Chapter 34 - Management Duties

1. Poison pills 2. staggered BOD 3. Super-majority voting

Which 3 shark repellents require shareholder approval to implement?

Corporate Opportunity Doctrine

While the self-dealing rules prevent managers from forcing their companies into unfair deals, the _________________________________________________________ instead prohibits officers, directors, and controlling shareholders from excluding their company from favorable deals.

No

Will directors of a corporation be held liable for an uniformed decision if the decision was entirely fair to the shareholders?

Disinterested

___________________________ members or shareholders are those who do not themselves benefit from a transaction.

Self-dealing

means that a manager makes a decision benefiting either himself or another company with which he has a relationship

1. Rational Business Purpose 2. Legality 3. Informed Decision

3 elements of a manager's duty of care:

conflict

A fundamental problem of the modern corporation is that the interests of managers, shareholders, and stakeholders often ______________________.

Tender offer

A public offer to buy a block of stock directly from shareholders

1. The disinterested members of the BOD form a special committee that approves the transaction 2. The disinterested shareholders approve it 3. The transaction was entirely fair to the corporation

A self-dealing transaction is valid in any one of the following 3 situation:

False; ALL selling shareholders must be paid the higher price, regardless of when they tendered

T/F: The Williams Act states that if the bidder raises the price offered, then only the selling shareholders who tendered that day will receive a higher price as well.

Hostile takeover

An attempt by an outsider to acquire a company in the face of opposition from the target corporation's board of directors.

Stakeholder

Anyone who is affected by the activities of a corporation, such as employees, customers, creditors, suppliers, shareholders, and the communities in which they operate

No. Instead it is supposed to give management time to communicate with shareholders, search for alternatives, negotiate a higher bargaining price, etc. (Shareholders should be able to sell the company if they really want to)

Are shark repellents intended to make takeovers impossible?

Directors and Officers

Corporations have what two sets of managers?

Anti-takeover devices and shark repellents

Defensive measures to protect against a hostile takeover

informed (informed means carefully investigating the facts)

Generally, courts will protect managers who make an __________________ decision, even if the decision ultimately harms the company.

By showing that the company would have been unable to benefit from the opportunity

If a manager violates the Corporate Opportunity Doctrine, how can he still avoid liability?

highest bidder

If it is clear that a target company will ultimately be sold, the board must auction the company to the _________________________________; it cannot give preferential treatment to a lower bidder.

If she can prove her decision was entirely fair to the shareholders, then she and her decision are still protected. If she cannot prove her decision was entirely fair to the shareholders, then the manager may be held personally liable and the decision could be rescinded.

In the Business Judgement Rule, what if the manager breached her duty or loyalty of care (did not act in good faith)?

controlling shareholder

In the case of self-dealing by a ________________________________________________ of the company, a court will always examine the fairness of the transaction, no matter how the special committee votes.

Special Committee

Independent board members form a committee to review a self-dealing transaction and determine if it is entirely fair to the corporation

Federal

Is the Williams Act federal or state?

Corporate Opportunity Doctrine

Managers are in violation of the _____________________________________________________ if they compete against the corporation without its consent.

1. Statutes that automatically impede hostile takeovers; and 2. Statutes that authorize companies to fight off hostile takevers

Most states have now passed laws to deter hostile takeovers. What are the main two types?

No (does not mean the manager is automatically liable, just means the court will no longer presume the transaction acceptable and will scrutinize)

Once a manager engages in self-dealing, does the business judgement rule still apply?

Blank Check Preferred Stock

Shark Repellent: A type of stock that keeps its rights and other characteristics left blank until filled in by the BOD upon issuance. (Like an unloaded gun that can be armed by the board whenever a shark threatens)

Staggered BOD

Shark Repellent: Only having a portion of the directors elected each year, making replacement of the entire board take several years (whereas typically, it can be done all at once)

Super-majority Voting

Shark Repellent: Requiring a higher percentage of approval of significant changes

Greenmail

Shark Repellent: The target buys back the shark's stock at a premium price.

Asset lockup (aka scorched earth strategy)

Shark Repellent: The target sells off the assets that the shark wants most.

Poison Pill (aka shareholder rights plan)

Shark Repellent: When an outsider shareholder acquires more than a certain percentage of company stock, a ______________________________ dilutes the value of these shares.

False; they are unsympathetic no matter what

T/F: Courts with be sympathetic to managers who engage in illegal activity IF their goal is to help the company

True

T/F: Directors and officers are liable for decisions that have no rational business purpose

True

T/F: The Williams Act states that any shareholder may withdraw acceptance of the tender offer at any time whole the offer is still open.

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

The Business Judgement Rule accomplishes what 3 goals?

Duty of loyalty Duty of Care

The Business Judgement Rule is broken into what 2 duties?

As long as the decision was made.... Duty of Loyalty 1. Without a conflict of interest Duty of Care 2. With the care that an ordinarily prudent person would take in a similar situation; and 3. In a manner they reasonably believe to be in the best interests of the corporation

The Business Judgment Rule provides that managers are not liable for decisions they make in good faith as long as what: (3 things)

5%

The Williams Act applies to any individual or group who together are trying to acquire ____________% of a company's stock.

bidder

The Williams Act largely regulates the behavior of the __________________ and not that of the target company.

20 ; 10

The Williams Act states that a bidder must keep a tender offer open for at least __________ business days initially, and for at least __________ business days after any substantial change in the terms of the offer.

pro rata

The Williams Act states that if the stockholders tender more shares than the bidder wants to buy, it must purchase shares ___________________ (must but the same proportion from everyone, not first come first served)

Business Judgement Rule

The ____________________________________________ states that if a manager has acted in good faith, a court will not hold her personally liable for any harm her decision has caused the company, nor will the court rescind her decision.

Duty of loyalty

The obligation of a manager to act without a conflict of interest.

fiduciary

The officers and directors of a corporation owe a _______________________ duty to both the corporation and its shareholders.

Duty of Care

The requirement that a manager act with care and in the best interests of the corporation

The Williams Act

This act regulates tender offers, but applies only if the target company's stock is publicly traded

Duty of Loyalty

This duty prohibits managers from making a decision that benefits them at the expense of the corporation.

1. The target has assets that the bidder genuinely wants 2. A speculator plans to acquire control and then resell all or part of the company at a profit

What are the 2 most common scenarios in hostile takeovers?

1. Maximize their income 2. Keep their jobs 3. Build an institution that will survive them

What are the 3 goals of managers?

1. Buy the company's assets 2. Merge with the company 3. Buy stock from the shareholders

What are the 3 ways to acquire control of a company via a takeover?

1. Poison Pill 2. Blank check preferred stock 3. Asset lockup 4. Greenmail 5. Staggered BOD 6. Super-majority voting

What are the 6 shark repellents corporations may use to protect themselves from a hostile takeover?

Some statues PERMIT managers to consider the interests of stakeholders, but managers have an AFFIRMATIVE DUTY to protect the interests of shareholders and the corporation.

What is the difference between the duty a manager owes to stakeholders versus that of shareholders?

A high stock price

What is the goal of a shareholder?

Wants the business to survive in their community and continue to provide jobs and customers

What is the goal of a stakeholder?

shareholder welfare

When establishing takeover defenses, what must be the board's primary concern?