The Market for Control - Defending Control

A. Defensive Measures

1. The Unocal standard:

   1. if board is taking a defensive measure (like blocking a tender offer), directors must demonstrate that the board was (1) independent, (2) has reasonable investigation (for coercion), and (3) has a rational basis (i.e. there is a threat of take-over)

   2. The response must be reasonable in relation to the threat. The response cannot be coercive.

B. The “Revlon Moment”

1. In defending a corporation against takeover:

   1. buying up outstanding shares to drive up the stock price

   2. issuing poison pill, a poison pill has

      1. trigger: paper dividend to encourage shareholders to buy more shares

         1. e.g. a note providing that, if any shareholder increases their holdings of the corporation up to 20% they will get a dividend

      2. linked to catastrophic event: if there is a merger

         1. e.g. if there is a merger (catastrophic event), for every $100 worth of shares, SH can get $200 promissory note with a high interest rate

         2. The promissory note value is unreasonably high—this will deter hostile bidders from fulfilling the trigger condition.

         3. Other examples:

         4. if catastrophic event, shareholders have right of buyback against company: company will purchase every $100 in share value for $200.

      3. Offswitch: subject to redemption - up until such time as any shareholder so increases their holdings, Revlon retains the option of repurchasing the paper dividend notes.

         1. Revlon: non-redeemable poison pill is preclusive, and therefore invalid.

   3. purchasing stock using notes encumbered with a covenant that disallows Revlon from taking on debt.

      1. This deters hostile bidders, who finance acquisitions by taking on a lot of debt at high interest, and will need to quickly pay off such debt using debt on better terms. Normally they get such terms by borrowing against the value of the target firm upon acquisition. If they can’t do that, they’re fucked.

   4. finding a white knight

      1. another bidder who will place a bid in competition with the hostile bidder’s, but will also promise to preserve current management if he wins the bidding.

   5. agreeing to deal protections with such white knight

      1. crown jewels: if the white knight loses the bidding, target will transfer key assets to the white knight anyway

      2. $25 million cancellation fee if white knight loses bidding

C. What’s Left?

1. a target board is only subject the the Revlon duty when:

   1. target board either

      1. agrees to sell the target company, or

      2. initiates a sale of the target company, and

   2. the prospective transaction represents the last clear chance for target shareholders to receive a control premium for their shares. Generally speaking, target shareholder will only be said to lose such chance if:

      1. they had such chance in the first instance (because they owned shares in a company without a majority holder), and

      2. they are losing it because they are either:

         1. receiving only non-share (cash) compensation for their shares, or

         2. are receiving shares in a company with a majority holder.

2. the board’s role changes from defense to auctioneer and has the responsibility to get the best offer.

3. target board must show:

   1. independence

   2. reasonable investigation

   3. rational basis= best offer

D. Deal Protection Provisions and Fiduciary out Clause

1. Deal protection mechanism in Omnicare

   1. Force the vote: requires merger agreement be placed before the Target SH for a vote, even if T board of directors no longer recommend it

      1. Del. § 146 authorizes this: A corporation may agree to submit a matter to a vote of its stockholders whether or not the board of directors determines at any time subsequent to approving such matter that such matter is no longer advisable and recommends that the stockholders reject or vote against the matter

   2. Stock vote agreement: stockholders who hold a majority of the voting power of T, agree unconditionally to vote all of their shares in favor of the merger.

2. Fiduciary out: A right...

Buy the full version of these notes or essay plans and more in our Business Association (Duke Cox) Outlines.