Mergers and Acquisitions

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Ways in which to do a transaction

  1. Asset Sale --> biggest advantage is that you can exclude liabilities (other advantages: step up in basis, no voting by acquiring company needed unless the certificate of incorporation has to be amended to issue new stock). Generally the court will uphold any contractual agreement to exclude liabilities, but in the case that the court rules that the liabilities were transferred, the deal will often have an indemnification provision to help offset that the liability was transfered to the buyer.
    1. When you are using cash to buy things like equipment, 10b-5 does not apply because there are no securities being sold.
    2. It is difficult to document everything that is going on the process and therefore it is more expensive.
    3. Third party consent - often the agreement will not allow the acquirer to transfer the agreement to another corporation; often third parties will give their consent, but this takes time and money and the other party will try to negotiate something out of you in order to get the consent. Many courts have said that the consent provision is not enforceable, because of section 259 which says that all liabilities will go to the surviving company.
    4. Many states will tax asset sales
  2. Stock purchases
    1. The target company stays the same company that it was before; there is no change in the legal status of the company and so this type of acquisition is much less complicated than the other two forms of the acquisition.
    2. Disadvantage of this method is that a stock purchase could be complicated if you have many stock holders, as opposed to the asset sale/merger where you only have to deal with the target's board (there could be holdouts, etc)
  3. Merger - has to be approved by both stockholders (majority of outstanding shares according to DE)
    1. Choice of law: look at where the corporations are incorporated.
    2. The assets and liabilities are transferred over to the surviving corporation (no contracting around this)
    3. Procedure for a merger. The merger agreement has to define
      1. Has the define who the survivor is
      2. Has to determine what the final certificate of incorporation is going to be.
      3. What type of consideration will be used (stock, notes, etc. pretty much anything)
    4. Often used to mess with the rights that preferred stock holders have
    5. Delaware
      1. Section 251 - Basic procedure
      2. Section 259 - Impact of merger on the two corporations
      3. Merger agreement
        1. Who will survive
        2. What will be the final article of incorporation
        3. What consideration is being used
      4. Stockholders of both sides have to vote and agree to the merger
        1. In olden days, need unanimous approval for a merger
        2. In DE, need majority of outstanding shareholders (other states have 2/3 voting requirement - there are 10-15 of such states)
        3. The merger agreement has to be filed with the State Secretary of State --> can file a certificate of merger which states the basic info about the merger rather than just fining the merger agreement (if you are not a public reporting agreement then you might file the certificate to keep your merger agreement secret)
        4. the merger agreement can specify a later date to have the merger be legal (later than the filing date)
        5. at the effective time of the merger, the non-surviving corporation disappears; the assets and liabilities of both firms still exist - THERE IS NO WAY AROUND THIS
    6. Exceptions to general rules to mergers
      1. 251(f) - If the merger isn't big enough compared to the size of the surviving company, then the shareholders of the survivors do not have to vote.
        1. As long as the certificate of the incorporation does not have to change, and that each share of stock of the survivor do not change in terms of their rights, and the articles of the incorporation do not say otherwise, then only the non-survivor's board needs to vote.
        2. What is small enough for these purposes - after the merger the outstanding shares of the survivor cannot have increased by more than 20%
        3. The statute does not talk about cash; but there is an implication that if you use cash, then the acquiring shareholders cannot be diluted down to having less than 83% of the shares. [There is no case law or article commentary on this topic, even though the straight text of 251(f) seems to allow a cash acquisition of any size. Because of the historical reasons behind 251(f), it seems unlikely to allow this cash acquisition of any size. There could possibly be a middle ground approach in which the corporation would be allowed to acquire a company with cash to the amount of 20% of the value of their outstanding shares.]
      2. If a parent owns 90% of the stock of the sub, then only need the approval of the parent board (short form merger) - but there is a fiduciary duty to the last 10% of the shareholders
      3. There may or may not be appraisal rights to the dissenting stockholders
      4. Multiple classes of stock:
        1. DE the default is one share, one vote, unless something in the certificate of incorporation says otherwise (212(a))
        2. If there certificate doesn't say anything, then all the classes of preferred and common stock vote together (in most cases there are many more common stock and therefore the preferred will be drowned out; because of this the common can just get rid of the preferred shareholders preferred rights --> I can say that the surviving company will eliminate some of the rights of the preferred shareholders; ).
        3. 242(b)(2) --> if some shares are adversely affected --> you get class voting rights; there are many cases where there is an arguement whether there is actually adverse affects; so this not an issue often there is something in the contract that says what adverse affects are(XXX)
  4. Reverse Triangular merger
    1. Motivations - if the target has a valuable name in the market place; you can try to use this to get around the third party consent issue because the target has stayed in place; tax issues (you can use the favorable tax attributes of the disappearing company); potentially regulatory issues
  5. Forward Triangular merger
    1. Motivations - You can cut out the acquiring shareholders and all you need is the board resolution of the acquiror (they act as the stockholder of the acquiring sub but acquiring stock holder vote will be needed if there has to be an increase in the number of shares outstanding); there might be better insulation against liability against the target company if there are no veil piercing
    2. Reasons not to do this - cannot get tax free reorg to happen.
  6. Tax implications
    1. The seller generally recognizing a gain or loss on the asset that is bought or sold
    2. The stockholders get taxes on the dividends, if there is any (potentially double taxation)
    3. If you can qualify, you can get a tax free C-reorganization
      1. These are not really cash free; they are tax deferred
    4. How to qualify C - reorg
      1. substantially all of the company's assets AND
      2. Continuity of interest requirement - 80% of the total consideration has to be of the voting stock of the buyer AND
      3. the seller must distribute all of its assets to the shareholders
      4. The selling corporation pays no tax on the sale of the assets AND the seller's stock holders do not have to pay tax on the shares they receive on this distribution (AT THIS TIME)
      5. If boot is used, then this part is taxable
    5. In a B reorg - only voting stock can be used as consideration (no cash or other boot can be used) AND the buyer have to have 80% of the entire stock of the buyer
      1. This is not a taxable sale of the target shareholders at this time; the tax is deferred
      2. [100 % of the consideration has to be voting stock of the buyer]
    6. For any other merger -> this is a taxable event for the target shareholders
    7. reorg(A)
      1. Requirements - valid statutory merger under state law; cannot use for triangular mergers (as a practical matter); a "substantial portion" (at least 45%-50% according to case law) of the total consideration has to paid for in stock by the surviving entity; no requirement on the voting stock for consideration;
      2. Benefits - Tax would have to be paid on the percentage of
    8. Triangular mergers - 368(a)(2)(d) - the parent stock has to be used for consideration.
      1. Requirements - same continuity requirement as reorg(a) -> 45% to 50% of the total consideration has to be paid for in stock by the surviving entity
    9. Accounting
      1. Cooling method (add the balance sheets of the two entities that are being combined; not valid under GAAP) and the purchase method (if the price that is being paid in the transaction is greater than the book value of the assets, then the assets are written up to the purchase price.)

Substantially All Assets

  1. If substantially all of assets sold -> shareholders have to approve this
  2. Many times loans documents will say that the borrower is prohibited from selling substantially all of assets without the approval of the lender
  3. Historically the DE courts have viewed substantially all in qualitative and quantitative terms
    1. Quantitative inquiry - what percentage of the total assets are the assets sold; what percent of net worth was sold; the subsidiary of the parent company are considered when determining the total value of the company
    2. Qualitative inquiry (ex. Gimbel, Katz) - Hollinger asked if the sale of the Telegraph is a sale of substantially all of assets; Strine questions the validity of the qualitative inquiry. Chancellor Strine says that substantially owns is more than half of the company, but the prestige of the asset is not relevant to determining whether the asset is substantially all.

De Facto Merger

  1. Generally, in an asset deal, the buyer can determine, in the purchase agreement, what liabilities that the buyer does and does not want; there are exceptions as follows
    1. public policy reasons - cannot disclaim environmental, labor, and security law liabilities (but can indemnify environmental liabilities)
    2. de facto merger doctrine
      1. See Harris below
      2. In DE, there is no de facto merger doctrine; the DE supreme court admits that functionally this transaction achieves the same as a merger but given the legislature has an asset sale, we are not going to overturn that. If you satisfy section 271, then that is it. We have no right as a court to delete section 271 because the transaction looks more like a 251 merger. (Doctrine of independent legal significance)
    3. mere continuation doctrine - this is very similar to the de facto merger doctrine; it looks at the resulting company and determines if the company is offering same or similar employees or products or same of similar group of owners and board. It asks functionally if the result acheived the same result as a merger would have.
    4. product line doctrine (Ramirez) - new theory that is outside of the de facto merger doctrine or the mere continuation doctrine.
      1. Requirements- liability
        1. Even if in the contact documents this liability was supposed to remain to the seller
        2. Whether the buyer made the defective machine or not
      2. Reasons - no remedy for Ramirez; if we put the liability on Amstead this is justifiable because Amstead is best at taking the risk of the product even if it didn't make the product; the buyer is getting the goodwill (and you have to take the good with the bad); Amstead was in a better place to buy insurance against the loss;
      3. Not many courts have taken this - only NJ and CA
    5. Choice of law
      1. The rule that is followed in every state is the internal affairs doctrine - you look at the place of incorporation to find the applicable law; the exception is the state of California, which bases some of laws on if a company does at least half of its business in California and at least of shares are owned by California residents. Delaware only cares about what Delaware law has to say about Delaware corporations.
      2. Parties are free to specify in their merger agreement whose law they want to govern the agreement

Structure of Typical M&A Type Agreement

  1. Exchange of bilateral promised - performance occurs at closing
    1. The purpose of the closing is for the performance to happen
    2. Until that time you just have an executory contract
    3. There is usually a long time between signing and closing - the reason for the lag time is that there is a lot to do in that time period
  2. Representations and warranties
    1. The seller often makes more representations and warranties to the buyer
    2. Most provisions have a material provision which say that the mistake in the representation had to be material (but there is no good case law on the definition of materiality)
    3. These are not qualified by knowledge - when the seller make a representation to the buyer, it is not to the best of the seller's knowledge (usually the reps and warranties are strict statements that do not start with the language "best to the seller's knowledge.") Reps and warranties are done to allocate risk, and the buyer wants to come up with a price based on the facts that they are given.)
  3. Covenants
    1. Promises that the parties make to each other that are operative between the time of the signing and the closing (to do something or to refrain from doing anything) (ex. best efforts obtain third party approval and government consents)
  4. Closing conditions
    1. Things that have to happen for the obligation for perform to happen
    2. Ex:
      1. The representation had to be true at the time of the signing and closing (as if they had been made at the time of the closing)
      2. There were no covenants that were broken
      3. If this deal has not closed by a certain date, then no one has to perform (or can be in the termination provisions)
  5. Termination provisions. Ex:
    1. Often can be done by mutual agreement
    2. If there is no closure by a certain date, then either party can terminate
    3. If one of the closing conditions cannot be met (this is often litigated)
  6. Indemnification provisions
    1. These come into play after the closing - intended to give the buyer a privately designed remedy
    2. These often extend damages to causation farther than the common law would
    3. Often the indemnification is limited for certain kinds of damages
    4. The parties will often time will put a time limit on indemnification claims
    1. There is often a clause that says that there are no reps or warranties outside of the merger agreement and that there was nothing relied on outside of this agreement.
  7. Pricing terms
    1. Parties have many ways to determine price of the business (can agree to pay a fixed price, you can pay a price that is fixed but is adjusted at closing, fixed exchange ratio for stock, fixed price at closing with earn outs - issue with earn outs is that the buyer can manipulate the financial results of the business to make it seem like the earn out condition is not met - in this case the court in this case will ) - implied covenant of good dealing is given some teeth in this case and the court looks at the intention of the parties.
  8. MAE Provisions
    1. One party does not have to close if there is some material adverse effect to the company
      1. Now parties have very specific definitions of what is a material adverse effect
    2. Borders case - (MAC - material adverse change) - the agreement said that the buyer didn't have to go forward if there was a MAC. The court says that the purpose of this provision to protect the buyer only when the seller is not able to continue doing business as a business entity. The court says that it is not a MAC because target management is not the one that caused the business to be destroyed.
    3. Esplanade case - The court said that the price of oil does not have to do something with properties and so the MAE provision is not triggered
    4. IBP v. Tyson - Tyson claims that there has been a MAE and that IBP has breached its representations about its financial statements. Tyson claimed this despite public disclosure of mistakes/errors/restatements of their financial statements in their past. The question of the case is what is the definition of a "material adverse effect." The burden of proof was put on the defendant because its the buyer who invokes the MAE (and therefore they always have the burden of proof. The court says that the MAE provision is "A backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather Material Adverse Effect should be material when viewed form the longer-term perspective of a reasonable acquirer." In order to get MAE, you really need a huge, unexpected event to occur. To do the analysis, the court compared the expectations of the buyer at the time of the contract creation. The question is if the claim raised to the level of a calamity.
    5. Huntsman v. Hexion - This case was a classic trianguler merger. In the agreement, there was no buyer's obligation that the buyer has to find financing, although there was a conditional commitment letter from potential financiers saying that there would be financing if the combined company was solvent (which might have been an issue given the buyer was a LBO.) Hexion tried to get out of the agreement by getting an opinion that the combined company will be insolvent, saying it could not find the financing, and thus saying it wanted out of the merger (and having to pay the break up fee, rather than regular damages.) Further, the court claims that the MAE exceptions only come into play when the defendant can carry the burden that there was a MAE. Further, MAE is determined when comparing the current situation of the firm to historical performance of the firm, but not to some expected earnings created by the buyer. Finally, the court claimed the definition of knowing and intentional breach is any breach that is volitional.
    6. General exceptions to MAE:
      1. If what happens to the company is similar to what is happening in the market, then this would not be considered an MAE
  9. Reasonable Best Efforts Clauses
    1. The court uses the implied covenant of good faith and duty and it will be enforced
    2. Best efforts - Do what is commercial reasonable in the circumstances
    3. Allowed to consider your best interests to some extent, but might have to make some sacrifices. However, there are no exact lines, but this is the concept that is used in the case law.
    4. In Huntsman v. Hexion - Hexion didn't try to take best efforts to find additional financing.


Getting Consent to a Deal

  • Shreiber v. Carney - vote buying is not illegal per se; there has to be fraud or unjust result for the shareholders for vote buying to be considered illegal. In this case since the vote buying was not to defraud or cause injustice to shareholders, it was declared legal.
  • Kirschner Brothers Oil v. Natomas Company - In general, preferred stock holders are only guaranteed what they are contractually promised and a limited set of fiduciary duties. The court viewed preferred stock as fundamentally about contract rights. When a person buy preferred stock, the parties have the ability to negotiate the terms for the contract. The court is not saying preferred stock holders do not have fiduciary duties owed to them, but these duties will be read in a limited manner.

Asset Sale / De Facto Merger

  • Gimbel v. The Signal Companies - "If the sale is of assets quantitatively vital to the operation of the corporation and is out of the ordinary substantially affects the existence and purpose of the corporation, then it is beyond the power of the Board of Directors."
  • "Harris v. Glen Alden Corporation - To determine if an agreement is a merger or an agreement it is necessary to determine if the agreement changes the fundament corporate character of a company. ( The argument is that this is essentially a merger, and thus this should be treated as a merger for the sake of appraisal rights.) In this case the plaintiff was a Glen Alden shareholder. The asset sale has all the features of a merger. The plaintiff got his appraisal rights because the court labeled that this was a merger. [This case was overturned by the PA supreme court.]
  • Hariton v. Arco Electronics - In Delaware, you can structure an asset sale to be very similar to a merger, and the courts will not classify the asset sale as a de facto merger.
  • Lengfelder - Rights accrued by preferred shareholders cannot be eliminated by amendment to the corporate charter under Delaware law, but can be eliminated via a merger due to the independent legal significance doctrine
  • Ramirez v. Amsted Industries, Inc. - (NJ Case) If the acquiring company purchases assets from another company, and continues to manufacture essentially the same line of products, then certain liabilities that have to do with this line of products might be transferred to the acquiring company.
  • Antiphon v. LEP Transport - (MI Case) If a company does not explicitly come out and say that it will not assume the liabilities of the company that it is acquiring, then it might be estopped from claiming that it is not responsible for the liabilities.

Sellers Remedies

  • Con Edison - If a merger agreement is breached by the buyer, who can enforce it? The company or the shareholders? Since this agreement says that there are no third party beneficiaries, then the shareholders can do anything to enforce a merger agreement. Shareholders only have rights at the time the merger closes (when they get the merger consideration).
  • United Reynolds - (Specific performance as a remedy.) The agreement has conflicting language as to if there was specific performance remedy available or not. The court says that you can get specific performance of a covenant but cannot get

Defensive Measures

  • Blasius - When the primary or chief motivation of the board is to pack a board so that an insurgent isn't able to get seats on the board, then the board has a heavy burden to find a compelling justification to pack the board. This Blasius standard was combined with the Unocal standard in MM Comapanies.
  • MM Companies - The chancellor found that the primary purpose of the appointment to the board was to entrench current directors. The Delaware Supreme Court says that Blasius is collapsed on the second half of the Unocal test (measure if the response is reasonable in relation to the threat posed).
  • Mercier v. Intertel - A board faced even with non-coercive all cash or all shares offer, as long as well motivated, there is nothing necessarily wrong with the board availing itself the authority to reschedule a meeting where the composition of the management would be discussed. The facts in this case were well motivated and there is a compelling justification because the board wants to give stock holders more time to deliberate the merger.

Poison Pills

  • An agreement where the parties to the agreement are the company and the rights agent (a commercial bank), which says that every common stock holder gets a right to do/buy something. The distribution date of the right is the date during which someone acquires a certain percentage of the stock (usually around 15%) or the date on which someone announces a tender offer which would lead to someone getting a certain percentage of stock. At this date, the rights detach from the common stock and can trade separately form the security. The board is allowed to redeem the rights at anytime before there is an acquiring person. The holder of the stock has the right to purchase shares of the target for half the price of the original price (flip in), or purchase shares of the survivor for half the price of the original price (flip over). The acquiring person does not have these rights.
  • Moran - Moran is not a blank check that carries forward when the pill is put into action by the board. When the board makes the actual decision to redeem the pill or not, we get use the Unocal standard.
  • Airgas - The offer was conditional on the board redeeming the rights of the poison pill. The bid went from $60 a share to $70 a share (and the offer was not structurally coercive). Air products was able to get three people on the board of the target. Mere perceived price inadequacy counts as a Unocal threat that justifies the use of the pill even if there is no competing offer or any coercion, even though the court says that it doesn't like the result and that it feels that the pill did its job to raise the offer. It is also relevant that Air products has the opportunity to have a proxy content. (The interesting question is that because there is no coercion, and there is all cash, and shareholders are informed, then how is this a threat? The shareholders can just reject this merger if they think it is not fair.)
  • Selectica - There was a change in the trigger requirement for the poison pill (in order to prevent loss of Net Operating Losses). Before we even get to the reasonable and relation inquiry of Unocal, we should ask if the defensive measure is either preclusive (the measure makes the bidder's ability to wage a successful proxy content mathematically impossible or realistically impossible) or coercive (XXX). If the measure is either preclusive or coercive, it is considered draconian and would be considered illegal by law. The couse concludes that lowering the trigger to 5% is neither preclusive or coercive, because the evidence at trial claims would not impede's someone's ability to wage a proxy contest (for smaller cap companies, how many proxy contents were there by people with less than 5% of stock? there were 15 of which the challenger won 10). Further, Selectica has a small number of share holders so the pill won't have a preclusive measure. Then the court determined that the protecting NOL's is a perfectly reasonable objective.
  • Under dead hand provisions, pill's can only be redeemed by direc (not allowed because you are stripping future boards of the right to make decisions - especially their ability to make business judgments).
  • No hand pill - the pill cannot be redeemed at all over some time period
  • Delaware - You have to let the board in place at time of the hostile offer, you have to let them make the decision, because otherwise you are hurting their ability to act.
  • Pennsylvania, Georgia - these states have addressed in their corporate statutes what the duties and rights of the board of directors in the case of a take over and poison pill and therefore allow dead hand pills and no hand pills. The board in Pennsylvania allows that the board can consider a number of things in redeeming the pill and the board does not have to redeem the pill. The board has no difference board of proof in a take over/ pill context than it does in any other context.


  • Smith v. Van Gorkam - Held that the board was grossly negligent in approving and going forward with the merger at $55 a share. The court claims that they do not have a true fiduciary out. Van Gorkam thought that we had an implied fiduciary out because directors should have those. The court found this because there was process lacking in the agreement:
    • The board got nothing in advance
    • There was a short meeting
    • There was valuation done
    • There was no adequate market check
  • Smith lead to the passing of 102(b)(7). If this had been in place during Smith, then there likely would not have been liability.
  • Mear negligence or gross negligence is not enough for bad faith. You need either subjective bad fair or objective conscious disregard of duty ("super recklessness")
  • Revlon -


  • The court states that even if we held that Revlon duties were held, there would not be a different result.
  • The main concept that guides the court is that there are some draconian business measures. In this case when you have a draconian, preclusive provision in the merger agreement with large shareholder who are directors.
  • This was an official defensive measure of the company rather than two official stockholders who can do what they want with their shares.
  • The dissent claims that this is a perfectly legitimate business judgement that this is how the company is going to enhance shareholder value here, given that the Genesis is real, and the "draconian" measures are what it took to get the best offer on the table, and it was uncertain if the Omnicare deal was going to go through. If certain measures are required to make sure the best value goes through, this seems to be allowed in Unocal and Revlon, and McMillan. (Question: is there tension between what the teachings between Unocal and OmniCare)
  • Some cases suggest that although there are a number of offers in front of a company, it is a business judgement to determine if the offer is real or not.
  • Question: are OmniCare and Paramount v. QVC are really the same fact patterns or are these really different cases? Are the fact patterns really materially different?
  • Question: what is of final importance: only the best price, or the board using the correct process?
  • Question: what incentive structure will OmniCare lead to?


  • How is Revlon analysis affected by a 102(b)(7) provision (directors are not liable for ordinary duty of care violations, but still can be liable for bad faith and duty of loyalty)? If a company has a 102(b)(7) and Revlon applies, then you have to show a duty of loyalty violation or bad faith.

Paramount v. QVC

  • One holding: a fiduciary out has to be negotiated.


  • Two tobacco companies are merging.
  • Special committee created with financial advisers
  • The special committee approves the deal; but the majority holders agreed to vote for any alternative transaction that might come along for 18 months.
  • The judge finds that the agreement came about in their capacity as stock holders and not in their capacity as directors.
  • The court distinguishes OmniCare by stating that agreements were as private stockholders and not as directors. The court also says that although the minority shareholders might have been influenced to vote in a certain way, there was no coercion. Finally, the court states that the board did negotiate a fiduciary out.

Appraisal Rights

  • Generally considered the safety valve of the M&A deals.
  • Appraisal rights (DE 262) are generally given unless the shares are publically held, if there was no vote for the merger. However, appraisal rights are reinstated if the shareholder is required to take cash as part of the consideration.
  • A company can add to its articles of incorporation appraisal rights in certain cases (such as sale of substantially all assets, etc.) Other states provide appraisal rights in other cases, such as the sale of substantially all assets.
  • To perfect appraisal rights there are number of hoops that have to be jumped through (have to hold shares to the date of the merger, cannot vote against the merger, have to delivery written demand for appraisal to the company before the vote on the merger is taken, voting no on the merger does not count as the appraisal, a company has to notify shareholders that they have appraisal rights)
  • DGCL Section 262(h): The court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be aid upon the amount determined to be fair value. In determining such fair value, the court shall take into account all relevant factors." The court in its discretion can award the shareholder attorney's fees. There is nothing that says that this is the exclusive remedy that a stock holder can get.
  • Piemnote - The court is supposed to look at earnings value (and apply a multiple) and market value.
  • Chandler -
  • Weinberger v. UOP - Any financial valuation method accepted by the financial community will be accepted. However, the court states that speculative value from the result of the merger should be excluded. One can take into account value from the accomplishment of the merger, but not speculative elements. Note that the statute does not use the word speculative. This case says that the DCF model of valuation is potentially valid
  • Chancellery court is given huge discretion on which valuation to use. If there is a factual finding (the court has two or more experts and they are battling about some facts), and the court states that one valuation is more reasonable than another price, then this will only be reviewed on abuse of discretion.
  • What are you valuing? The going concern of the company. Thus we are not supposed to be valuing based on breaking up the company. Rather we are valuing the company based on if it would keep going and then we divide by the number of shares to get what each shareholder will get.
  • The company's value is supposed to
  • Cede - Question is if you take into account potential merger value in appraisal rights. There is a small factual question as to if Technicolor had started to run based on what Perleman wanted to do with the company. Cede could be ready broadly or narrowly.
  • MPM Enterprises - The word speculative is left out. A court does not have to consider synergistic benefits.
  • Weinberger - One questioned posed: when is appraisal rights the exclusive remedy? The court uses the "intrinsic fairness" standard and threw out the test of business purpose (and eventually turns into entire fairness.) To meet this test we need to have (1) fair dealing and (2) fair price. (1) is about if the process is fair, was it hurried or rushed, and was it fair and fully informed (2) good price; There is a famous footnote (7) in which the court says that the result here would have been entirely different if UOP had appointed outside directors to deal with signal at arms length. In the entire fairness process, the court says that if the entire fairness test is triggered in a cash out merger between a majority stock holder and its controlled entity, then the controlling party has the burden of proving entire fairness. The court goes on to say that if the majority of the minority of stock holders of UOP approve the transaction, then the burden would be shifted to the plaintiff or we would be open to doing so, except we are not going to do that unless the stock holder vote was fully informed, which in this case they were not informed. For this reason, Chitia carries the burden. What are the remedies that one would get in the event that there is a breach of fiduciary duty and the defendant cannot carry its burden? "ordinarily the remedy for breach of the duties of entire fairness is fair value", although fair value might not be appropriate when there has been "gross and palpable overreaching", fraud, self dealing, waste, and in these cases the chancery court retains ability to fashion any sort of relief that is appropriate under the circumstances.
  • Glassman - Appraisal is the exclusive remedy if what is asked by the plaintiff is that the price of the stock is not fair, otherwise appraisal is not the exclusive remedy.
  • Andrea v. Blunt - When there is a potential for a higher bid that was not taken for bad faith reasons, then damages might be given for this higher bid value.
  • Kahn v. Lynch - What is a controlling stock holder? You can be a controlling stockholder even if you own less than 50% for purposes of Weinberger if you dominate the corporation through actual control (this is a factual inquiry). Kahn also reaffirms the burden shifting that happens if an independent and disinterested committee. Mere existence of the committee will not actually shift the burden, but you need people who have "real bargaining power." In Kahn the committee did not have real power so there is no burden shifting.
  • Plaintiffs often try to argue that there should be no burden shifting under entire fairness if the independent committee doesn't have the power to take alternative transactions the power to say no is good enough to shift the burden.
  • How can you get rid of the entire fairness test entirely?
    • Weinberger itself involved a cash out merger, and the court seems to suggest that entire fairness only applies to cash out mergers.
    • Once could Weinberger and Kahn to mean that
  • Robust procedural protections standard - approval of majority of outstanding majority shareholders and other protections although what "robust" means in unclear; Entire fairness is applied if robust procedural protections are not met.
  • What counts as independent and disinterested - mostly that is a common sense definition, but ordinary the mere prospect that a director might lose their directorship and their fee, that does not compromise your independence. But if you can show that the fees were abnormally high and the directors were relying on this for their livelihood, then you could make an argument.
  • Crazner v. Moffit - Two companies that were supposed to consolidate into a third company and the consideration was new stock in new company (i.e. this was not a cash out merger). Both companies set up special committees. The court had an opportunity to say the BJR applies when there is special committee, but it doesn't say that.
  • Question: do Weinberger and Kahn apply only to cash mergers or stock mergers as well?
  • Hammonds: Presence of a controlling stockholder doesn't mean that entire fairness is triggered. There was going to be a merger between Elin and Hammond. The public majority was going to be cashed out, but Hammonds was not going to be cashed out; he was going to get interest in surviving entity. A special committee was set up to do the negotiating for the public stockholders. Chandler: The transaction was with Eilen and since neither Eilen and Hammonds were on both side of the transactions, then not self dealing. Just having Hammonds get interest in new company doesn't mean that we should get entire fairness here. However, Hammonds is bothered by this between public stockholders and him are competing for fixed pie of consideration. There is a robust procedural protections standard created - approval by disinterested directors, requirement that majority of outstanding publicly held minority shares.

Control Premium

  • Does appraisal rights include a control premium? Cavalier Oil - no matter how small discenting stock holders share is, there should be no discount for this factor; Rapid America - The company being valued was a holding company and all income generated by three subs. The court said that in doing valuation for the shell company that it has to include control premium for all three companies. In the appraisal proceeds it was initially considered that fair value not including control premium was $51, and then at the Supreme Court level, the court said that they were OK with the $51, but there should be another $22 for a control premium. In the end the shareholders in the appraisal proceedings got $74 which was 4 times the market price before the merger agreement
    • People are up in arms about Rapid America - maybe the pre-merger price doesn't reflect the final price, but does 4X price make sense.
    • Delaware courts are settled on giving a control premium (and everyone gets a share of it). Not giving one would be unfair because if there was no control premium had to paid, then this would be a windfall to the majority shareholder. (But not sure this makes sense because there is already a controlling shareholder who own the control premium.)
  • You are not supposed to discount shareholders price for lack of marketability