#11699 - The Market For Control Defending Control - Business Association (Duke Cox)

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.

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

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.

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

target board must show:

1. independence

2. reasonable investigation

3. rational basis= best offer

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.

Fiduciary out: A right for the board to consider superior third-party offers and accept one to replace the current, signed agreement.

1. An exception to the no-shop covenant in a merger agreement. Generally, when the board of directors of a public company agrees to sell the company in a cash deal, the board becomes subject to a heightened duty of care, or “Revlon duty.” This duty requires the board to obtain the highest value reasonably available to the company's stockholders. Consequently, even though the directors may negotiate several deal-protection mechanisms (such as a no-shop), they still need to be able to accept a better deal for the stockholders without being fully locked up by the terms of the merger agreement. A fiduciary out permits the board to change its recommendation for the signed deal and terminate the merger agreement if failing to do so would breach its fiduciary duties.

Securities Exchange Act §§ 13(d)(1)

1. Make sure it’s applicable

2. To make a tender offer that would result in ownership of more than 5% (of any class) of a § 12 company, have to file a disclosure simultaneously

3. You have to file a report within 10 days of getting 5%, but you can keeping buying within the 10 days.

§ 14(e): general prohibition on fraud

14d-7: Tendering shareholders have a right to withdraw shares at any time while the offer is still open

14d-8: If tender offer is oversubscribed, tender offeror shall purchase deposited shares pro rata

14d-10(a): Tender offers have to be available to all holders of that security; tender offer shall provide same price to all SH

14e-1: Have to keep a tender offer open for 20 business days

14e-2: Target management has to announce its position within 10 days after a tender offer and reasons for taking the position

1. Position can be recommend acceptance, recommend rejection, no opinion and neutral, unable to take position

Most states have statutes regulating takeover bids...