Homes form a special committee and approve the deal. If a NELC shareholder challenges the deal between NELC and Boston Homes in court, how should the court rule?

strike down the deal unless it is entirely fair to NELC

State statutes governing takeovers tend to protect

target companies, because legislators fear the impact on the local economy if a major employer leaves

If a court determines that a manager's corporate decision amounted to self-dealing,

the business judgment rule will not apply

In re S. Peru Copper Corp. Shareholder Derivative Litig. involved a transaction between

the controlling shareholder of SPC and SPC

Dominique is the CEO of a pharmaceutical company and must decide whether to continue the company's research into a new skin treatment. Originally, the company had hoped the treatment would help burn victims recover quickly, but two years and $5 million in testing has revealed that it is only useful in relieving very dry skin if applied hourly. In addition, projections show that it will be so expensive to produce the treatment that the company will have to charge $100 a day for it in order to make a profit. However, the researcher in charge of the project is Dominique's best friend, so Dominique approves another $5 million to be spent on continued research of the treatment. If the company's shareholders challenge Dominique's decision, how will a court rule?

the court will rescind Dominique's decision and hold her liable for any losses suffered by the company as a result of the decision, unless Dominique can show the transaction was entirely fair to the shareholders

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

the disinterested members of the board of directors must approve the transaction

A manager who has engaged in self-dealing has violated the duty of loyalty to the corporation, unless the self-dealing was entirely fair to the corporation.

true

A public offer to buy a block of stock directly from shareholders is called a tender offer.

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.

true

Adopting supermajority voting makes it more difficult for a shark to acquire control of a company, primarily by making the process take longer.

true

Courts generally give managers wide latitude when determining whether a business decision had a rational business purpose.

true

Power Wind is a corporation that specializes in designing and manufacturing windmills. Power Wind has a manufacturing plant in Colorado and offices throughout the southwestern United States. NRGreen, a provider of a variety of renewable energy design and installation services, has offered to buy Power Wind at a favorable price. However, because NRGreen's business model does not involve any manufacturing, it will close the Colorado plant immediately after acquiring Power Wind. May Power Wind's directors decline NRGreen's offer in order to keep the plant open?

yes, if they are in a state that has codified Unocal