LAW 6256 – Mergers and Acquisitions Outline

An Introduction to Acquisitions; Overview of the M&A process: 8/29

Overview of the Mergers & Acquisitions Process:
 Mergers and Acquisitions: Heavily regulated transaction in which the ownership of a company, other business
organization, or its operating units is transferred or consolidated into another entity.
o Major Areas of Law: M&A transactions encompasses six major areas of law.
 (1) State Contract Law: Indemnity provisions within M&A agreements are construed and
interpreted in accordance with the governing state contract law.
 (2) State Corporate Law: When is a stockholder vote required and what are the fiduciary duties
of the board during the process.
 (3) Federal Securities Law: Impacts both public & private companies, however, there is a larger
impact on M&A transactions involving public companies (disclosures, filing obligations, etc.).
 (4) Federal and State Tax Law: When is a transaction taxable or tax-free. Distinction between
tax-free stock-for-stock mergers and asset acquisitions.
 (5) Federal Accounting Standards: Accounting system that needs to be used for categorizing
the deal.
 (6) Federal Antitrust Law: Hart-Scott-Rodino Act review.
o Minor Areas of Law: (1) Labor Law; (2) Pension Plan Regulations; (3) Environmental Law; (4)
Products Liability Law; (5) Debtor-Creditor Law; (6) Federal Bankruptcy Law; and (7) Regulatory Laws.
 Participants: In a M&A transaction.
o A = Acquirer/Buyer: The firm which is purchasing a company in an acquisition.
o S = Seller/Target: The firm that is being acquired.
o Legal Counsel: The person/firm that is legally qualified and licensed to represent the party in the acquisition.
o Financial Advisers/Bankers: Investment representative that devises executes M&A
transactions/corporate finance projects.
o Tax & Accounting Advisor: Analyzes the tax and accounting issues relevant to the acquisition when
assessing the overall feasibility of the transaction.
 Reasons for Acquisitions:
o Expand into a New Market: Cheaper to buy existing businesses vs. start a new one from scratch.
o Horizontal Integration: Benefit from efficiencies of scale — Usually you can manage a larger company
(within reason) with the same resources as a smaller one, only difference is expanding the scope of profits.
o Vertical Integration: Buying the supplier/end user to integrate the supply chain.
o Target Company’s IP: Acquiring a company for its trademarks, domain names, copyrights and patents.
o Customer Base: Acquiring a company to take on a larger customer base.
o Employee Knowledge Base: Seen in service-oriented businesses. Integrating high quality
knowledgeable workers into your existing business.
o Eliminating Competition: One less option for consumers to choose.
 Terminology: A customary understanding of basic terms.
o Mergers v. Acquisitions:
 Acquisition (of Purchase of the Firm): Situation whereby the acquirer company purchases most
or all of another company’s assets or stock in order to take control of the target company. The
acquirer company retains their relative stake post acquisition and makes decisions regarding the newly
acquired assets, while the target company holds no equity in the surviving entity post-acquisition.
 Asset Purchase/Asset Acquisition: Purchasing a company by buying its assets instead of
its stock. The seller remains as the legal owner of the entity, while the buyer purchases
individual assets of the company.
o Exp: Equipment, licenses, goodwill, customer lists, inventory.
 Stock Purchase/Stock Acquisition: The acquirer buys the stock of the target and takes
the target as it finds it, in regards to both assets and liabilities.
 Mergers: An agreement that unites two existing companies into one new company. Generally,
stock is given as consideration to target’s stockholders who retain an equity stake in the surviving
entity, and the acquirer’s stockholders hold a reduced stake in the post-acquisition acquirer.

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 o Takeovers and LBOs:
 Takeovers: When an acquiring company makes a bid, often in the form of a tender offer, in an
attempt to assume control of the target company. If successful, the acquirer becomes responsible for
target’s operations, holdings, and debts. Two Forms: Hostile and Friendly takeover
o Tender Offer: A public, open offer or invitation by a prospective acquirer to all
stockholders of a publicly traded corporation (the target corporation) to tender their
stock for sale at a specified price during a specified time.
 Hostile Takeover: Takeover where the acquirer goes directly to the target’s shareholders to
obtain control and does not have support from the target’s board or management.
 Friendly Takeover: An acquisition/merger in which the target company’s management or
board of directors agrees to the acquisition/merger that is subject to shareholder approval.
 Leveraged Buy-Outs (LBOs): Generally, a stock acquisition made with cash that is financed by non-
investment grade debt issued to finance the acquisition. LBOs are frequently conducted by tender
offers and management may or may not play an active role in the acquisition group.
o Control vs. Non-Control Transactions:
 Control Transactions: A transaction between two entities that are associated entities. Entities are
associated if —
 (a) An entity participates directly or indirectly in the management, control or capital of
another entity; or
 (b) The same person participates directly or indirectly in the management, control of capital
of two entities.
 Non-Control Transactions: Where the acquiring entity does not own enough stock to control the
subsequent elections to the selling firm’s board of directors.
o Cash Equivalents: Investments securities that are for short-term investing, and have high credit quality and
are highly liquid.
o Carveout: The partial divestiture of a business unit in which a parent company sells minority interest of a
child company to outside investors. Instead of fully selling the business, the parent is selling an equity stake in
the child or spinning it off while retaining an equity stake.
o Diluted: Reducing the value of a shareholder by issuing more shares in a company without increasing the
value of its assets.
o Second Stage Merger: When the acquirer purchases a controlling block of stock in a target, most often a
majority of outstanding voting stock, then with control of the board squeezes out the remaining shareholders.
o Reorganizations/Restructurings: Where a corporation significantly modifies its debt/operations or structure
as a means of potentially eliminating financial harm and improving the corporation’s business.
 Asset or Operating Business Spin-Off: A subsidiary of a parent company that has been sold off in a
transaction involving either cash or stock compensation to the parent, where the subsidiary becomes a
new company.
 Note: Can involve an IPO or sale to a third-party.
 Squeeze-Out Transactions: An action taken by a firm’s majority shareholders that pressures or
eliminates a firm’s minority equity position.
 Application: Can involve reverse stock splits or cash-out features.
o Cash-Out: Paying off an existing loan by taking out another, usually larger loan.
 Stock Redemption Transactions: Redemption of a minority equity position with either cash or debt
securities. In cash transactions, the cash is usually funded by the new issuer.
 Deal Timeline:
o (1) M&A Negotiation (Initial Steps): CEOs of two constituent corporations meet.
 Agree on ballpark financial terms for the deal.
 Options:
 Confidentiality/Non-Disclosure Agreement: Agreement that governs the exchange of
information among the two corporations. May include a standstill provision for the target.
o Standstill Provision: Potential acquirer agrees to not go hostile in exchange for
receiving information for the public target.
 Non-Solicitation Agreement: Agreement where target and acquirer agree for a period of
time to refrain from engaging in business that is competitive to the other entity.
 No Shop/Exclusivity Agreement: Stops target from pursuing other buyers
o Note: Exclusive negotiating rights are usually granted to buyer for a duration of diligence
 Standstill Agreement: Prohibits acquirer from buying the target’s stock during negotiations.

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  Outcome:
 Letter of Understanding (LOU)/Memorandum of Understanding (MOU)/Term Sheet:
Generally nonbinding, sets out the main terms/framework on which to build the actual agreement.
o May Include: (1) Price; (2) Structure; (3) Open Items; (4) Things to be Approved; (5)
Expenses; and (6) Breakup fees.
o Note: Final terms are subject to completion of due diligence and negotiation of final
acquisition documents.
o (2) Retain Experts/Advisers: Each party will typically retain both legal and financial advisers to assist them in due
diligence investigation and negotiation of final acquisition documents.
o (3) Due Diligence: Comprehensive appraisal of a business generally focused on the target, however, can focus on
acquirer in a stock for stock transaction. ON TEST!
 Organization Documents (Charter & Bylaws): Important for (1) voting threshold for mergers; and (2)
any other procedural wrinkles to completing the transaction.
 Stock Ledger: Outstanding shares, options, etc.
 Financials
 Contracts: Assignment provisions, etc.
 Existing Material Contractual Arrangements: Material supply/customer contracts.
 Key Employee Employment Agreements: Potential change in control agreement, carry over of
key employees post-acquisition. Employee benefits matters.
 Litigation: Civil, regulatory (ex. SEC), etc.
 Patents/Intellectual Property
 Audits Records/Opinions
 Regulatory Matters/Compliance: Environmental, SEC compliance, industry specific.
 Property: Owned or leased? Valid title? Easements? Etc.
 Debt: Do note holders have voting rights/authority.
o (4) Negotiations: Parties negotiate deal price, structure, and documentation.
 Acquisition agreement & related documents prepared.
 Secured Financing (Optional): Get financing commitments or highly confident letter.
o (5) Present Final Agreement to Board of Directors: Board of directors vote on approval of acquisition documents
in resolution.
 Note: Seller often requests independent banker to provide fairness opinion.
 Fairness Opinion: A professional opinion, provided by an investment bank or other third party,
about whether the price offered in a merger or acquisition deal is reasonable.
 If Yes: Board authorizes CEO to sign agreement for the corporation.
o (6) Pre-Closing: If needed, (1) shareholders ratify the agreement; and (2) Agency approval is secured.
 Dealing with the SEC: Done for public companies.
 File proxy solicitation materials with the SEC.
 Register securities or satisfy exceptions if buyer is using securities to buyer’s shareholders.
 If Tender Offer: Comply with ’34 Act § 14(d)
o (7) Closing: Sign closing documents and exchange consideration
o (8) Post-Closing: Lawyers make appropriate filings and post-closing adjustments (see below) are applied.
 Valuation: Easier for public vs. private companies. Privates frequently use public comparable for equity valuation.ON TEST
o Price to Market Value: Price offered/market price per stock
o Price to Book/Liquidation: Offered price compared to book value.
 P/B Ratio = Stock price per share / book value per share
 Book Value = Assets = Liabilities
 Note: Very rough valuation.
o Price to Earnings (P/E): Measures the current share price relative to its per share earnings
 P/E Ratio = Stock price per Share / Earnings per Share
 Methods: (1) After taxes; (2) Before taxes; (3) Before interest & taxes (EBIT); or (4) Before interest, taxes,
depreciation, and amortization – spreading payment over period (EBITDA).
 EBITDA = Rough approximation of cash flow.
o Price to Revenue: Price of a company’s stock against its annual sales.


o Discount Cash Flow (DCF) Method: Predicts future cash flow of seller by discounting amounts to reflect present value.
 Discount Rate Reflects: (1) Time Value of Money; (2) Risk of Currency Inflation; and (3) Risk of Volatility in
Projections.
 DCF = [CF1 / (1+r)1] + [CF2 / (1+r)2] + ... + [CFn / (1+r)n]
 CF = Cash Flow
 r= discount rate (WACC)

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 Lawyers Role in Negotiating:
o Document the intent of the parties to the transaction on business-related matters in the final acquisition documents.
o Advocate on your client’s behalf in drafting/negotiating “non-business” points in acquisition documents.
o Keep your client informed of the status of negotiations on open “non- business” matters.
o Advise your client on fiduciary duty issues and related state corporate law matters.
o Advise your client on Federal securities law and other regulatory compliance issues.
o Coordinate deal structuring matters with your client’s tax and financial advisors.
o Manage the due diligence process.
o Prepare or assist in the preparation of any required regulatory filings.
o Coordinate matters related to any required stockholder votes.
o Coordinate and prepare closing materials.
 Specific Pricing Adjustment Issues:
o Post-Signing Adjustments:
 Fixed Exchange Ratio: Pre-defined amount of acquirer’s stock for each share of target stock
outstanding that may be acquired. Ratio is set when board of directors vote on agreement.
 Risk: Sellers shareholders bare general market risk and specific risk with acquirer’s stock price.
 Floating Exchange Ratio: Based on the average market price for the acquirers stock during a
period before the closing. The number of shares to be issued to seller’s shareholder’s floats with
acquirer’s stock price.
 Period: Usually 10-30 trading days.
 Risk: Acquirer bears the risk of decline in its own stock => Having to issue more shares
to seller’s shareholder’s at closing.
 Caps: Limits the value and number of shares the acquirer is obligated to issue.
o Application: If exchange ratio hits cap, seller’s owner’s absorb additional losses.
 Fill/Kill Option: Acquirer has right to waive cap & avoid walk rights => must issue full
complement of shares required by floating ratio.
 Floor: Minimum number of acquirer’s shares paid.
 Collar Agreement: Fixed exchange rate with floating mechanism. Establishes a range of prices
within which the aquierer’s stock will be valued or range of share quantities that will be offered.
 Walk Right/Material Adverse Change Clause (MAC): Ability for the seller to walk away from
the transaction if a predefined event occurs.
 Single Trigger: Decrease in value by X% triggers walking rights
 Double Trigger: Can only terminate if — (1) Acquirer’s stock falls by the specified %;
and (2) Falls a specified % relative to defined peer group of stock.
o Post-Closing Adjustments:
 Note: This is very difficult for public companies
 True-Ups: Adjust the purchase price based on reconciling differences between the value of the
company as reflected in the company’s latest financial statements prior to entering into the sale
agreement and the value of the company based on the financial statements as of the closing date.
 Earn-Outs: A mechanism to provide for contingent additional purchase price based on the
company’s post-closing performance. Post-closing payments are made if certain specific
benchmarks are satisfied within certain specified periods.
 Note: Only for private companies
 Contingent Value Rights (CVR): Price protection mechanism that pays additional consideration
to the target shareholders in the event certain conditions are met. Similar to options because they
have an expiration date beyond which the shareholder’s rights to additional benefits will not apply.
 Note: Must be very careful to avoid offering securities.

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Understanding Transaction Structures/Mechanisms of an Acquisition: 9/5
Transaction Types and Mechanics:

 Tax Consequences:
o Stock: If consideration is paid in stock, then the stock is not taxable to the seller.
o Cash: If consideration is paid in cash, then the cash is taxable to the recipient (either seller or shareholders).
Acquisition Structures:
 Statutory Merger: A business combination in which one of the combining entities continues in existence as a legal
entity. Different than consolidation, where both entities are terminated and replaced by successor. ON TEST
o Process: (1) Seller’s stock is cancelled => seller is extinguished; (2) Shareholder’s get (either acquirer’s
shares or cash) as consideration; and (3) Acquirer absorbs target’s assets & liabilities as a matter of law.
 Stock-for-Stock Statutory Merger: Benefit – it is tax free.

 Cash-for-Stock Statutory Merger:

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o DGCL § 251 – Statutory Mergers: Governs the approval process of a merger or consolidation of two or
more Delaware corporations into one corporation under Delaware law.
 Note: DGCL § 252 governs mergers of Delaware corporations with non-Delaware
corporations. Note: Both usually Delaware on the test.
 (1) Board of Directors: Both board of directors must pass resolution approving
 (a) The Agreement of Merger; and
 (b) Statement declaring its advisability. NOTE: Standard
 (2) Buyer & Seller: Both corporations must submit agreement to shareholder vote.
 Requirement: Majority of all outstanding shares entitled to vote must ratify the
Agreement of Merger.
 Note: Shareholders can neither initiate acquisition vote nor amend an Agreement of Merger.
 (3) Filing: Parties file an agreement (of summary “Cert of Merger”) with Delaware Secretary of State.
 Requirement: Merger must become effective within 90 days of filing.
o DGCL Exceptions: To stockholder approval/voting for statutory mergers. Don’t need shareholder vote.
 Both Forms of Consideration: Cash and stock.
 DGCL § 251(f) – Small-Scale Merger Exception: Buyer’s shareholders do not have to
vote on the merger if—
o (1) Buyer’s certificate of incorporation is unchanged;
o (2) Buyer’s shares are not diluted by more than 20% (1/6th); and
 Exp: If buyer issues new stock to give to the seller, the buyer’s
shareholder must still hold 83%+ of their previous bloc after.
o (3) Shares’ rights, preferences, and privileges remain unchanged.
 DGCL § 253 – Short Form Merger Provisions: Statutory merger of a parent
corporation & a subsidiary where the parent corporation holds at least 90% of each class
of the subsidiary’s voting stock. Two Types: Upstream & Downstream—

o
 Short Form + Friendly Takeover: Seller’s shareholders do not have to vote if— (1)
Acquirer already owns 50% of the stock; and (2) Board of directors of the seller approve
the squeeze out merger.
 Cash-Out Merger: Merger of a target firm paid in cash by the buying firm. Occurs when the
target firm’s stockholders do not want any part of the ownership of the buying firm by stock as a
result of the merger.
 Rule: Buyer’s shareholder’s do not have to vote if — (1) Certification of incorporation
remains unchanged; and (2) All of the buyer’s shares outstanding before the deal are still
outstanding after the deal is closed.

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  Rauch v. RCA Corp. (2nd Cir. 1988 – pg. 60): GE acquired RCA, converted all RCA stock to
cash (1 share = $40). Problem, RCA Certificate of incorporation said preferred should receive
$100 per share if they ever chose to redeem. Preferred shareholder sued, district court
dismissed claiming not a redemption, & appeal filed.
o Issue: Can a conversion of shares to cash that’s carried out to accomplish a merger
be legally considered a redemption of shares by a corporation?
 Two Distinct Methods of Acquisition: (1) Conversion of shares to cash to
accomplish a merger; & (2) Redemption of shares by a corp.
 Note: Both viable although achieving basically same result.
 Result: Certificate of incorporation is not triggered.
o Holding: A conversion of shares to cash that’s carried out to accomplish a merger is
legally distinct from a redemption of shares by a corporation. Del.
o Who Can Vote:
 Delaware: Shares without general voting rights cannot vote on major transactions. No voting rights
for shares that do not vote on board of directors and no class voting.
 However: This can be changed by contract.
 Class Voting: Each class or type of shareholder can veto an acquisition.
 Most Jurisdictions (all but 6): Don’t follow Delaware’s rules.
 MBC § 11.04(f): Class voting on statutory mergers (1) if a class or series of shares is
converted into other securities, cash or property; or (2) if the plan contains a provision “that,
if contained in a proposed amendment to articles of incorporation, would require action by
separate voting groups.
 Asset Acquisition: Purchase of a company by buying its assets instead of its stock. Make sure not a de facto merger.
o Advantages Over Merger: Asset Acquisitions ^^^ on test
 (1) Buyer gets assets without most/all of the liabilities.
 Note: However, de facto merger doctrine (pg. _) may come into play.
 (2) If Stock Deal: Buyer’s shareholder’s do not have voting rights or right of appraisal.
o DGCL § 271 – Asset Acquisition Approval: Governs the sale of “all or substantially all” of a Delaware
Corporation’s property and assets. Approval requirements —
 Seller:
 All of Substantially All: If seller is selling all or substantially all of its assets
o Board of Directors: Sellers Board of Directors must (1) Approve the acquisition
agreement; and (2) Determine that the sale is in the best interest of the corporation.
 Optional: Also state that sale is in the Shareholder’s best interest.
 Not Required: Stating that the sale is advisable. NOTE: Standard ^^^
o Seller’s Shareholder Vote: Majority of outstanding shares entitled to vote must
ratify.
 Dissolution: If the corporation is dissolving after the sale, shareholders must vote.
o Note: This is true even if the sale is not for all/substantially all of the assets and the
board/shareholders did not vote before.
 Buyer: Shareholders are not entitled to vote and cannot initiate the transaction.
o Exceptions: Asset acquisitions that do not require voting.
 (1) Transactions that occur during the regular course of business
 Note: Even if all/substantial all assets involved.
 (2) Redeployment of parent’s assets into wholly owned subsidiaries.
o Who Can Vote: Same rules as Statutory Merger (See DGCL § 251 – pg. 6).
o Substantially All: Courts interpret the phrase substantially all based on the quantitative and qualitative
repercussions of the transactions.
 Hollinger Inc. v. Hollinger International, Inc. (Del. 2004 – pg. 46): International owned Telegraph
and Chicago Group, which were valuable for international. Telegraph slightly more valuable.
International agreed to sell Telegraph to a third party, Hollinger controlled 68 percent of the voting
power in International and objected to the sale. Hollinger sought a preliminary injunction to enjoining
the sale on the grounds it affected substantially all of International’s assets and required a vote. (NO)
 Issue: What does it mean for assets to comprise substantially all of a corporation’s assets.
o Quantitatively: Vital to the Corporation’s operations.
o Qualitative: Substantially affect the corporation’s existence and purpose
 Holding: Substantially all means (1) the assets are quantitatively vital; and (2) qualitatively vital.

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  MBC § 12.02 – Safe Harbor: A corporation is deemed to have retained significant continued business
activity if the corporation retains business activity that represents —
 (1) 25+ % of total assets at the end of the most recent fiscal year; and
 (2) 25+ % of either —
o (a) Income from continuing operations before taxes; or
o (b) Revenues from continuing operations for that fiscal year.
o De Facto Merger Doctrine: If a transaction produces the effects of a statutory merger, then (1) The same voting
and appraisal rights are required; and (2) must also assume the target’s liabilities (can’t pick & choose).
 Heilbrunn v. Sun Chemical Corporation (Del. 1959 – pg. 49): Plaintiff challenged the stock-for-asset
purchase of Ansbacher corporation by Defendant. Shareholder plaintiffs content that transaction was a de
facto merger and that they had been denied appraisal rights causing them to suffer financial injury.
 Issue: Do stockholders of the acquiring corporation have appraisal rights under the de facto
merger doctrine in a stock-for asset transaction?
o Requirements/Rational: For no appraisal rights
 (1) No damage to the stockholders
 (2) Business went on with new assets
 (3) Not forced to accept stock in a foreign corporation
 (4) Essential nature of the corporation remains unchanged.
o Permitted: Plaintiffs free to argue transaction was unfair on its terms.
 Holding: Shareholders were not injured, therefore no appraisal rights.
o Note: Very few courts have found for plaintiff shareholders under the de facto merger
doctrine. Just CA and OH allow acquiring firm SH voting and appraisal.
o Creditors: De Facto Merger Doctrine applies to seller’s creditors because the buyer must
assume seller’s liabilities (if de facto merger).
o Policy: Appraisal rights given to shareholders during a merger because the stockholder is
forced against its will to sell his shares and is a form of compensation for the repeal of the
unanimity rule.
o After Acquisition: Buyer may or may not have some of the seller’s pre-transaction liabilities.
 Seller Must: Either
 Cash Deal: Reinvest cash into its operating assets; or
 DGCL § 275 – Dissolution: Dissolve & pass the cash/shares to the shareholders. This requires —
o (1) Board of Directors must adopt a resolution
o (2) Shareholders (majority) must ratify the resolution
o (3) Firm must send a certificate of dissolution to the Delaware Secretary of State.
o Types of Asset Acquisitions:
 Cash-For-Assets Acquisition: One corporation purchases the assets of the target corporation in exchange
for either cash or for the assumption of liability. There is no change in the constitution documents of either
corporation or a change in the shares outstanding of either corporation.
 Result: Target corporation usually uses cash to settle outstanding liabilities or pay SH.

 Stock-For-Assets Acquisition: Instead of using cash, the acquirer uses common stock. If the acquiring
corporation not only purchases the assets, but also liabilities, then result is same as in a statutory merger.
 Result: Shareholders of the constituent corporations pooled their ownership into a single firm.

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 Stock Acquisition: An acquiring corporation buys all of a seller corporation’s assets and liabilities using the acquiring
corporation’s stock as consideration. After the transaction, the seller corporation becomes a wholly-owned subsidiary
of the acquiring corporation.
o Note: Generally tax-free for seller corporation’s shareholders.
o Advantages: Seller’s creditors don’t have a claim on buyer’s (parent’s) assets.
o DGCL § 122 – Authority: Corporations have the authority to purchase & hold stock of another corporation
and parent corporations are empowered to manage the subsidiary’s affairs.
o Approval:
 Board of Directors:
 Buyer: Board of director approval needed
 Seller: Board of director approval not needed since buyer deals directly with shareholders.
 Shareholders: Neither have right to vote on stock acquisition.
 Seller: Shareholders individually decide whether to accept purchase offer.
o Special Rule for Publicly Traded Companies: Anti-takeover statutes restrain stock acquisitions of publicly
traded companies.
 Buyer: May be required to approve the issuance of the shares required to complete the transaction if it
exceeds the 20% threshold under NYSE/Nasdaq rules. 20% rule is key.
 Seller: Shareholders get voting rights on the effect of the acquisition.
 Exp: Whether stock acquired by buyer can vote or whether buyer can execute 2nd stage cash-
out statutory merger.

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 Special: Rules and types of mergers/acquisitions.
o DGCL § 203 – Business Combo Anti-Takeover Statute: Default Rule. IMPORTANT
 Interested Shareholder: Corporation shall not engage in a business combination with any stockholder for
a period of three years following when stockholder becomes an interested shareholder.
 Interested: This is important and on the test.
o (1) Owns: 15% of outstanding voting stock; or
o (2) Both:
 (a) Owned 15% at any time in the last 3 years; and
 (b) Is an officer/director or affiliate of the corporation.
 I.E.: Three year look back + three-year hold period.
 Unless: Either
o (a) Before shareholder became interested, the board of directors either;
 (1) Approved the business combination (backdoor merger); or
 (2) Transaction by which the shareholder became interested.
 Essentially: Gave Board of Directors merger agreement + proposed
takeover before.
o (b) Shareholders already owned 85% of the corporation’s outstanding voting stock; or
 However: Practically must be 90% to qualify as a short form merger (if truly
hostile).
o (c) Post Transaction approved by
 (1) Board of directors; and
 (2) 2/3 of the rest of the outstanding shareholders.
 However: The corporation can opt out by express opt-out — (a) In the original charter; (b) In the
bylaws; or (c) Shareholders vote amending the charter.

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o Triangular Acquisition: When the acquirer creates a wholly-owned subsidiary (acquisition vehicle),
which in turn merges with the selling entity. There are three types of triangular acquisition —
 Forward Triangular Merger: Acquisition where a target corporation is merged into a
shell subsidiary owned by the acquiring corporation. Merger approved by aquirer’s
board.

 Reverse Triangular Merger: Acquisition where an acquiring company creates a shell

subsidiary, the shell subsidiary purchases the target company and the shell subsidiary is
then absorbed by the target company.

 Triangular Asset Acquisition: Acquisition where the acquirer creates a shell subsidiary,
the subsidiary purchases the assets or stock of the target corporation, and the target
corporation dissolves (if involving assets).

 Law: Acquirer’s shareholders don’t have to vote (not technically constituent to merger), however,
shareholders may opt to change this rule in the acquirer’s charter.
 Exceptions:
o California: Parent shareholders have voting rights if —
 (1) Parent stock used as consideration; and
 (2) Dilutes pre-existing shareholder’s voting power by over 5/6
o MBC: Same as California, however, no appraisal rights.

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o Two-Step Acquisition: Where an acquiring corporation first makes a tender offer for a majority of a target
corporations shares. After gaining control of a majority of the target corporation’s shares, the acquiring
corporation then engages in a squeeze-out merger to obtain control of the target corporation.
 Rational: The acquiring firm is able to gain control of the target faster because it can close the first
stage faster than a statutory merger or asset sale. Also safer to do.
 Process:
 (1) Stock Acquisition: Acquirer over 50% of the target’s voting shares.
o Note: If this is a hostile takeover, must get to 90% (to do a short form merger).
 (2) Back End Triangular Merger: Buyer drops down a subsidiary and the subsidiary
mergers into the partially owned target corporation (squeeze out).
 (3) Optional: Complete short form merger with the newly formed subsidiary and acquirer the
target’s assets and liabilities


o Leveraged Buy Out: When an acquiring company utilizes debt provided by a debt investor to acquire control
of and take over a target corporation. In a leveraged buyout, the acquirer is taking on the debt.
 Mezzanine Debt: Usually financed leveraged buyouts. Mezzanine debt occurs when a hybrid debt
issue is subordinated to another debt issue from the same issuer. Mezzanine debt has warrants or
embedded equity instruments attached to it, which increases the value of the subordinated debt and
allows for greater flexibility.
 Note: Bridges the gap in a capital stack between bank debt and equity financing.
 Risk: Often the highest-risk form of debt.
 Cash Flow: Most important factor in a leveraged buyout => The target corporation’s cash flow must
be sufficient to pay down debt.


o Recapitalization: Type of corporate reorganization that involves substantial change to a company’s capital structure
 Process: (1) Corporation forms a wholly-owned acquisition subsidiary; (2) Common stockholders of
corporation approve statutory merger into the subsidiary; (3) The subsidiary acquires all assets & liabilities
through a statutory stockholder; & (4) Preferred stockholders receive subsidiary shares in the merger.

11
Miscellaneous Legal Issues:
 Internal Affairs Doctrine: Doctrine that the law of the state of incorporation governs all questions of internal affairs.
o Application: States may not attempt to regulate structure of foreign corporation.
o VantagePoint Venture Partners v. Examen, Inc. (Del. 2005 – pg. 85): VantagePoint owned 83% of preferred stock
in Examen and 0% common stock. Under Delaware law, shareholders vote as a single class and VantagePoint
lacked the votes to block the merger. Under California law, Vantagepoint can defeat merger, while under Delaware
law it cannot. CA statute purported to apply CA law to foreign corps. with sufficient ties to CA.
 Issue: Does the internal affairs doctrine trump the pseudo corporation doctrine?
 State of Incorporation: Creates the corporation, prescribes its power, and defines the rights that
are acquired by purchasing shares. Only the laws of the state of incorporation govern and
determine issues related to a corporation’s internal affairs.
 Due Process Clause: Directors and officers have a significant right to know what law will be
applied to their actions and stockholders have a right to know what standards of accountability
they may hold managers to.
 California Rule § 2115 – Outreach Statute: The articles of foreign corporation are deemed
amended to comply with CA law if, inter alia, more than half the company’s stock is held by CA
residents and if at least half of its business is done in California.
o Court: Rejected in Delaware. The Due Process Clause and the Commerce Clause
prohibit CA from applying its law to a foreign corporation’s internal affairs. In addition,
this would have to be recalculated every year.
 Policy: Not using this law promotes stability.
 Reasoning: (1) We need consistency, certainty, & predictability; and (2) Examen is incorporated
in Delaware, so Delaware law applies.
 Holding: The law of the state of incorporation govern matters related to the internal affairs of a
corporation. IAD is default rule, but can be contracted around.
 Preferred Shareholder Issues: Preferred stock has no voting rights under the DGCL, unless expressly granted in the charter.
o If Granted: (1) Must also vote on any change to charter that materially & adversely affects these rights, and (2)
Can’t avoid their vote by using a parent/subsidiary merger transaction.
 Note: This includes any transaction with the prong one outcome, not just pure statutory mergers.
o Elliott Assoc. v. Avatex Corp. (Del. 1998 – pg. 80): Avatex corporation proposed a merger with a wholly-owned
subsidiary in order to effect a reorganization that would change the charter. According to charter, preferred shares
had no voting rights except on any “amendment, alteration, or repeal” of the certificate of incorporation “whether by
merger, consolidation, or otherwise,” that “materially and adversely” affects the rights of the preferred shares.
Plaintiff sued arguing class voting was required for transaction.
 Issue: Under the charter/certificate of incorporation, is class voting required for preferred shareholders or is
the corporation free to amend its certificate by using a parent/subsidiary merger.
 Consolidate: Meant that more than a mere DGCL § 251(b)(3) merger could trigger this provision.
Consolidation = there are no surviving corporations, a new corporation is created.
 Court Interpretation: Charter is evincing the intention of allowing preferred shareholders to vote
on a variety of other mergers & transactions that affected the certificate of incorporation.
 Holding: Cannot sidestep a voting of the preferred stockholders to amend a certificate of incorporation by using
a parent/subsidiary merger transaction.
 Application: When a certificate grants only the right to vote on an amendment, alteration or repeal, the
preferred have no class vote in a merger. When a certificate adds the terms “whether by merger,
consolidation or otherwise” and a merger results in an amendment, alteration or repeal that causes an
adverse effect on the preferred, there would be a class vote.
 Appraisal:
o DGCL § 262 – Scope & Mechanics: Appraisal rights generally apply in cash mergers for the target corporation, but not
in stock mergers.
 Permitted: Stockholders entitled to appraisal of fair value of its shares if —
 (1) Hold shares as of the date of the appraisal demand;
 (2) Hold shares continuously through effective date of the relevant M&A; and
 (3) Must neither vote in favor of such M&A or otherwise consent to it in writing.
 Application: Shareholders seek an appraisal of the fair value of such shares from Delaware Court of Chancery.
 However: No appraisal rights if —
 (1) Shares That Are: (a) Traded on a national securities exchange, or (b) Held by over 2000 holders
 (2) Shareholders are not required to vote on the M&A transaction
 (3) Receiving shares from buyer, unless the seller is receiving illiquid securities (not publicly traded).
 However: Still get appraisal rights if shareholders receive anything other than —
o (1) Shares of buyer; (2) Shares of another corporation listed on a national exchange or
held by >2000 shareholders; or (3) Receiving cash in lieu of fractional shares.

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o Fair Value:
 Weinberger v. UOP, Inc. (Del. 1983 – pg. 96): Signal owned 50.5% of UOP and wanted to acquire
the other 49.5%. Signal dominated the board and had directors who served on both boards undertake a
“feasibility study” for the benefit of Signal, determining a favorable price to pay for acquisition. Study
determined $24 would be fair, minorities not told this, and Signal offered $21. UOP minorities
accepted this. Plaintiff brought suit on behalf of minorities claiming Signal breached fiduciary duties
owed to minority holders.
 Issue: Is a minority shareholder vote in favor of a proposed merger fair if the shareholders
weren’t given information on the highest price that the buyer was willing to offer for the shares?
o Determining Price: Courts must take into account all factors & elements which
reasonably might enter into fixing of value.
 Factors: (1) Market value; (2) Asset value; (3) Dividends; (4) Earning
prospects; (5) Nature of enterprise; (6) Other facts known @ merger date
that may speak to merged entity’s future prospects; and (7) Control premium
(worth more if buying control share). Anything not speculative.
 However: Should not consider speculative/synergistic efforts of the merger.
 Exp: The accomplishment of expectation of the merger.
o Note: If disinterested board approves => strong evidence of value.
 Holding: In a parent-subsidiary/controlling shareholder merger, courts will apply entire
fairness standard with the burden on controlling shareholder to prove fair price & fair dealing.
o Result: Merger failed because (1) Parent set up all terms of the merger; & (2) Never
disclosed a feasibility study which concluded $24 was fair. Doubts $21 was fair.
 Special Rules for 2 Step Transactions:
 CEDE & Co v. Technicolor, Inc. (Del. 1996 – pg. 100): Technicolor was in financial trouble,
controlling shareholder of MAF determined it would be attractive takeover candidate.
Technicolor agreed to a two-step merger in which first a tender offer then a cash out merger
with any remaining shareholders. MAG acquired 82% of Technicolor and controlling
shareholder developed plan for improving Technicolor’s performance. CEDE did not accept
tender offer and dissented from cash-out merger. CEDE sued for appraisal. Trial court
excluded controlling shareholder’s plan and CED appealed.
o Issue: In a two-step merger, should plans of the new majority owner re target firm be
included in the valuation of the minority shares to be cashed out in the second step?
 Element of Fair Value of Dissenter Shares: Value added by buyer before
the final step accrues to benefit of remaining shareholders.
 Counts for Valuation: If action & plan are implemented (1) after
step one of the transactions, but (2) before the final merger.
 Note: This does not include “accomplishment/expectation” because it must
be something that is concrete.
o Holding: Value added to the going concern by the majority acquirer during the
transient period of a two-step merger accrues to the benefit of all shareholders, and
must be included in the appraisal process.

13
Acquisition Documents: 9/12
Preliminary Documents:
NDA/Confidentiality Agreement: Legal contract between two or more parties signifying a confidential relationship
exists between them because the parties are sharing information among themselves that should not be made publicly available.
 Provisions: (1) Obligates the buyer to keep information received in strict confidence; (2) Exceptions for publicly
available or “independently developed” information (usually); (3) Secrecy of deal negotiations (most); and (4)
Standstill provisions (public companies).
 Requirement: Must deal with the extent to which obligations modified on closing.
o Usually: NDA superseded by provisions in the main agreement.
o Sunset Provision (Often Included): Termination date for the NDA if the acquisition doesn’t close.
 If No NDA: Some state laws provide some protections for trade secrets.
o Application: 40+ jurisdictions have adopted uniform trade secrets act.
Letters of Intent: Outlines the terms of a deal and serves as an “agreement to agree between the two parties.
 Includes: (1) Nature of contemplated transaction; (2) Summary of basic terms (Payment, Conditions of closing);
and (3) Exclusive Dealing/Exclusivity Provisions (usually).
 Usually Nonbinding: Moral obligation to close the deal on stipulated terms.
o Note: It’s best to explicitly stipulate whether specific terms are binding/nonbinding.
o Promissory Estoppel Doctrine (NY Law): A letter of intent will be enforceable if —
 (1) There is clear and unambiguous intent to be bound; and
 Texaco, Inc. v. Pennzoil Co. (Tex. 1987 – pg. 258): Pennzoil and Getty Oil entered into a
merger agreement, had signed a memorandum of understanding, and had made a joint
press release to that effect. Texaco went over the top on Pennzoil and made a far more
lucrative offer for Getty Oil. Getty Oil reneged on the memorandum with Pennzoil and
accepted Texaco’s off. Pennzoil sued for tortious interference requesting damages.
o Issue: Can Pennzoil sue for tortious interference with a contract?
 Factors to Consider: Note that the existence or absence of any of the
four factors alone generally is not conclusive. KNOW THESE
 (1) Either party expressly reserved right to only be bound by
written agreement;
o Note: If either party expresses intent not to be bound except
by written agreement => Informal contract can’t be binding.
 (2) Partial performance;
 (3) All essential terms have been agreed upon (Exp: Term Sheet);
o Solution: Put “There are still other terms to be decided.
 (4) Complexity/magnitude of the transaction was such that
formal executed agreements would normally be expected.
o Holding: A defendant may be liable for intentional interference with a contractual
relationship even if the defendant is mistaken as to the legal significance of the facts
giving rise to the contractual duties and believes that the agreement is not legally
binding.
 (2) There is reasonable and foreseeable reliance on such promise by the party asserting such estoppel.
 Other Rules:
o (1) Mere failure to perform the ministerial function of signing will not defeat the efforts of the parties if
an agreement has previously been reached;
o (2) Attorneys may be deemed to be acting as agents of a party in negotiating a binding agreement; and
o (3) If a party has indicated that a deal has been reached, capricious refusal to sign such agreement does
not void the fact that an agreement exists.
Investment Banker Engagement Letters: Engagement letter between parties to an acquisition and an investment banker
that outlines the services to be provided by the investment banker and specifies compensation.
 Typical Terms: (1) Find acquisition partners; (2) Negotiate the terms of the transaction; (3) Fees to be paid; and
(4) Performing due diligence and research on an opposing party. Note: May also include delivery of a fairness opinion.
 Success Fee: Typically, how investment bankers are paid. Fees are contingent on completion of the transaction.
Usually a percentage of the total transaction.
o Covered Transaction: Usually the most negotiated term. Is a description of the transaction, often
includes a tail period for which similar transactions would qualify.

14
Acquisition Agreement: Contract governing the merger of two or more companies that is binding between those
companies and enforceable by law.
 Key Components: Of an acquisition agreement.
o (1) Identification of the Parties
o (2) Terms & Structure: This is the main varying provision between a stock & asset acquisition.
 Stock/assets to be acquired
 Consideration
 Timetable for Close
o (3) Representations and Warranties: Statements of fact that exist/will exist at closing
 Core Representations (Both Parties): (1) Party’s ability to enter into and perform the contract;
(2) Entity’s standing & authority; (3) Outstanding capital; and (4) Title to assets.
 Seller: (1) Validity of formation and organizational documents; (2) Confirmation of capitalization
+ valid issuance of all outstanding shares; (3) Compliance with applicable law (regulations,
licenses, permits, filings, etc.); (4) Confirmation of corporate authority; (5) No conflict with
organizational documents, material agreements or applicable laws; (6) No required consents for
execution and performance; (7) Accuracy of public reports and financial statements; (8) No
material legal proceedings; (9) Confirmation of tax matters; (10) Confirmation of employee
matters; (11) No undisclosed material liabilities; (12) No undisclosed environmental liabilities;
(13) Confirmation of receipt of fairness opinion; and (14) Confirmation of accuracy of provided
information.
 Purchaser: Less detailed, usually just core representations and warranties.
o (4) Covenants: A binding agreement or written contract in which damages are liable to be paid, if broken.
 Breach of Covenant: Remedies paid under termination.
 Pre-Closing (Mostly Seller): Conduct of the business pre-closing
 Maintenance of existing business
 Limits on acquisition/disposition of assets
 Limits on incurrence of additional debt
 No change in tax/accounting process/elections
 No settlement of material claims/litigation
 No stock-splits, etc.
 Deal Protection (Stalking Horse Protections):
 No Shop: Can’t actively solicit competing offers.
 No Talk: Can’t even discuss offers
o Note: This is problematic because of fiduciary duties of the board.
 Go Shop Clause: Enables directors to actively solicit competing offers for a limited time period
after signing the acquisition agreement.
 Satisfies Fiduciary Duties: Common in conflict of interest transactions/management
buyouts.
 Post Close: Obligate the parties to work together on a smooth transfer of assets/liabilities.
o (5) Conditions Precedent (to Closing): A condition that must be satisfied by a party to a transaction,
failing which the other party is not bound to close the transaction.
 General (Both Parties): (1) Receipt of required shareholder approvals; (2) Receipt of required
SEC and/or regulatory approvals; (3) Continued accuracy of representations and warranties; (4)
Permit continued access to information; (5) Seek to satisfy all required legal or regulatory
conditions to closing; (5) Non-solicitation of alternative transactions; (6) Performance of all
required obligations of each party; and (7) Federal tax opinion (if tax-free transaction).
 Purchaser: Generally, gets walking rights if —
 (1) Failure of Condition: There is no breach remedy, unless it also breaches a covenant.
o Exp (of a covenant breach): Best efforts clause.
 (2) Due Diligence Unsatisfactory
 (3) Material Adverse Change: Seller’s value declines significantly after signing
o Note: There is usually a carve-out for global political conditions, etc.
o Litigation: MAC’s are not great because there is usually a lot of litigation around
therm.
 (4) Fails to Secure Financing.

15
 o (6) Termination/Amendment Provision: Clause that details the circumstances under which a party may end
or amend the acquisition agreement.
 Termination Usually Allowed If: (1) Mutual agreement to terminate <= This is important, have it in
there; (2) Breach of agreement by other party; (3) Regulatory approvals denied; (4) Transaction not
consummated within the stated time period (Exp: 1 year from the date of the agreement, etc.); and (5)
Fiduciary duties require (Exp: In light of a higher bid).
 Effects of Termination:
 (1) Payment of other party’s expenses
 (2) Break-Up Fee: A penalty set forth in an acquisition agreement, to be paid if the target
corporation backs out of a deal. This is done to protect the deal.
o Party may pay fee without triggering breach of the agreement.
o Note: Usually combination with express limitations on claims outside fee
o Fiduciary Duties: Having a breakup fee could be problematic for the board.
 Drop Dead Date: When either party may refuse to close the deal without penalty.
o (7) Miscellaneous Boilerplate: Standardized text used for efficiency and to increase standardization of the
acquisition agreement.
 Exp: (1) Governing law; (2) Consent to jurisdiction of certain courts; (3) Waiver of jury trial; (4)
Arbitration; (5) Interpretation clauses; and (6) Indemnification (usually only if private firm).
o (8) Schedules (of Disclosure Letter): Limits, modifies, completes, or expands the seller’s representations.
 Might Include: (1) Itemization of all assets owned by the seller; and (2) Exceptions to blanket
statements in the representations and warranties.
Supporting/Supplemental Documents (to an Acquisition Agreement): Documents that supplement the acquisition
agreement. May include —
 Stock Purchase Agreements: Agreement that two parties sign when shares of a company are being bought or sold.
 Employment/Non-Compete Agreements: Documents between the firm and an employee setting forth terms of
the relationship they must follow.
 Earnout Agreements (Private Only): A contractual provision stating that the seller of a business is to obtain
additional compensation in the future if the business achieves certain financial goals, which are usually stated as a
percentage of the gross sales or earnings.
o Contingent pricing mechanism
o Buyer pays seller part of price as a % of future earnings/revenue. Usually based on EBITDA
o O’Tool v. Genmar Holdings, Inc. (10th Cir. 2004 – pg. 285): Plaintiff agreed to a merger with Genmar,
wherein he received cash consideration and earnouts for five years that depended on his performance and the
performance of his division. Plaintiff sued Genmar for breach of contract because Genmar made business
decisions that rendered plaintiff’s earnouts worthless.
 Issue: What obligations do earnouts create for a company.
 Earnouts: Often there is a covenant of “good faith & fair dealing” in earnout clauses.
o Breach: If the purchaser’s actions undermine seller’s ability to receive earnouts =>
may be deemed a breach of good faith and fair dealing covenant.
 Exp: Purchaser can’t provide earnouts & then actively takes steps that would
limit/prevent earnouts from being paid.
o Good Faith and Fair Dealing: To interpret and act reasonably.
 Rationale: Convention designed to protect the spirit of an agreement when, without violating
an express term of the agreement, one side uses oppressive or underhanded tactics to deny the
other side the fruits of the parties' bargain.
 Holding: An acquirer will breach a contract by not giving plaintiff a fair opportunity if the acquirer
cannot provide earnouts, then actively takes steps to limit or prevent the earnout from being paid.
o Richmond v. Peters (6th Cir. 1999 – pg. 290): Richmond sold business to Peters, stock purchase agreement set
out an earnout agreement based on aggregate profits and stated business would-be run-in accordance to “sound
business practices.” After Peters received no payments, he brought suit alleging breach of fiduciary duties for
not running business properly.
 Issue: Does a fiduciary duty attach to earnout agreements?
 Fiduciary Duties: Requires evidence of mutual knowledge of confidentiality or the undue
exercise of power or influence.
o Here: Both parties were experienced business people and a provision requiring Peters to
operate business in accordance to sound business practices didn’t impose a fiduciary duty
 Holding: No fiduciary relationship exists between Richmond and Peters.

16
Closing Documents: All documents, agreements, and certificates deliverable to the parties at close of the agreement.
 Opinions of Counsel: Formal, written report by an attorney that outlines (1) attorney’s understanding and
analysis of the facts basic to the acquisition; (2) implications of applicable laws to the acquisition; and (3) a
suggested course of action.
o Dean Foods Company v. Pappathanasi (Mass. 2004 – pg. 301): Law firm hired to create an opinions of
counsel letter which included a “no-litigation” provision. The law firm failed to disclose that there was a
grand jury investigation into the company. Three months following the close of the transaction, the client
was criminally indicted and subsequently entered into a plea agreement to pay a $7.2 million fine.
 Issue: Is a law firm liable for issuing an opinions letter that was incorrect and caused injury to the
client, when they were unaware of the omitted information.
 Law Firms: May be liable for issuing an opinions of counsel if —
o (1) Firm knew (or reasonably should’ve known) that the opinion was incorrect; &
o (2) Purchaser/seller relied on it.
 Knowledge Qualifiers: Do not necessarily mitigate damages. If there are
facts/circumstances that the attorney should have known about, may still be liable.
 Holding: Law firms may be found liable for negligent misrepresentation when actions taken in
preparing an opinion letter are not “consistent with the customary practices relating to an opinions
letter.
 Here: Firm failed to follow the firm’s own policy and failed to exercise customary due
diligence as reflected by various bar association reports. Liable for the $7.2 million.
 Supplement to Disclosure Letter: Seller’s update of information in the disclosure letter between signing and
closing.
 Forthright Negotiator Principle: When multiple interpretations of an acquisition agreement are reasonable,
courts may consider extrinsic evidence from the negotiation to ascertain its meaning.
o United Rentals, Inc. v. RAM Holdings, Inc. (Del. 2007 – pg. 280): United’s lawyer negotiated the terms
of a merger with RAM’s lawyer. United clearly communicated it was a priority for United to have a
mechanism to seek specific performance of the merger, and drafted the merger agreement accordingly.
RAM reviewed agreement and striked specific performance provision. RAM consistently communicated
that United has a right to refuse to close for $100 million and did not have a right to specific performance.
RAM stated that it could not include an equitable remedy above paying a penalty. In the final agreement
there was a right to specific performance and a provision stating the exclusive remedy was $100 million
that precluded equitable remedies. Deal didn’t go through and United sought specific performance.
 Issue: Where a contract’s meaning is ambiguous, can the subjective understanding of one party
bind the other party when the other party knew or should have known of that understanding.
 If Parties Don’t Negotiate Openly: Provisions may not be interpreted in a certain way.
 When Negotiated Fairly: Court consider the following evidence
o (1) What one party subjectively believed the obligation to be; and
o (2) Whether the other party knew or should have known of such belief.
 Here: United’s counsel failed to convey his client’s belief that specific performance still
applied, notwithstanding liquidated damages. However, RAM’s counsel did covey belief
that liquidated damages clause precluded specific performance.
 Holding: Where a contract’s meaning is ambiguous, the subjective understanding of one party
may bind the other party when the other party knew or should have known of that understanding.
 Public Companies: Special rules.
o Agreement is usually much shorter.
o Limited representations and warranties (based on the current SEC filings).
o No post-closing indemnification rights against the seller’s public shareholders.

17
The Mechanics of Acquisitions – Federal Securities Laws: 9/19
Securities Act of 1933: The general rule is that you file a Registration Statement with the SEC when you engage in a
public offering of securities.
 Public Offering: When securities are offered to over 35ish people.
 Rule 145: Must comply with Section 5 (registration) of the ’33 Act if —
 (1) Seller’s shareholders receive buyer’s securities; and
 Offer/Offer to Sell/Sale: Shareholders required to elect whether to accept new/different
securities in exchange for their existing securities.
 (2) Number of seller’s shareholders is large.
o Note: Overrides previous “no sale:” theory in M&A with share exchanges.
o Timeframe: This affect timetable for acquisition.
 Form S-4 Registration Statement: A filing with the SEC by a publicly traded company that is used to register
any material information related to a merger or acquisition.
o Required For: (1) Statutory Mergers; (2) Compulsory stock exchanges; and (3) Asset sales.
o If Voting Required: This form can serve as a proxy statement for either party’s shareholders.
o Incorporation by Reference: If the S-4 Form incorporates by reference other public disclosure
documents, the companies must send the S-4 Form 20+ days before the shareholders meet to vote.
 Exception: Can file a Form S-1 to get around this, but this form is way more extensive.
 Registration Statements: A set of documents, including a prospectus, which a company must file with the U.S.
Securities and Exchange Commission before it proceeds with a public offering.
o Timeframe: A registration automatically becomes effective 20 days after filing. However:
 Rule 473(a) – Delay: Procedure by which delaying amendments are automatically deemed field.
 Accomplished By: Including a ¶ on the cover of the registration statement
 Effectuates: An auto-continuing amendment of the registration statement until amended again.
 Rule 461 – Acceleration: Grants the SEC the power to grant or withhold acceleration of the effective date
of a registration statement as a means of compelling the distribution of the preliminary prospectus during
the waiting period.
 Requirement: Must request 2+ days before the desired Effective Day.
 Note: Conditioned on filing a delaying amendment.
o Communications with Seller’s Shareholders: In a negotiated stock swap merger.
 Mailing: Can mail purchase procedures, however, you usually do not because it can’t include
proxy card.
 Usually: Announce transaction immediately after reaching agreement.
 Buyer: Must file communications text under Rule 165 & Rule 425
 Seller: Makes similar filing under Rule 14a-12.
 Special Transactions:
o Reverse Merger: A way for a private company to go public. Usually simpler, shorter, and less
expensive than an IPO, investors of the private company acquire a majority of shares of a public shell
company, which is then combined with the purchasing entity.
 Procedure: Private company merges into a public shell company without assets.
 ~85% of shell stock given to private corporation’s owners.
 The private corporation is dissolved.
 Public Shell Company Survives: Changes its name to the private corporation’s name.
 Advantage: Minimal time getting registered.
 However: Doesn’t raise new capital (unless there is also an offering as well).
o Special Purpose Acquisition Companies (SPAC): A publicly-traded buyout company that raises collective
investment funds in the form of blind pool money, through an initial public offering (IPO) for the purpose of
completing an acquisition of an existing private company, sometimes in a specified target industry.
 SPAC: A shell company with no operations, but raises funds through an IPO
 Requirement: Registration statement lists the organizer’s intention to merge/acquire another
corporation with the IPO proceeds. Proceeds held in trust and released upon acquisition. Must:
 (1) Complete acquisition within 18-24 months; and
 (2) Use 80% of the SPAC funds.
o Note: If the transaction fails, the SPAC must return the funds to the
Shareholders.

18
 o Exchange Tender Offer: A form of tender offer, in which securities are offered as consideration instead
of cash.
 Timeframe: Can commence tender offer before the effective date (as early as filing the
registration statement).
 Rule 162(a) – Mechanics: File a combination registration statement and tender offer statement,
then distribute this to the target company’s shareholder’s
 Policy: SEC committed to more expeditious review.
 Registration Exemptions:
o Securties Act § 3(a)(9) – Voluntary Exchanges & Recapitalizations: Covers any SEC registered
securities (1) exchanged by the issuer with its existing shareholders exclusively, (2) where no
commission or other remuneration is paid for soliciting such exchange.
 Time, Inc.: The limitation on payment for solicitation is relatively inflexible.
 Note: This is important for poison pill plans.
o Securities Act § 4(a)(2) - Private Placements: Exempts from registration transactions by an issuer not
involving any public offering. Specific test for determining whether it qualifies.
 SEC Regulation D – Limited Offerings: Securities offered to a maximum of 35 non-accredited
investors are exempt for registration.
 Securities Act of 1934 – Filing Requirement: Reporting requirement for publicly held companies must file
reports with the SEC.
o Publicly Held: Must register its securities, triggered by either —
 ’34 Act § 12(a) & (g): Securities traded on a national stock exchange; or
 Regulation 12g-1: (1) Issuer has assets over $10 million; and (2) a single class of equity
securities is held of record by over 500 shareholders.
Disclosure Requirements: There is no general over-arching legal duty for a corporation to disclose material facts, plans,
and strategies to the trading markets.
 Basic, Inc. v. Levinson (1988 – pg. 589): Combustion discussed possibly merging with Basic starting in 1976.
Over two years, Basic made three public statements denying that it engaged in discussions. Allegedly in reliance
of this, plaintiff sold his stock at artificially low prices. Plaintiff brought suit, alleging statements violated Rule
10b-5. District court found statements not material, appeals court reversed. Supreme Court granted certiorari
o Issue: When must a merger negotiation be disclosed before its omission is a material statements of fact?
 Materiality (Prospective Event): Depends on the probability that the event will occur and the
importance of the event to the company.
 Mergers: Can be most important to company’s existence, therefore can be material.
o Facts and Circumstances: Depends on the significance that a reasonable
investor would place on the withheld or misrepresented information.
o Note: Silence does not equal misleading.
 Agreement-in-Principle v. Reasonable Investor: Court refuted agreement in principle test and
went with reasonable investor test instead.
 Agreement-in-Principle Test: Disclosure triggered based on having reached an
agreement on price and structure of the transaction.
 Reasonable Investor Test: Represents to some extent a probability vs. magnitude test.
o Probability: That a merger or acquisition agreement will in fact be reached; vs.
o Magnitude: Of the impact on the subject company (either the target or the acquirer).
o Holding: Misstatements about merger negotiations can be material statements of fact, depending on the
significance that a reasonable investor would place on the withheld or misrepresented information.
 Exceptions: To the general rule.
o 34 Act Reports: (1) Quarterly Reports; (2) Annual Reports; (3) Periodic Reports; and (4) Proxy Statements.
o Federal Securities Regulations: Specific events often trigger disclosure.
 Exp: (1) Form 8-k triggering events; (2) Regulation F-D; (3) Proxy Solicitation; (4) Tender
Offers; (5) Periodic reporting requirements; and (6) Beneficial Ownership (greater than 5%).
o Exchange Rules: Rules that an exchange requires companies it lists to follow.
 General Duty: Timely disclose material events/news.
 Note: Market rumors/unusual activity may trigger requirement to confirm/deny.
 M&A: Some exchanges have specific rules for this.
o Voluntary Statements: Half-truth rule applies (below).

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 Disclosure-Related Liability:
o Rule 10b-5 Liability: It is illegal for anyone to directly or indirectly use any measure to defraud, make
false statements, omit relevant information, or otherwise conduct operations of business that would
deceive another person in relation to conducting transactions involving stock and other securities.
o ’33 Act Liability: In proxy solicitations or tender offers involving exchanges of securities.
o Half-Truth Rule: Disclosure must not omit any material information required to make it complete if the
duty of speak attaches (or a voluntary statement is made).
 Disclosure: May not omit any material information necessary to make a complete/accurate
investment decision. I.E.: No partial disclosure if misleading in light of the concealed facts.
 Materiality: Reasonable investor standard where there is a substantial likelihood that a reasonable investor
would consider the information important in making an investment decision.
o TSC Industries, Inc. v. Northway Inc. (1976 – pg. 549): National acquired 35% of TSC’s stock in 1969,
several National execs placed on TSC’s board. Companies planned to merger and a joint-proxy statement
was issued to shareholders. Northway brought suit, alleging TSC committed fraud in not disclosing in
proxy statement National was already highly involved with TSC.
 Issue: Is a fact material pursuant to Exchange Act § 14a-9 when there is a substantial likelihood
that a reasonable shareholder would consider it important in deciding how to vote?
 Exchange Act § 14 Materiality Reasonable Investor Standard: Material if there is a
(1) substantial likelihood that a (2) reasonable investor (3) would consider the
information significant/important given total mix of information (4) in making an
investment/voting decision.
 Not Required: Actual reliance showing (omitted fact effected outcome), but, see
pleading standard.
 Disclosure: Must be taken as a whole (i.e., could the omitted fact be implied from the
disclosure).
 Holding: A fact is material pursuant to Exchange Act § 14 if there is a substantial likelihood that
a reasonable shareholder would consider it important in deciding how to vote.
 Note: This demonstrates why fairness opinions are written broadly, as an interpretation
of all the relevant statistical analyses, without giving undue weight to any specific factor.
o Special Rule for Omissions: If something is already publicly known (in the total mix), omission doesn’t
equal misleading
 Lewis v. Chrysler Corporation (3rd Cir. 1991 – pg. 558): Chrysler’s failure to disclose that the
poison pill might be used to maintain manager control wasn’t an actionable omission cause
investors are charged with the knowledge of the universal interest of corporate officers and
directors in maintaining corporate control. Shareholders: Charged with some general knowledge
of information.
 Exp: Corporation will act to prevent loss of control (takeover defensive tactics).
 Pleading Standards: Response to loosening of material standards = tighter pleading Standards
o Private Securities Litigation Reform Act (PSLRA): For there to be a 10b-5 action, plaintiffs must
allege —
 (1) Misstatement or omission;
 (2) Of material fact;
 (3) Made with scienter;
o Scienter: Intent or knowledge of wrongdoing.
 Note: Must please a strong inference of science, i.e. state with
particularity allegations raising inference. Exp: Intentional, knowing, or
severely reckless.
 (4) On which the plaintiff relied;
 (5) That proximately caused plaintiff’s injuries.
 Note: This also incorporated FRCP 9B) requirements into the pleading standard.
o Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp. (5th Cir. 2009 – pg. 561): In order to
adequately plead the fraudulent intent element of common-law securities fraud with particularity, the
plaintiff must set forth specific facts to support an inference of fraud from facts that either— (1) show the
defendant’s motive to commit securities fraud; or (2) identify the circumstances that indicate conscious
behavior on the part of the defendant.

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 Forward Looking Statements: Information that a company provides as an indication or estimate of its future
business. Typically includes sales projections, market conditions, company spending, and future earnings.
o Note: These are inapplicable to going-private transactions.
o Governing Law: The Private Securities Litigation Reform Act (“PSLRA”).
o SEC’s Position: Encourages this because the information is coming directly from the “driver’s seat.”
o Safe Harbors: For Forward Looking Statements.
 Bespeaks Caution Doctrine (Statutory Equivalent): If a forward-looking statement is
accompanied by meaningful cautionary language, then it’s not considered misleading and no
liability will be found.
 Note: Boilerplate warnings/qualifying language is not sufficient to excuse liability.
 Asher v. Baxter Int’l Inc. (7th Cir. 2004 – pg. 582): Baxter manufactures medical
products and released second quarter 2002 financials that were lower than expected.
Stock plummeted! In 2001, Baxter projected revenue would grow + made a stock-for-
stock acquisition between 2001 and 2002. Asher, person that exchanged shares, brought
sought claiming projections were materially false because (1) Baxter division did not
meet internal budget, (2) Baxter closed multiple low production plants, and (3) Baxter
experienced a product failure. Baxter didn’t change forecast based on this. District court
dismissed, Asher appealed.
o Issue: Must a company include all important variables in cautionary language
accompanying a forward-looking statement even as risk change, in order to
receive safe-harbor protection under the Privacy Securities Litigation Reform
Act?
 PSLRA § 77z-2(c)(1)(A): Provides a safe harbor to written and oral
statements that are accompanied by meaningful caution.
 Fraud-on-the-Market Theory: All public information is
reflected in stock price and therefore affect investors,
Boilerplate language not enough to provide protection for
omission of important variables.
o Holding: A company must include all important variables in cautionary
language accompanying a forward-looking statement, even as risks change, in
order to receive safe-harbor protection under the Private Securities Litigation
Reform Act.
 Puffery/Opinion: Opinions/pugging of general optimistic statements are not considered
actionable. Exp: “High value” or “fair value.”
 Unless: (1) Underlying facts are objectively verifiable; and (2) Opinion is fraudulent.
 Virginia Bankshares, Inc. v. Sandberg (pg. 574 – 1991): In 1986, 1st American &
Bankshares merged. 1st American obtained Bankshares valuation from independent
investment firm, firm reported $42 value based on unverified Bankshares information.
Bankshares board offered to purchase shares for $42 stating this was a premium for
stock. Shareholder’s broad suit claiming stock worth more.
o Issue: Is a statement of belief by a board of directors a material misstatement if
the statement is false?
 Statement of Belief: Can be a misstatement if the statement is false.
 Here: False, because board advertised the price as a premium
when it was really based off what it was valued at.
o Holding: A statement of belief by a board of directors can be a material
misstatement if the statement is false.
 Financial Projections: There is no affirmative duty to disclose internal forward-looking
financial projection documents.
 However: You can disclose if the disclosure — (1) is made in good faith; and (2) made
with a reasonable basis. Note: Protection is granted even without cautionary language.
 Walker v. Action Industries, Inc (4th Cir. 1986 – pg. 578): The SEC encourages
disclosure of internal financial projections, however, absent express SEC disclosure
requirements, no express requirement to disclose financial projections of future
performance required.

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  Disclosure of Assumptions that Underlie Forward Looking Statement: No specifically required,
however, they may be required (for safe harbors) if —
 (a) Material to understanding of projected results; or
 (b) Necessary to satisfy reasonable basis/good faith standard.
 Duty to Amend/Correct/Update: If material changes occur, you must —
 (1) Amend actual filings
 (2) Correct any incorrect statements
 (3) Update statements that were accurate when made but became inaccurate due to
subsequent events. Note: Some courts find that this may not be a duty.
 Disclosure of Preliminary Merger Negotiations:
o NYSE Rules: Confidential discussions permitted without having to disclose.
 However: It’s considered a public disclosure once important matters disclosed outside close circle of
advisers. Note: Emphasis on binding advisers with confidentiality provisions.
 Leaks: If there is a leak, it can cause additional/early public disclosures of negotiations
o Regulation F-D (Fair Disclosure): There is a duty not to (1) selectively disclose (2) material non-public
information (3) to brokers/analysts etc. (4) absent a confidential relationship.
 Selective Disclosure: Once there is a selective disclosure, it must be addressed by broadly
disseminate the material non-public information to the market.
 Exp: Form 8-k (mandated); Press release; Public forum (if publicly announced & open to public).
o Note: May also be made in a forum that has been publicly announced and is open to
the public to attend.
 Safe Harbor: Confidentiality.
 Confidentiality: If there is a confidentiality contract or relationship, you may disclose
anything without triggering Regulation F-D.
o Business Purpose Exception: Can temporarily withhold material information (e.g., merger talks) if —
 (1) There is a good business reason for withholding the information; and
 Exp: Disclosure would jeopardize the merger completion
 (2) Firm/insiders do not trade during the withholding period.
 However: Can’t delay disclosure in bad faith.
o Liability for Disclosure: The materiality of a preliminary discussion depends on — (1) The probability of the
merger actually occurring; and (2) The magnitude of the transaction.
 If Material: 10b-5 liability attaches for misleading statements
 Preliminary Merger Discussions: Are not material until —
 (1) There is an agreement-in-principle between the parties
 (2) As to price & structure of the transaction.
 Note: Agreement-in-principle test rejected by Basic v. Levinson (see pg. 19).
o Corporate Defense Measures (Special Rules):
 Lewis v. Chrysler (pg. 20): The mere implementation of defensive measures will not trigger disclosure.
 Shareholder Guidance: Statements about whether a transaction is in a Shareholder’s best interest is
not actionable, unless there is a misstatement or omission.
 Duty to Disclose Initial Agreement: Triggered by execution of merger, acquisition or similar definitive agreement.
o Item 1.01 of Form 8-k: Where you place the entry into a material definition agreement.
 Note: Not triggered by “non-binding” letter of intent or memorandum of understanding.
 However: (1) Confidentiality and non-solicit provisions may be binding; and (2) “No-shop”
or exclusivity agreements may require disclosure
 Preliminary Merger Discussions: Not necessarily subject to disclosure.
 Pre-Filing Announcements/Jumping the Gun: Governed by Section 5 under the Securities Act
o Gun Jumping: The offeror is making an offer before a prospectus is required and available.
o ’33 Act § 5 – Prohibited Gun Jumping: The following forms of gun jumping are prohibited —
 (1) Pre-Filing: Oral offers, prior to filing of a registration statement.
 (2) Waiting Period: Written offers prior to effectiveness of a registration statement, other than a
Section 10 conforming prospectus (i.e., the “preliminary” prospectus).
 (3) Post-Effective: Written offers after effectiveness of a registration statement that are not
accompanied or preceded by a Section 10 conforming prospectus (i.e., the “final” prospectus).
o Rule 425 - Safe Harbor for Tender Offers & Proxy Communications: Allows parties to discuss, negotiate,
& offer to target firm.
 Procedure: (1) File communication with the SEC; & (2) Include a legend stating read the final statement.

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 NYSE Disclosure Requirements (In Depth): General duty to timely disclose material events/news.
o Mergers & Acquisitions: Confidential discussions permitted, but public disclosure must be
made once “important” matters are disclosed outside of a close circle of advisers.
 Note: Emphasis on binding advisers with confidentiality provision
 Leaks: Can cause additional and/or early public disclosure of negotiations.
o Market Rumors/Unusual Market Activity: There is a duty to respond to market rumors and/or
unusual market activity.
 Exp: Unusual price movements and/or postings or reports of pending transactions may
trigger requirement to confirm or deny.
 Disclosure of Finalized Merger:
o Form 8-K: If you enter into a materially definitive agreement, you must disclose to the public in
a Form 8-K filing.
 Triggered By:
 (a) Execution of a merger, acquisition, or similar definitive agreement.
 (b) No-Shop Provision (even if in a non-binding LOI): Prevent target from
soliciting purchase proposals from other parties for a given duration of time.
 (c) Exclusivity Provisions (even if in non-binding LOI): Prevents you from
doing business with anyone else besides the co-signer to the agreement.
 (d) Regulation F-D event.
 Not Triggered By: Non-binding LOI/MOI alone.
 Note: There are certain provisions (see above) which cause these to be triggered.
o Item 1004 Regulation M–A: Transaction terms that must be disclosed.
 Tender Offer:
 Total # & class of securities
 Type & amount of consideration offered.
 Expiration date of offer
 Whether subsequent offering period will be available.
 Whether offer may be extended
 Withdrawal dates that tender party may withdrawal by
 Procedures to Tender
 Manner in which securities will be accepted
 Statement as to Accounting Treatment of the Transaction if material
 Federal Tax consequences of transaction (if material)
 Mergers (& Similar Transactions):
 Brief description of transaction
 Consideration offered
 Reasons for transaction
 Vote required for approval
 Explanation of material differences in rights of security holders as result of the
transaction
 Statement as to accounting treatment
 Federal Tax consequences of the transaction (if material)
 State Law: Mostly open-ended general obligations of disclosure (unlike federal forms/schedules).
o Obligations Arise Under: (1) Directors’ general fiduciary duties to shareholders; & (2)
Equitable fraud doctrine.
o State Courts: Utilize federal case law, apply Rule 10b-5 & other federal standards.
 Exp: Delaware follows reasonable investor standard and other federal benchmarks.

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Stock Purchases During Acquisition Period by Participants:
 Anti-Manipulation Rule: Buyers cannot purchase its own stock —
o During period after public announcement of a merger, acquisition, or similar transaction involving a
recapitalization, until the earlier of:
 (a) The completion of the transaction; or
 (b) The completion of vote by the target’s shareholders.
 Rule 10b-18 – Anti-Manipulation Safe Harbor: Provides a safe-harbor for issuer repurchases for anti-
manipulation rules under the Exchange Act (including 10b-5).
o Carve Outs: (1) Cash Mergers & Acquisitions; and (2) Routine Stock Buy-Back programs (25% ADTV
Limit). ADTV = Average Daily Trading Volume.
 Regulation M: Generally, restricts repurchases by an issuer of certain affiliates during a distribution.
o Restricted Period (for M&A Transactions):
 Begins: On day proxy solicitation or offering materially disseminates to security holders.
 Ends: Upon completion of the distribution.
o Distribution: (1) Stock <=> Asset; (2) Stock <=> Stock Acquisitions; & (3) Stock-swap mergers
o Distribution Participants: Applies to all “distribution participants,” which includes any person “who
has agreed to participate or is participating in a distribution.”
 Applies to the acquirer and its affiliates in a stock transaction;
 Could apply to a target & affiliates if target is soliciting votes of its stockholders to approve
transaction.
Proxy Solicitation: Proxy solicitation is generally governed by the rules adopted under the Securities Exchange Act of
1934 (i.e., the “Exchange Act”).
 Exchange Act § 14(a): Governs proxy solicitation of publicly held corporation.
o Proxy: Delegation of shareholder voting power to agent (proxy holder).
 Regulation 14A: Gives effect to § 14, governs proxy solicitations generally including —
o Rule 14a-1: Includes definition of solicitation.
o Rule 14a-9: Anti-fraud provision under proxy regulations.
o Rule 14a-12: Pre-filing communications — incorporates legend and filing requirements.
 Shareholder Approval (When Required): (1) Merger agreements; (2) Sale of substantially all of a company’s
assets; and (3) Significantly diluted issuance of equity (Nasdaq – 20% rule).
o State v. Federal Matters:
 State Law: Generally, focuses on the matters triggering stockholder approval requirements.
 Federal Securities Law: Applicable to public companies and generally focuses on disclosures
regarding the purpose of the solicitation.
o Exceptions:
 State Law: Governs form and timing of notice of shareholders’ meeting.
 Federal Law:
 Rule 14a-8: Requires inclusion of certain shareholder proposals
 Shareholder Access Rule: Significant stockholder could include own director nominee
in company’s proxy materials. This would avoid expensive proxy contests for election of
directors.
o SEC: Has adopted rules for shareholder access.
 However: This rule’s implementation delayed until resolution of
pending court actions.
 Securities Act Requirements: Filing and disclosure requirements kick in if securities will be issued in
connection with a business combination that is the subject of a solicitation of stockholders, absent an available
exemption.
o Timeline: Applies at the very beginning.
 Includes: All public announcements relating to the proposed business combination.
o In Short: A “solicitation” under the proxy rule equals an “offer” under the Securities Act if securities
will be issued to the voting shareholders.
 Application: Rule 425 under Securities Act is comparable to Rule 14a-12 under the Exchange
Act.

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 What is a Solicitation: Basically the same as an offer to voting shareholder’s under the ’33 Act.
o Rule 14a-1: Extremely broad scope, includes — (1) Any request for proxy; (2) Any request to
reject/revoke proxy; and (3) Furnishing of a form of proxy.
o Exclusions/Exemptions: Non-inclusive list.
 Shareholder statements regarding how you intend to vote & why (i.e., Warren Buffet on
proposed Kraft/Cadbury transaction).
 Solicitations of up to 10 persons not made by the registrant.
o Rule 14a-12: Safe harbor for statement made prior to filing of formal proxy materials (R 14a-12 + R 425
if stock exchange). Pre-filing statements allowed if —
 Must include required legend.
 Must be filed with the SEC
 Schedule 14A – Primary Proxy Filing Disclosure Requirements:
o Description of proposed transaction
o Disclosure of related party transactions and conflicts of interest
o Disclosure of background + parties of the transaction. Note: Very detailed.
 Includes dates/participants in meetings.
 Documents board consideration and negotiations.
o Discussion of board’s determination with respect to the proposed transaction
o Discussion of any financial advisor’s fairness opinion.
 Solicitation Subject to the Securities Act: Registration statement must be filed under the Securities Act.
o Rule 425: Must be followed in addition to Rule 14a-12 for pre-filing communications.
 Filing with SEC: Schedule 14A
o Preliminary Copies: Preliminary copies of the statement + card must be filed for any non-routine
matters 10+ days before use. Note: All M&A matter will likely be non-routine.
 SEC Review Process: SEC typically issues comments on preliminary proxy materials and may
require one or more amendments.
 Review: SEC will perform both a legal and accounting review.
 Note: If SEC comment, may take longer to resolve.
 Rule 14a-6(e)(2): Can file confidentially, unless transaction = rollup or going private.
o Definitive Copies: Definitive copies must be filed with SEC and any exchange where listed.
 Typically: Only filed after clearing any SEC comments.
 Mailing: The definitive proxy materials are what actually is mailed to the stockholder.
 Note: May only send definitive copies to shareholders.
o Note: In solicitations subject to the ’33 Act, the accompanying registration must also be declared
effective.
 Rule 14a-9 – False/Misleading Statements: General anti-fraud provisions.
o Generally: Prohibits any material misstatement or omissions in proxy material.
o If Material Developments Post-Initial Solicitation: Required to file amended or supplemented
materials to reflect the material developments.
 Exp: New third-party bidder, increase in merger consideration, etc.

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The Mechanics of Acquisitions – Tender Offers and the Williams Act: 9/26
Tender Offers: An offer to purchase some or all of the shareholder’s shares in a corporation.
 Types of Tender offers & Governing Law:
o Rule 13e-4 + 14(d)-(e) – Issuer Tender Offers: (1) Option re-pricing offers; & (2) Going private transactions.
o Regulation 14D – 3rd-Party Tender Offers: (1) Negotiated or hostile takeover bids; & (2) Significant Investments
 SEC’s View: On what constitutes a “tender offer” Utilizes the Flexible Factors Test —
 (1) Active & widespread solicitation of public shareholders
 Focus on how many people are contacted/might potentially see offers.
 (2) Seeks substantial % of issuer’s stock
 No Bright Line Rule: However, there is a 5% reporting threshold (probably applies here too).
o Here: It’s the amount being sought (not total owned after) => amount sought probably
should be less than 5%.
o However: If only few % that put the bidder over 50%, it may be considered a tender offer
 (3) At premium over prevailing fair market value
 (4) On fixed terms (non-negotiable)
 (5) Contingent on a minimum number of shares agreeing.
 (6) Open for a limited period of time
 (7) Pressure on shareholders to respond.
 (8) If Successful: Bidder would hold substantial amount of securities
 Note: Same test as Factor # 2, but focus on ultimate position.
o Note: No single factor = dispositive.
 Benefits:
o Over M&A: Speed, no board of director approval
o Over Proxy: Quicker => limits time for competing bidder to make competing bid in time.
 Timeline: When a Tender Offer Commences
o When a bidder first publishes it or gives shareholders the means to tender. Exp: Sends letter of transmittal.
o Note: Anything short of instructing shareholder’s how to tender does not equal a tender offer, as long as
 (1) All written communications are filed with the SEC on the date of first use.
 (2) First such communications delivered to the target + competing bidders on date of first use.
 Types of Tender Offers:
o Partial Tender Offer: Max limit on # of shares willing to accept.
o Any-and-all Tender Offer: No max limit,
o Issuer Tender Offer (Rule 13e-4 & 14(e)): Restructuring of some sort; Going private transactions
 Note: Disclosure + timing = identical to third party tender offers.
o Third Party Tender Offer (Regulation 14d + 14(e)): Negotiated or hostile takeover bids.
 Tender offers after which the bidder will hold less than 5% of a subject company’s outstanding stock
generally not subject to Regulation 14D
 Rule 14d-5: Subject company obligation regarding dissemination (deliver stockholder list or mail material)
 Rule 14d-9: Subject company solicitation, filing all pre and post communications, filing a Schedule 14D-9
by subject company, exception for “stop-look-listen” communications.
 Tender Offers Involving Private Companies: Private company tender offers are not subject to SEC tender offer disclosure
requirements.
o Private Companies:
 (1) Have no class of equity securities registered under Section 12 of the Exchange Act;
 (2) Not required to file reports with the SEC under Section 15(d) of the 1934 Act; and
 (3) Not closed-end funds registered under the Investment Company Act of 1940.
o Note: Private company tender offers remain subject to anti-fraud provisions of the Exchange Act.
 Exp: Section 14(e) under the 1934 act; Regulation 14E.
 1934 Act § 14(e): It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made, in the light of the circumstances under which they are made,
not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender
offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer,
request, or invitation.
 Compliance Overview:
o If Cash Tender Offer (Seller’s Shares for Cash): Buyer must comply with the Williams Act Only.
o If Exchange Tender Offer (Seller’s Shares for Buyers Shares): Acquireror must comply with (1) the Williams
Act, and (2) ’33 Act Registration => File a Form S-4.
 Financing Methods for Tender Offer: (1) Cash on hand; (2) Previously executed financing arrangements (no conditions to
closing); (3) Anticipated financing arrangement (financing as a condition to closing; and (4) Stock-for-stock exchange
(Registration under ‘33 Act likely required).

26
Williams Act (Exchange Act § 14(d)-(e), Regulation 14D + E): Regulates all offers resulting in ownership of greater than 5% of a
registered class of securities.
 Regulation 14: Requirements for all Tender Offers —
o 20 business day minimum offering period.
 Note: This may be delayed by SEC or regulatory approvals.
o If there is a material change in the offer, a 10-business day extension must be granted.
 Exp: Change in the % of class sought or a change in consideration paid.
o Bidder must pay consideration promptly upon termination.
 Promptly: Not defined, it might depend on the complexity of the transaction financing.
 Exp: A few days
o Bidder must provide notice of an extension of the tender offer.
 Section 13(e)(4) + Regulation 14D – Additional Requirements for Public Tender Offers Only:
o Ability to Withdraw Tender Offer:
 (1) Until expiration of the tender offer; and
 (2) Either:
 (a) Issuer Tender Offer: After the expiration of 40 business days from commencement, if not yet
accepted for payment.
 (b) Third-Party Tender Offer: At any time after 60 days from date of the original tender offer.
o Over-Subscription Offers: Buyer may accept on a pro-rata basis.
 Policy: Avoids time pressure for shareholders, buyer must purchase all tendered securities on a pro rata
basis.
o All Holders and Best Price Rule:
 All Holders Rule: All shareholders of a class sough must receive the offer.
 Best Price Rule: If price increases while offer open, the increase is retroactive to early tenderers. All
shareholders must ultimately get the same price (i.e., best price).
 However: Payment for early tender compensation/severance/etc. excluded.
 Regulation 14E – Subsequent Offering Period: Bidders may provide a 3-20 day subsequent offering period. Shareholders
that tender will have no withdrawal rights during the subsequent offering period.
o Requirements:
 Initial offering period exceeds twenty business days.
 No Ceiling/Cap: Tender is for all outstanding securities of the subject company.
 Bidder immediately accepts & promptly pays for —
 All securities tendered during the initial offering period
 All securities tendered in subsequent period. I.e. required to accept all tenders.
 Bidder announces results by 9:00 a.m. on the next business day following expriation of the initial offering
period.
 Same consideration is paid during initial and subsequent offering periods.
 Prohibition: During Tender Offer (After public announcement), bidder may not —
o (1) Purchase shares other than pursuant to the tender
o (2) Conduct a short tender.
 Short Tender: Using borrowed stock to respond to an offer made during an attempted acquisition of some
or all of a shareholder’s shares.
 Disclosure/Filing Requirements:
o Bidder: Must file a Schedule TO. Requirements —
 Ownership: If the bidder will own over 5% of a registered class, must file a report —
 Identifying themselves
 Disclosing plans for further acquisitions
 Detailing how they will finance transaction
 All pre/post commencement written communication.
 Provided to the SEC/Issuer/Exchanges
 Within 10 days of acquisition that triggers reporting requirements.
o Seller: Must file —
 Schedule 14D-9: (1) File prior to any solicitation/recommendation (including position statements), then (2)
update with response (if accept/reject).
 All Pre/Post Commencement Communications, except stop-look-listen communications.
 Stop-Look-Listen Communications: (1) Identifies tender offer by bidder, (2) states tender offer
is under consideration by board, (3) states on or before specified date board will give guidance,
and (4) requests security holders defer until then.
 Special Rules for Issuer Tender Offer:
o Requirements: Schedule TO and Schedule 13E-3 (maybe)

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  Dissemination:
o For Cash/Exempt Securities Offers: If direct delivery to shareholders, send a long form schedule. (see pg. 28)
 Otherwise: Can do short form (publication) (see pg. 28).
o For Stock Offers: Requires long form (Registration statement on Form S-4).
 Note: Must comply with the ’33 Act.
o Note: Target must work with the bidder (Even if hostile) to facilitate dissemination to all shareholders by either (1)
supplying shareholder list to the bidder, or (2) sending the bidder’s materials themselves.
 Regulation 14E – Target Position Statement:
o (1) Within 10 days of commencement of an offer, target must send notice to shareholders —
 (a) Recommending acceptance (+ why);
 (b) Recommending rejection (+ why);
 (c) Expressing no opinion (neutral); or
 (d) Stating that it is usable to take a position.
o (2) Within 10 days, target may issue stop-look-listen request asking shareholders to refrain from tendering until managers
can make above decision.
o Note: If recommending accept/reject, target must deliver updated Schedule 14D-9 to shareholders.
 Communications Safe Harbors:
o Rule 13e-4(c): Issuer Tender Offer
o Rule 14d-2: Third Party Tender Offer
o Rule 425: ’33 Act.
 Regulation 14E – Antifraud Provisions: In connection with a tender offer, it is unlawful to
 (1) Make untrue statements of material fact
 (2) Omit any material fact necessary to make other statements not misleading
 (3) Engage in fraudulent/deceptive/manipulative acts.
o Note: Applies to all Tender Offers (even if private/debt/mini)
Special Tender Offer Rules:
 Creeping Tender Offers: Takeover strategy involving the gradual acquisition of a public company’s shares on the stock market,
instead of making a direct bid. Types —
 Significant open market purchases during a short time frame.
 Privately negotiated purchases if significant block of outstanding shareholders.
o SEC concerns regarding circumvention of tender offer protections afforded by Regulation 14E
 Result: If viewed together would constitute a tender offer, the first transactrion is considered commencement of
the tender offer.
 Mini Tender Offer: Results in less that 5% ownership and therefore does not require disclosure.
o However: Regulation 14E antifraud provisions apply (SEC interpretation).
 Prohibits Mini Tender Offer:
 (1) For less than fair market value
 (2) at above fair market value (free call option) if — (a) without withdrawal rights, and (b) Offeror
intends to hold until market rises above offer.
 Tender Offer for Debt or Private Companies: Not subject to disclosure/filing requirements.
o However: Anti-fraud provisions (Regulation 14E) still apply.
 Exp: 20-day requirement also applies.
Benefits of Tender Offers:
 Shorter Timeframe for Acquisition: (1) No requirement to seek stockholder vote; (2) SEC permits “early commencement” (i.e.,
commence tender offer upon filing); and (3) In cash offer context, ability to use short form publication (see pg. 28).
 No requirement to obtain board approval from subject company.
 Terms can be more easily shifted to reflect change in market demand
Drawbacks of Tender Offer:
 Less Certainty Regarding Outcome: (1) Must obtain sufficient percentage of outstanding equity to avoid subsequent stockholder
vote; and (2) Board of subject company may actively campaign against offer.
 Tender offer may put subject company “in play” for white knight/other bidders.
 Market demands may force higher offer price than in negotiated merger.

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The Mechanics of Acquisitions – Going Private transactions: 10/3
Beneficial Ownership Reporting:
 Governing Law: § 13(d)/(g); Regulation 13D
 Regulation 13D-3 – Definition of Beneficial Ownership: Anyone who has either (a) Voting power (Exp.
Holds/submits owner’s proxy); or (b) Dispositive Power (determining the outcome or decision of shares).
o Note: Can be beneficially owned by more than 1 person.
 Exp: Via contract relationship, share voting/investment power, etc.
o Look-Forward: There is a 60-day look-forward provision for
 (1) Options: Already beneficially owned if —
 (a) Have the ability to exercise options within 60 days; and
 (b) You know (with certainty) that there will be an actual acquisition.
o I.E.: If no plan to exercise it, don’t own.
 (2) Rights
 (3) Warrants
 (4) Other convertible securities.
o Rule 13d-5 – Special Rule for Groups: A group may be formed (1) If 2+ persons agree to work collectively
(2) for the purpose to acquire/hold/vote/dispose of an issuer’s securities —
 Each member beneficially owns all securities held collectively by the entire group.
 Note: Each member could be subject to reporting (based on total # of shares).
 Note: No formal contract required.
 Initial Filing Requirements:
o Rule 13(d)-1(a) – Filing Required: Triggered if —
 Acquisition: Direct or by Tender Offer resulting in beneficial ownership of greater than 5% of a
securities class.
 Exceptions - § 13(d)(6): (1) Acquisition of less than 2% in any 12 month period; (2)
Acquisition by issuer; (3) Registered exchange offers; and (4) IPO acquisitions.
o Note: May still be subject to catch-all.
o Consequence: Must file either —
 Schedule 13D – Long Form: Disclosure of intent & purpose with those shares.
 Note: Must be filed within 10 days of triggering acquisition.
 Schedule 13G – Short Form: Disclose how many shares you own.
 Can only use if
o Rule 13d-1(b) – Institutional Investors: Broker-dealers, banks, insurance
companies, registered investment Co’s, registered investment advisers, & employee
benefit plans.
 Note: Excludes private funds
 Must be passive (not actively trying to run corporation). If you become
active, this triggers Schedule 13D
 When to File:
 45 days after end of calendar year in which greater than 5%
reached.
o I.E. can own more than 5% during entire year and sell to
under 5% by end of year without triggering any reporting
requirements (unless trigger 10% threshold).
 10 days after end of month in which holding greater than 10%.
o Rule 13(d)-1(c) – Passive Investor:
 Requirements: (1) No purpose/effect of influencing control over issuer; (2)
Not an institutional investor; and (3) Beneficial ownership of less than 20%
of the subject class.
 When to File: 10 days after triggering acquisition.
 However: If you become greater than 20% => must file a Schedule
13D (within 10 days)
 Rule 13(d)-1(e) -Control Intent Filing Requirement: If either an institutional or passive
investor changes to control intent
 Note: Simply voting your securities does not change intent.
o Must file a Schedule 13D within 10 days
o 10 Day Cooling Off Period: Can’t vote; Can’t acquire more securities.

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  Rule 13d-1(d) – Catch All: Must still file a Schedule 13D/G if —
 Note: You are required to file 45 days after end of calendar year.
o (1) Own greater than 5% of a class of securities as of the end of the calendar year; and
o (2) Isn’t otherwise already required to file report.
 Note: Even without acquisition or in exempt acquisition (Exp: an IPO).
 Amendments:
o Schedule 13D: Must amend if — (1) Any material change; or (2) Any increase/decrease of 1%.
 Filing Requirement: Must file amendments promptly
o Schedule 13G: Must amend if — Any change from prior information (no materiality).
 Filing Requirements: Must file within 45 days of the end of the calendar year, unless —
 10% Threshold Reached: Then you must file within 10 days of the end of the month.
o Therefore: Amendment requirement if increase/decrease by more than 5%.
Rule 13e-3 – Going Private Transaction Types: Any transaction or series of transactions of the following specified types —
 (1) Purchase of any equity security by the issuer thereof or any affiliate of such issuer;
 (2) Tender offer for a class of equity security made by issuer thereof or any affiliate of such issuer; or
 (3) Proxy solicitation by an issuer or an affiliate thereof regarding—
 (a) A merger, consolidation, reclassification, recapitalization, reorganization or similar
corporate transaction of an issuer or between an issuer and its affiliate.
 (b) Sale of substantially all assets of an issuer to an affiliate or group of affiliates; or
 (c) Reverse stock split of any class of equity securities of an issuer involving the cash
purchase of fractional interests.
 Going Private: Any transaction or series of transactions of the type specified in Rule 13e-3 which has either (1) a
reasonable likelihood or (2) a purpose of producing any of the following effects—
 (1) ’34 Act registered class of securities becomes held by less than 300 shareholders; and/or
 (2) Class of securities delisted from national exchange or inter-dealer quotation system.
o Note: In a series of transactions, the first step triggers compliance with Rule 13e-3 obligations.
 Affiliates: Person that (1) directly or indirectly through one or more intermediaries (2) controls/is controlled by/in
common control with an issuer. Note: Determined by the facts and circumstances of the case.
o Examples: (1) Directors/officers => definitely; (2) Significant shareholders => maybe (~20% = rough
approximation); and (3) Shareholders with board participation rights (seat or observation) => probably.
o Groups: If—
 One Member = Affiliate: Rest of the group may be tainted as affiliates.
 Collectively Own a Significant Amount: Each member may be affiliate.
 Schedule 13E-3: Required filing in connection with any going-private transaction (other than excepted transaction).
Must be filed by each participant (issuer or affiliate) involved in the going-private transaction.
o Item 1013: Purpose, reason, & effects of the transaction (PRE). Note: Conclusion statements are insufficient
 Note: Benefits and detriments (i.e., effects) must be quantified to the extent permitted.
o Item 1014: Fairness of the transaction to unaffiliated shareholders, as determined by the issuer & affiliates.
 Supporting Rationale (Factors Considered): Generally, consider — (1) Current market prices; (2)
Historical market prices; (3) Net book value; (4) Going concern value; (5) Liquidation value; (6) Purchase
prices paid in previous acquisitions by affiliate; (7) Report/opinions/appraisals; & (8) Any other firm offers.
 Note: Must discuss whether unaffiliated representatives were appointed by independent board members.
 Voting: Must indicate if the transaction is subject to a majority vote of unaffiliated stockholders.
o Item 1015: (1) Reports, opinions & appraisals (received by issuer); & (2) Conflicts of interest (if any) of
preparers.
 Issuer: Liable on fairness assertion under general antifraud provisions.
o Fairness Determination Requirement: (1) Each person filing a Schedule 13E-3 must disclose whether such
filer reasonably believes that the transaction is fair or unfair to unaffiliated stockholders; & (2) Disclosure must
include detailed list of factors considered in reaching fairness determination, and the relative weight assigned
to each factor considered.
o One-Year Limited Exception: Applies only to going-private transactions occurring within one year of the
date of expiration of a tender offer. Requirements:
 Affiliate engaged in going-private transaction must have been a bidder in such tender offer and
become an affiliate as a result of such tender offer
 Consideration paid must be no less than highest amount offered in prior tender offer
 Desire to effect a going-private transaction must have been disclosed at time of the prior tender offer.
o Practical Implications: (1) Danger of open market purchase by affiliates; (2) Risk of stock buy-back
programs; and (3) Inclusion of “going-private” conditions to closing in certain tender offers.

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  Rondeau v. Mosinee Paper Corp. (1975 – pg. 604): Petitioner invested in respondent corporation in 1971, by May
held 5% of outstanding stock. In 1970 Williams Act amended from 10% to 5%, petitioner claimed to not know
this and filed Schedule 13D late stating he claimed to make tinder offer. Respondent filed an injunction, looking
to block petitioner from purchasing more stock. DC found sufficient harm and granted it.
o Issue: In order to obtain injunctive relief under Securities Act § 13(d), what type of harm must be found?
 Harm: Not satisfied just because of technical default, must analyze the likelihood that a target’s
stockholders will be disadvantaged, or that the target will be unable to properly respond in view
of a late 13D filing.
 However: People that sold stock to petitioner at depressed price have cause of action.
 Requirements: Irreparable harm, bad faith, and delayed disclosure.
o Holding: A showing of irreparable harm, in accordance with traditions of equity, is necessary before a
private litigant can obtain injunctive relief based on Securties Act § 13(d).
 Note: Mere failure to timely file a Schedule 13D does not warrant injunctive relief against the acquirer.
 Hedge Funds: Frequently challenge the definition of group (pg. 28-29) and its limits —
 (1) Funds often act in wolf packs, gathering to purchase stock of targets they feel are mismanaged
 Question: When does simultaneous action become a group for purposes of the section?
 (2) Funds use sophisticated swap contracts to buy consequences of stock price appreciation, but
not the stock itself.
 Question: When does such a contract constitute either beneficial ownership or a group
agreement?
o CSX Corporation v. The Children’s Investment Fund Management (2nd Cir. 2011 – pg. 609): TCI and
3G hedge funds acquired a position in CSX and sought to elect minority board members in 2008. Filed a
13D acknowledging they were acting as a group. CSX filed suit requesting an injunction for failing to
meet its Securities Act § 13(d) requirements. CSX claimed violations because it (1) TCI failed to disclose
its beneficial ownership of shares it held by counterparties that were referenced in a cash-settlement
equity total return swap, and (2) TCI and 3G failed to disclose the formation of a group.
 Issue: Whether TCI and 3G are considered a group with respect to the shares owned outright by
the funds?
 Group: Requires a precise finding, adequately supported by specific evidence as to
whether funds formed a group for purpose of acquiring, holding, voting or disposing of
CSX shares.
o Review: Limited to CSX shares owned outright by the fund. Need 5% based om
this
 Injunction: In the context of violating Section 13(d), should only be considered upon “a
showing of irreparable harm to the interests that section seeks to protect.”
o Factors Considered: (1) number of shares at issue, (2) whether shareholders
have been notified about ownership, (3) whether false testimony was given, and
(4) whether a disclosure is made sufficiently in advance of a shareholder vote
when weighing whether to injunct.
 Cash-Settlement Swap: Court failed to address issue.
 Holding: To be considered a group under Securities Act § 13(d), there must be specific evidence
of whether a group existed for purposes of holding a company’s shares.
 Court: The late filing based on when a group had been formed did not warrant injunctive
relief in view of time lapse between filing and subsequent stockholder vote.
Required Filings: Overview.
 Exchange Act Forms:
o Tender Offer: Schedule TO
o Proxy Solicitation: Schedule 14A
o Going-Private Transaction: Schedule 13E-3
 Securities Act Forms:
o Registration Statement: On Form S-4

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Fraud/Insider Trading: 10/17
Securities Fraud: Misrepresenting information investors use to make decisions.
 Securities Act § 10(b) => SEC Rule 10B-5 – General Cause of Action: It is unlawful for any person,
directly or indirectly, by the use of any means or instrumentality of interstate commerce, to —
 Note: Used as enforcement tools by the SEC to prevent persons with insider information
from unfairly profiting from that information.
o (a) Employ any device, scheme, or artifice to defraud;
o (b) Make misleading statements/omissions; or
 (i) Make any untrue statements of material fact, or
 (ii) Omit statements necessary to make the statement not misleading
o (c) Engage in any act/practice/course of business
 Which operates as fraud/deceit upon any person
 In connection with the purchase or sale of any securities
Insider Trading: The buying or selling of a security by someone who has access to material nonpublic
information about the security.
 Rule 10b-5 – Generally: If someone —
 MNPI: Possesses material nonpublic information about a company.
 Material: Evaluated under reasonable investor test
 Note: Can be positive or negative
 Duty: As a result of a relationship of trust and confidence.
 Relationship: Nature of the relationship depends on who the someone is
 Relationship is what gives rise to the duty.
o Then, You Must Either:
 (a) Disclose it to the investing public; or
 (b) Refrain from trading (& maintain confidentiality).
 Material Non-Public Information: Potentially any information, not known to the general public, that
could impact the price of a company’s stock.
o Application: Information for which there is a substantial likelihood that a reasonable investor
would consider important in making decisions to buy or sell a security.
o Note: Material information can be either positive or negative news about a company.
o Examples of Material Non-Public Information: (1) Operating or financial results; (2) Business
or technology acquisitions, licenses, sales, or joint ventures; (3) Public or private debt or equity
transactions; (4) Major management changes; (5) New product or line of business
announcements; (6) Significant delays in product development; and (7) Major litigation.
 Insider Trading: Who is covered?
o Traditional/Classic Insiders: Officers, directors, executive employees, & controlling shareholders.
 Note: Duty exists by virtue of their position within the corporation (fiduciary duties).
o Outsiders:
 Misappropriation: Occurs when any person trades securities on the basis of insider
information in breach of duty owed to the source of the information.
 Misappropriation Theory: A duty (for the source of the information) exists if —
 (a) The person holding the information had agreed to maintain the information in
confidence.
o Exp: An associate at a law firm trading on client information.
 (b) If the person communicating the material nonpublic information & the
recipient —
o (1) Have a history/pattern/practice of sharing confidences.
o (2) That result in a reasonable expectation of confidentiality.
 (c) The person communicating the information & the recipient are
spouses/parents/siblings.

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  United States v. O’Hagan (1997 – pg. 614): O’Hagan partner at firm representing tender offeror.
Tender offer confidential + not public until formal offer made, however, during its runup partner
purchased call options and sold them for over a $4 million profit. SEC investigated and brought
charges under §10(b) and § 14(e). Dude convicted, appeal reversed on ground R 10b-5 cannot be
grounded in misappropriation theory of insider trading. Supreme Court granted certiorari.
 Issue: Is a person guilty of securities fraud when he misappropriates confidential information
for securities trading purposes, in breach of a duty to the source of the information?
o Misappropriation Theory (Insider Trading): When an individual
misappropriates material nonpublic information for the purposes of trading, in
breach of his fiduciary duties to the source of the information.
 Requirements: Use deceptive practices in connection with purchase of
securities.
 Exp: Deal in deception by feigning loyalty while using
confidential information.
 Doesn’t Require: Express/implied duty to company that’s subject of the
trading
o Classical Theory (Insider Trading): When a corporate insider misappropriates
material nonpublic information for the purposes of trading, in breach of a
fiduciary duty to the shareholders of the corporation.
 Holding: A person is guilty of securities fraud when he misappropriates confidential
information for securities trading purposes, in breach of a duty to the source of that
information.
o Here: Lawyer violated his fiduciary duties to his law firms.
o Impact on 14e-3(a): In connection with pending tender offers – disclosure or
abstain rule
 Prohibits trading on material non-public information regarding pending
tender offer obtained from offeror or issuer, absent disclosure
 Applies even in the absence of a breach of confidentiality to the source
 Broader in scope than even the misappropriation theory.
o Tippers and Tippees: Both the tipppee and tipper are liable if —
 (1) The insider’s tip constitutes a breach of the insider’s fiduciary duties; and
o Note: Insider only breaches if he receives a personal benefit from the disclosure.
 Tangible Benefits: Financial/gifts.
 Intangible Benefit: Relationship benefit (maybe), family always counts.
 However: Cannot be totally theoretical (exp. Friendship).
o However: Financial benefit to the tipppee is irrelevant.
 (2) The Tipppee knows that the insider violated his fiduciary duties.
o Low Bar: Tipppee probably knows if the information is non-public.
 Tippers: Tippers who do not trade on the basis of the insider information themselves but
communicated the insider information to tippees who do trade on the basis of the information can
be held liable for insider trading.
 Note: Must receive some benefit from passing on the information to the tippee. Any
benefit, however intangible, may be the basis for liability.
 Tippees: Tippees will be held liable for illegal insider trading if it can be established —
 (a) The tippee used material non-public information to trade; and
 (b) The tippee obtained this information from a tipper who breached a duty of
confidentiality or other fiduciary obligation when he communicated the information.
o Control Persons: People who control insiders (exp. Executive Employees) may be held jointly and
severally liable too if insiders violate insider trading laws.
 Result: Insider trading by a registrant’s employees can sometimes expose the registrant and its
management team members to civil liabilities and penalties for the actions of employees under
their control who engage in insider trading or tipping.
 Penalties: For Insider Trading
o Criminal: Up to $1,000,000 and up to ten years in jail
o Civil: Up to three times the profit gained or the loss avoided

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Tender Offer Fraud: Securities Exchange Act forbids fraud in tender offers & authorizes the SEC to issue
supplementary rules to combat it.
 Exchange Act § 14(e): Anti-fraud provision. No fraud or misleading statements are allowed in either (a) a tender
off; or (b) an invitation for a tender offer.
o Note: This applies to all tender offers, not just tender offers for more than 5% of a class.
 SEC Rule 14E-3: If a person has material nonpublic information relating to a tender offer, that person must either—
 (a) Disclose the information to investors; or
 (b) Abstain from trading.
o Note: This is regardless of the person’s fiduciary duties (i.e., this rule does not just apply to insiders).
Short Swing Trading: When insiders, who have greater access to material nonpublic information, take advantage of that
information for the purposes of making short-term profits.
 Exchange Act § 16(b): Any profit realized by an officer, director, or substantial shareholder —
 (1) Obtained by reason of relation to the issuer
 (2) From any (re)purchase or sale of
 (a) Any non-exempt security of the issuer; or
 (b) Securities-based swap agreement.
 (3) Within a 6-month period.
o Result: Gives the issuer a cause of action for disgorgement of profits.
 Even If: (1) Intent to hold/not repurchase the securities for less than 6 months; or (2) no inside
information was exchanged.
 This is Not Technically Illegal: Merely triggers a cause of action by the issuer.
 Note: You can affirmatively disgorge to avoid the suit.
 Can even be negotiated as part of a transaction with the issuer.
o Unless: The securities were acquired in good faith in connection with a debt previously contracted.
 Scope: Only applies to — (1) Officers/directors; or (2) Persons with over 10% ownership in the company (only
applies to shares above 10% threshold).
o Note: Doesn’t matter if it’s the same shares.
 How to Determine Liability: Liable for the maximum possible profits.
o Exp: The highest sale price is matched against the lowest purchase price to determine liability under
Section 16(b).
 Texas International Airlines v. National Airlines (5th 1983 – pg. 620): Texas owned more than 10% of National
in hopes of tinder offering. Texas owned shares for 4 ½ months. Pan Am merged instead with National for $50
per share, before merger was complete Texas sold shares to Pan Am. National sued arguing Texas needed to
disgorge profits made on stock under Section 16(b), while Texas argued sale was involuntary because of merger.
o Issue: Is Texas required to disgorge profits from sale under Section 16(b), even though it sold its shares
as a result of the National-Pan Am Merger.
 Intent: Does not matter under §16(b), recoverable by the issuer if within a 6-month period.
 Calculating Profit: Does not include incidental expenses, but does include nonincidental expenses.
 Incidental Expenses: (1) administrative overhead expenses; (2) Interest on loans used to
make the purchase; (3) Legal fees; (4) Cost of 16(b) litigation; (5) Loan commitment fees; &
(6) investment banking fees.
 Nonincidental Expenses: (1) Brokerage commissions; and (2) transfer taxes.
 Involuntary Trade: Trading to avert a hostile tender offer doesn’t qualify. However, you could ask
seller to structure transaction where buyer must give $$$ to cover discouragement if §16(b) kicks in.
o Holding: The cancellation of stock as a result of a merger is an involuntary sale of stock, however, if you
sell before the cancellation it is voluntary and subject to § 16. Therefore, Texas must disgorge profits.
 Note: Had Texas waited until the merger was complete, it wouldn’t have had to disgorge. Was
punished for wanting money now.
o Dissent (Garza): Texas was moving to protect its interests when it agreed to sell its shares to avoid being
part of a hostile takeover, therefore it should not be required to discourage. This case allows Pan Am to
avoid its contract with Texas.
 SEC Rule 16B-3 – Safe Harbor: Transfers between directors/officers and the issuer are exempt if —
 (a) Approved by a disinterested board of directors; or
 (b) Ratified by the shareholders
o Note: Also applies to shares converted into cash/securities of a buyer in a merger.

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  Sterman v. Ferro Corp. (6th 1986 – pg. 624): Crane through chairman Evans acquired 22.4 percent of Ferro common
stock for between $22 and $27 per share between early 1981 and November 1982. In spring of 1982, Ferro arranged a
meeting with Evans about repurchasing stock and agreed to $30 per share sale + $.30 dividend. Board of directors duly
authorized repurchase and adjusted the sale price to $31.03 to counteract any short swing profits made. Plaintiff
shareholder brought suit alleging the transaction was an illegal waiver of short swing profits.
o Issue: Can a company contract around short swing profits so that it can buy back shares owned by a
significant shareholder?
 Duty: An issuer generally has a duty to pursue disgorgement under Section 15(b) if a short swing
profit has occurred.
 However: Section 16(b) Liability can be discharged with an appropriate payment of cash
to the company at the close of the transaction and with proper board approval.
o Price: Structured to accommodate Section 16(b) liability
o Holding: Avoiding short swing liability can be negotiated as part of a transaction with the issuer.
 Note: These are odd circumstances where a technical violation of law can be contemplated in a
proposed transaction structure.
 Application to M&A: Texas International Airlines
o (1) The bidder amassed over 10% in the process of making a bid
o (2) After acquiring shares, the bidder ultimately losses to another bidder
o (3) Their shares get bought out by the successful bidder within 6 months of them purchasing the shares.
o (4) Now they have a § 16(b) problem
State Law: Under state court defined fiduciary duty principles, a board has an obligation to make proper disclosures to its
shareholders in anticipation of a shareholder vote.
 Disclosure Requirements: Tend to be opened-ended general obligations vs. detailed forms, schedules and rules
required by federal law.
o Source of Requirements: Directors’ general fiduciary duty to shareholders and the separate doctrine of
equitable fraud.
 In re Pure Resources, Inc., Shareholders Litigation (Del. 2002 – pg. 625): Unocal owned 65% of Pure. Pure’s
management controlled between a quarter and a third of Pure stock. Unocal had business opportunities
agreements with Pure and Pure’s management had agreements with Unocal that gave them better incentives for
tendering shares. Unocal had access to Pure’s non-public information and made no retributive threats. Unocal
made an offer to buy the rest of Pure’s stock with (1) a non-waivable majority of the minority provision, (2) a
waivable condition that the tender give it 90% ownership, and (3) a planned second step short form merger.
Independent special committee formed to consider offer, negotiated offer with Unocal, however, did not deal with
them as aggressively as it would have with a third-party buyer. Minority shareholders brought action, claiming
offer was inadequate and should be subject to entire fairness standard.
o Issue: Is a tender offer made by a controlling shareholder subject to the entire fairness standard if the
offer is non-coercive and accompanied by full disclosure of all material facts?
 Delaware Law: Mergers and tender offers by controlling shareholders treated differently,
although it is uncertain if one provides more protection over the other.
 Entire Fairness Standard: Applied when the target board negotiates a merger with a
controlling shareholder.
 Reasonable Investor Standard: Applied when a controlling shareholder seeks to buy a
company through a tender offer. Must provide balanced, truthful account of all matters.
o Application: No judicial intervention if offer is fully disclosed and non-coercive.
 Tender Offer Non-Coercive If: (1) it is subject to a non-waivable, majority-of-the-minority
tender condition, (2) the controlling shareholder promises to do a short-form merger at the same
price if he obtains 90 percent ownership, and (3) the controlling shareholder has made no
retributive threats.
 Note: If all other non-coercive requirements are met, Solomon standard applies. If one
requirement is not met, company can amend tender offer to meet standard.
 Here: Offer is coercive because its majority-of-the-minority provision includes Unocal-
affiliated shareholders and Pure’s management in the minority, however this can be
cured.
o Holding: A tender offer made by a controlling shareholder is not subject to the entire fairness standard if
the offer is non-coercive and accompanied by full disclosure of all material facts.

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Other regulatory matters affecting M&A transactions: 10/24
Antitrust Law: A collection of federal and state government laws that regulates the conduct and organization of business
corporation, generally to promote fair competition for the benefit of consumers. Designed to combat anti-competitive
effects of mergers or acquisitions among current market competitors.
 Clayton Act § 7 (15 U.S.C. § 18): No one may transact if the affect may be to either (a) substantially lessen
competition; or (b) tend to create a monopoly.
o Transact: (a) Statutory merger; (b) Asset acquisition; or (c) Stock acquisition.
 Note: Can’t structure around it
o Exceptions: Stock purchase purely for investment.
o Enforcement & Remedies:
 Enforcement: (1) Government cause of action (FTC &/or DOJ); & (2) Private cause of action.
 Remedy: Two ways of potentially stopping the transaction.
 Court Order: Enjoin violating transactions.
 Administrative Proceeding (Gov. Only): Cease & desist order against merger.
 Note: Clayton Act violations can occur & be brought even after a transaction is complete.
o Federal Trade Commission (“FTC”): Granted authority to seek (1) An order enjoining any merger in
violation of Section 7; or (2) Seek a cease & desist order in an administrative proceeding against a merger
 Horizontal Merger Guidelines (DOJ & FTC): A merger or business consolidation that occurs between firms
that operate in the same industry. Competition tends to be higher among companies in the same energy and
synergy/potential gains in market share may be realized by this merger. Jointly issued by DOJ & FTC.
o Rule: Mergers shouldn’t be permitted to create/enhance market power.
 Market Power: The ability (1) Profitably; to (2) Maintain prices above competitive levels; (3)
For a significant period of time.
 Price-Inelastic Market: You can raise price without diminishing demand.
 Also: The ability to depress prices to a point where output is “depressed.”
 Indica of Market Power:
 Coordination of activities (explicit or implicit).
 Activities that are likely to encourage 1+ firms to — (1) raise price; (2) Reduce Output;
or (3) Diminish innovation.
o Test: Is the transaction permissible and when will FTC enforcement kick in?
 Factors that Weigh Against Merger:
 (1) Would merger significantly increase concentration => result in a concentrated market?
o Most Important
 (2) Does the merger raise concern about potential adverse competitive effects?
 (3) Would injunction be timely, likely & sufficient to deter/counteract problematic
effects? <= Note, this is kind of a throw away. The FTC really doesn’t look at this.
 Factors that Weigh in Favor of Merger:
 (1) Are there efficiency gains that cannot be achieved through other means?
o Note: Almost always true => Neutral factor
 (2) Would either party fail (Assets exit market) without a merger? Most Important
o Market (Definition):
 (1) A Product/Group of products <= Parties want broad, gov. wants narrow.
 Note: This includes all products reasonably interchangeable by consumers for the same
purpose.
 (2) In a geographical area where the products are produced/sold <= Parties want broad.
 (3) Such that the hypothetical profit maximizing firm that was the sole producer or seller in such area.
 (4) Would likely impose a small but significant and nontransitory increase in price
 Exp: Raising prices in a meaningful way over.
 (5) Assuming no price regulation
o Evaluation Considerations: Market Shares, Market Participants, and Market Concentration
 Market Shares: Market shares of all firms producing products in the relevant market.
 Market Participation: The market share of the target is compared to the market share of other
market participants to determine competitive significant.

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  Market Concentration: A function of the number of firms and their respective shares of the total
production in a market. Often calculated using the Herfindahl-Hirschman Index.
 Consideration: Both the post-merger levels and the change in concentration resulting
from the merger.
 Herfindahl-Hirschman Index (“HHI”): Common measure of market concentration that is used
to determine market competitiveness. Calculated by squaring the market share of each firm
competing in a market and then summing the resulting number. HHI = s1^1 + s2^2 + s3^2 . . .
o Unconcentrated Markets: HHI below 1500
o Moderately Concentrated Markets: HHI between 1500 and 2500
o Highly Concentrated Markets: HHI above 2500
 General Standards: For relevant markets defined by Herfindahl-Hirschman Index.
o Small Change in Concentration: Mergers involving an increase in the HHI of less
than 100 points are unlikely to have adverse competitive effects & ordinarily require
no further analysis.
o Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely
to have adverse competitive effects and ordinarily require no further analysis.
o Moderately Concentrated Markets: Mergers resulting in moderately
concentrated markets that involve an increase in the HHI of more than 100 points
potentially raise significant competitive concerns and often warrant scrutiny.
o Highly Concentrated Markets: Mergers resulting in highly concentrated
markets that involve an increase in the HHI of between 100 points and 200 points
potentially raise significant competitive concerns and often warrant scrutiny.
 Enhanced Market Power: Mergers resulting in highly concentrated
markets that involve an increase in the HHI of more than 200 points will
be presumed to be likely to enhance market power.
 Presumption: May be rebutted by persuasive evidence showing
that the merger is unlikely to enhance market power
o Efficiencies: Primary benefit of mergers to the economy. Their potential to generate significant
efficiencies and thus enhance the merged firm’s ability and incentive to compete.
 Result: Lower prices, improved quality, enhanced service, and new products.
 Application: Two ineffective competitors combine assets to form a more effective competitor.
 Merger-Specific Efficiencies: agencies only credit efficiencies likely to be accomplished by the
merger and unlikely to be accomplished absent the proposed merger or another means having
comparative anticompetitive effects.
o Failures and Exiting Assets: Merger is not likely to enhance competition if the plan is to cause the assets
of the merged firm to exit the relevant market.
 Note: If relevant assets would otherwise exit the market, customers are no worse off after the
merger than they would have been had their been no merger, therefore should not be approved.
o Midwestern Machinery, Inc. v. Northwest Airlines, Inc. (8th Cir. 1999 – pg. 710): Northwestern Airlines
merged with Republic Airlines long before suit brought. Plaintiffs were frequent fliers who claimed that
the merger caused a monopoly in Minneapolis. Government said that it wouldn’t raise any
anticompetition concerns when the merger occurred, however this doesn’t prevent individuals from suing
under antitrust law. Northwest claimed no antitrust action could be brought because Republic no longer
exists and claimed no Republic stock or assets are left to substantially lessen competition.
 Issue: Can a Clayton Act violation be brought after a merger is finished?
 Clayton Act: Violation can occur and be brought even after a transaction is complete.
o Statute: Explicitly provides that claim occurs when stock/assets “in whole or in
part” is acquired.
 Policy: Without this, mergers would be purely based on speed.
 Holding: A Clayton Act § 7 action may be brought even after a merger occurs and the two
corporations effectively become one. An acquisition of all the target’s assets does not prevent
plaintiffs from bring the action later. Sorry Northwest.
 Policy: Prohibit a corporation from controlling the time frame when an antitrust action
could be brought.
o Note: If the court found for Northwest, Corporations have an incentive to merge
very quickly to minimize the risk of having an antitrust suit brought against the.

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 o Federal Trade Commission v. Whole Foods Market, Inc. (DC Cir. 2008 – pg. 711): Whole Foods and
Wild Oats were premium supermarkets, in 2007 Whole Foods announced acquisition of Wild Oats. FTC
sued under Clayton Act § 7, arguing these two chains competed with each other. Whole Foods argued
relevant product market included all supermarkets, FTC focused on whether Wild Oats customers would
switch to normal supermarket and presented evidence Whole Foods charged higher prices at non-Wild
Oats locations (key evidence court looked at). District Court disagreed and FTC appealed.
 Issue: Can core or committed customers be used to define a relevant product submarket for
antitrust analysis?
 Clayton Act § 7: Mergers prohibited that substantially lessen competition in any line of
commerce which is defined by the relevant product market.
o Relevant Product Submarket: Sometimes contain submarkets that constitute
distinct realms of competition.
 Defined By: Existence of core customers, specific shopping habits,
unique needs, and social values.
 Application: If shoppers tied to submarket, then merger
substantially lessons competition.
 Court: All requirements met here and economic data indicates the existence of multiple
premium supermarkets decreases price. Therefore, this is a relevant product submarket.
 Holding: Core or committed customers can be used to define a relevant product submarket for
antitrust analysis. Remand for further decisions, sorry Whole Foods.
 Concur (Tatel): In addition to serving core customers, Whole Foods operates a distinct product market.
 Product Market Definition: Product that are reasonably interchangeable.
o Here: Consumers do not view premium, natural, and organic products as
reasonably interchangeable with products offered by conventional supermarkets.
 Concur (Ginsburg): I concur in the denial of rehearing en banc because, there being no opinion
for the Court, that judgment sets no precedent beyond the precise facts of this case.
 Dissent (Kavanaugh): Relevant product market includes all supermarkets. Whole Foods and
Wild Oats compete for customers with all supermarkets. I like beer!
 Conventional Supermarkets: Have the ability to influence prices at premium
supermarkets, because if premium-supermarket products become too expensive,
customers will move to conventional supermarkets.
 Special Rule: Price Fixing Among Competitor Bidders in Tender Offer is Accepted
o Common Scenarios: (1) Two bidders realize that bidding only raises cost to both, and (2) They agree
that 1 win’s and the winner sells a portion of the assets to the second bidder.
o Rule: Joint bidder agreements allowed under Tender Offer Williams Act laws.
 Result: Sherman Act (adopted prior to deciding case) implicitly repealed here.
o Finnegan v. Campeau Corp. (2nd Cir. 1990 – pg. 722): Federated was going to sell itself to the highest to
the highest bidder. Campeau and Macy’s started bidding against each other, but then thought it would be
better if they joined their bidding efforts. Macy’s dropped its highest bid, and Federated sold to Campeau
at its highest bid price (since Campeau’s highest bid was less than Macy’s, Federated’s shareholders lot
money. Plaintiffs brought suit alleging the joint bidding plan violated Sherman Act § 1.
 Issue: Was this an explicit price fixing agreement that was anti-competitive and thus against the
Clayton Act?
 Tender Offer Laws: Explicitly allow agreements of joint bidders.
o Court: Cannot be authorized in one act and then given liability in another.
 Disclosure: Means by which shareholders are protected, 14D Filing is
required that agreements be disclosed. All Williams Act requires
 Result: Shareholders decide for themselves if they want to agree.
 Holding: Williams Act implicitly superseded Sherman Act in the regulation of tender offers and
Williams Act § 14(d) expressly contemplated joint bidding and didn’t forbid it.
 Note: Professor thinks that court should have ruled for A on the ground that the joint
bidding plan did not create a monopsony in the purchasers’ market for Federated. There
were no barriers to entry into this market, so other corps can bid against
Campeau/Macy’s.

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Pre-Merger Negotiations: The Hart-Scott-Rodino Antitrust Improvement Act of 1976
 Hart-Scott-Rodino Antitrust Act: Mandates that in certain circumstances (that may violate Section 7), transacting
parties must submit notice to the FTC and DOJ of their proposed transaction for anti-trust purposes.
o Policy: This pre-merger notification and approval process allows agencies to determine whether the acquisition
might violate the Clayton Act. Whatever comes later trumps what came before.
 Who Must File: These are based on post-transaction basis, based on aggregate amounts of voting securities & assets.
o (1) Acquiring party who would hold a total amount of securities and assets in excess of $337.6 million ($200
million as adjusted); or
o (2) Acquiring parties with above $84.4 million ($50 million as adjusted) but below $ 337.6 million; and
 Manufacturing Target: Net Sales or Total assets of $16.9 million ($10 million as adjusted) and
Aquiror has Total Assets or Net Sales of $168.8 million ($100 million as adjusted).
 Non-Manufacturing Target: Net Sales or Total assets of $16.9 million ($10 million as adjusted) and
Aquiror has Total Assets or Net Sales of $168.8 million ($100 million as adjusted).
 Any Party With: Net Sales or Total Assets of $168.8 million ($100 million as adjusted) and acquirer
has Total Assets or Net Sales of $16.9 million ($10 million as adjusted).
o Overall: Above $200 million => You must file; Above $50 million but below $200 million => You may file,
but must engage in analysis.
o Information Requested/Reported: Identify Business; Ownership; Describe Transaction; Miscellaneous; and
Submit all studies and analyses to FTC & DOJ.
 Note: Fairness opinion will not contain language of “market share” or price power, efficiency only.
 Rule: Firm planning acquisition must filer notice with DOJ + FTC and adhere to a waiting period.
o Waiting Period: Waiting period before any qualified merger can be consummated (in calendar days)
 Cash Tender Offer: 15 days; or
 All Other Transactions: 30 days.
 However: FTC or DOJ may extend this period by an additional 10 for tender offers and 30 days for all
other transactions after receipt of additional requested information.
 Note: The reviewer does not need to take all time and may grant early termination. DOJ or FTC must
waive the rest of the waiting period if there are no antitrust concerns after they examine the record of
the proposed merger.
 Filing Thresholds/Triggers to Notification: Adjusted periodically, see above.
o Size of Person: Annual sales or total assets of both parties.
o Size of Transaction: Value of seller’s voting securities/assets.
 Note: If large enough, could override the size of person test.
 Exempt Transactions: Hart-Scott-Rodino Antitrust Act does not apply.
o (1) Acquisition of voting securities of a majority-owned subsidiary (50% or more ownership in subsidiary);
o (2) Acquisitions of good/realty transferred in the ordinary course of business; and
o (3) Acquisition of less than 10% of securities of a corporation for investment purposes.
 Ways to Get Around Hart-Scott-Rodino Antitrust Act Requirements:
o (1) Form a partnership acquisition vehicle where each partner owns less than 50% of the equity.
o (2) Don’t purchase stock, but instead purchase options in the target.
o (3) Just don’t comply
 Second Requests: DOJ or FTC will ask for more information from corporations if there is a possible antirust concern.
Waiting period is extended another 20 days (10 days for cash tender offer) if they occur. Waiting period begins to run
after FTC and DOJ get all the information they want. If FTC or DOJ don’t like the merger, they’ll challenge it.
o Three Resolutions to a Government Challenge:
 (1) Corporation drops the deal;
 (2) Corporation fights government’s challenge in Court
 (3) Consent Decree: Merged corporation agrees to sell off certain assets or divisions in either the
acquirer or target so that there can be increased competition.
 HSR Notification & Report Form: Requires the attachment of any “studies or analyses” that were prepared for
the purpose of analyzing or evaluating the acquisition with respect to its competitive effects.
 Enforcement:
o Public: FTC & DOJ file suit.
o Private: Private law suit can be brought even after settlement with the FTC/
 Note: HSR prohibits harms to consumers even after settlement occurs.
 However: Failure to act prior to completion might bar future claims. California case here.
 Note: Especially if government was actively involved in the extension of HSR review.

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 o Failure to File: Civil penalties of up to $16,000 a day. This includes if you structure a transaction to
avoid HSR. This will not alter your reporting obligations.
o California v. American Stores Co. (1990 – pg. 736): American wanted to merge with Lucy Stores. FTC
consented to the deal (it entered into a consent decree whereby American had to divest assets), however,
the State of California sued a couple of years later raising Clayton Act concerns. State was asking for an
injunction to stop the deal.
 Issue: May a state or private party bring a claim for breach of federal anti-trust laws after the FTC
has negotiated a settlement that permits a merger to occur?
 FTC/DOJ Consent: Only bars suits pursued by the federal government.
o Other Parties: States and individuals can still sue under federal antitrust laws.
 Rational: The HSR Act will prohibit harms to consumers even after a
settlement occurs. Enforcement not exclusively vested with Feds.
 Holding: A Hart-Scott-Rodino Antitrust action may be brought even after a negotiated settlement
with the government.
 However: The failure to act prior to completion of a transaction, particularly where the
FTC or DOJ was actively involved in an extensive HSR review process prior thereto,
may have the effect of barring future claims. Thus, since California didn’t participate in
the discussions & essentially wanted a second bite at the apple, couldn’t pursue action.
 Special: Operational control pre-completion.
o Rule: If the buyer is able to exert operational control over the seller as a result of the transaction, there is
a possible HSR violation. Indica of Violation:
 (1) Restrictions on conduct of business;
 (2) Approval requirements for new contracts; and
 (3) Implicit control over revenue recognition.
o Note: Restrictions on price discounts or customer contracts pre-merger may also constitute a Sherman Act
violation.
 Implication: Merger contract shouldn’t cause operational control pre-completion.
o United States v. Computer Associates International, Inc. (Antitrust 2002 – pg. 738): The covenants
section of a merger agreement had covenants that not only were typical, but also required certain pricing
be enacted by the target, and exuded operational control over the target.
 Issue: May an acquirer structure a merger so that it can execute operation control over it before
obtaining Hart-Scott-Rodino approval?
 What is Acceptable: In a Merger Agreement
o (1) Standard Customary Covenants.
o (2) Covenants that require the business to continue in the ordinary course of
business.
o (3) Covenants that assure no material impairments of assets occur.
o (4) Covenants that assure no added debt, above certain amount.
 Why: Standard covenants that protect acquirer in the interim of waiting
for approval from waste are customary protection and are intended to
protect the aquireror’s balance sheet.
 What is Unacceptable: Operation control over the seller
o Operational Control: Controlling what operations the target engages in, pricing,
discounts to acquirer, and other anticompetitive activities.
 Rational: Otherwise, would contradict the whole intention of Hart-Scott-
Rodino approval to have it reviewed.
o However: Regardless of when the agreement becomes effective, when it is
entered into, it cannot in the interim be anti-competitive.
 Holding: In the interim period if pre-approving for Hart-Scott-Rodino, an acquirer of a
competitor may not violate the Clayton Act.
 Takeaway: Advise Your Client —
o (1) When drafting a merger agreement, avoid operational non-balance sheet
controls in the covenants section when acquiring a competitor, large or small.
o (2) We want HSR to be clean, easy, and quick.
o (3) Avoid litigation with FTC and DOJ

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Legal Duties of Board of Directors – Duty of Care; Duty of Loyalty: 10/31
Fiduciary Duties: Generally, shareholders are owed fiduciary duties which consist of the (1) Duty of Care; (2) Duty of
Loyalty; and (3) The Duty of Candor (Duty to inform shareholders of all the facts).

Test: For evaluating either a breach of the Duty of Care or Duty of Loyalty.
 Business Judgment Rule (BJR): Courts will not interfere with the board’s discretion regarding business decisions.
o Presumption: That the board acted — (1) On an informed basis & in good faith (Duty of Care); and (2) In an
honest belief that the actions taken are in the best interests of the corporation’s shareholders (Duty of Loyalty).
 Policy: Allows Board of Directors to operate, exercising its judgment without fear that they will be
punished for making mistakes or being negligent.
 Note: While presumption may be rebutted, gives them more freedom to make biz decisions.
 To Rebut: Effect of a rebuttal is that the burden shifts to the defendant to prove entire fairness test.
o Unless: Rebutted by gross negligence by the directors.
 Breach of Care: Directors haven’t actually exercised a business decision. This is demonstrated by
showing either (1) the directors were uninformed; or (2) the decision lacked a business purpose/ had
no rational purpose to it.
 Smith v. Ban Gorkom (Del. 1985 - pg. 341): Directors agreed to sell company for $55 per
share, which was $18 more than the market price. Directors approved transaction after 2hr of
meeting, at which they relied on a 20-minute oral presentation concerning the transaction &
did not read the merger agreement or inquire into the basis of the agreed price. Smith broad a
class action suit, claiming directors uninformed.
o Issue: May directors of a corporation be liable to shareholders under the business
judgment rule for approving a merger without thoroughly reviewing?
 Uninformed: Directors didn’t inform themselves of (1) all material
information; (2) reasonably available to them; (3) prior to the meeting.
 Exp: Short notice before agreement, lack of document review.
 Court: BJR presumption rebutted by showing lack of informed decision
making. Could bring duty of care fiduciary duty breach claim.
o Holding: There’s a rebuttable presumption that business determinations made by a
corporation’s board of directors is fully informed, made in good faith, & in the
corporation’s best interests.
 Takeaway: Create a paper trail, use explicit process for making decisions,
consider getting directors and officers insurance to provide protection.
 Breach of Loyalty: Conflict of interest or interested board of directors.
 General Rule: If the majority of the board is not interested, then there is no duty of loyalty
issue and the business judgment rule is presumptive.
o Duty of Loyalty Issue: If a majority of the board of directors are (1) materially
interested, (2) not independent, or (3) there is a controlling shareholder.
 Result: The entire fairness test applies (fairness in process & price).
 Rationale: Bypass BJR due to conflict/heightened screutiny.
 Effect of Controlling Shareholder: The idea that, because the shareholder
can vote for directors and control the vote, essentially all directors have a
conflict of interest.
 Burden: Defendants must prove that the transaction was fair.

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 o Special Committee: If a special committee is created or required to vote, then —
 Delaware: Entire farness test applies, but the burden is shifted to the
plaintiffs to prove the transaction is unfair.
 MBC States: Business judgement is reinvoked.
 Consists Of: Committee of disinterested independent directors, independent legal
counsel, and investment bankers.
 Orman v. Cullman (Del 2000 pg. 366): General Cigar controlled by members of two families referred
to as the Cullmans. Swedish Match AB approached General Cigar & the Cullmans expressing interest
in merging. The BOD set up a special committee charged with advising the BOD on the transaction.
Orman brought suit, arguing that members of the Cullmans who were members of the board breached
their fiduciary duty by entering into a voting agreement based on recommendations.
o Issue: Is a disinterested director necessarily independent?
 Interested Director: A director may be deemed to have an interest in a transaction if
either —
 (1) He appears on both sides of the transaction; or
 (2) Expects to derive—
o (a) Material personal benefit from the transaction; and
 Material: Significant enough to make it improbable that
the director could perform duties without being
influenced by personal interest. Exp: Getting enough
money that there is no way you can be uninfluenced.
o (b) Benefit isn’t enjoyed generally by corporation/shareholders
 Note: Benefit alone does not disqualify.
 Independence: A director’s actions are based on the corporate merits of the
transaction, rather than any “extraneous considerations or influences.”
 Here: Directors were effectively under control/influence of another party to the
transaction. Therefore, may be subject to extraneous considerations or influences.
o Holding: A disinterested director is not necessarily independent.
 Conflict of Interest Transactions: If (1) a majority of the board members are conflicted; or (2) there is
a controlling or dominant stockholder, the transaction must meet the entire fairness test, absent other
mitigating factors.
o Note: Dominant shareholder doesn’t have to be majority shareholder, can be a plurality or
sufficiently large ownership block.
o Practice: Use a special committee consisting of disinterested directors to negotiate the
transaction. This protects against breach of duty of loyalty claims and may revive BJR
presumption, absent the involvement of controlling shareholders.
 Burden: This shifts the burden to the plaintiff to show that the special committee’s
determination is not entirely fair.
 Special Committee: Typically employees own counsel & financial advisors.
 Entire Fairness Test: If there is a breach of either the duty of loyalty or the duty of care that rebuts the BJR presumption, then the
board is required to prove that the transaction was entirely fair to the shareholders.
o Test: In order to be considered entirely fair, the transaction must have —
 Note: The entire fairness test is relatively tough for board of directors to satisfy.
 (1) Fair Dealing: Looks at the transaction process, including—
 When the transaction was timed.
 How it was initiated, structured, negotiated, and disclosed to the directors.
 How the approvals of the directors and the stockholders was obtained.
o Application: Minority shareholders must be informed of all material information including
what the highest price buyer is willing to pay.
 (2) Fair Price: Looks at the economic and financial considerations of the proposed transaction.
 Exp: Was the price offered the highest value reasonably available under the circumstances.
o Safe Harbors: To entire fairness test, if these occur BJR applies or burden shifts to the plaintiff.
 Cleansing Process (BJR): Remove the conflicted individuals from the approval process.
 Approval by Majority of the Minority Shareholders (Burden Shifts): Must be informed & un-coerced.
 Burden Shifts: Plaintiff must show that the transaction is unfair to the minority.
 However: Breach of duty of candor suggests uninformed approval process.
 Special Committee (BJR): Disinterested directors negotiate the transaction.
 However: If controlling shareholders involved, then burden shifts vs. BJR.
o Burden Shifts: Plaintiffs must show that the committee’s decision is not entirely fair.
 Short Form Merger (BJR): When the acquirer already owns over 90% of the seller’s stock.
 However: Majority shareholder has a duty of disclosure to the minority shareholder.
o Disclosure: Minority shareholder must be able to make an informed decision based on
appraisal (only remedy available).

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 o Weinberg v. UOP, Inc. (Del. 1983 - pg. 378): Signal owned 50.5% of UOP and wanted to acquire the
other 49.5%. Signal dominated the board and had directors who served on both boards undertake a
“feasibility study” for the benefit of Signal, determining a favorable price to pay for acquisition. Study
determined $24 would be fair, minorities not told this, and Signal offered $21. UOP minorities accepted
this. Plaintiff brought suit on behalf of minorities claiming Signal breached fiduciary duties owed to
minority holders.
 Issue: Is a minority shareholder vote in favor of a proposed merger fair if the shareholders were
not given information on the highest price that the buyer was willing to offer for the shares?
 Entire Fairness: Consists of two elements – fair dealing and fair price.
o Fair Dealing: Focuses on procedural matters, such as how the transaction was timed,
initiated, structured, disclosed, and approved.
o Fair Price: Focuses on substantive matters, including the economic and financial
consideration offered in the transaction.
 Arm’s Length Review: Need to set up a procedure that will as best as possible mimic an
arm’s length transaction, so you have independent committees negotiating against each other.
 Note: Majority of minority clauses are helpful to ensure fairness.
 Court: Merger fails because (1) Parent set up all terms of the merger; and (2) Never disclosed
feasibility study which concluded $24 was favorable. Also doubts about $21 fairness.
 Holding: In parent-subsidiary/controlling shareholder mergers, court will apply entire fairness
standard with burden on controlling shareholders to prove fair price and fair dealing.
o Controlling Stockholder Cases:
 Rosenblatt v. Getty Oil Co. (Del. 1985 - pg. 381): What needs to be disclosed to “inform” minority.
 Weinberger does not impose a duty on a majority stockholder to disclose its top bid to
the minority. Problems arise when directors appointed by a majority stockholder fail to
satisfy their duty of loyalty to the target company.
 Rule: It is not required that controlling shareholders disclose their top bid to the minority.
o Here: Controlling shareholder prepared a report for itself to use. Does not need
to disclose the report to the minority shareholders of target.
 Glassman v. Unocal Exploration (Del. 2001 - pg. 382): In short-form Merger (90% owned by
controlling shareholder) Entire Fairness is not applicable.
 Result: Shareholders may not bring entire-fairness suit due to controlling shareholder’s
act, their sole remedy is an appraisal proceeding.
 However: The majority stockholder has a duty of disclosure to the minority stockholder
to allow them to make an informed decision with respect to appraisal rights.
 Kahn v. Lynch Communication System (Del. 1994 - pg. 382): The use of a special committee or
a “majority of the minority” vote does not reinstate the BJR presumption where a majority
stockholder is involved.
Special Mergers and Acquisition Situations:
 Challenging Buyer’s Decision to Buy: Timing of the review for rebutting the BJR & expert opinions.
o ASH v. McCall (Del. 2000 - pg. 354): The acquiring firm purchased a target that had accounting fraud
issues. The acquirer hired the best accountants and lawyers, however, the firm still ended up taking major
losses. The shareholders sued, arguing that the Board breached its duty of care in the transaction for
failing to make an informed decision in finding the fraud.
 Issue: Is the board of directors entitled to BJR presumption, even if their target has a record of fraud.
 BJR Protection: It is generally difficult to contest the board’s decision. Board protected,
absent a showing of a breach of the duty of loyalty or duty of care.
o Adequacy of Care: Evaluated at the point the transaction is approved when the
board makes its decision (not before/after).
 Note: Doesn’t use hindsight. If directors informed POT, result is irrelevant.
 Expert Opinions: Board is entitled to rely on the reports of experts in making its
evaluation with respect to a transaction. May rely, in good faith, on experts.
o Here: BOD used two of the best accounting and law firms to do the due
diligence & audit.
 Court: Unless showing BOD did not in fact rely in good faith, BJR protects.
 Holding: BOD is entitled to the presumption that they exercised proper business judgment.

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 Board Vote Buying:
o Hewlett v. Hewlett-Packard Co. (Del. 260 - pg. 360): Hewlett the former owner of HP and large shareholder did not
agree with the transaction they were doing. Engaged in long proxy contest. HP purchased from Investment Bankers
who held a large portion of shares, their vote to approve the transaction to purchase Compaq.
 Issue: May a shareholder vote be invalidated on the basis of faulty disclosures absent a showing that
management knowingly and intentionally made material misrepresentations?
 Court: There is no blanked for prohibition on vote buying. Subject to Entire Fairness.
o However: Vote buying is illegal if object or purpose is to (1) defraud or in some way
disenfranchise other stockholders; or (2) Actually affect/change outcome of transaction.
 Note: Affecting transaction is a de facto ban on management vote purchasing
then, as there is no real reason otherwise to purchase votes.
o Note: Management may not use corporate assets to by votes.
 Contract/Agreement Not Required: While there may be an understanding, it’s unlikely that
there will be a written agreement to vote to defraud shareholders.
o Court: Focus is on the harm to shareholders, not contract of board.
 No Specific % Trigger Threshold: No minimum vote purchase needed to state cognizable claim.
Even small amounts of votes can tip in favor one way or another.
 Holding: In order to invalidate a shareholder vote on the basis of faulty disclosures, a plaintiff must show
that management knowingly and intentionally made material misrepresentations.
 Takeover by Controlling Shareholders:
o In re CNX Gas Corporation Shareholders Litigation (Del. 2010 - pg. 386): CONSOL owned 83.5% of CNX.
CONSOL unsuccessfully attempted to acquire shares, then decreased number of directors. CONSOL made tender to
CSX shareholder, then commenced a two-step freeze out merger conditioned on majority of minority acceptance.
CSX board authorized committee to review tender, committee attempted to negotiate higher price but was
unsuccessful. Committee did not give an opinion on the tender offer. CSX shareholder sued challenging tender offer.
 Issue: Does the “entire fairness” test apply in a tender offer context involving a majority stockholder?
 Entire Fairness Test: Applies, unless—
o (1) Special committee negotiated & approved the tender offer; and
o (2) Tender offer is conditioned upon affirmative tender of a majority of minority shares.
 However: Majority of minority tender requirement must exclude stockholders
affiliated with controlling stockholder or management of the target.
 BJR: Applies to subsequent squeeze-out transactions (back-end mergers).
 Court: The special committee effectively had its hands tied & failed to explicitly approve the
tender offer.
 Holding: Under the unified standard, the BJR applies to two-step freeze-out mergers initiated by a
controlling shareholder if the first-step tender offer was (1) recommended by an independent committee of
directors; & (2) conditioned on approval by a majority of the minority shareholders.
 Buyouts in Closely Held Corporations:
o Lawton v. NYMAN (1st Cir. 2003 - pg. 390): Three shareholders of a voting class of stock sent letter out to minority,
non-voting shareholders offering to repurchase their shares. They repurchased many of them, and several weeks
later, entered a sale of the company for large sum of money. Due to their purchase of shares, they became
substantially wealthy. Minority brings suit arguing breach of duty of loyalty.
 Issue: Are there enhanced duties with respect to a closely held corporation?
 If Directors Repurchase Minority Interest: When directors of a closely-held corporation are
repurchasing minority interest, they have a duty of complete candor.
o Complete Candor: Duty to disclose all info in their possession germane to da transaction
 Rational:
o (1) There is no public market for the stock. (In public biz, disclosure would elevate price)
o (2) All directors are shareholders here too, therefore all directors are interested.
 Holding: The duty of candor (disclosure) is higher for closely-held corporation than for a publicly-traded 1.
 Recapitalizations:
o Levco Alternative Fund v. The Reader’s Digest Assoc. (Del 2002 - pg. 395): Two classes of shares were being
recapitalized. One class was getting a premium, and that class was owned by a fund that the directors were on.
 Issue: Does the entire fairness test apply to recapitalization plans?
 2 Classes of Equity Exist: Fairness evaluated separately for each class (not the entity as a whole).
o Note: Even if a special committee is used, this may be insufficient to shift the fairness
burden from controlling stockholders where separate class of equity is at issue.
o Result: Must be fair in price and fair in process to meet fairness standard. If yes, burden
shifts to the plaintiff.
 Holding: Entire fairness test applies in a recapitalization context.

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Legal Duties of Board of Directors – Duties of Controlling Shareholders: 11/7
Free Trade Rule (Default): A controlling shareholder does not have to include other shareholders in the sale of a
controlling block of shares—
o (1) Other shareholders/board of directors can’t contest shareholders decision to sell its own shares.
o (2) No obligation for the controlling shareholder to share the proceeds from the sale.
o (3) The other shareholder don’t have tag along rights (right of equal opportunity to participate in the sale).
 Zetlin v. Hanson Holdings, Inc. (NY 1979 - pg. 397): Zetlin owned 2% of outstanding shares, Hanson owned
44%. Hanson sold interest for a $15 per share premium (twice what stock was trading at), giving other party a
controlling interest. Zetlin brought suit seeking to obtain part of the premium other party paid Hanson.
o Issue: Is there an obligation on the part of a controlling stockholder to share the proceeds from the sale of
its controlling block of stock?
 Free Trade Rule: Controlling stockholders generally permitted to sell their shares at a premium.
 Exceptions: Evidence of (1) Looting of corporate assets; (2) Conversion of a business
opportunity; (3) Fraud; or (4) Other acts of bad faith.
 Drag Along Rights: Majority may force minority to join in sale of company.
 Note: There is no concept of equitable drag-along rights for minority shareholders.
o Holding: Minority shareholders are generally not entitled to share equally in a premium paid for a
controlling interest in a corporation.
 Note: Contrast this with the “all holders” and “best price” rules imposed under Regulation 14D
regarding third party tender offers.
 Regulation 14D: A public tender offer must give an equal opportunity of participation to
all shareholders, large and small alike.
o Note: SEC is debating changing this rule to include all large block sales of stock.
 Privately Negotiated Purchases: Can sell a large block of stock without offering to all
shareholders, provided it is not an unconventional tender offer and does not occur
alongside a pending tender offer.
Exceptions: To the Free Trade Rule.
 Public Tender Offer: Must comply with Regulation 14D of the Williams Act (see above).
 The Duty Not to Sell to a Looter:
o Insuranshares Corp. of Del. V. Northern Fiscal Corp. (PA 1940 - pg. 399): Suit brought by corporation
against shareholder group. Shareholder group owned a controlling portion of shares, sold their
investment to the Robb Morris and Solon. Acquisition was the first step in a scheme to strip corporation
of its valuable assets and leave it as a mere shell to the other shareholders.
 Issue: What are the duties owed by a majority shareholder when selling its controlling block of
stock to a potential corporate looter?
 Duty not to Sell to Looters: Majority shareholders have a duty not to transfer ownership
if the circumstances surrounding the transaction — (1) Awaken suspicion; and (2) Put a
prudent man on his guard.
o Punishment: May be required to account for the premium derived on the sale
and for any injury caused to the corporation.
o Exception: This can be overcome if —
 (1) There is a reasonably adequate investigation; and
 Reasonably Adequate: Minimal/non-burdensome.
 (2) That investigation would convince a reasonable person;
 (3) That no fraud is intended or likely to result.
 Holding: Majority shareholders are effectively subjected to a duty of — (1) Reasonable
investigation; & (2) Due care to the corporation — when selling their controlling block of shares.
 Effects: Must do some type of due diligence to cover yourself as controlling shareholder
o Harris v. Carter (Del. 1990 - pg. 403): Courts have applies a “reasonably prudent person” standard for
determining when a majority shareholder should have known that a purchaser “is dishonest or in some
material respects untruthful.”

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 The Fiduciary Duty of the Board of Protected Minority Shareholders In Transaction with Majority:
o Entire Fairness Test: If the board of directors participated in the sale in some way, there is a fiduciary duty to
protect the minority shareholders and the entire fairness test applies.
 Exp: Controlling shareholders negotiate a sale in which the minority shareholders tag along at the same
price, must justify the price under the entire fairness test.
 Note: Even if the majority shareholder has the power alone to approve a transaction, the board of directors
retain the obligation to secure the best value reasonably available for all shareholders.
o McMullin v. Beran (Del. 2000 - pg. 404): ARCO owned 80% of a subsidiary. ARCO negotiated a 2 step
acquisition with a third party. Minority shareholders sued arguing sale price was too cheep.
 Issue: Do the duties of a BOD to evaluate a transaction change when a majority shareholder is involved?
 Rule: Notwithstanding the fact that a majority has the power, alone, to approve a transaction, the
board of directors retains its obligations to secure the transaction offering the best value
reasonably available for all stockholders.
o BOD Duties: (1) Duty of Care; (2) Duty of Loyalty; and (3) Duty of Candor
 Holding: A board must still comply with its fiduciary obligations to all shareholders in evaluating a
transaction, even if no other alternative transactions are realistically available.
 Conundrum: Had the controlling shareholder just sold its block, would there have been a
problem? Probably not, see Zetlin (pg. 45).
o In re Digex, Inc. Shareholder Litigation (Del. 2000 - pg. 405): DGCL § 203 limits a purchaser’s ability to transact
with a target corporation. If BOD does not extract benefits for minority shareholders when granting a waiver of
DGCL § 203, they may be found to have breached their fiduciary duties.
 The Duty Not to Sell a Director/Officer Position:
o Essex Universal Corp. v. Yates (Ed.) (2nd Cir. 1962 - pg. 407): Yates president/chairman of BOD of Republic.
Yates 28.3% sold stock to Essex, stock purchase agreement called for immediate transfer of control of Republic’s
BOD through resignations. Normally 1/3 of board elected annually at meetings, thus should normally take 18
months. Is this immediate transfer of control allowed?
 Issue: When can a selling stockholder agree to board and/or management changes as a condition to closing
of the sale of its block of stock?
 General Rule: Controlling shareholders cannot agree to management/board changes as a
condition to selling in a sales and purchase agreement.
o However: This rule can be overcome if —
 (1) Practically certain;
 (2) The purchaser could do whatever he wants after the transaction anyway.
 Question: Would acquirer have effective ability to implement required
changes post-transaction?
 Holding: A provision in a contract for the sale of majority share control in a corporation that calls for the
immediate transfer of control of a board of directors to the buyer is not illegal even if the buyer cannot
convert the share control into operating control immediately.
 Concurring (Friendly): The threshold for “practically certain” is probably around 50% ownership,
however, maybe even less.
 Note: Working control (having enough voting power to influence or determine corporate policy)
would likely not be sufficient.
 The Duty Not to Usurp Corporate Opportunities:
o Thorpe v. Cerbco, Inc. (Del. 1996 - pg. 410): Cerbco was controlled by the Erikson brothers, who were majority
shareholders and who constituted half the board. Cerbco owns East, its subsidiary which INA wanted to buy. INA
approached Ericksons in their capacity as Cerbco directors in order to discuss purchase. Erickson nixed proposal,
but offered to sell their Cerbco shares to INA. Ericksons did not tell other BOD members of proposed purchase.
Plaintiff sued claiming Ericksons usurped corporate opportunity for their own benefit.
 Issue: What are the duties of a majority stockholder who is also a BOD & how does a majority
stockholders ability to stop transaction affect analysis of whether it represents viable corporate opportunity?
 Rule: A majority shareholder with a BOD seat owes same duty of care & loyalty, failure to
disclose possible corporate opportunities = a breach of fiduciary duties.
o However: If a majority shareholder has ability to effectively veto possible transaction,
then the transaction is not a viable corporate opportunity. Analysis:
 (1) Is shareholder vote required to approve the transaction?
 (2) Does the majority shareholder hold sufficient voting power to block
its approval?
 Note: Still must disclose deal to the rest of the board.
 Holding: Damages stemming from usurpation of a corporate opportunity must be awarded even when the
usurping director could have prevented the corporation from actually taking advantage of the opportunity.

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Legal Duties of Board of Directors – A Target Board’s decision to block a takeover: 11/7
Target Boards Decision to Block a Takeover: Generally, there are two separate legal issues that need to be addressed
when a target’s board attempts to block a takeover.
 (1) Is the defense chosen by the board void ab initio (from the beginning), as simply beyond the scope of power
afforded to the board?
 (2) Fiduciary Duty: Did the directors breach their fiduciary duties in deploying or failing to defuse a chosen defense?
o Note: Fiduciary duties apply even if the board’s chosen defense is ok.
Potential Defenses: Defenses is defined broadly. All actions that can be taken in order to prevent a firm from being acquired.
o Note: Many of these chosen defense methods are not reactions to a takeover, rather, some simply exist in
the articles of incorporation as good corporate governance.
o Modern: Most corporations have some form of “defense” already within their articles.
 However: Some actions are reactions to a takeover, while others simply exist.
 Shark Repellent (Preventative): Amending the certificate of incorporation to hinder someone with newly
acquired voting power from taking control of the board of directors. Examples—
o (1) Staggered Board of Directors: Making a portion of the board elected in intermittent years. Typically,
1/3 of the directors are chosen each year.
 Rationale: This deters take over due to time it will take to get control (several years).
o (2) Eliminating “Voting by Written Consent”: Eliminating investors ability to vote without physically
being present at a shareholder meeting.
 Reasoning: Such voting by written consent eliminates the need for a shareholder meeting so a
shareholder with enough shares could simply write in his votes and take over control.
o (3) Limiting Shareholder’s Right to Call Special Meetings: This prevents/limits an ad hob submission
of transactions of shareholders by increasing the vote requirements for declaring a meeting.
 Reasoning: A majority owner could bypass typical schedule, call special meeting, and then vote
his shares in the meeting to take control. This prevents that.
o (4) Only Existing Board of Directors Can Appoint New Directors: Take shareholders out of the
equation entirely.
o (6) Prohibition on Removal of Directors Other Than “For Cause”: So hostile shareholders cannot
simply vote them out quickly, need a reason to vote them out.
o (7) Limitation on the Creation of New Board Seats: This prevents hostile shareholders from organizing
meetings to add several more board positions and make other board members moot on their decisions.
o (8) Supermajority Voting Provision: Require that, if a stockholder hits above a certain percentage (i.e.,
15%), super-majority of all outstanding shares are required to vote to approve business obligation.
 Effects: The hostile party will be unable to get control as they will be unable to get shares with
higher voting rights.
 Result: This deters takeovers by allowing maintenance of control by owner or certain
shareholders.
o (9) Recapitalization with Two-Tier Voting Stock: Recapitalizing a company and having different
classes of voting stock. For instance, ShitCo has Class A and Class B common stock, Class B ShitCo
stock gets 10X the votes of Class B stock.
 Effect: The hostile party will be unable to get control as they will be unable to get shares with
higher voting rights.
 Result: This deters takeovers by allowing maintenance of control by owner or certain
shareholders.
o (10) Put Rights for Non-Tendering Stockholders: Option of non-tendering shareholders to sell their
stock back to the corporation for a specified price.
o (11) Reduce Voting Rights of Stock Acquirer: Making recently stock acquirer’s voting power not as strong.
 Asset-Based Strategies (Responsive):
o Board Decision: When a hostile bid occurs, target board will consider — (1) Accept the bid; (2) Defend
against bid; or (3) Find a “White Knight” other buyer.
o Crown Jewel/Asset Lock-Up: Firm takes its most valuable assets and either (1) sells them outright; or
(2) Gives another firm the option to buy them in the future.
 Effect:
 Target less attractive to acquirer if primary assets are gone or could be gone,
 Gives leverage to the board to negotiate.

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 o Greenmail: Unwanted bidder who is acquiring stock in the target is simply bought off by buying the
target stock the buyer purchased for a higher premium on his shares.
 Exp: Activist investor, like Carl Ichan, begins acquiring shares, making public
announcements about intentions, etc…nuisance to greenmail company. Target just buys off
his shares to make him go away.
o Golden Parachutes: Handsome severance payments to company officer’s contingent on control changes.
 Historically: Large payment packages (A.K.A “Change in Control Contracts”) were
contracted with managers that were contingent on change in control.
 Purpose: To increase the cost of the takeover, so as to deter the takeover attempt.
 Modern: Has a negative connotation, managers typically paid a portion of it to waive its
provisions.
 Note: Is used even in friendly transaction as method to negotiate out of the contract
o White Knight: Issuing stock to a friendly party with resale restrictions.
 Typical Scenario: Hostile bidder is seeking to break up the company, selling it piecmeal.
 Target: Will seek a white knight who may want, instead, to merge with it, or buy it
to continue it rather than break it up.
 Exp: Wallstreet.
 Note: See infra, Revlon Duties, as they may trigger when White Knight defense used.
o Clayton Defense: Causing the acquisition to create an antitrust problem for the bidder.
 Exp: Target acquires a company in the same market as the bidder, when purchase goes
through the acquirer will have to deal with broad HSR (pg. 39) and Clayton Act issues.
o Pentagon Play: Create a national defense concern/issue if the bidder is a foreign entity.
 Exp: Target acquires a subsidiary that deals with “national defense issues” or has security
clearance.
o Pac-Man Defense: When acquirer is deciding to take over target, the target takes over the acquirer.
 Exp: Porsche was trying to take over VW, when it couldn’t line up financing VW bought
Porsche out.
 The Poison Pill (Shareholder Rights Plan): If unapproved stock acquisition, provide a dividend
distribution of stock to shareholders with special redemption/conversion options.
o Exp: Plan will issue some right to each shareholder. The right will be allowed to be exercised by
every shareholder that does not engage in a triggering event.
 Triggering Event: Some event, like a stock holder acquiring a fixed percentage of stock, will
trigger the right.
o Call Plans: Holder has a contingent right to buy securities at a steep discount.
o Put Plans: Holder has a contingent right to forcibly sell securities to the target/acquirer at a steep
premium.
o Purpose: (1) Board has time to consider the transaction, approve it or not; (2) Board will have the
option to “waive” the right, defusing it; (3) This helps avoid fast moving offers; and (4) Gives
Leverage to negotiate the transaction.
o Effect: (1) Gives shareholders immediate profit of buying at discount; (2) Floods market with shares;
(3) Reduces the hostile bidders ownership %, as it is diluted greatly; and (4) Makes the takeover
prohibitively more expensive to do
 Call Plan Provisions: If triggered, the stockholder gets right to buy shares at a deep discount.
o Purpose: Dilutes hostile shareholder, as he may not participate in buying, while all other
shareholders may buy more shares.
o Flip-In: If buyer exceeds some ownership threshold, holder has a right to buy sellers securities.
o Flip-Over: If merger occurs after rights are triggered, holder has the right to buy securities of
surviving corporation at a discount.
o Note: Does not cost the corporation any money.
 Put Plan Provisions: Shareholders are given a right to sell back shares to the corporation at a premium
o Note: Extremely costly for the corporation.
o Requirement: The acquirer now has to deal with paying for all of the put options it now may acquire
via the target.

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Defenses Test: Was it permissible to use as a defense?
 “Void Ab Initio”: Was the defense inherently beyond the board of director’s powers?
o Quickturn Design Systems, Inc. v. Shapiro (Del. 1998 - pg. 426): Shapiro attempted a hostile takeover Quickturn. In
response to the takeover attempt, Quickturn’s BOD voted to amend its bylaws to (1) amending 10% or greater
stockholder’s ability to call special meetings and (2) amending the shareholder Rights Plan by eliminating its dead and
feature and replacing it with a deferred redemption provision whereby no newly elect board members could redeem the
plan for six months after taking office. Shapiro sought declaratory judgment that amendments invalid, one in district court
and Quickturn appealed.
 Issue: Whether defensive measures that restrict board of director’s rights are lawful under the DGCL?
 BOD: Must always maintain full power to manage & direct a corporation’s business and affairs.
o Void ab Initio: If any provision results in something other than this, it is unlawful. Provision
may not be beyond the boards power.
o Examples: Of void defenses.
 Dead Hand: If board is replaced, only remaining board members who existed when
poison pill was in place may waive it.
 No Hand: If majority of directors are replaced by shareholder action, the newly
elected board may not redeem rights issued under the poison plan for a specified
period after the purpose of facilitating the transaction with interested person.
 Holding: Any defense which restricts the board of directors’ rights as directors is unlawful including no hand
and dead hand restrictions.
 Fiduciary Duties (Enhanced Scrutiny): Does the defense measure breach any of the board’s fiduciary duties?
o Unocal Corporation v. Mesa Petroleum Co. (Del 1985 – pg. 433): Mesa Petroleum offered Unocal a two-tier tender offer
for controlling interest in company. Offer inadequate, Unocal’s Board instead offered shareholder’s a self-tender offer for
stock. Board left out Mesa. Mesa brought suit, claiming it was improperly excluded from tender.
 Issue: May a BOD repurchase stock from its stockholders selectively to defeat a perceived threat?
 Rule: An action by the board of directors is only valid if —
o (1) It is not preclusive or coercive;
 Note: If either, you don’t even need to evaluate proportionality.
 Preclusive: Makes the bidder’s ability to gain control realistically unattainable.
 Coercive: Cramming down a management sponsored alternative on the SHs.
o (2) There is a reasonably perceived threat to corporate policy/effectiveness; and
 Requirement: Must be done in good faith AND not motivated primarily by a desire
to perpetuate control.
 Note: Board of directors allowed to determine that market price
undervalues shareholder’s actual value and protect shareholders from
offers that don’t reflect shareholder’s long-term value.
o However: Inadequate value does not equal only threat that may
be considered.
o (3) The defensive measures were reasonable in relation to the posed threat.
 Requirement: Measures must be proportional.
 Holding: The fact that a defensive measure must not be coercive or preclusive does not prevent a board from
responding defensively before a bidder is at the corporation’s gate. If any element not met, action is invalid.
o Air Products and Chemicals, Inc. v. Airgas, Inc. (Del 2011 - pg. 434): Air Products made a $60 per share hostile tender
offer to Airgas. Poison pill in place that could only be removed by majority of directors, stagnated director seats make this
hard. After obtaining board seats, Air Products raised bid to $70 per share. Airgas obtained independent financial
advisors and rejected offer as inadequate. Evidence showed that a majority of the Airgas shareholders were willing to
tender their shares, regardless of whether the price was adequate or not. Air Products asked the court of chancery to
remove the poison pill since it did not have power yet to do it itself.
 Issue: Does the board of directors have the ultimate power to defeat an inadequate hostile tender offer?
 Unocal: Two prongs that must be met by a board of director to not remove a poison pill
o (1) The board must show its good faith, a reasonable investigation, and a threat to the
corporation. Three types of threats —
 (A) Structural Coercion: Different treatments of non-tendering shareholders may
change shareholders' tender decisions.
 (B) Opportunity Loss: Shareholders may lose the opportunity to choose a better
offer proposed by management; and
 (C) Substantive Coercion: Shareholders may accept an inadequate offer due to
misevaluation.
o (2) The defensive measure must be proportionate in response to the threat brought by the
tender offer. Accomplished by showing that a response is not preclusive or cursive & falls
within a range of reasonableness.
 Preclusive: Makes the bidder’s ability to gain control realistically unattainable.
 Coercive: Cramming down a management sponsored alternative on the SHs.
 Holding: The board of directors have the ultimate power to defeat an inadequate hostile tender offer.

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 o Blasius Industries, Inc. v. Atlas Corp. (Del. 1988 - pg. 487): Blasius held 9% of stock in Atlas, proposed
that Atlas sell assets, issue bonds, and distribute a large one-time dividend to shareholders. BOD believed
not in best interests, Blasius formalized proposal and requested election for 8 new board members to
increase size to 15 (max allowed by charter). Fearing takeover, BOD amended bylaws to add 2 additional
board members. Blasius sued, seeking to void board’s action.
 Issue: May a board, acting on its good-faith view of the corporation’s best interest, take steps
with the primary purpose of interfering with shareholder voting?
 Interfering with Shareholder Vote: A board of directors may not interfere with the
effectiveness of a shareholder vote, unless it has compelling justification for doing so.
o Compelling Justification: Heavy burden of persuasion to justify actions.
 Result: Board can’t tacitly usurp shareholder rights.
 Framework: Blasius becomes an additional prong when Unocal standard for defensive
measures applies.
o (1) Was there a reasonably interpreted threat?
o (2) Was the reaction proportional?
o (3) If primary purpose of action to interfere with vote, was there compelling
justification?
 Holding: A board generally cannot undertake action with the primary purpose of interfering with
shareholder voting, even if it acts in the good faith pursuit of the corporation’s best interests.
 Union Contracts: If a union contract has a provision within it that has purely antitakeover effects, it will be
subject to the Unocal test.
Up for Sale: Duties of the board when a corporation is up for sale.
 Duty - Revlon, Inc. v. MacAndrews & Forbes Holding, Inc. (Del. 1986 - pg. 461): 2 parties bid to acquire a
target company, a hostile acquirer & a white knight. Both bidders offered cash to all existing shareholders.
Board agreed to lock up option & no shop provision with white knight, even though hostile party offered more
money. Hostile party brought suit over option & provision.
o Issue: If a break-up is inevitable, does a corporation’s board violate the duty of loyalty if it’s first
consideration isn’t to maximize shareholder profits?
 BOD Duty: The duty of the board is to maximize benefits (and price) for the shareholders.
 Requirement: All actions taken (including defenses) must seek to achieve greater value
for shareholders.
o Inevitability: Once it becomes inevitable a break up will happen, directors must
aim to maximize shareholder value and act as auctioneers.
o Holding: When the break-up of a corporation is inevitable, the duty of the corporation’s board of
director’s changes from maintaining the company as a viable corporate entity to maximizing the
shareholders’ benefit when the company is eventually and inevitably sold.
 Trigger - Paramount Communications v. QVC Network (Del. 1994 - pg. 469): Paramount’s board decided to
favor one bidder, Viacom, over another. Since the board had not initiated an action, and the Viacom deal did not
involve the breakup of Paramount, the board assumed Revlon did not apply. Bidding campaign occurred, but
Paramount determined Viacom was best for shareholders and locked in. Other company brought suit.
o Issue: May a no-shop provision in a merger agreement between two corporations define or limit the
fiduciary duties of the directors of one or both of the corporations?
 Auctioneers: A board of directors is required to act as auctioneers when —
 (1) There is a sale of the target for cash.
 (2) There is an active bidding process.
o Exp: Hiring financial advisers to scavenge & solicit offers.
 (3) There is a bust-up of operating divisions or businesses.
o Note: Asset sales trigger this too.
 (4) There is a transaction that results in change of control.
o Note: It is very difficult to structure around Revelon.
 Note: Just because a corporation is in play does not mean that it is up for sale. The board of
directors probably need to make the affirmative decision to embark on the transaction.
o Holding: When a corporation undertakes a transaction, which will cause a change in corporate control or
a break-up of the corporate entity, the directors’ obligation is to seek the best value reasonably available
to the stockholders.

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  Timing: Duties kick in when the corporation prepares to enter triggering transaction.
o Note: The board of directors is not required to take action simply because the corporation is in play.
 However: Once they start considering the offer, the obligation begins.
 No Required Path/Specific Steps - Lyondell Chemical Co. v. Ryan (Del. 2009 - pg. 476): Takeover company’s
subsidiary published a 13(d)-disclosure stating they had a right to acquire 8% of takeover target. Board did not react
and take over company offered $40 per share to buy out. Price was raised and independent advisors concluded this was
the best price. Merger approved by shareholders, other shareholders filed a class action suit claiming breach of
fiduciary duties regarding negotiating the merger.
o Issue: Under Revlon, do corporate directors have a set of judicially prescribed fiduciary duties that must be
fulfilled before a corporation may be sold?
 Revlon Duty: Does not arise just cause a company is in play. Duty to seek best available price applies
only when a company embarks on a transaction, on its own or in response to an unsolicited offer
 Board of Directors: Must act in good faith when evaluating whether to act.
o Bard Faith: The board of directors intentionally failed to act in the face of a known
duty to act.
 Auction: Best way for a board of directors to protect itself from bad faith.
 Insufficient: (1) Implicit post-signing market check (if smaller corp. with limited visibility),
and (2) Limited auction process.
o Holding: Corporate directors have a fiduciary duty to attempt to get the best sale price for the company.
However, boards are not required to take positive actions to get the best price under Revlon simply because a
corporation is in play for a merger.
Deal Protection Covenants:
 Requirement: A deal protection covenant cannot override the board of director’s fiduciary duties.
o Unenforceable: If the provision requires the board of directors to breach their fiduciary duty.
 However: Fiduciary out clauses can help avoid this type of litigation.
 Omnicare, Inc. v. NCS Healthcare, Inc. (Del. 2003 - pg. 452): A company’s board agreed to submit a merger to its
shareholders for a vote without allowing the board to get out of the commitment if a better deal came along before the
vote. At the same time, a few shareholders who owned a majority of the company agreed to vote in favor of the
merger, no matter what happened. Better offer came along and board withdrew recommendation for merger, however,
deal stated shareholders must still vote. Company with better offer brought suit, hoping to block the shareholder vote.
o Issue: Is an agreement to submit a merger to shareholder vote without allowing the board to get out of the
agreement if a better deal comes along valid?
 Deal Protection Covenants: Evaluated under the Unocal Standard.
 Coercive If: Forces SHs to accept management sponsored alternative to a hostile offer.
 Preclusive If: Prevents shareholders from hearing & voting on all available tender offers.
 Exp: Voting agreement that disallows shareholders to oppose a merger.
o Note: You have to let either the BOD or Shareholder’s vote (can’t lock up both).
 Exp: Breakup fees that are egregiously large.
o Holding: An agreement to submit a merger for a shareholder vote without allowing the board to get out of this
commitment if a better deal comes along before the vote is invalid.
o Dissent (Veasey & Steele): There was absolutely no bad faith of the board in this case. They were trying to
get the best deal for the holders and thought the exchange of certainties was the best way to do this.
o Dissent (Steele): Shouldn’t establish rules that ban negotiating strategies adopted by the BOD.
 Brazen v. Bell Atlantic Corp. (Del. 1997 - pg. 457): D and NYNEX entered into merger negotiations (stock for stock).
Agreed to a 2 tiered $550m termination fee as liquidated damages, not a penalty. Plaintiffs brought suit, argueing that
the fee was not reasonable. It's instead intended to punish SHs for not approving the merger, therefore coercive.
o Issue: Can a two-tiered $550m termination fee in a merger agreement be considered valid or invalid penalty to
coerce SHs into voting for the merger?
 Liquidated Damages: There are valid and will not be disturbed when they are —
 (1) Uncertain: Don’t have a specific number for the damages; and
 (2) Reasonable in Amount: Court looks at the anticipated loss and the difficulty of
calculating the loss; the greater the difficulty, the more likely the amount is reasonable
o Unreasonable: Amount is irrational and unconscionable.
o Note a Penalty: 1-2% of the value of the transaction is usually seen as reasonable.
 Note: This uses a reasonableness test and not a business judgement rule test.
o Holding: Breakup fees that are egregiously large will not be enforced.

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State change-of-control statutes; public company deal protection matters: 11/14
State Anti-Takeover Statutes: There are four main types of state anti-takeover statutes
 (1) Control Share Acquisition Statutes: Statutes that state if a single shareholder exceeds a certain % of shares,
that shareholder cannot vote their shares without board of director or shareholder approval.
o Note: You can opt out of these statutes.
 (2) Business Combination Statutes: Statutes that impose a moratorium on certain kinds of transactions between
large shareholders and the firm for a period usually ranging between three- and five-years prohibiting mergers,
unless specific exceptions are satisfied.
o DGCL § 203 – Hostile Acquisitions: Combinations between shareholders of a target of 15% and a target
firm are prohibited for 3 years, except when —
 (1) The board of directors approve the pre-transaction;
 (2) The transaction results in ownership of 85%; or
 (3) The board of directors approve and 2/3 of the shareholders (not including the
interested party approve.
 Purpose: (1) Encourages negotiation pre-transaction; (2) Deters coercive/hostile bids; (3)
Decreases speed, giving target time to negotiate and leverage itself; and (4) Raises prices.
 Relation to Unocal: Since Section 203 is an anti-takeover provision, its actions by the Board may
be seen under the Unocal test.
 Exp: If the board refuses to approve something, you may het enhanced scrutiny.
o BNS, Inc. v. Koppers Company, Inc. (Del. 1988 - pg. 497): Prior court decisions invalidated business
combination statutes, as a result legislature addressed these problems and drafted second generation
statutes. Delaware statutes where enacted after these challenges, statute still challenged by plaintiff.
 Issue: Does DGCL § 203 violate the Williams Act and Commerce Clause?
 Constitutional Validity:
o Williams Act: A statute is not preempted if the tender offer has a meaningful
opportunity for success, it can be difficult but must have a way forward within
the regulatory framework.
 DGCL § 203: Not preempted because there are still opportunities to
successfully have a tender offer under it.
o Commerce Clause: A statute is not preempted if (1) The effects are not
discriminatory; (2) The statute does not create an impermissible risk of
inconsistent regulation; and (3) The statute promotes stable corporate relations
and protects shareholders.
 DGCL § 203: Not preempted.
 Holding: DGCL § 203 does not violate either statute.
 (3) Fair Price Statutes: Statutes that state bidders can’t merge into target unless — (1) The remaining
shareholders receive a “fair price;” or (2) The majority of the remaining shareholders approve the merger.
o Note: This is essentially just another cause of action for shareholders (already covered by appraisal).
 (4) Redemption/Appraisal Statutes: Gives shareholders a right to put their shares to the company for certain
value if certain stock acquisitions are triggered.
Other Anti-Takeover Statutes: Not, these statutes are not present in Delaware.
 Liability Shield Statutes: Statutes that effectively overturn Unocal and Revlon. They apply business judgment
rule to Board of Directors actions in the context of mergers and acquisitions.
 Constituency Statutes: Allow BOD to consider more than just price when considering takeover offers.
o Note: These effectively reject Revlon’s best price test.
 Norfolk Southern v. Conrail: Court found Unocal and Revlon “myopically focused” on shareholder value.
o Note: Subsequent commentary focused on perceived losses to employees and other constituent groups.
 Air Line Pilots Ass’n v. UAL Corp.: Union contract provisions that have a purely anti-takeover effect are subject
to Unocal.

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Special Rules for Bondholders:
 Metropolitan Life Ins. Cor. V. RJR Nabisco, Inc. (NY 1989 - pg. 518): MetLife owned RJR bonds, bond
indentures include express provisions allowed RJR to merger/sell assets and assume additional debt. No
provisions requiring payout to previous bond holders if new debt acquired. RJR produced memoranda indicating
MetLife understood risk and decided to accept a leveraged buyout that reduced MetLife’s bond value. MetLife
brought suit, alleging RJR breached an implied covenant of good faith and fair dealing by taking additional debt.
o Issue: Can a covenant of good faith and fair dealing restrict a borrower’s ability to incur additional debt
be implied in a bond indenture?
 Bondholders: Do not have the same rights as shareholders (fiduciary duties, etc.)
 Corporation doesn’t owe a thing to bondholders beyond what is expressly in contract.
o Note: If there is no express provision protecting bondholders, no protection is
implied.
 Bond Governing Framework: Contract law, not corporate law.
 Exp: LBO that benefits shareholders at creditor’s expense is not a breach of any duty.
o Holding: A debt security holder can do nothing to protect itself against actions of the borrower which
jeopardizes the borrower’s ability to pay the debt unless the security holder establishes a right to do so
through contractual provisions in the indenture.
 McMahan & Company v. Wherehouse Entertainment, Inc. (2nd Cir. 1990 - pg. 525): Key selling feature of a
bond was a put right upon a change in control. Company went up for sale and the company argued that the
wording of the indenture allowed them to avoid triggering the put right through board approval.
o Issue: Is protection to bondholders implied in this situation?
 Material Misrepresentations: Restrictively reading a bond’s indenture to avoid implied
protection provision conflicts with how bonds are sold and makes the offer and sale based on a
material misrepresentation.
o Holding: If bonds are marketed in a certain way, the protection could be implied.
 Exp: Marketing bonds with an implied protection provision.

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