Business Law

takeover defenses

Business Judgment Rule not valid if directors have an interest...but in a hostile takeover, management has an interest - KEEPING their jobs. Must show suitor poses a threat to corporation to support board vote for defenses. Generally, Bus Rule supports poison pills.

Business Judgment Rule (applies to Board votes/decisions)

Defense where courts presume Directors acted in good faith and that actions were taken for the best of the company. Gross negligence will not allow Business Judgment Rule defense.

Freeze Outs

Delaware SC holds that a majority of Sh can force minority SH to cash out - if transaction is fair, ex. subsidy merging into its parent company. Courts view deal structure, initiation, disclosure and price. Majority SH owe minority Sh duty of loyalty in dealings.

duty of candor

Directors have duty to disclose all material facts ...and directors that disseminate false information breach their fiduciary duties.

Allocation of Power Poison Pills

Directors have vote as guardians of SH's interests...but can get conflicted. Poison Pill - a shareholder rights plan that may make a split up merger uber expensive and unfeasible.

To use Business Judgment Rule

Directors must 1) not have conflicted interests in decisions. 2) act in good faith 3) decide in rational manner and 4) not grossly negligent

Regulatory considerations and anticompetition/monopoly

FTC regulates horizontal mergers.

Blasius standard of review

If directors disenfranchise SH voters, decision is suspect and subject to review per Blasius case.

Revlon Rule

If firm will be sold, duty to find best price for shareholders!

Statutory limitations on director's liability for breaching duty of care

Many states limit monetary liability of directors for breaches of duty of care (NOT loyalty and good faith). Will not limit in cases of: 1. acts of omissions not in good faith 2. breach of loyalty 3. unlawful payments of dividends or stock 4. any conflict of interest transaction where director personally benefits

deal protections devices

No talk provisions. Court frowns on no talk provisions, prefering No Shop Agreements where target will not actively seek other bidders but can negotiate with unsolicited bidders.

Intrinsic value

Off shoot of Van Gorkom Trans Union case is that many directors now rely on external investment bankers for firm valuation.

duties of controlling SH

SH majority owe fiduciary duty to corporation and other SH. If they know sale of their shares may give control of company to an entity to detriment of the company, they have duty not to sell. Controlling Shares may sell at a premium but minority may file derivative lawsuit attacking proceeds as assets.

Acquisitions

Shell corp formed of many - consolidation (ABC become F, all SH of A B and C approve). Merger - two firms join A and B to become B (SH A must approve, not B). Cash for assets. A controls B. cash for stock. Hostile Takeover Stock for assets - liability follows assets. stock for stock - merger/consolidations. Dissenters may have rights to appraisal

self tender

company agrees to buy back SH shares for a fair price

Decisions must be informed

and authorizes use of reports and external SME but Directors have obligation to verify information

Delegation of negotiating authority

being a member of the financial negotiations of a deal may make officers and directors liable.

Directors must not be conflicted

but a decision can be made with an 'interested' director if a majority of disinterested directors (and external directors) approve.

Trusts

can run businesses as trusts. Trusts cannot issue stock but CAN borrow money. Grantor gives money/property to a trustee to manage for benefactors. Cannot merge.

Corporate opportunity doctrine

directors cannot take personal advantages from a business opportunity that belongs to the corporation.

Duties in takeovers/mergers and acquisitions

directors must consider: 1. intrinsic value of firm 2. appropriateness of delegating negotiation authority to management 3. non monetary price considerations 4. reliability of officer's reports to board (see Trans Union Van Gorkom case) 5. reliability of SME reports 6. investment banker's fee structure 7. reasonableness of defensive tactics. Must act in good faith and be well informed.

Fudiciary duties required of directors

duties of care where directors are required to make informed, reasonable decisions and exercise reasonable supervision of business. Duty of loyalty requires directors act in good faith and best interest of firm.

EU Takeover Directive April 2004

governs takeovers in Germany and EU. Goal to open European markets, harmonize conflicting laws that regulate individual member states, and create transparency thru COMMON, UNIVERSAL rules governing SH rights and defensive mechanisms. Arguments between individual states left a watered down symbolic statute that left national takeover rules intact.

Line of business test

if director learns of an opportunity that is in line with the firm's business - the officer is not permitted to take the opportunity for himself. (different states apply different tests)

L3C

low profit limited liability corp. No obligation to create SH value. Charitable or educational. Tax benefit for charitable distributions.Ex. Gates Foundation

Break up fees (2-3%)

makes bidder whole for legal fees etc. when target partner walks from deal.

SME

must be written and reasonable - otherwise not protected by Business Judgment Rule

Duty of Loyalty

must subordinate director's interests to the firms. Decisions can be overturned if shown it was not fair and in best interest of firm.

duty to maximize shareholder value (Revlon precendent case)

once a takeover is in play, directors have duty to maximize price for SH. Directors may be required to do a Market Check. A change in corporate control or a break up of corp. entity puts a business in Revlon mode and requires directors to maximize SH price.

Greenmail

raider acquires stock from a target then threatens to commence a hostile takeover if they don't repurchase stock at a premium price.

All holders rule SEC

requires all holders of a stock class be able to participate in a stock repurchase plan. Removes ability of tiered purchase plans as takeovers and greenmail tenders.

False lien is a

slander of title tort

directors have duty

to disclose preliminary negotiations for mergers ...Management Buy Out may be conflicted

Directors have fiduciary duty

to give reasonable supervision of business. SOX further supports Directors' requirement to acknowledge accuracy of public Co SEC filing reports. Duty of Loyalty is breached if directors fail to exercise oversight of the corporation.

REIT

variation of a common law trust. time limited. used in real estate development. Grantors get money back by selling property or merging into another entity.

Unjust enrichment doctrine

where one party benefits at the expense of another...has obligation to make restitution.