Business Associations/Corporations Class 21

1. Business Associations/Corporations Class 21 Professor Hill

2. Takeover defenses • Unocal framework: IF • Reasonable grounds to believe that there is a threat to corporate policy and effectiveness AND • Response reasonable in relation to threat posed • THEN: D gets bj deference

3. Mesa holding and aftermath • Discriminatory self-tender permitted where • threat to corporate policy and effectiveness and • Response is reasonable in relation to threat posed • In its tender offer rules, SEC outlaws discriminatory self-tender, adopting “all-holders” rule • Poison pills are permitted, though, and they allow for discrimination between acquirer and other shareholders

4. Tender Offers: Present rules • Some Federal securities laws • Disclose holdings of more than 5 percent • Disclose intent to seek control • BUT: can acquire a lot during 10 day window between acquisition and disclosure requirement • File required disclosure document • Substantive regulation • All holders/one price • Minimum time for offer to stay open

5. WILLIAMS ACT • Harrison Williams says • “In recent years we have seen proud old companies reduced to corporate shells after white-collar pirates have seized control with funds from sources which are unknown in many cases, then sold or traded away the best assets, later to split up most of the loot among themselves”

6. WILLIAMS ACT SOLUTION, in general: • Disclosure • Required disclosure by bidders and those acquiring more than a certain percentage (5%) of target stock • Rationale for 13D disclosure is that acquisitions of that amount often presage later attempts at takeovers • Substantive regulation of offers (unlike general federal securities law philosophy of requiring only disclosure) • Time for offer to stay open • Price for one=price for all in a given offer • Other types of substantive regulation, especially designed to eliminate rush to tender • Anti-Fraud provisions

7. Poison pill example • 1 million shares outstanding of Co. x, $5/share market price, =$5 mil market capitalization. • Shareholders other than one acquiring 20% can buy an additional one share for each share they own, at $2/share. • Acquiror spends $1,000,000 and buys 20% of company, 200,000 shares, from 3d party.

8. Poison pill example • At this point: • Market value of whole company is $5,000,000. There are a million shares outstanding. • Market value of acquiror’s interest is $1,000,000; he has 200,000 shares. • Market value of other shareholders’ interests is $4,000,000. They have 800,000 shares.

9. Poison Pill example • Pill is triggered; assume right is exercised. Shareholders w/800,000 shares buy one new share each, for $2/share, totaling $1.6 million for 800,000 shares. • Co. was “worth” $5,000,000; now is “worth” $6,600,000. • There are now 1.8 million shares outstanding

10. Poison Pill example • Acquiror owns 200,000 shares, worth $733,333. • 6.6 million (value) / 1.8 million (# of shares) = 3.66/share; 3.66 x 200,000=$733,333 • Shareholders own 1.6 million shares, worth $5,866,666 • 3.66x 1.6 mil = $5,866,666

11. Poison Pill example • Shareholders GAIN $266,666 • Old value (4 mil) + new $ paid (1.6 mil), = $5.6 mil. New additional value= New value, $5,866,666, -$5.6 (“amount paid”)=$266,666 • Acquiror LOSES $266,666. • Old value, 1 mil-new value, 733,333=$266,666 • Courts in theory can require company to redeem pill, but do so only extremely rarely/almost never

12. Revlon framework • When “break up becomes inevitable” board becomes auctioneers, “charged with getting the best price for the shareholders at a sale of the company.” • The Revlon board’s authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale.”

13. Vocabulary • “bust-up” • How could firm’s bust-up value be higher than value when whole? • If it’s true, what follows from that? • Poison pill/rights plan • Intrinsic value • Standstill agreement • Grossly inadequate (bid/offer) • Cumulative convertible exchangeable preferred • Pro rata

14. Vocabulary • subordinated • Triggering event • Notes covenants • waiver • Trading at par • Exchange offer • Board as auctioneer when Revlon duties kick in • When do the duties kick in • What do the duties require?

15. Vocabulary • Lock-up • Asset • Stock • LBO/MBO • Termination Fee • Break up fee • Reverse Termination fee

16. Revlon rule • When else do Revlon duties attach? • Co. runs auction for itself • Proposes to sell control • [other]

17. Post-Revlon: What Do Revlon Duties Require? • Not full-blown auction, but market check • If there is more than one bidder and propose lock-up or other such device, favored bid must be a lot higher or must be other very good reason to grant lock-up • Discrimination must enhance shareholder interest (in getting best value available) • Discrimination must be reasonable in relation to advantage sought or threat posed by particular bid • Use of no-shop “even more limited” than use of lock-up

18. Revlon • Repurchase is ok • Shareholders get note (with covenants), preferred stock • Very popular- almost all stockholders want to do this • How much is note worth? (depends in part on covenants. Why?) • Rights plan is ok • Lock up is not ok • Cancellation fee is not ok • No shop is not ok

19. Ryan v. Lyondell • Revlon-type case • ‘bad’ facts • Company knows it is ‘in play’ (from 13D filing, in May 2007) and doesn’t prepare or do much • Board meets only 7 hours • Deal negotiated and finalized in less than a week • Didn’t try to get a better price (?when?) • Didn’t conduct market check • Gave considerable deal protections given (above, especially lack of preparation/not conducting market check)

20. Ryan v. Lyondell • Good facts • Directors generally knew about market value of company • Though company in play, no other (real) suitors emerged, and they had reason to think none would • Deutsche Bank says price is fair and that nobody else will pay more • On many metrics, price is great (indeed 99% of shareholders accept)

21. Ryan v Lyondell re: Revlon • When did Revlon duties attach? • lower court: once company is ‘in play’ (as per 13D, May 2007) • This court: July 10, 2007, when Board starts negotiating the sale

22. Ryan v. Lyondell • What did the duties require? • Lower court- market check or otherwise getting impeccable knowledge of market/valuation? Negotiating more vigorously? Spending more time thinking about it? • This court: no formula. Meeting several times, general awareness of company value and market, getting and following legal and financial advice, trying to negotiate a better deal is ok even if don’t get better deal, especially where ‘all the evidence indicates that Basell had offered a ‘blowout price’

23. Intermediate Standards • Revlon • Board’s responsibilities re: hostile acquirer • Can board ‘just say no’? • Sometimes • If sale/change of control is inevitable, Revlon duties • When is sale/change of control inevitable? • What do Revlon duties require? • (is it care or loyalty? Intermediate, more on the loyalty side)

24. Stock Lock-up • Assume Brown Corp has 95 million shares outstanding • Brown gives Fred, a favored acquirer, an option to buy 5 million shares at the then-market price, assume $40/share.

25. Stock Lock-up • If Fred wants to buy 100% of Brown, he has to buy the 95 million shares already outstanding. Assume he’s willing to pay $50/share. So, he’d pay $4,750,000,000. (He wouldn’t exercise the option)

26. Stock Lock-up • If anyone else wants to buy 100% of Brown, they have to buy the 100 million shares, at the then-market price- assume $50/share – Fred will exercise his option. How much will someone else have to pay? What is the result for Fred?

27. Stock Lock-up • So, anyone else has to pay $5,000,000,000 for Brown. Fred nets $50,000,000 (because he bought 5 million shares at $200,000,000 and sold them for $250,000,000)