Mergers and Acquisitions Outline
DGCL §251 Merger or consolidation of domestic corporations and limited liability company
(b) The board of directors of each corporation which desires to merge or consolidate shall
adopt a resolution approving an agreement of merger or consolidation and declaring its
advisability the agreement shall state (1) the terms and conditions of the merger or
consolidation (2) how the merger or consolidation is to be done (3) in the case of a
merger, such amendments or changes to the cert of inc of the surviving corp as are
desired to be effected by the merger, or if no such amendments are desired, as statement
that the cert of inc of the surviving corp shall be its cert of inc (4) in the case of a
consolidation, that the cert of inc of the resulting corp shall be as is set forth in an
attachment to the agreement (5) what will happen to the stock of the effected corporations
(2) other details such as a provision for payment of cash in lieu of fractional shares.
(c) The agreement shall be submitted to the stockholders of each constituent corporation
at an annual or special meeting for the purpose of acting on the agreement. Notice of the
meeting needs to be mailed at least 20 days before the meeting. If the agreement is
approved by a majority of the outstanding stock entitled to vote on such matters, the
surviving corporation should then file the agreement or a certificate of merger with
secretary of state in accordance with §103.
(d) The agreement may contain a clause saying that at anytime before the filing of the
agreement or the cert of merger with the secretary of state becomes effective, the
agreement may be terminated by the board of directors of any constituent corporation. If
the termination takes place after filing but before the filing has become effective, a
certificate of termination must be filed. Similarly the agreement may be amended
following the stockholder vote in subject to numerous listed limitations.
(e) In the case of a merger, the cert of inc of the surviving corp shall be automatically
amended with the changes set forth in the merger agreement.
(f) Un less required by cert of inc, no shareholder vote of any constituent surviving corp
in a merger is necessary if (1) no amendment to that corp‟s cert of inc, (2) each share of
stock of such a constituent corp outstanding immediately prior to the effective date is to
be an identical outstanding or treasury share of the surviving corp after the effective date
(3) no securities are to be issued in connection with the merger or the authorized unissued
shares or the treasury shares of the common stock of the surviving corporation to be
issued or delivered or converted to under the plan do not exceed 20% of common stock
outstanding immediately prior to the effective date.
(g)Unless required by cert of inc, no shareholder vote of any constituent in a merger with
or into a single direct or indirect wholly-owned subsidiary of such constituent corp if
several enumerated condition are met.
DGCL §253 Merger of a Parent Corporation and Subsidiary or Subsidiaries
Allows for a merger btw a corporation and its 90% subsidiary by a resolution of the
board, subject to several enumerated conditions.
DGCL §271 Sale Lease or Exchange of assets; consideration procedure
(a) With board and stockholder approval, a corporation may sell, lease, or exchange all or
substantially all of its assets.
(b) Even after the shareholder approval, the board can change its mind, subject to the
right of third parties.
William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14
Cardozo L. Rev. 261 (1992)
Two conflicting conceptions of the business corporation
Property Conception the corporation belongs to the shareholders (residual the risk
takers) and should act in accordance to their wishes. “The corporation is a like a
limited partnership; its property is equitably property of the shareholders. The
directors are elected by shareholders and it is unquestionably on their behalf that the
directors are bound to act.” The corporation maximizes wealth (allocation efficiency).
Issues of distributional fairness can be addressed through other means (taxes etc).
Efficient b/c what capital for corporations is shareholders‟ contributions which are
based on expectation
Entity Conception Corporations are independent entities “with purposes, duties,
and loyalties of their own [to other constituencies]; purposes that might diverge in
some respect from shareholder wealth maximization.” Corporations exist by the grace
of the state and are tinged with a public purpose.
The takeovers in the 1980s unmasked the conflict b/c
So much was at stake (change in corporate control; massive corporate restructuring)
The short term/long term distinction (used previously to justify corporate charitable
contributions etc.) was of little analytical or rhetorical use in resolving takeover issue.
Big issue: can board take action to prevent shareholders from accepting non-
coercive all cash TO?
Hard to say that preventing shareholders from accepting non-coercive cash
offer at a high premium is good for them in the long run.
Following the unmasking of this conflict, our courts and legislatures endorsed the entity
Paramount v. Time boards can take action to prevent shareholders from accepting
non-coercive all cash TO
28 states have adopted constituency statutes
Implications of choosing the entity model
Under the property model, “an active market for corporate control might exists to
discipline and remove inefficient corporate management,” accepting of the entity
model removes this market constraint.
The choice may not be final
Two dominant social trends that will exert potentially transformative pressure on
corporate governance in the years a head
The evolution of a truly global economy encourage efficiency and value-
creating management, pushing shareholders back into the center of thinking about
The continuing growth and dominance of the institutional shareholder the
evolution of stockholders large enough to overcome collective action problems
may mean real stockholder discipline and oversight.
Schnell v. Chris Craft Industries (Del 1971)
Facts: The board of Chris Craft was able to change the date of the annual meeting by
amending the bylaws. πs claim that through this change (making the meeting about a
month earlier) and through making the location of the annual meeting a remote town in
upstate NY, the board deliberately sought to handicap the effectors of πs and other
stockholders sympathetic their views solicit votes for a rival slate of directors. πs seek a
preliminary injunction declaring the change in the by-laws null and void on that grounds
that it was for the sole purpose of entrenchment. The board also hired two successful
proxy solicitors, disingenuously resisted πs request for the stockholders list and used an
amendment to the DGCL to limit the time for contest. However, πs did receive the list on
November 10th and sent a preliminary mailing on that date.
American Hardware “in the absence of fraud or inequitable conduct, the date for a
stockholders‟ meeting and notice thereof, duly established under the by-laws, will not be
enlarged by judicial interference at the request of dissident stockholders solely because of
the circumstances of a proxy fight.”
Held that the injunction should be granted
“Management has attempted to utilize the corporate machinery and the Delaware Law
for the purpose of perpetuating itself in office; and, to that end of obstructing the
legitimate efforts of dissenting stockholders in the exercise of their rights to undertake
a proxy contest against management”
“[I]nequitable action does not become permissible simply because it is legally
Martin Lipton, Takeover Bids in the Target’s Boardroom, The Business Lawyer, vol.
35, Nov. 1979
Lipton argues in favor of Boards being able to reject/set up defenses against hostile
takeovers though TOs and get BJR protection for their decision in such circumstances.
He lists a number of issues/info that directors should consider. If based on that
information directors decide that the takeover should be rejected, he says they should be
able to take any reasonable action to accomplish this purpose. Lipton believes that there
should be no distinction made in the type of reasonable defense used, but points out that
defensive litigation gets BJR, while other defensive tactics get reviewed under the
primary purpose (entrenchment) test [note: this is not quite the state of the law now].
Lipton likens hostile TOs to statutory mergers where the board recommends and the
shareholders approve, but the shareholders don‟t get to approve unless the board
recommends. In support of his argument he points out the following.
Shareholders usually win when a take over is rejected Following over 50% of the
rejected unsolicited TOs between 1973 and 1979 the share of the target either went up
or were acquired by another company at a price higher than the offer price.
There is no logical distinction between requiring directors accept any bid at a
substantial premium and requiring directors to determine annually whether it would
be possible to sell or liquidate the company at a substantial premium and if so, that
they do so.
Both situations would cause directors to focus on the short term as opposed to the
Would require directors to sell the company even if they believed that they could
get more for the company in the future or that the value of the future market value
plus interim dividends would be greater than the current bid.
Could be advantageous for management to be able to insure its constituencies (e.g.
employees, customers, and suppliers) that it plans to stay around and remain
independent. Those assurances might take the form of a company policy not to
engage in merger discussions, a charter amendment requiring the company to
consider these constituencies in their decisions, or certain takeover defenses.
Carter Administration required that Chrysler show that its shareholders,
employees, suppliers and others were making maximum sacrifices in connection
with proposed legislation designed to rescue Chrysler from Bankruptcy. If these
constituencies are required to help bail a company out of bankruptcy, they
shouldn‟t be ignored when the question is a takeover bid that will benefit
The dynamics of TOs are such that the decision to tender is a forgone conclusion.
“Retaining the target‟s shares in the face of a TO will bring the shareholder no
benefit.” The shareholder will either be forced out through a merger at a later date
for at best the same benefit he could have realized (sooner) upon the initial offer
or be left with an illiquid (and likely less valuable) minority investment. This is
especially true if the shareholder believes the bidder is a bad manager or the
second step merger is less attractive than the TO.
Equity migrating to stockholders with short term interests
There has been shift in equities from individuals to professional investment
managers in the last 30 years. In addition arbitrageurs will typically purchase
10-50% of the stock of the target once a bid is announced. Arbitrageurs will
tender b/c they are out for short term profit and institutional investors will
tender because of the desire to improve performance and the ability of tax
exempt funds to realize gains w/o incurring taxes, even if there is a more
attractive long term investment available.
If the shareholders are dissatisfied with the board‟s rejection of a takeover bid, they
can replace the directors at the next election or instruct them to accept the bid (though
a precatory shareholder proposal).
Price may not be the only issue. There may be other issues concerning antitrust,
regulatory approval, disclosure, a conflict of interest by those advising or financing
the raider, the impact of the takeover on constituencies other than the shareholders of
the target, or the poor quality of the raider‟s securities in an exchange offer, which
directors are better situated to consider.
Ronald J. Gilson, A Structural Approach to Corporations The Case Against Defensive
Tactics in Tender Offers, 33 Stan. L. Rev. 819 (1980-1981).
Gilson argues that management‟s use of defensive tactics against TOs circumvent the
mechanism by which corporate structure constrains managerial discretion (managerial
self-dealing) and are therefore improper. He says that the appropriate function for
management in a TO is providing information to shareholders such as the value of the
targets shares (and the value of the bidders shares in an exchange offer). Management
should also be able to seek out a white knight. These activities will help the market to
work more efficiently rather than constraining the market.
Analyzing management‟s motives (primary purpose after reasonable investigation test)
cannot resolve the conflict between management‟s wish to stay in control and
shareholders‟ desire to have access to the highest price for their stock since it is not the
reason that management acts, but the fact that they ac that creates the conflict. Because
management can always find a conflict over policy between itself an the insurgent, the
motive analysis collapses into BJR instead of the fairness review to which interested
transactions are normally subject.
The costs of separation of ownership and control create agency costs. Management‟s self-
interest should control significant deviation from efficient operation since management‟s
continued employment (like the profitability of shareholders‟ investments) depends on
the corporation‟s success in the market for the good or service it provides. However this
same low-cost market mechanism routed in managerial self-interest does not constrain
managerial self-dealing, since what is of concern is management‟s ability to allocate
income generated through successful operation of the corporations‟ business to itself.
Thus the market for corporate control provides a much needed and unique constraint on
management‟s ability to self-deal. If management has complete control over mergers and
sales of assets, and proxy contests are economically unattractive to potential acquires,
then the tender offer assumes a critical role in the corporate structure. And if management
can adopt defensive tactics against TOs then a not all efficient TOs will be made since an
offer will be made only if the perceived value of the target following the TO exceeds the
value of the TO consideration plus the transaction costs of the TO (including the cost of
defeating management‟s defenses) exceed
TOs are not even mentioned in the corporation statutes, let alone placed under
The functional equivalent of TOs and mergers points in favor or a non-equivalent (more
limited) role for mangers in TOs since the bidder having a TO option provides a safety
valve against the directors‟ conflict of interest and is an important justification for giving
directors unfettered discretion in negotiating acquisitions.
This doesn‟t mean that bidders will always go straight for the TO since they can often
get valuable non-public info in merger negotiations.
Responses to Lipton‟s supporting arguments
Arbitrageurs buying up stock when a bid is announced contribute to TOs being fait
acomplis arbitrageurs are simply proxies for shareholders who have already
expressed their desire to sell (e.g. they would tender anyway).
Shareholders benefit when bids are rejected criticisms of Lipton‟s methodology.
Shareholders will make the wrong decision not a prisoner‟s dilemma if the gain
from the premium offered is more than the anticipated loss on shares retained after
the bidder‟s success. This will typically be the case since typically a TO includes a
second step merger for the same price as the TO, so as long as the other shareholders
tender, the deliberating shareholder will get the same consideration whether he
tenders or not.
[But Lipton doesn‟t argue that shareholders will necessarily lose by not tendering,
just that they won‟t gain, so why not tender and have the $ sooner].
Corporate social responsibility Assumes that bidders board is less socially responsible
than targets board; TOs provide an important check on management‟s social judgments
as well as their business judgments. The corporate community can‟t have it both ways: it
can‟t argue against measures to improve corporate accountability by relying on the
discipline of the market to dispose bad mangers then seek to neutralize that discipline
through anti-takeover provisions.
“Preclusive defensive tactics are gambles made on behalf of target shareholders by
presumptively interested players.”
Smith v. Van Gorkom (Del. 1985)
On September 20, 1980, Transunion‟s board voted to approve merger with an
affiliate of the Marmon Group, Inc. to spite (1) no advanced notice of the proposal (2)
only 2 hours of deliberation (3) never having seen the agreement and (4) not
consulting with their investment banker or obtaining a fairness opinion or any other
real basis for determining the adequacy of the price/the intrinsic value of the
At this meeting Mr. Romans (CFO) gave a report indicating that the value of the
company was in the $55 to $65 range, but his investigation was made in a search
for ways to justify a price in connection with an LBO, and not a valuation of the
company. Also, Van Gorkum had chosen the $55 figure based on the viability of
an LBO at that price.
Also at this meeting, Transunion‟s outside counsel advised the board that it might
get sued it if didn‟t accept the offer and that a fairness opinion was not required
The agreement gave Tranunion the right to accept, but not solicit, better offers
and gave Prizker a lock-up of 1 million shares at $0.75 above market price if he
met or waived the financing conditions in connection with the merger.
After the deal was announced key management members threatening to leave, Van
Gorkom met with Pritzker who proposed some amendments. Van Gorkom then
described these amendments to the board at a meeting held on October 8th, and the
board approved the amendments without having seen them (they were not written
yet). The board then retained Salomon brothers to shop the deal (but not to write a
While the amendments were supposed to allow Transunion to solicit and extend
the market test period, they actually effectively shortened the market test period
by requiring a definitive merger agreement before Transunion could withdraw and
moving up the filing of the preliminary proxy statement and the mailing of the
proxy statement to shareholders.
Transunion did get two other bids (one MBO and one from GE capital) but they
didn‟t work out.
On October 9th Pritzker announced that the exercise of his option to purchase 1
million shares of Transunion‟s treasury shares at $38/per share ($.75 above market
price). Van Gorkum then signed the amendments without reading them.
On January 26th, after the shareholder suit had been filed, the board met again to
discuss everything concerning the merger. At that meeting the board voted to issue a
supplement to the proxy statement disclosing the failed GE bid and voted
unanimously to recommend the merger.
On February 10th the stockholders voted overwhelmingly to approve the merger.
The plaintiffs seek rescission of the merger or alternative relief in the form of
(1) Whether the directors reached an informed business judgment on September 20th,
(2) if they did not, whether their actions taken subsequent to September 20th, were
adequate to cure any infirmity in their action taken on September 20th.
BJR “a presumption that in making a business decision, the directors of a
corporation acted on an informed basis, in good faith an din the honest belief that the
action taken was in the best interests of the company.”
The plaintiffs must rebut this presumption that the board‟s September 20th
decision was informed.
Did directors inform themselves of all material information reasonably
available to them prior to making a decision? (care)
The standard of care is predicated on concepts of gross negligence
Directors cannot abdicate their duty (under §251(b) to act in an informed deliberate
manner in determining whether to approve a merger agreement before submitting the
proposal to shareholders) in the merger context by leaving to the shareholders alone
the decision of whether to approve or disapprove of the agreement. Only an
agreement of merger satisfying the requirements of DGCL §251(b) may be submitted
to shareholders under §251(c).
The issue of whether the directors reached an informed decision to sell the company
on September 20th must be determined only upon the basis of the relevant information
reasonably available to them at the time, and not on their subsequent actions.
Under §141(e) directors are entitled to rely on reports of officers, but not unfounded
reports such as Van Gorkum‟s report of the merger agreement which he had never
read and for which he had determined a price for without a valuation study.
“Where a majority of fully informed stockholders ratify action of even interested
directors, an attack on the ratified transaction must normally fail.”
The board‟s September 20th decision to approve the proposed cash-out merger was
not the product of informed business judgment.
Defendants adequately inform themselves of neither Van Gorkum‟s role in
forcing the sale of the company and establishing the per share price NOR the
intrinsic value of Transunion.
Defendants improperly relied on (1) the magnitude of the premium (premium
over what management/directors had been saying that the stock was trading at
a discount and if they didn‟t know the value, how could they know the premium)
(2) the amendment to the merger agreement (3) the collective experience and
expertise of the board and (4) outside counsel‟s statement that they would be sued
if they didn‟t accept.
Board had no rational basis to conclude on September 20th or in the days
immediately following that its acceptance of Pritzker‟s offer was conditioned on
(1) a market test and (2) the board‟s right to withdraw from the Prizker
Agreement and accept any higher offer.
No solicitation right before Amendment; no mention of right to accept offers
in press release.
The merger agreement was never produced inference that it doesn‟t
support the boards contention that it incorporated a market test.
Tranunion‟s board market test contention was meaningless in the face of the
timing and terms of the Prizker merger.
The board‟s subsequent efforts to amend the merger agreement and take other
curative action were ineffectual, both legally and factually.
The boards conduct at the September 8th meeting exhibited the same deficiencies
as their conduct at the September 20th meeting.
By the January 26th meeting the board could only recommend the merger or not
recommend the merger and face a breach suit from prizker. It did not have the
option to recommend against the merger or take a neutral position and not face
potentially serious economic consequences for breach of contract. So board‟s
decision to recommend the merger then doesn‟t count.
The board failed to disclose material facts to the stockholders which they knew or
should have known in the proxy statement, as amended, so it can‟t be said that there
was an informed shareholder ratification that cured the boards breach of its fiduciary
duty of care.
Note: this opinion reasserts that an independent fairness opinion is not legally
necessary, but its several references to it make it unlikely that boards will proceed
without one in the future.
The directors of Trans Union breached their fiduciary duty to their stockholders by
(1) failing to inform themselves of all information reasonably available to them and
relevant to their decision to recommend the Pritzker merger and (2) failing to disclose
all material information such as a reasonable stockholder would consider important in
deciding whether to approve the Prizker offer.
3rd Party transaction, so informed disinterested shareholders could have ratified
boards actions ex-post, but not hear b/c court said that shareholders weren‟t informed.
Strange case stock hadn‟t traded above $39 in past 5 years, half of directors were
disinterested, bankers shopped the deal. Seems surprising that πs won. Hard to say
that its irrational for board to lock in $55 price under these circumstances. Scary case
The Core Cases
Unocal v. Mesa Petroleum (Del. 1985)
Facts: Messa, a 14% stockholder of Unocal controlled by T-Boone Pickens (a reputed
greenmailer), made a tender offer for 37% of Unocal‟s outstanding stock for $54 per
share, and announced its intention to do later do a back end merger in which it would
provide junk bonds purportedly worth $54 as consideration. The board, which had a
majority of independent directors, met for 9½ hours during which they consulted with the
lawyers and Goldman Sachs to determine how they would respond. Goldman opined that
the liquidation value of Unocal was in excess of $60 per share and outlined various
defensive strategies including a self-tender. The following day, on April 15, the board
unanimously approved exchange offer where by if Messa acquired a total of 51% of
shares outstanding, Unocal would buy the remaining 49% outstanding for an exchange of
debt securities having an aggregate par value of $72 per share. Unocal‟s offer was
commenced on April 17th and Messa sued. On April 22nd Unocal, under the advice of
Goldman, decided to waive the Messa Purchase Condition. Goldman also advised the
Unocal directors that they should tender their own stock to demonstrate their confidence
in the TO. The board was also advised by their legal counsel that under DE law, Mesa
could be excluded for what the directors reasonably believed to be a valid corporate
purpose. The directors decided to exclude Messa from the exchange offer b/c their
purpose was to adequately compensate shareholders at the backend of Messa‟s offer and
to include Messa would defeat that goal.
DGCL §160(a) allows directors to deal in their own stock. “From this it is now well
established that in the acquisition of its own shares, a Delaware corporation may deal
selectively with its stockholders, provided the directors have not acted out of a sole or
primary purpose to entrench themselves.”
Board‟s power to act derives from its fundamental duty to protect the corporate
enterprise, including stockholders, from harm reasonably perceived, irrespective of its
The principal of selective stock repurchases is neither unknown nor unauthorized in
Delaware. In greenmail situations for example, other stockholders are denied the
favored treatment of the stockholder being paid off.
“There is no support in DE law for the proposition that when responding to a
perceived harm, a corporation must guarantee a benefit to a stockholder who is
deliberately provoking the danger being addressed. There is no obligation of self-
sacrifice by a corporation and its shareholders in the face of such a challenge.”
A director does not become “interested” merely because he is a stockholder. Directors
tendered into the offer on a pro-rata basis; no preferential treatment.
Legal Rule Announced
Because of the “omnipresent specter” that a board may be acting primarily in its own
interests when erecting defensive measures, defensive measures must meet the
following test before receiving the protection of the business judgment rule.
(1) “[D]irectors must show that hey had reasonable grounds for believing that a
danger to corporate policy and effectiveness existed because of another person‟s
[T]hey satisfy that burden by showing good faith and reasonable investigation.
Such proof is materially enhanced when, as here, there is approval of a board
comprised of a majority of outside independent directors who have acted in
accordance with the forgoing standards.
Examples of threats may include inadequacy of price, nature and timing of the
offer, questions of illegality, the impact on constituencies other than the
shareholders, the risk of non-consummation, and the quality of the securities
being offered in the exchange. “While not a controlling factor, it also seems to
us that a board may reasonably consider the basic interests at stake, including
those of short term speculators, whose actions may have fueled the coercive
aspect of the offer at the expense of the long term investor.”
(2) The defensive measure must be reasonable in relation to the treat posed.
“A corporation does not have unbridled discretion to defeat any perceived
threat by any draconian means available.”
[Unitrin later interprets “draconian” to mean preclusive or coercive]
The selective exchange offer was reasonable in relation to the reasonably perceived
threat of a grossly inadequate concretive tender offer by a reputed greenmailer.
Therefore the selective exchange gets BJR protection and to defeat that Messa would
need to show a breach of fiduciary duties or fraud, which it hasn‟t.
The selective nature of the exchange offer is permissible.
Moran v. Household International (Del. 1985)
Facts: On August 14, 1984, the board of Household, the majority of whom are
independent, adopted a shareholders rights plan by a vote of 14 to 1 after seeking the
advice of WLRK and Goldman Sachs because of its concern about Household‟s
vulnerability to a raider in light of the current takeover climate (frequency of bust-ups
and increasing takeover activity in the financial services industry). Some stockholders,
including Moran, sued.
Boards are authorized to adopt rights plans pursuant to DECL §§151(g) and 157.
Rights plans are similar to anti-dilution and anti-destruction provisions which are
valid under DE law.
Moran‟s citation of DGCL §203 as legislative intent not to provide stronger
protections from TOs is a non-sequitur. “The desire to have little state regulation
cannot be said to also indicate a desire to have little private regulation.” Furthermore
the court does not view the rights plan as much of an impediment to the takeover
Receiving a proxy does not entail beneficial ownership under DE Law.
Ways around the poison pill
Sue when pill is triggered
Shareholders rights plans (poison pills) are permissible under DE law.
The adoption of a shareholders rights plan will be examined under Unocal. Here the
adoption of the plan was proportional in relation to the reasonably perceive threat in
the market place of coercive two-tiered tender offers.
To determine whether a business judgment was an informed one, the court uses
the standard of gross negligence. Here the board reviewed a summary of the plan
as well as articles on the current takeover market and had discussions with WLRK
and Goldman Sachs before approving the plan.
When the board is faced with a TO and a request to redeem the rights plan, they will
not be able to arbitrarily reject the offer. The decision to keep the plan in place in the
face of an actual take over bid will also be reviewed (again) under Unocal.
Poison pills generally massively diluted to an acquirer;
Flip over gives stockholders the right to purchase shares in the acquirer at a discount.
Flip in gives stockholder the right to purchase shares in the target at a discount.
DGCL §157 permits pills it gives the board the power to issue rights to purchase
DGCL §151 allows corporation to issue stock with different preferences.
Note: in practice need to read pills very carefully.
Revlon v. MacAndrews & Forbes Holdings, Inc. (Del 1986)
- 10 -
On August 14, 1986, Pantry Pride‟s board authorized the acquisition of Revlon
through a negotiated deal for $42-43 per share or through a hostile TO for $45 per
share. It planned to finance the acquisition through junk bond financing, followed by
a break up of Revlon and a disposition of its assets.
Revlon met with its Lazard Freres and WLRK to consider the offer. LF advised them
that $45 was grossly inadequate and that the break up that Pantry Pride was
contemplating could produce a return of $60-$70 per share for them while a sale of
the company as a whole would produce a per share price in the mid $50 range. The
board adopted two proposals suggested by WLRK:
(1) An exchange (repurchase) of 10 million of its nearly 30 million shares of stock
outstanding for Senior Subordinated Notes of $47.50 principal at $11.75 interest,
due 1995. These note contained covenants restricting asset sales w/o approval by
(2) A Note Purchase Rights Plan under which shareholders would receive as a
dividend a $65 note at 12% interest for each share of common stock held and the
notes would become redeemable in the event that anyone acquired beneficial
ownership of 20% or more of Revlon‟s shares, unless the purchaser acquired all
of the company‟s stock for $65 or more per share. In addition, the rights would
not be available to the acquirer and the Revlon board could redeem the rights for
10 cents each.
On September 16th, Pantry pride announced a new TO at $42 per share,
conditioned on receiving at least 90% and on Revlon‟s board redeeming the
Revlon‟s bard Met on September 24th and authorized management to negotiate
with other potential bidders.
On October 3rd, the Revlon boar approved a deal with Forstmann and the
investment group of Adler & Shaykin whereby they would buy Revlon for $56
per share; management would purchase stock in the new company by the exercise
of their golden parachutes; Forstmann would assume Revlon‟s $475 million in
debt incurred by the issuance of the notes; and Revlon would redeem the rights
and waive the notes covenants in connection with Forstmann‟s offer or any other
superior offer (once financing was secure).
When the merger, and thus the waiver of the notes‟ covenants was announced, the
market value of the notes began to fall. Pantry
Pride raised its offer to $56.25 and announced that it would engage in fractional
bidding to top any bid made by Forstmann.
Forstmann raised its bid to $57.25 and agreed to support the par value of the notes
by exchanging them for new notes. Fosetmann‟s offer was conditioned upon an
asset lock-up (the right to buy certain Revlon assets below market in the event
another acquirer acquired 40% of Revlon), a no shop provision, the board‟s
removal of the notes covenant and redemption of the rights effective as of the
October 3rd agreement, and a $25 million break up fee. Forstmann said that if his
offer was not accepted immediately, it would be withdrawn and the board
accepted because it was a higher bid than Pantry Pride‟s, it protected the
noteholders, and Forstmann‟s financing was firmly in place.
- 11 -
Pantry Pride, which had originally sought injunctive relief from the rights plan on
August 22nd, filed an amended complaint on October 14th challenging the asset
lockup, $25 million termination fee, and the exercise of the Rights and Notes
On October 22nd, Pantry pride raised its bid to $58 per share conditioned upon the
nullification of the Rights, waiver of the covenants, and an injunction of the
Lock-ups and related agreements are permitted under DE law where their adoption is
untainted by director interest or other breaches of fiduciary duty. “The no-shop
provision, like the lock up provision, while not per se illegal, is impermissible under
the Unocal standards when a board‟s primary duty becomes that of an auctioneer
responsible for selling the company to the highest bidder.”
“[W]hile concern for various corporate constituencies is proper when addressing a
takeover threat, that principle is limited by the requirement that that there be some
rationally related benefit accruing to the stockholders.”
“when a board ends an intense bidding contest on an insubstantial basis,…[that]
action cannot withstand the enhanced scrutiny which Unocal requires of director
Legal Rule Announced
Once the break up of the company became inevitable, the board had a duty to
consider only the stockholders’ short term interest and sell the company for the
highest price possible: “However, when Pantry Price increased its offer to $50 per
share, and then to $53 per share, it became apparent to all that the break-up of the
company was inevitable. 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. The duty of the board thus changed from the preservation of Revlon as a
corporate entity to the maximization of the company‟s value at a sale for the
stockholder‟s benefit. This significantly altered the board‟s responsibilities under the
Unocal standards. It no longer faced threats to corporate policy and effectiveness or to
the stockholder‟s interests, from a grossly inadequate bid. The whole question of
defensive measures became moot. The directors‟ role changed from defenders of the
corporate bastion to auctioneers charged with getting the best price for the
stockholders at a sale of the company.”
Lock-ups are a permissible tool when used to get a higher price.
Under Unocal, the adoption of the rights plan was reasonable in relation to the
reasonably perceived treat posed by Pantry Prides offer which the board concluded to
be inadequate. . Its continued usefulness was rendered moot by the board‟s
subsequent actions. On October 3rd the board announced that it would redeem the
rights upon the consummation of the Forstmann merger or to facilitate a more
favorable offer. On October 12th the Board also unanimously passed a resolution
redeeming the rights in connection with any cash proposals of $57.25 or more.
Because all the pertinent offers eventually surpassed this amount, the rights are no
longer an impediment to any bid for Revlon.
- 12 -
Under Unocal, the exchange offer for 10 million of its shares for notes was
reasonable in relation to the reasonably perceived treat posed by Pantry Prides offer
which the board concluded to be inadequate.
The lock-up and the no-shop provision granted to Forstmann were impermissible
under the Uncoal standards because when the break-up of the company is inevitable,
the primary duty of the board becomes that of an auctioneer and those two provisions
were designed to end rather than intensify the bidding contest.
In its capacity as an auctioneer the Revlon board‟s concern for non-stockholder
interests (such as those of the noteholders) was inappropriate. The duties the of
the Revlon board to the noteholders are limited to the principle that one may not
interfere with contractual relationships by improper actions. The noteholders
rights were fixed by agreement and in accepting that agreement, the noteholders
accepted the risk that the covenant would be waived and that there would be an
adverse market effect stemming from that waiver.
“[W]hen bidders make relatively similar offers, or dissolution of the company
becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by
playing favorites with the contending factions. Market forces must be allowed to
operate freely to bring the target‟s shareholders the best price available for their
Revlon‟s board was made up of 6 insiders and 4 other directors who held substantial
blocks of stock; not the ambivalence. In Unocal, directors owning stock didn‟t matter,
but here it does.
Courts don‟t like to enjoin a deal resulting from a bad process but yielding a good
price; Pantry Pride increased its bid even after the Chancery Court‟s ruling to make
sure that it was going in with claim of a bad process and a bad price.
Square with Unocal: In blocking (erecting defensive measures) boards can consider
other constituencies, but when there is a sale of control, board can only consider short
term interests of shareholders and must get them the best price.
Who Decides: Episode I
City Capital Associates v. Interco (Del.Ch. 1988), Allen
Through Cardinal Acquisition Corp., City Capital made an all cash all shares tender
offer for Interco at $74 per share and expressed the intent to do a backend merger at
the same price if its offer was accepted. As an alternative to this tender offer,
Interco‟s board is attempting to implement a major restructuring which they estimate
will have a value of $76 per share. The restructuring does not require a tender offer,
merger or any other corporate action requiring shareholder approval. Interco has a
poison pill in place, which at this point is basically serving to prevent shareholders
from choosing the $74 TO over the restructuring, which the board believes will be
more valuable to shareholders. Interco is a diversified Delaware holding company
with subsidiaries in 4 major businesses: furnishings, footwear, apparel, and general
retail merchandising. Its board is composed of 14 directors, 7 of whom are outside
- 13 -
The plaintiffs seek a preliminary injunction requiring Interco to redeem its
shareholder rights plan and barring further implementation of Interco‟s planed
restructuring plan including the sale of Ethan Allen and cash and securities dividend.
Under Moran, boards have the power to adopt the poison pill, but their decision to
keep it in place in the face of a TO (as well as their decision to adopt it in the first
place) will be analyzed under Unocal.
The value of the restructuring is uncertain b/c (but not solely b/c) the value of the stub
security that stockholder will be left with is unknowable with reasonable certainty.
The board of Interco believes in good faith that the value of the restructuring is $76
per share and that the City Capital price is inadequate. The board of Interco has acted
prudently to inform itself of the value of the company (though consulting with
stockholders etc.). Shareholders have different liquidity preferences and a reasonable
shareholder could choose either offer.
As of now Interco‟s poison pill serves the sole purpose of protecting the restructuring.
Unocal should be applied cautiously to avoid unraveling the business judgment rule.
Tender offers can pose two types of potential threats
Threats to voluntariness of choice (coercion)
So far all the cases in which the DE Supreme Court has applied Unocal have
involved coercive offers.
Threats to the substantive, economic interest represented by the stockholding
This treat alone will justify leaving the poison pill in place for a period “while
the board exercises its good faith business judgment to take such steps as it
deems appropriate to protect and advance shareholder interests…” Those
steps may include negotiating with the offer, conducting a Revlon like auction
or creating a recapitalization to provide shareholders with an alternative to the
tender offer. “But once that period is closed,…then in most instances, the
legitimate role of the poison pill in the context of a non-coercive offer will
have been fully satisfied. The only function then left for the pill at this end-
stage is to preclude the shareholders from exercising a judgment about their
own interests that differs from the judgment of the directors, who will have
some interests in the question.”
DE law does not require that poison pills must always be redeemed in the face of a
“Even where an offer is noncoercive, it may represent a “threat” to shareholder
interests in the special sense that an active negotiator with power, in effect, to
refuse the proposal may be able to extract” a higher price or arrange a more
“…in the setting of a noncoercive offer, absent unusual facts, there may come a
time when a board‟s fiduciary duty will require it to redeem the rights and to
permit the shareholders to choose.”
Under Unocal the mild treat to shareholders‟ economic interests posed by a non-
coercive all cash tender offer that the board deemed to be inadequate did not justify
effectively foreclosing shareholders rights to accept that offer through the use of a
- 14 -
poison pill; preliminary injunction requiring directors to redeem poison pill is
granted. There may be a case where it is appropriate for a board to permanently
foreclose their shareholders from accepting a non-coercive offer through the use of a
poison pill, but this is not the case. Even if the Interco‟s bankers‟ assessment of the
value of the recapitalization is correct, the difference btw the two offers is only 3%
and City Capitals offer will provide cash sooner. On this issue the plaintiffs are likely
to prevail on the merits and if the court doesn‟t grant this relief, Interco‟s
shareholders (one of which is Cardinal Acquisition Corp and although it is asserting
its rights as a buyer, it has standing to assert the rights of a shareholder) will suffer the
irreparable harm of loosing the opportunity to choose City Capital‟s offer.
[Note: This part of the holding was latter called into question by the Paramount v.
Under Unocal the proposed sale of Ethan Allen was reasonable in relation to the mild
threat posed by the non-coercive cash offer.
The interco board is competently shopping Ethan Allen and the court assumes (in
the absence of contrary evidence) that the board will sell it for the best available
price and not for less than a fair price.
“Of course, a board acts reasonably in relation to an offer, albeit a non-coercive
offer, it believes to be inadequate when it seeks to realize the full, market value of
an important asset.”
Suggestion that boards have more leeway to do this b/c this is something that
boards normally do.
Ethan Alen is not a show stopper for the City Capital offer; it is not a crown
jewel; also, City Capital is free to bid for it.
[Note: one possible problem with this assessment is that a 3rd party might buy EA,
then no one else will want to buy the rest of Interco.]
The court reserves judgment on the dividend question b/c the record does not show
whether there are anti-takeover provisions in the covenants contained in the various
debt securities being given as dividends to shareholder.
“It is, however, difficult for me to imagine how a pro rata distribution of cash to
shareholders could itself ever constitute an unreasonable response to a bid
believed to be inadequate”
The Interco board had not duty to conduct an auction sale instead of seeking to
implement the proposed restructuring.
Although the recap will involve the sale of assets generating about ½ of Interco‟s
sales, massive borrowing, and a distribution to shareholders of cash and debt
securities equaling about 85% Interco‟s market cap, defensive recaps are to be
considered under Unocal and not under Revlon.
Here there was a sale of an asset that produced 50% of the company‟s sales as a
defensive measure, but yet no Revlon.
G&K say that if you go in and you find that management has a plausible story to sell
on how they can deliver higher value, they should pass Unocal. The court in Interco
says that after the board has had opportunity to shop and develop a strategy, then only
thing the pill is doing is preventing the shareholders from choosing btw forgone
options shareholders should be able to choose.
- 15 -
What if a 3rd Party buyer buys E&A then no one wants to buy the rest of Interco;
then, while presumably the board maximized shareholder value on the sale of E&A,
overall the shareholders might loose b/c they don‟t get a control premium for the rest
of the company.
Gilson & Kraakman, Delaware’s Intermediate Standard for Defensive Tactics: Is There
Substance to Proportionality Review?, 44 Bus. Law. 247.
Gilson and Kraakman introduce the terms “structurally coercive” (coercive in structure
as in a two tiered offer with less favorable consideration on the back end) and
“substantively coercive” (“the prospect that shareholders who mistakenly disbelieve
well-intentioned managers‟ expectations about future value may be led to tender to a
hostile bidder against their own best interests”).
Empirical literature shows that successful target defenses may indeed make shareholders
better off, but only if the target firms are later acquired in a later transaction. In cases
where the firms remain independent the share price eventually sinks back to pre-offer
levels, inflicting a heavy opportunity cost on shareholders.
This poses a problem for the proportionality test b/c it send a mixed message about
“Envoking the target‟s intrinsic value to justify continued independence in the face of a
premium offer is always a delicate argument for the management of a target firm to
make. Sooner or later, most shareholders sell their shares on the market, and the market
has already assessed managers‟ efforts. Indeed, share prices might undervalue corporate
assets because shareholders mistrust management investment policies. Even if the
securities market under values the target firm for reasons other than the company‟s poor
performance, managers can seldom predict when the market will come to accept their
own assessment of the value of the company or explain what would cause the market to
alter its valuation.”
3 types of threats The most difficult part of developing an effective proportionality
test is the challenge of offers that are assertedly substantively – but not structurally –
coercive, and the central problem in applying the proportionality test to substantive
coercion is suspect information. For offers where the threat is structurally coercion or
opportunity loss (of a better management proposal), the court need only too look to the
terms of the offer or management‟s alternative plan to determine the bona fides of these
“To support an allegation of substantive coercion, a meaningful proportionality test
requires a coherent statement of management‟s expectations about the future value of the
company…management must set forth its plan in sufficient detail to permit the court
independently to evaluate the plausibility of management‟s claim.”
Management must set forth a coherent statement of the firms future value and how
and when it will do better.
In response to the prospect of meaningful proportionality review, private actors will
regulate themselves. E.g. in formulating their claim of substantive coercion, managers
will know they are going to be reviewed; they will also employ experts (such as financial
advisors) who will have reputations to protect; if the predictions they make in their
substantive coercion claim do not come true, it will be harder for management to assert
such a claim in response to a future hostile offer.
- 16 -
“By minimizing management‟s ability to further its self-interest in selecting its responses
to a hostile offer, an effective proportionality test can raise the odds that management
resistance, when it does occur, will increase shareholder value.”
TW Services v. SWT Acquisition Corp (Del. Ch. 1989)
Facts: SWT (an affiliate of Coniston Partners) made a hostile offer for TW (a company
which operates restaurants and food facilities and provides retirement and nursing home
care) which finally (after amendments) came to $29/share cash for all shares (significant
premium). The offer was subject to an 80% minimum, financing condition, and a
condition that the TW board approve the offer and recommend that the shareholders of
the company accept the offer and tender their shares and that TW enter into a merger
agreement with SWT or one of its affiliates. The TW board had met to consider SWT‟s
pervious offers before this and had heard presentations of its financial advisors to the
effect that $29/per share was inadequate. Following the announcement of the all shares
TO the TW board met and decided that the offer was merely an invitation to negotiate, so
it needn‟t consider redemption of the poison pill. The next day the TW board sent SWT a
letter responding to SWT‟s offer to consider waiving its conditions if TW will redeem its
poison pill, saying that it would not consider the question of redemption until SWT
waived its conditions, particularly the board approval and merger agreement conditions.
TW informed the board that with respect to financing, it has received commitments from
City Bank and DLJ. 88% of shareholders tendered. πs are requesting a preliminary
injunction requiring TW‟s board to redeem the poison pill.
Elements to be satisfied by plaintiff for preliminary injunction
Reasonable probability of success on merits at final hearing
Failure to issue preliminary injunction would result in an irreparable harm that
would occur before trial.
Balance of the equities (π,Δ, 3rd parities, public)
However, here since granting a preliminary injunction would constitute final
(irreversible) relief, πs must satisfy the standards applicable to a grant of summary
The fact that there is an all cash all shares offer and that 88% of stockholders have
tendered (presumably expressing a preference for maximizing short term value) does
not put TW in Revlon.
The court notes that in this case the financing condition alone would not support the
TW board‟s claim that the SWT offer is not bona fide.
The DGLC treats TOs and merger agreements (two functionally similar transactions)
differently. With respect to merger agreement §251 gives directors the critical role of
initiating and recommending a merger to the shareholders, while with respect to a TO
the board has been accorded no statutory role. The poison pill can be seen as an
attempt to address what some would consider a flaw in the DGLC (e.g. divergent
treatment of merger agreements and TOs).
Maybe the different statutory treatments of merger agreements and TOs stems
from the notion that TOs essentially solicit the sale of shareholders‟ separate
property and thus such sales – “even when aggregated into a single change of
control transaction – require no “corporate action and do not involve distinctively
- 17 -
“By conditioning the closing of its tender offer upon the execution of a merger
agreement, SWT has implicated not simply the self-conferred power arising from the
stock Rights Plan, but the board‟s Section 251 power….the exercise of the boards
power under that Section is, where there is no interested merger, involved subject to a
traditional business judgment review, not the proportionality review of Unocal. Since
SWT has chosen to proceed in a way that does require the exercise of the board‟s
Section 251 power, it cannot complain if the board‟s decision with respect to it is
reviewed under the traditional business judgment approach.”
The court does not accept that SWT‟s modification of the merger condition to
provide that it will automatically be waived if 48 hrs after the TW board redeems
its pill the two parties have not entered into merger negotiations constitutes a
waiver of that condition.
In this case “the TW board‟s decision not to divert this Company from its long term
business plan in order to facilitate or propose an extraordinary transaction designed to
maximize current share value” should be analyzed under BJR and not Unocal; and
since the board appears to be acting in the good faith pursuit of legitimate corporate
interests and with due car, πs rejequest for preliminary injunctive releif reqirng TW to
redeem its poison pill is denied.
The board is justified in not addressing further whether it should deviate from its long
term management mode to pursue a current value maximizing transaction.
Blasius Industries v. Atlas Corporation (Del Ch. 1988)
Facts: After having unsuccessfully suggested to the Atlas board a leveraged restructuring
proposal that would result in a distribution of cash to shareholders, on December 30,
1987, Blasius (a 9.1% shareholder of Atlas) delivered to Atlas a form of stockholder
consent that, if joined by a majority of shareholders, would (1) adopted a precatory
resolution recommending that the board develop and implement a restructuring proposal
(2) amended Atlas‟s by laws to, among other things, increase the board of Atlas from 7 to
15 members and (3) elected 8 new members nominated by Blasius to fill the new
directorships. Atlas had a charter based staggered board. On December 31, 1987 the Atlas
board held an emergency meeting (even though a regularly scheduled meeting was to
occur one week hence on January 6, 1988) at which the board amended the bylaws to
increase the size of the board from 7 to 9 members and appointed two new members to
fill the new vacancies. On January 6, 1988 the Atlas board held its regularly scheduled
meeting during which it heard from its financial advisors (Goldman) that the Blasius
restructuring proposal would land Atlas in bankruptcy and result in the stub common
stock having little or no value and Atlas not having the resources to develop a meaningful
discovery of gold. The board voted to reject the Blasius restructuring proposal. The next
day Blasius caused a second modified written consent to be delivered to Atlas. Blasius is
suing to have the Atlas board‟s bylaw amendment invalidated and claiming that the
inspector of elections made an error in the counting of the shareholder votes concerning
the consent solicitation.
It is clear that the reason why the Atlas board didn‟t wait for the January 6 meeting
was that it feared that this court would might issue a temporary restraining order
- 18 -
prohibiting the board from increasing its membership, since the solicitation had
Atlas directors Farley and Bongiovanni admit that the board acted to slow the Blasius
Generally shareholders have only two protections against perceived inadequate
performance: They can sell their stock or vote to replace the board.
A per se rule that would invalidate any board action taken for the primary purpose of
interfering with the effectiveness of a corporate vote would have the advantage of
relative clarity and predictability, but it would also be over inclusive.
The court recognized the “transcending significance of the franchise to the claims to
legitimacy of our scheme of corporate governance.”
The board was not faced with a coercive action taken by a powerful shareholder
against the interest of distinct shareholder constituencies. It was merely presented
with a consent solicitation from a 9% shareholder, Moreover the board had time to
inform the shareholders of its views and was permitted to expend corporate funds to
The argument that the board knows best is irrelevant when the question is who should
comprise the board of directors.
Legal Rule Announced
BJR does not apply to board acts taken for the primary purpose of interfering with a
stockholder‟s vote, even if taken advisedly and in good faith.
“Action designed to interfere with the effectiveness of a vote inevitably involves a
conflict between the board and a shareholder majority. Judicial review of such an
action involves a determination of the legal and equitable obligations of an agent
towards his principle. This is not, in my opinion, a question that a court may leave
to the agent finally to decide so long as he does so honestly and competently; that
is, it may not be left to the agent‟s business judgment.”
Board must have a compelling justification to act with the primary purpose
of interfering with the shareholder franchise.
Coates says this is a higher standard of review than entire fairness.
Even though the Atlas board acted in subjective good faith and due care, their action
(precluding a majority of shares from placing a majority of new directors on the Atlas
board though the Blasius consent solicitation) constituted an unintentional violation
of their duty of loyalty b/c the board was acting with the primary purpose of
interfering with the shareholder franchise; and as such, it is invalid.
“If the board was not so motivated….it is very unlikely that such action would be
subject to judicial nullification.”
The election judges properly confined their count to the written “ballots” before them
and while they made several errors, correction of those errors does not reverse the
result they announced. πs‟ consent solicitation failed to garner the support of the
majority of Atlas‟s shares.
Problematic rule since it will be rare where, as here, boards admit that their primary
motivation was interfering with the shareholder franchise. Also, later courts say it
should be applied sparingly.
- 19 -
Shareholders have two fundamental rights: vote and sell. Distinguish poison pills
poison pills block TOs and not the right of a shareholder to sell on the open market.
Moran said the pill wasn‟t such a problem b/c of the bypass (elect new directors); this
case protects the bypass. Idea that the pill does place some limit on the right to sell,
and if we also allow interference with the vote, it will seriously undermine corporate
Who Decides: Episode II
Paramount v. Time (Del. 1990)
Time had been looking to become a more vertically integrated and global
entertainment organization, but had desired to maintain independent in a way that
reflected the continuation of the distinctive and important time culture (e.g. their
editorial reporting structure).
Time has a staggered board, a restriction on shareholder action by written consent or
to call a meeting, an advanced notice provision (50 days notice of shareholder
motions at meetings), and a poison pill that is triggered at 15%.
In the spring of 1987 Time began talks with Warner about a possible joint venture. At
the Time Board meeting of July 21, 1988, the board (consisting of a majority of
outside directors) approved the negotiation of a merger agreement with Warner if
certain conditions (including time personnel being the managing group in the
combined entity since Time desired to remain an independent entity able to control its
on destiny and that its magazines retain their editorial independence). Also at this
meeting, the board heard reports from management that it had reviewed other
possible strategic partners including Paramount, Disney and others and had concluded
that Warner was the most desirable prospect for achieving Time‟s goals.
On March 3, 1989 Time and Warner (both of which have a majority of outside
directors and both of which received legal and financial advice) entered into a merger
agreement which represented about a 12% premium for Warner stockholders and
would have resulted in the Warner shareholders owning about 62% of the combined
entity. The merger contemplated Warner merging into a wholly-owned Time
subsidiary with Warner as the surviving company then the shares of Warner being
converted to Shares of Time at the agreed upon ratio. As such (reverse triangular
merger) it would only require the vote of the shareholders of Warner under DGCL,
but the merger agreement contemplated a stockholder vote by both corporations since
NYSE listing rules required it (issuance of more than 20% of outstanding shares of
Steps to protect the Merger
Share Exchange Agreement gives each party the option to trigger an exchange
of shares that would give Warner 11.1% of Time and Time 9.4% of Warner.
There after Warner did trigger the exchange and the exchange has now occurred.
Dry up agreements Realizing that the corporation might be deemed “in play,”
Time management sought and paid for commitments from various banks that th
they would not finance an attempt to take over time.
- 20 -
No talk provision unless a hostile TO for 25% or more of Time‟s stock is
The Time shareholders meeting was scheduled for June 23, 1989. On June 7, 1989
Paramount announced an all cash all shares TO for Time at $175/share. The
announcement was timed to follow the Time‟s distribution of proxy materials so that
Time would be publicly committed to put the Warner merger agreement to a
shareholder vote. The offer was subject to a number of conditions including.
The termination of the Time-Warner merger agreement (or the agreement being
left subject to a vote in which Paramount controlled 51% of the vote)
Termination or invalidation of the Share Exchange Agreement
Material approvals being obtained
The removal of a number of Time create/controlled impediments to closing the
offer or effecting a second step merger (e.g. poison pill, DGCL 203 and Time
Charter supermajority voting requirements).
Financing (which was secured before this action)
Majority acceptance of the offer
The Time/Warner merger had received only a lukewarm reception from the market
(shares rose slightly $105-$122), but with Paramount‟s announcement, Time‟s
shares jumped $40 to $170.
The Time Board met on June 8, 11 and 15 to consider the $175 offer. No one
suggested taking the offer; the board claims that it thought the offer to be insufficient
and had a reasonable belief that if Time were not to be sold, which was the board‟s
determination, that Warner was a far more appealing partner which whom to have an
on going business consolidation than Paramount.
The board was advised by its investment bankers that if it elected to sell the
company it would probably get more than $250/share pre-taxes. The board was
also presented with valuation ranges for a strategic acquirer, an LBO and a Recap
which ranged from prices some what above the $175 to prices above the current
The board was also advised by Wasserstein, Perella that following the merger, the
stock of Time-Warner would trade at around $150 per share with a possible range
of $160 to $175 in the short term. In the long term they predicted trading ranges
of $159-$247 (1991), $230-$332 (1992), and $208-$402 (1993).
[Note: Broad ranges; Probably doesn‟t meet G&K‟s requirement that board
show when and how they will deliver better value to stockholders]
Also during these meetings the Time board received a presentation on Paramount
and concluded that there was a bad fit between the two companies.
The time was also concerned about the conditional nature of Paramount‟s bid and
cited possible outs in the cable franchise approval process.
On June 16, 1989, the Time board decided to reject Paramount‟s demands and recast
the Warner transaction in the form of a cash TO for a majority stake in Warner to be
followed by a merger for cash or securities or a combination of both that would not
require Time shareholder approval, which at this point was problematic. The board
also decided that the offer was inadequate and that it was not in the long term
interests of Time or is shareholders to sell the company at this time.
- 21 -
The new Time/Warner acquisition would leave Time with possibly $10 billion or
more in new debt, a reduced ability to support additional borrowing and
practically no reported earnings b/c it would need to amortize about $9 billion
since they wouldn‟t be able to take advantage of pooling.
On June 23, 1989 Paramount increased its offer to $200/share.
In this motion πs seek a preliminary injunction to enjoin Time from buying stock
under a June 16, 1989 offer to purchse 51% of Warner shares for $70 per share. In
this motion πs do not seek to have Time dismantle its rights plan or taken other action
sought in πs‟ complaints. [NB: NOT A POISON PILL CASE]
Chancery Court Holding.
Time board was not in Revlon b/c no change of control was contemplated by the
original Time-Warner transaction; it is irrelevant that 62% of the Time-Warner-Stock
would have been held by former Warner shareholders. Revlon is implicated where
there is to be a change in control and here control passed to no one: control “remained
in a large, fluid changeable and changing market.” There would have been a change
of control if a company with a controlling shareholder was acquiring a public
company without a controlling shareholder. The time shareholders would have
suffered dilution of the same type as they would have upon the public distribution of
new stock. [Note that actually issuance of shares would have meant the same type of
dilution in voting power, but worse dilution in economic interest]
Blasius does not apply. DGCL allows a board to reconsider an approved merger
agreement prior to the shareholder vote and creates no power in shareholders to
authorize a merger without prior affirmative action of the board.
Under Unocal the Time board‟s reaction to the reasonably perceived threat to their
preexisting plan designed to maximize long-term profit that the Paramount offer
posed was proportional. Paramount is not foreclosed from taking over the combined
Directors are not obligated to listen to a majority of shareholders; directors are
charged with managing the firm.
Two (non-exclusive) circumstances may implicate Revlon
When a corporation initiates an active bidding process seeking to sell itself or to
effect a business reorganization involving a clear break-up of the company.
When, in response to a bidder‟s offer, a target abandons its long-term strategy and
seeks an alternative transaction involving the break-up of the company.
[conspicuously missing is the Chancery Court‟s change of control theory, even
though the court said it was a correct conclusion as a matter of law – this is taken
up in QVC]
The court declines “to extend Revlon‟s application to corporate transactions simply
because they might be construed as putting a corporation either “in play” or “up for
The court disapprovingly cites the chancery court opinions in Interco and its progeny
and TW Services as not being in keeping with Unocal to the extent that they stand for
the proposition that the only conceivable threat that an all cash all shares value can
pose is one of inadequate price (implying that Paramount‟s offer could only be
considered a threat to the extent that it was inferior to the value of the Time-Warner
- 22 -
transaction) b/c such a misconception would involve the court substituting its
judgment as to what is a “better” deal for that of a corporation‟s board of directors.
“Indeed, in our view, precepts underlying the business judgment rule militate
against a court‟s engaging in the process of attempting to appraise and evaluate
the relative merits of a long-term versus a short-term investment goal for
The court cites G&K for the proposition that there are 3 types of coercion and two
(substantive and opportunity loss) are implicated here.
“Directors are not obligated to abandon a deliberatively conceived corporate
plan for a short-term shareholder profit unless there is clearly no basis to sustain
the corporate strategy.”
Chancery courts decision is affirmed.
Applying Unocal, the court finds that Paramount‟s TO was reasonably perceived by
Time‟s board to pose a threat to Time and Time‟s board‟s response (the restructured
Time-Warner transaction and its accompanying protection) was reasonable and
“One concern was that Time shareholders might elect to tender into Paramount‟s
cash offer in ignorance or a mistaken belief of the strategic benefit which a
business combination with Warner might produce.” Time‟s board was also
concerned by the conditional nature of Paramount‟s offer and the fact that timing
was arguable designed to upset if not confuse the shareholder vote.
Time‟s board was adequately informed of the potential benefits of a transaction
The board‟s lengthy pre June investigation of potential merger candidates
including Paramount, mooted any obligation it had to halt the Warner merger
process to consider the Paramount offer.
12 of Time‟s 16 independent board members were outside independent directors.
Time’s response to Paramount’s TO was not designed to cram-down on its
shareholders a management sponsored alternative “but rather to carry
forward a pre-existing transaction in an altered form.”
The restructured Time/Warner agreement was not preclusive in that Paramount
was free to make a bid for the combined entity.
The fact that the Time had to take on substantial debt in order to purse the
restructured Warner deal does not make the response unreasonable as long as the
directors could reasonably perceive that the debt load would not be so injurious as
to threaten the corporation‟s well being.
The court rejects the argument that under Unocal the only threat posed by an all-
shares, all cash tender offer is the possibility of inadequate value.
Times board did not come under Revlon by entering into the original merger
Agreement with Warner so that decision gets BJR.
While the chancellor‟s conclusion was correct as a matter of law, rather than
premise this holding on the chancery court‟s conclusion that Revlon was not
implicated b/c there was no change in control, the supreme court premised it‟s
holding on the fact that in negotiating with Warner, Time did not make the
dissolution or break-up of the company inevitable as was the case in Revlon.
- 23 -
The argument that Time-Warner will create more value for shareholders is a different
argument than Paramount is a bad fit. Shows that directors/management is caring
about the future of the organization beyond shareholder interests (b/c shareholders
would have no continuing interests in a cash deal).
Strine the chancery court ineffectively distinguishes Blasius
In Basius, no statutes were violated. By-laws and certificates allowed board to fill
directors, preventing certain shareholder nominated . Court imposes equitable
In Blasius the board had the right to fill vacancies and it exercised that right; here
the board has a right to take the Time-Warner deal off the voting table and they
Strine notes conflict in finding substantive coercion b/c the court also found large
amounts of stock held by institutional investors. Also, the SC opinion cited to G&K
but did not hold directors to G&K‟s standard of showing how and when the company
will do better.
Strine also thinks that an unspoken element of this opinion is that Time and Warner
were blue chip companies, so the court gave more credence to their corporate culture
Lesson taken by M&A bar you can just say no
Paramount Communications v. QVC Network (Del. 1994)
Paramount is a DE corporation held by numerous unaffiliated investors. It has15
board members, 11 of whom are outside directors (and several of whom are large
stockholders). Viacom is a DE corporation controlled by Sumner Redstone
(Chairman and CEO) who controls (indirectly) about 82% of the voting stock. QVC
is a DE corporation with several large stockholders. Beginning in the late 1980s,
Paramount investigated acquiring or merging with another company in the
entertainment, media, or communications industry. In the early 1990s, Paramount
began talking with Viacom. In April 1993 Davis, Paramount‟s Chairman and CEO,
and Redstone discussed a stock and cash deal which leave Davis as the CEO and
Redstone as the controlling stockholder of the combined company. Negotiations
broke down in July 1993.
On July 21, 1993 Davis learned of QVC‟s potential interest, but told QVC that
Paramount was not for sale.
On September 12, 1993 the paramount board met again and unanimously approved
the a merger agreement whereby Paramount would merge with and into Viacom and
each share of Paramount be converted into 0.1 shares of class A voting stock, 0.9
shares of class B nonvoting stock, and $9.10 in cash (about $70/share).
Protection devices contained in the merger agreement
No shop provision
$100 million termination fee to be paid to Viacom if Paramount‟s board
terminated the agreement b/c of a competing transaction or recommended a
competing transaction or if Paramount‟s shareholders failed to approve.
- 24 -
Stock Option Agreement granted Viacom an option to purchase approximately
19.9% of Paramount‟s outstanding common stock at $69.14 per share if any of the
triggering events for the termination fee occurred.
Two unusual features
Viacom was permitted to pay for the shares with a senior subordinated
note of questionable marketability, therefore obviating the need to raise
the $1.6 billion purchase price.
The put feature Instead of purchasing the shares, Viacom could elect to
require Paramount to pay Viacom a cash sum equal to the difference
between the option price and the market price of Paramount‟s stock. B/c
there was no cap on the put feature, it could and did reach unreasonable
In addition the Paramount board agreed to amend its poison pill to exempt the
transaction with Viacom.
On September 20, 1993 QVC sent a letter to Paramount proposing a merger in which
Paramount stockholders would receive about $80/share in consideration (.893 Shares
of QVC common stock and $30 in cash). After QVC supplied evidence of financing,
pursuant to the Paramount-Viacom merger agreement‟s no shop provision, the
Paramount board decided to authorize management to meet with QVC, but
discussions proceed slowly due to a delay in Paramount signing a confidentiality
On October 21, 1993, QVC filed this action and publicly announced an $80 cash TO
for 51% of Paramount‟s shares with an anticipated second-step merger in which each
remaining share of Paramount would be converted into 1.42857 shares of QVC
On October 24, the Paramount board approved an amended merger agreement and an
amended stock option agreement with Viacom.
Consideration The agreement contemplated a $80/share cash TO by
Viacom for 51% of Paramount‟s stock and second-step merger consideration
of .20408 shares of Viacom class A voting stock, 1.08317 shares of Viacom
Class B non-voting stock, and .20408 of a new series of Viacom convertible
preferred stock per share of Paramount stock.
Provision granting Paramount the right not to amend its rights agreement to
exempt Viacom if the Paramount Board determined that such an amendment
would be inconsistent with its fiduciary duties because another offer
constituted a better alternative.
The paramount board was given the power to terminate the amended merger
agreement if it withdrew its recommendation of the Viacom transaction to
shareholders or recommended a competing transaction.
However the defensive measures (namely the no-shop provision, the termination
fee and the Stock Option agreement were not modified.
Viacom‟s TO was commenced on October 25, 1993 and QVC‟s commenced on
October 27, 1993.
On November 6, 1993 Viacom raised its TO price to $85/share in cash and offered a
comparable increase in the value of the securities for the second-step.
- 25 -
On November 12, 1993 QVC raised its TO price and the securities offered in the
second step to $90 per share.
On November 15, 1993 the Paramount board determined that the new QVC offer was
not in the best interests of shareholders b/c it was excessively conditional. The
paramount board did not communicate with QVC about the conditions of the offer b/c
it believed that the No-Shop provision preclude them from doing so in the absence of
firm financing. Several Paramount directors also testified that they believed the
Viacom transaction would be more advantageous to Paramount‟s future business
prospects than a QVC transaction.
On November 19, 1993 QVC informed Paramount that it had obtained financing
commitments and that there was no anti-trust obstacle.
On November 24, the Court of Chancery issued its opinion granting a preliminary
injunction in favor of QVC and the plaintiff stockholders.
“When a majority of a corporation‟s voting shares are acquired by a single person or
entity, or by a cohesive group acting together, there is a significant diminution in the
voting power or those who thereby become minority stockholders.” Under DGCL
many of the most fundamental corporate changes can only be implemented after
majority shareholder approval (e.g. elections of directors, amendments to cert of inc,
mergers, consolidations, sales of all or substantially all of a corporation‟s assets and
dissolution). When there is a majority shareholder, minority shareholders are
effectively deprived of a say in such actions and can also be deprived of a continuing
equity interest in the company by means of a cash-out merger.
The price of gaining a majority of shares and the control that comes with being a
majority shareholders is usually a control premium which recognizes not only the
value of a control block of shares, but compensates the minority shareholders for their
resulting loss of voting power.
Currently no one stockholder owns a majority of Paramount‟s voting stock. Control
of Paramount “is not vested in a single person, entity or group, but vested in the fluid
aggregation of unaffiliated stockholders.” In the event that the Paramount-Viacom
transaction is consummated, the public stockholders will receive cash and a minority
equity voting position in the surviving corporation, which will have a controlling
shareholder who will have the voting power to elect directors, approve fundamental
transactions, cash out the minority shares, and otherwise materially effect the nature
of the corporation and the minority shareholders‟ interests.
Because the sale of Paramount (a company with no majority shareholder) to Viacom
(a company with a majority shareholder) will shift control to Viacom‟s controlling
shareholder, leaving Paramount stockholders without the leverage to demand a
control premium in the future, “Paramount stockholders are entitled to receive a
control premium and/or protective devices of significant value. There being no such
protective devices in the Viacom-Paramount transaction, the Paramount directors had
an obligation to take the maximum advantage of the current opportunity to realize for
the stockholders the best value reasonably available.”
Under the facts of this case, the Paramount directors had the obligation to “(a) be
diligent and vigilant in examining critically the Paramount-Viacom transaction; (b) to
act in good faith; (c) to obtain and act with due care on, all material information
- 26 -
reasonably available,” including information allowing them to compare the two offers
or an alternative course of action that might yield better value; “(d) to negotiate
actively and in good faith with both Viacom and QVC.”
The $1 billion disparity between the two deals cannot be justified on the basis of the
Paramount directors‟ vision of future strategy primarily b/c the change in control
would supplant the authority of the Paramount board to implement that strategy. Also,
the Paramount board‟s uninformed process deprived their strategic vision of much of
When a corporation under takes a transaction which will cause (a) a change in
corporate control or (b) a break-up of the corporate entity, the directors‟ obligation
is to seek the best value reasonably available to stockholders and there will be close
scrutiny of board actions which could be contrary to shareholder interests.
Rejects Paramount‟s reading of Paramount v. Time that both a change and control
and a break-up of the company would be necessary.
The Viacom-Paramount deal was a change of control in that it sold Paramount (a
company with no controlling shareholder) to Viacom (a company with a controlling
shareholder) and as such it implicates Revlon.
Paramount‟s claim that it was preclude from negotiating with QVC or from seeking
other alternatives fails; “Such provisions, whether or not they are presumptively valid
in the abstract, may not validly define or limit the directors‟ fiduciary duties under
Delaware law or prevent the Paramount directors from carrying out their fiduciary
duties under Delaware law.”
The Paramount directors process was not reasonable (draconian deal protections;
blinded themselves to QVC‟s offer; didn‟t use the leverage of QVC to negotiate
substantially better terms with Viacom), and the result achieved for stockholders was
not reasonable under the circumstance.
The deal protection devices used for the Viacom-Paramount deal together failed
Unocal/Revlon; the stock-option agreement was draconian.
The stock option agreement and the no-shop provision are invalid; Viacom‟s claim of
vested contract rights with respect to the No-shop agreement and the stock option
agreement fails. Viacom is a sophisticated party with sophisticated advisors; it can‟t
claim the Paramount directors can enter into an agreement in violation of their
fiduciary duties then render Paramount, and ultimately its stockholders, liable for not
carrying out that agreement in violation of those duties.
Since Paramount knew of QVC‟s interest before it entered into the Viacom transaction,
the Viacom transaction seems defensive.
Termination fee was a “naked no vote” fee no later deal necessary; if board failed to
recommend, Viacom gets the fee.
After conspicuously failing to mention the Chancery Court‟s „legally correct‟ change of
control theory of Revlon in the two non-exclusive Revlon triggers it listed in time, it
doesn‟t seem entirely fair that the supreme court would now turn around and base this
decision on change in control theory.
- 27 -
Not clear what constitutes a controlling shareholder for the purpose of the Revlon change
in control trigger; Here the court seems to contemplate a majority shareholder, but what
happens if there is a 40% shareholder who exercises dominion over corporate policy?
“In the absence of devices protecting the minority shareholder, [FN12] stockholders votes
are likely to become mere formalities where there is a majority shareholder. “
FN12 examples of such protective devices are super majority voting provisions,
majority of the minority requirements etc. Although we express no option on what
effect the inclusion of any such stockholder protective devises would have had in this
case, we note that this court has upheld, under different circumstances, the
reasonableness of standstill provision which limited a 49.9% stockholder to 40%
board representation. Ivanhoe.
Perhaps also a drag along provision majority shareholder cannot be bought out for
a better deal than is offered to minority.
No one way to maximize shareholder value under Revlon; don‟t have to have auction.
Don‟t need to ignore future value of strategic alliance but you need to have a systematic
way of looking at value and quantify the value of non-cash consideration (similar to
Krakman and Gillman).
Arnold v. Savings Bank Corp. (Del. 1995)
Suggests that you can have Microsoft buy joe‟s pizza shop in a stock for stock deal and if
neither of these have a controlling stockholder, its still not a change of control. Control
remains in fluid market.
The Death of “Enhanced” Scrutiny?
Unitrin v. American General (Del. 1994)
On July 12, 1994, American General made a merger proposal to acquire Unitrin for
$2.6 billion at $50 3/8 per share (30% premium) and said that it would consider
offering a higher price (if Unitrin could demonstrate additional value) and different
consideration to avoid tax issues.
The Unitrin board met on July 25, 1994 and considered the AG offer. It heard from its
financial advisors, who said the deal was inadequate, and from its legal advisors, who
said there could be anti-trust issues. The board unanimously concluded that the offer
was not in the best interest of Unitrin shareholders and voted to reject it. Because
Unitrin‟s board has a majority of outside directors. It was suggested that the board
consider takeover defenses, but since it though that AG intended to keep its offer
private, it didn‟t at this time.
On August 2, 1994 AG issued a press release announcing their offer and noting that
the Unitrin board had rejected it.
On August 2, 1994, at its regularly scheduled meeting, the Unitrin Board discussed
AG‟s press release and determined that AG‟s public announcement constituted a
hostile act designed to coerce a sale of Unitrin at an inadequate price. The board
unanimously approved the previously considered poison pill and advanced notice by-
From August 2, 1994 – August 12, 1994 Unitrin‟s boards issued a series of press
releases saying (1) they believed Unitrin‟s stock was worth more than AG‟s offer, (2)
the price of AG‟s offer did not reflect Unitrin‟s long term business prospects and an
- 28 -
independent company, (3) the true value of Unitrin was not reflected in the current
stock price, (4) the board believed that the a merger with AG would have anti-trust
problems, and (5) the board had adopted a shareholder rights plan to guard against
undesirable takeover effects.
On August 11, 1994 the board adopted a repurchase program for up to ten million
shares of its outstanding stock;
On August 12, 1994 the board put out a press release announcing the repurchase plan
and stating that the director stockholders were not participating in the repurchase plan
and that the repurchases will increase the percentage ownership of those stockholders
chow choose not to sell. It also said that directors owned 23% of Unitrin‟s stock, that
the Repurchase Program would increase that percentage, and that Unitrin‟s certificate
of incorporation included a supermajority voting provision for mergers with a greater
than 15% stockholder.
Unitrin had a shark repellant provision baring any business combination with a
more than 15% shareholder unless approved by a majority of continuing directors
OR by a 75% stockholder vote.
The chancery court found that under the repurchase program, the Unitrin directors
ownership was expected to rise to 28%.
On August 17, 1994 Unitrin sent a letter to its stockholders stating that it believed the
repurchase program was designed to provide an additional measure of liquidity to
shareholders in light of AG‟s recent offer and that it believed that Unitrin‟s stock is
undervalued and that the program would tend to increase the value of shares that
Between August 12, 1994 and August 24, 1994 Morgan Stanley purchased nearly 5
million of Unitrin‟s shares on Unitrin‟s behalf. The average price paid was slightly
above American General‟s Offer Price.
Following the announcement of the AG offer, Unitrin‟s shareholder filed suit seeking
to compel the sale of the company and AG filed suit to enjoin Unocal‟s share
repurchase program. Unitrin‟s board has a majority of outside directors. It was
suggested that the board consider takeover defenses, but since it though that AG
intended to keep its offer private, it didn‟t at this time.
The Court of Chancery granted the π‟s request for a preliminary injunction enjoining
the purchase of any more shares under the share repurchase program (but π did NOT
ask to have the court require Unitrin to lift its poison pill); This court granted the
interlocutory appeal and has expedited its review.
Chancery Court’s Holding: The Unitrin directors reasonably perceived of the mild
threat of AG‟s offer (negotiable in both price and structure) being inadequate and
potentially facing antitrust problems. The repurchase program, the poison pill, and the
advanced notice by-law are all to be reviewed under Unocal. In light of the fact that the
board properly adopted a poison pill in response to the mild threat of AG‟s low ball offer,
the repurchase program went beyond what was necessary to protect Unitrin‟s
shareholders and therefore it fails the proportionality prong of Unocal. It was designed to
keep the decision to combine with AG within the control of the Unitrin board. While
some hostile offeror might be able to make a bid high enough to make at least some of
the Unitrin directors sell their shares, the directors place value on their prestigious
positions and may, at least subconsciously, reject any offer that does not compensate
- 29 -
them for that. Therefore the court issued a preliminary injunction to enjoin further
implementation of the repurchase plan. (Note that AG did not ask for an injunction
requiring Unitrin to lift its poison pill).
Preliminary injunction standard; π must demonstrate
Reasonable probability of success on the merits
Reasonable probability of irreparable harm in the absence of preliminary
Balance of harms weighs in favor of granting π relief
3 standards of review
BJR “presumption that in making a business decision the directors of a
corporation acted on an informed basis, in good faith and in honest belief that
the action” was taken in the best interest of the company,” which the party
challenging the board‟s decision is charged with rebutting. If BJR is not
rebutted, a “court will not substitute its judgment for that of the board if the
board‟s decision can be attributed to any rational business purpose.
Unocal enhanced judicial scrutiny
If director‟s judgments pass Unocal, they get BJR
Entire fairness (applies if the presumption of BJR is defeated)
The Unitrin board identified 2 threats it perceived that the AG offer posed: (1)
inadequate price and (2) antitrust complications.
In Stroud v. Grace, the court accepted the basic legal tenants set forth in Blasius, but
rejected the applicability of Blasius in that case b/c the primary purpose of the board‟s
actions was not to interfere with the stockholder franchise and the stockholders had a
full and fair opportunity to vote.
The Chancery court‟s decision to enjoin the repurchase program is attributable to a
misunderstanding that in conjunction with the long standing super majority vote
provision in the Unitrin charter, the Repurchase Program would operate to provide
the director stockholders with a veto to preclude a successful proxy contest by AG.
(1) The chancery courts conclusion that the Unitrin directors need the repurchase
program to put them in a blocking position under the supermajority provision was
unsupported by the record. The directors already had an effective veto against a
15% shareholder even before the repurchase program b/c since in a proxy contest,
shareholder participation will likely be below 100%, the outside director‟s
absolute voting power of 23% would constitute absolute voting power of more
(2) The chancery court‟s conclusion that the ability of AG to succeed in a proxy
contest for Unitrin depended on the repurchase program being enjoined b/c of the
supermajority voting provision in Unitrin‟s charter was unsupported by the
record. It would be irrational for bidders to acquire over 15% of Untrin‟s shares
without the approval of the Unitrin board even without the repurchase program
since 15% ownership triggers the Unitrin poison pill and the constraints of DGCL
IF AG were to initiate a proxy contest before acquiring 15%, it would need to
amass only 45.1% of the votes assuming a 90% turn out.
- 30 -
Institutional investors own 42% of Unitrin‟s shares and institutional shareholders
are more likely to vote, more likely to vote against management, and more likely
to vote in favor of shareholder proposals.
After the repurchase plan, assuming a 90% turn out, a 14.9% shareholder would
need 30.2% of the votes to win a proxy contest and 35.2% of the votes in a
subsequent merger (since mergers require over 50% of outstanding shares, not
just a plurality).
Even a full implementation of the repurchase program will not have a preclusive
effect on AG‟s ability to win a proxy contest. “The key variable in a proxy contest
would be the merit of American General‟s issues, not the size of its
Stockholders are presumed to vote in their best economic interest when they vote in a
proxy contest; the chancery court improperly determined sua sponte that the Unitrin
outside directors, who were also stockholders, would not vote like other stockholders.
If πs wanted to claim that, the burden was on them to prove it.
Three types of threats that Hostile TOs can pose
The Unitrin board reasonably perceived a treat of substantive coercion. Its response
was not preclusive or coercive.
“The fact that a defensive action must not be coercive or preclusive does not prevent
a board from responding definitively before a bidder is at the corporate bastion‟s
Legal Rule Announced: Refined Unocal
Was there reasonably perceived threat to corporate policy and effectiveness? If yes,
Was the directors‟ response draconian; e.g. was it preclusive (making a successful
proxy fight mathematically impossible or realistically unattainable) or coercive? If
Was the director‟s response within the range of reasonableness?
The chancery court erred in focusing on whether Unitrin‟s repurchase program was a
necessary defensive response. The record supports that the Unitrin board reasonably
perceived the American General offer as a treat to corporate policy and effectiveness.
On remand the chancery court must determine whether the repurchase program was
draconian (e.g. preclusive or coercive) and if not, whether it was with in the range of
reasonableness, and if within this range, the boards action will get BJR review. In
making this determination the Court of Chancery should consider:
A repurchase program is a statutorily authorized for of business decision which
boards routinely make in the non-takeover context.
As a defensive response, it was limited and corresponded to the degree and
magnitude of the treat.
With the repurchase program, the Unitrin board properly recognized that not all
shareholders are alike, and provided immediate liquidity to those shareholders
who wanted it.
- 31 -
The court of chancery should also so consider Unitrin‟s claim that should the court of
chancery find in favor of π, the apropriate equitable remedy would be to enjoin the
the Untrin directors from exercising any increase in their voting power as a result of
the repurchase plan rathe than ejoining the repurchase plan. The Court of Chancery
might do this (rather than enjoining the non-preclusive non-coercive repurchase plan)
in balancing the harms if it is not clear whether the repurchase plan is within the
range of reasonableness.
Maybe the repurchase program doesn‟t preclude AGC from winning a proxy
fight, but it makes it pretty hard.
AGC would need 2/3 of contested votes to win a proxy fight (less if it already
Also, threat is substantive coercion (stupid shareholders) but repurchase is not
preclusive b/c smart institutional shareholders hold high majority of contested
Hard for the Unitrin board that it is protecting its shareholder from substantive
coercion by buying their shares at market price.
More v. Wallace (US Dist. Ct. D. Del. 1995)
In February 1995, Moore (an Ontario Canada corporation that specializes in business
forms) approached Wallace (a DE corporation in the computer services and supply
industry) about a possible business combination and Wallace said it wasn‟t interested.
One June 14, 1995, the Wallace board approved an employment agreement for the
Wallace CEO that included an $8 million severance package (substantially similar to
the employment agreement of the previous CEO). The board also approved a 60
advanced notice by-law for shareholder proposals.
Around July 30, 1995, More announced its intention to commence a TO for all
outstanding shares of Wallace stock for $56/share (27% premium) and delivered
proxy solicitation materials to Wallace‟s shareholders, nominating a new board. The
offer was conditioned upon
Getting a majority of outstanding shares
The redemption of Wallace’s poison pill
Wallace Board approval of the acquisition of shares pursuant to the offer and
proposed merger as required by DGCL §203
DGCL §203 applies to any Del Corp that has not opted out of the statute‟s
coverage and provides that any person acquiring 15% or more of a company‟s
voting stock may not engage in any business combination, including a merger
for 3 years after becoming such, unless that person has obtained certain
approvals from the board of directors or the affirmative vote of at least 2/3 of
the outstanding stock not owned by the interested shareholder.
The proposed merger having been approved pursuant to Article Ninth of
Wallace‟s charter or the inapplicability of that article to the proposed merger.
On July 31, 1995, the Wallace board retained Goldman to advise them as to the
adequacy of the Moore TO and Moore filed its complain seeking the court to compel
- 32 -
the removal of Wallace‟s anti-takeover devices. Wallace provided Goldman with the
necessary info including projections and a description of its strategic plan.
On August 15, 1995, after meeting twice, hearing Goldman‟s opinion that the Moore
offer was inadequate and unanimously concluding that the offer was inadequate, the
Wallace board officially rejected Moore‟s offer.
On October 12, 1995 Moore raised its bid to $60/share. The Wallace board met to
consider it. Goldman opined that the $60/share offer was inadequate. Goldman also
said that a reorganization or a recapitalization plan, which Wallace could adopt,
would produce current value which could exceed $60 per share, while allowing its
shareholders to keep their ownership interest in the company (which the $60/share
cash out offer would not allow for). Goldman did not provide the Wallace board with
a range of values that would be adequate.
πs seek a preliminary injunction primarily to compel Wallace to redeem its poison
pill. Wallace counter claims that Moore‟s TO, if consummated, would violate Section
7 of the Clayton Act. At the time of this hearing 73.4% of Wallace shareholders had
tendered their shares.
Jurisdiction based on diversity and federal question.
“The Supreme Court of Delaware and the Chancery Court have repeatedly held that
the refusal to entertain an offer may comport with the valid exercise of the board‟s
Wallace‟s poison pill is a defensive measure but its CEO‟s golden parachute
(identical to that of his predecessor) is not a defensive measure and the advanced
notice by-law amendment is only a mild defensive measure, so the court will only
apply enhanced judicial scrutiny to Wallace‟s boar‟s failure to redeem the poison pill.
The Chancery Court in Unitrin upheld the Unitrin‟s board‟s decision to adopt a
poison pill in the face of the “mild” threat of an inadequate offer which was
negotiable in both structure and price and the Delaware Supreme court did not contest
The request for the preliminary injunction is denied and Wallace has to alleged
sufficient antitrust injury and therefore lacks standing to bring its Clayton Act claim
and that claim is dismissed.
Wallace reasonably perceived the treat of substantive coercion presented by Moore‟s
inadequate offer (board with majority of independent directors examined projections
for Wallace and sought the advice of Goldman).
The poison pill is not coercive (not discriminatory) and it is not preclusive since it
will nave no effect on the bidders success in a proxy contest. As long as Moore stays
below the 20% trigger of the rights plan, it can wage its proxy contest unaffected.
The failure to redeem the poison pill is in the range of reasonableness of responses to
the reasonably perceived threat of substantive coercion.
Stands for the proposition that the board can “just say no”
Kahan, Marcel, Paramount or Paradox: The Delaware Supreme Court’s Takeover
Jurisprudence, 19 J. Corp. L. 583 (1994)
- 33 -
This article attempts to present to articulate a coherent theory explaining the Delaware
Supreme Court‟s takeover rulings.
No supreme court case has ever invalidated a boards defensive actions on the basis of
Unocal, ant the chancery court opinions that have were criticized by the supreme court in
“With regard to a target board‟s ability to reject a hostile tender offer, the principle
impact of Unocal is then two-fold: it shifts the locust of power from the board at large,
not to the shareholders or to the court, but rather to the independent directors; and it adds
to he process requirements the board is obliged to follow before making a decision. That
is, Unocal subjects a decision to reject an offer to an enhance review of the process by
which this decision is arrived at, but to an independent review of the substantive merits of
the decision.” (process scrutiny)
“[O]nce a company enters Revlon mode the locus of powers shifts form the directors to
the courts – who will scrutinize the substantive merits of board actions – and to the
shareholders – who will ordinarily be given the opportunity to accept a hostile bid.”
The rationale for giving independent directors the broad power to reject an offer that
shareholders would like to accept is the same as that for giving directors the power to
manage the company one way even if shareholders would prefer that directors mange it
another way: the shareholders elected the directors to mange the company; if the
shareholders don‟t like the way the directors mange, the shareholders can vote the
In the court‟s view the broad grant of power to independent directors to block a hostile
TO is balanced by the ability of the shareholders to revoke that power by voting the
directors out. But in a Revlon case the Board‟s decision is irreversible (shareholders loose
control so can‟t vote directors out) so the court subjects the board‟s decision to a more
stringent (substantive) review than the mere procedural review of Unocal).
Revlon duties are meant to protect shareholders‟ ability to override the board‟s decision
to reject a tender offer.
Why does the court apply Revlon to break-ups?
Breakups are different in degree than other business transactions in it is harder to
reverse the resulting changes than it is to reverse the changes than most other business
changes. Break-ups trigger Revlon duties b/c they fundamentally change the
company, thus they may deprive the shareholders of the only opportunity they have to
accept a TO for the company as it was previously. A strategic break-up of a company
into two parts where the shareholders retain proportional ownership in each part (e.g.
spin off) might not be a break-up that implicates Revlon (court has not yet
determined). On the other hand it is possible that other transactions that involve
fundamental changes in the company and are as difficult to reverse as a break up –
such as an exchange of all the company‟s assts for a different set of assets – may also
trigger Revlon. Or
Maybe the court‟s references to break-ups are primarily designed to include defensive
break-ups undertaken in response to hostile TO since in such situations the board
ceases to defend the corporate bastion (e.g. abandon‟s its strategic plan and embraces
- 34 -
Note that under either of these rationales, Interco would trigger Revlon. [note the
chancery court applied Unocal and said the poison pill failed but the asset sale
passed; the supreme court never got the case but criticized the chancery court‟s
Unocal based finding on the poison pill]
“The Court draws a clear distinction between target boards that continue a deliberately
conceived corporate plan and those that abandon their plan to sponsor an alternative to
the hostile bid. As to the former, the court indicates that, except in extreme
circumstances, it will not engage in substantive review.”
“[I]n a curious way,, the logic of Time and Unocal validates the use of the poison pill for
a “just say no” defense, but the very existence of a poison pill renders it more difficult
for a target company to adopt other, more active defenses. If a poison pill is sufficient to
protect the corporate objective against the threat of an inadequate offer, the nature and the
timing of an offer, the impact on other constituencies, and so on, then affirmative
defenses that result in more far-reaching deviation from a deliberatively conceived
corporate plan, by definition, tend to become disproportional.”
Unitrin undermines Kahan‟s argument as to what the unifying theory of Delaware law
is; Delaware Supreme Court allows Unitrin to use the pill AND other measures
including a selective repurchase at the same inadequate price that they are protecting
the shareholders from thus increasing the voting power of the board.
The Revival of Enhanced Scrutiny?
Chesapeake Corporation v. Shore (Del Ch. 2000); Strine
This case involves a contest for control between two corporations in the specialty
packaging industry, the plaintiff Chesapeake Corporation and the defendant
Shorewood Packaging Corporation, whose boards of directors both believe that the
companies should be merged. The boards just disagree on which company should
acquire the other and who should manage the resulting entity.
Shorewood, a Del Corp, has a 9 person board, only 3 of which can possibly be
considered outside independent directors. No majority of independent outside
directors. Mark Shore, the CEO and Chairman, whose father founded the company,
owns 17.3% of Shorewood, gets a substantial salary, and seems to be able to rely on
the Shorewood board to help him out of financial jams.
Outside non-management; non-employee. Unitrin.
Independent one who can base her judgments on the corporate merits without
be influenced by extraneous influences, such as personal relationships the director
has with management or a controlling stockholder, or other material financial
relationships the director has with the corporation. Unitrin.
[NB: since this case the Delaware Supreme court found in Beem v. Martha
Stewart that mere social ties do not destroy independence]
On October 26, 1999, Shorewood sent a letter to Chesapeake making an all-cash, all-
shares offer at a 41% premium for Chesapeake. The Chesapeake board rejected the
offer as inadequate, citing the fact that the stock market was undervaluing its shares.
Chesapeake countered with an all-cash, all-shares offer at a 40% premium for
- 35 -
Shorewood. The Shorewood board, all of whose members are defendants in this case,
turned down this offer, claiming that the market was also undervaluing Shorewood. In
making this decision they received no advice from financial advisors and while they
did receive legal advice, they are not revealing what it was under a claim of attorney
client privilege. One of the board members was a former i-banker, but did not view
himself as giving a fairness opinion, something his firm had never done.
On November 18, 1999, recognizing that Chesapeake, a takeover-proof Virginia
corporation (dead hand pill and staggered board), might pursue Shorewood, a
Delaware corporation, through a contested tender offer or proxy fight, the Shorewood
board adopted several defensive bylaws, designed to make it harder for Chesapeake
to amend Shorewood‟s bylaws unclassify the board and elect a new board to unseat
the incumbent board. The bylaws were as follows:
Eliminated the ability of stockholders to call special meetings
Eliminated the ability of stockholders to remove directors without cause
Gave the Shorewood board control over the record date for any consent
Eliminated stockholders‟ ability to fill board vacancies
Raised the votes required to amend the bylaws from a simple majority to 66 2/3%
of the outstanding shares. Because Shorewood's management controls nearly 24%
of the company's stock, the 66 2/3% Supermajority Bylaw made it mathematically
impossible for Chesapeake to prevail in a consent solicitation without
management's support, assuming a 90% turnout. Furthermore the historical voting
turn out for Shorewood elections had been 75-80% and most of the shares not
held by insider were held by intuitional investors.
Following this meeting, Shorewood hired Skadden, Bear Stearns and two other i-
banks, and a proxy solicitation firm.
On November 26, 1999, Ariel Capital Management, the largest shareholder of
Shorewood at 20%, and Chesapeake reached an agreement whereby Ariel would
shares equal to 14.9% (under 15% so as to avoid becoming an interested stockholder
for the purpose of DGCL §203) of Shorewood to Chesapeake for $17.25/share and in
the event of a future majority transaction in which Chesapeake was the winning
bidder, Ariel would receive an additional payment equal to the difference between
$17.25 and the winning Chesapeake bid. The agreement left Ariel free to vote its
remaining shares as it wished. In a Majority transaction in which another party
(including Shorewood itself) was the winning bidder, Ariel would receive an
additional payment equal to the difference between $17.25 on the one hand and half
of the difference between the highest Chesapeake bid and the winning bid on the
This gave Ariel a substantial economic incentive to support a Majority
Transaction with Chesapeake even in some situations where it believes that the
company is worth as a stand alone company or where a Non-Majority Transaction
offers more value. But there are no circumstances under which it would be in
Ariel‟s economic interest to support a Chesapeake Majority Transaction over
another majority transaction offering more $.
On December 3, 1999 Chesapeake:
- 36 -
Commenced an all shares all cash TO for Shorewood at $17.25, announcing its
intention to do a backend merger at the same price.
Commences a consent solicitation to
Amend Shorewood‟s by-laws to eliminate the classified board provision and
create a 3 person board
Remove the sitting members of the Shorewood board
Elect a new board that would dismantle any defenses impeding the TO
Initiated this lawsuit challenging the 66 2/3% Supermajority Bylaw.
Principally, Chesapeake contends that the Shorewood board, which is
dominated by inside directors, adopted the Bylaw so as to entrench itself and
without informed deliberations. It argues that the Bylaw raises the required
vote to unattainable levels and is grossly disproportionate to the modest threat
posed by Chesapeake's fully negotiable premium offer. Moreover, it claims
that the defendants' argument that the Bylaw is necessary to protect
Shorewood's sophisticated stockholder base, which is comprised
predominately of institutional investors and management holders, from the
risk of confusion is wholly pretextual and factually unsubstantiated.
In response the Chesapeake board met and decided the offer was inadequate and filed
a 14D-9 clearly explaining the reasons for its findings including the DGCL §203 risk
it thought the Chesapeake/Ariel contract posed.
On January 5, 2000, shortly before trial, the Shorewood board amended the Bylaw to
reduce the required vote to 60%. The meeting only lasted 45 minutes and the only
expert consulted was the proxy solicitor who was consulted by phone in a 5 minute
conversation during which he said that based on his experience as a proxy solicitor,
Shorewood could expect a 95% turn out in the consent solicitation. Based on this and
the assumption that the Ariel and Chesapeake were interested, while the directors
who had already committed to vote against the consent solicitation (including Mark
Shore) were not, the board concluded that the 60% was reasonable and fair b/c it
would enable a majority of the disinterested shareholders to decide the consent
solicitation. (e.g. 20% interested so half of the disinterested is 40% and 20% + 40% is
60%). The board however never considered whether it was reasonably practicable for
Chesapeake or any other party opposed to the board to win with the 60% requirement.
While the TO is still open, less than 1% of the Shorewood shares have been Tendered
The defendants faced only a modest threat of price inadequacy, which was adequately
addressed by other defensive measures and less draconian options available to the
There was no legitimate threat of stockholder confusion to which the Supermajority
Bylaw was responsive;
There was no evidence that this threat was identified until December. The
Sherwood directors were able to explain the reasons the believed Sherwood‟s
stock was undervalued in understandable terms to the court and, according to
them, to the analyst community on a regular basis.
“The most the Shorewood directors are able to credibly say is that stockholders
will never understand the relevant information as deeply as the directors do or that
- 37 -
stockholders might choose to blind themselves to it in favor of a short term
Over 80% of Sherwoods‟s shares were held my management or institutional
The defendants failed to consider whether any insurgent could realistically satisfy the
Supermajority Bylaw in the face of management opposition, as well as several other
There is no real-world evidence that a 60% vote is attainable by an insurgent opposed
by Shorewood management;
The defendants improperly treated themselves as "disinterested stockholders" while
treating other similarly situated stockholders as "interested" and as therefore having
less right to influence company policy at the ballot box;
The defendants' deliberative processes were grossly inadequate; and
Note that the Shorewood board has invoked attorney client privilege rather
frequently so the court could not consider virtually any of the professional advice
The defendants acted with the primary intent of changing the electoral rules so as to
make it more difficult to unseat them.
In sum, the Supermajority Bylaw is a preclusive, unjustified impairment of the
Shorewood stockholders' right to influence their company's policies through the ballot
Unocal appears to preclude the use of the entire fairness standard to defenses that do
no implicate DGCL §144; How else can one interpret Unocal‟s use of an independent
board majority as a factor enhancing the reasonableness of the board‟s actions.
Del Supreme Court has said that the Blasius “burden of demonstrating a compelling
justification is quite onerous, and is therefore to be applied rarely.” Williams v. Geier.
Also hard to determine when the board is acting “for the primary purpose;” absent
a confession the best evidence is of the effect of the board‟s actions.
When a case involves defensive measures of such a nature, the trial court is not to
ignore the teaching of Blasius but must "recognize the special import of protecting the
shareholders' franchise within Unocal’s requirement that any defensive measure be
proportionate and 'reasonable in relation to the threat posed." Therefore, a "board's
unilateral decision to adopt a defensive measure touching upon issues of control that
purposely disenfranchises its shareholders is strongly suspect under Unocal and
cannot be sustained without a compelling justification." Stroud v. Grace. Unitrin also
mentioned Blasius, but didn‟t apply it. Thus the Supreme Court has left open the
question of when Blasius will be applied either on its own or as part of Unocal.
Carmody v. Toll Brothers (Del Ch. 1998) The chancery court struck down the
dead hand pill as coercive b/c it forced stockholders to vote for the incumbent
directors in the election if they wished to elect a board with the authority to redeem
the pill, finding that the complaint stated a claim under both Unocal and Blasius.
B/c the invocation of Blasius normally means that the court is going to invalidate the
board‟s actions where as the failure to invoke blasius normally means that the board‟s
actions will survive Unocal and b/c of Schnell v. Chris-Craft, the continuing
usefulness of Blasius is not clear.
- 38 -
In Untrin the court held that the selective repurchase program was not necessarily
preclusive of a successful proxy fight by the tender offeror, even though the tender
offeror would be required to win very high majorities of the unaligned vote in order
to prevail (e.g. 64.12% to elect directors; 74.3% vote on merger) b/c the stock was
heavily concentrated with a small number of institutional investors and the court was
unwilling to presume that the directors block wouldn‟t sell (or vote to facilitate sale)
for the right price.
The highly concentrated institutional investor rational seems to undercut the
court‟s acceptance of substantive coercion as a rational for Unitrin‟s defensive
Instead of reading Untrin to mean that boards can have it both ways (e.g. claim
both substantive coercion and active/institutional shareholders cutting against
preclusion) when important voting rights and ownership are at stake, Strine
focuses of the fact that the Del Sup Court did not find that the repurchase program
was valid, but instead remanded to the chancery for that determination.
The substantive coercion argument can be invoked by a corporate board in almost
every situation with no threat of legal reprisal if the claim turns out to be erroneous so
it is important for courts to ensure that the threat is real and not imagined to protect
shareholders from abusive defensive measures. Board should show that they tried and
failed to communicate their message and a high proportion of institutional investors
should cut against their claim since concentrated stockholdings would facilitate
management‟s ability to communicate their message.
Also, boards seem to only cry substantive coercion when there is a premium offer
on the table when really substantive coercion is more of a threat to stockholders
who sell at the depressed market (pre-offer price) than those who sell into the
Strine cites Gilson and Kraakman for the proposition that management should be
required to make a coherent statement bout their expectations about the future
value of the company, including a showing of how and when management
expects the target shareholders to do better, to support a claims of substantive
coercion. Strine says that Unitrin is NOT intrinsically inconsistent with the
approach articulated by G&K.
“Preclusive defensive tactics are gambles made on behalf of target
shareholders by presumptively interested players.” Gilson & Kraakman supra.
The Shorewood‟s board‟s actions are entitled to less deference under Unocal since it
doesn‟t have a majority of outside independent directors.
The court believes that even though the board did not seek outside independent
financial advice until December, it reasonably perceived that the Cheasapeake bid
was inadequate before that.
The defendants have not met their burden to sustain the Supermajority Bylaw under
either the Unocal v. Mesa Petroleum Co. or Blasius Indus. v. Atlas Corp. standards of
While the board did reasonably perceive the mild threat of inadequate price (made
weaker by the board‟s failure to show that its current plans would yield higher,
- 39 -
realizable value in the future) it did not reasonably perceive (after reasonable
investigation and in good faith) the substantive coercion threat.
“On the basis of this record the threat of confusion emerges as a post-hoc,
litigation inspired rationale for the previously adopted 66 2/3% Supermajority
The bylaw is preclusive b/c the Shorewood board has failed to meet its burden
in proving that it is realistically attainable for Chesapeake to prevail in a
consent solicitation to amend Shorewood‟s bylaws.
The 95% estimates used to determine non-preclusiveness were unlikely
(90% would be more realistic) b/c they failed to take into account, the past
voting history of Shorewood and Shorewood‟s Board‟s decision not to
order the NOBO list (which only Shorewood‟s board can order) for the
“At most, the defendants can use Cornwell's analysis to demonstrate that it
is theoretically possible for Chesapeake, given ideal circumstances, to
meet the 60% threshold. But no real-world evidence supports the view that
such ideal circumstances have ever come to pass for an insurgent in
Chesapeake's position facing the concerted opposition of management
holders controlling over 20% of the vote.”
Even if one assumes that one assumes that Ariel is interested (the court
implies that it doesn‟t believe this) and will vote with Chesapeake,
Chesapeake would still have to get unrealistically high percentages of the
unaligned vote to prevail in its consent solicitation.
Even if the Supermajority Bylaw is non-preclusive, the Shorewood board has
failed to meet its burden in showing that it was a proportionate response to the
threat posed by Chesapeake. The “Supermajority Bylaw is an extremely
aggressive and overreaching response to a very mild threat. The board already had
a poison pill in place that gave it breathing room and precluded the Tender Offer.”
[Note accord with Kahan].
“The Shorewood board adopted the Supermajority Bylaw as a way of reducing
the voting power of Chesapeake and Ariel…By doing so it treated those votes as
less equal than others and acted to impede Chesapeake‟s voting
power….Compounding this intentional impairment of the franchise was the
defendants‟ decision to apply a very different standard to their own self-interest
than they did to that of Chesapeake and Ariel.” The mild threat Chesapeake‟s all
cash all shares offer and supporting consent solicitation does not provide a
compelling justification for the Bylaw.
The court sees no reason to reach, but does not reject Chesapeake‟s argument that the
Supermajority Bylaw is also invalid under Schnell v. Chris-Craft.
This holding is not at odds with Unitrin
Here Chesapeake would have needed 88% of the disinterested vote to succeed in
its consent solicitation, and in Unitrin, AG would have only needed 64.12% o of
the disinterested vote to change the Unitrin board.
The substantive coercsion rationale is even less credible here since the facts don‟t
bear out the rationale (only 1% have tendered; defendants‟ testimony about the
- 40 -
company‟s sophisticated stockholder and analyst base and management‟s
credibility with that base
Unlike here, the Unitrin board member stockholders were disinterested.
The level of attention the Shorewood board paid to the relevant issues was grossly
The court does not reach Chesapeake‟s argument that a board of directors may not, by
bylaw, require a supermajority vote to amend the bylaws.
The defendants do not have a vested right to serve out the remainder of their terms as
directors by virtue of DGCL 141(k) (prohibiting the removal directors on classified
boards without cause) since:
The shareholders have the authority to amend the By-laws to eliminate the
classified board under DGCL §109 and once they do that, the directors will no
longer be on a classified board.
That reading of 141(k) is the one most consistent with protection of the
stockholders‟ right to determine the board structure by which they wish the
corporation to be governed. §141(d) makes it clear that this is within the province
By virtue of §109, directors were on notice that the bylaws could be amended to
eliminate the classified board.
141(k) does provide some protection to directors under this reading: it protects
them from being singled out to be removed w/o cause.
Had the Shorewood board wanted greater security it could have put the classified
board provision in the Charter.
The tender offeror‟s agreement with the largest shareholder did not make the offeror
owner of 15% or more of the company‟s stock and therefore did not make the offeror
an interested stockholder for the purposes of DGCL §203.
The Agreement left Ariel to vote as it chose.
While it did have an incentive to vote for a majority transaction that yielded more
than the $17.25 over preferring a an independent strategy that would lead to a
higher share price down the line than that being offered by the majority
transaction, it was always in its best interest (when choosing between majority
transactions) to vote for the most valuable majority transaction.
Given the broad language of DGCL §203 it is plausible that an agreement could
create such substantial economic incentives or the seller with respect to purchased
shares that the agreement could constitute an “agreement, arrangement, or
understanding for the purpose of…voting” other shares still held by the seller. But
for that to be the case, there should be evidence showing that “the agreement
renders it economically irrational for the seller to, in almost all likely
circumstances, do anything other than vote his remaining shares in lockstep with
“Because §203 has the practical effect of disenfranchising parties found to be
"interested" under its terms, this court should be hesitant to strain the statute's
language to cover situations that do not threaten the interests the statute was
designed to protect. Seeing no such threat here, I decline to extend §203 reach.”
- 41 -
Even if the Ariel agreement violates §203, by the agreement‟s terms the practical
effect will be to reduce to the number of purchased shares sufficient to stratify §203
(at most reduced to none).
Lesson Put the staggered board in the charter
Strine is anti-substantive coercion
Strine Unitrin‟s suggestion that after a board passes Unocal the BJ rule applies and
after the Board fails Unocal it can go to entire fairness is absurd. If you pass Unocal,
you‟ll pass BJ. If you fail Unocal, you‟ll fail entire fairness (maybe can fail
reasonably perceived threat and get entire fairness, but can‟t fail proportionality and
get entire fairness).
Would have been a smart move for Skadden to drop supermajority provision down to
lower than 60%.
Quickturn Design Systems v. Mentor Graphics (Del. 1998)
Quickturn‟s board consists of 8 outside independent directors only. Quickturn and
mentor have a pending patent suit in which Quickturn is asserting a patent
infringement damage claim of $225 million. Mentor began exploring the possibility
of acquiring Quickturn b/c if it owned Quickturn, it would own the patents and could
end the litigation.
On August 12, 1998, after a decline in Quickturn‟s stock price, Mentor announced an
all cash all shares TO at $12.125 per share (a 50% premium over Quickturn‟s pre-
offer share price and a 20% discount from Quickturn‟s February 1998 stock price
levels) and its intention to do a second step merger at the same price. Mentor also
announced its intent to solicit proxies to replace the board at a special meeting.
Between August 13, 1998 and August 21, 1998 the Quickturn board met three times,
heard from financial advisors and legal advisors and considered the Mentor offer at
length, before deciding to recommend that shareholders reject Mentor‟s options. At
the August 21, 1998 meeting, the board also adopted 2 defensive measures.
A by-law amendment Quickturn had a bylaw that permitted stockholders
holding 10% or more to call a special stockholders‟ meeting. Quickturn amended
this by-law to provide if such a special meeting is requested, the Quickturn would
fix the record date for, and determine the time and place of the meeting, which
must take place not less than 90 days and not more than 100 days after the receipt
and determination of the validity of the shareholders‟ request.
An amendment to its rights plan replacing its “dead hand” feature with a deferred
redemption (“no hand”) provision, under which no newly elected board could
redeem the Rights Plan for 6 months after taking office, if the purpose or effect of
the redemption would be to facilitate a transaction with an “interested person” (a
person who proposed, nominated or financially supported the election of the new
directors to the board).
B/c the bylaw would delay a shareholder called special meeting for at least 3
months and the DRP would delay the ability of the a newly elected board to
redeem the pill for 6 months, the combined effect of these defenses would be
to delay an y acquisition of Quickturn by Mentor for at least 9 months.
- 42 -
During the course of the chancery court proceedings, the Quickturn board, relying
on the new bylaw, noticed the special meeting requested by Mentor for January 8,
1999, 71 days after the October 1, 1998 meeting day originally noticed by
Mentor. Mentor also received shares together with the shares it already owns
brings its holdings of Quickturn to 51%.
Chancery Court’s Holding
The bylaw amendment was not a disproportional response to the reasonably
perceived threat of mentor‟s offer under Unocal. The amendment merely
supplemented a bylaw that was formerly incomplete. The former version would have
allowed a hostile bidder holding the requisite percentage to call as special meeting
with minimal notice and stampede the shareholders into making a hasty and
uninformed decision). The amendment brought that by-law in line with Quickturn‟s
advanced notice by-law which similarly required a 90-100 day minimum advanced
Mentor did not file a cross-appeal challenging this issue, so this ruling is final.
The no-hand pill is in invalid. (this issue is being appealed)
Held that the by law amendment governing the time of special stockholder meetings was
is valid but the slow hand poison pill is invalid b/c like the dead hand pill found to be
invalid in Toll Brothers, it will impermissibly deprive any newly elected board both of its
statutory authority to manage the corporation under DGCL §141(a) and its concomitant
fiduciary duty. Affirmed.
“In Revlon, this Court held that no defensive measure can be sustained when it
represents a breach of the directors' fiduciary duty. A fortiori, no defensive measure
can be sustained which would require a new board of directors to breach its fiduciary
duty. In that regard, we note Mentor has properly acknowledged that in the event its
slate of directors is elected, those newly elected directors will be required to discharge
their unremitting fiduciary duty to manage the corporation for the benefit of
Quickturn and its stockholders.”
Black and Kraakman, Van Gorkom and the Corporate Board: Problem, Solution, or
Placebo?, Nw. U. L. Rev. 512.
Authors explain DE takeover law though hidden value theory (there‟s value that the
board knows and no one else does – e.g. shareholders and potential acquirers don‟t know)
which was first introduced in Van Gorkom, rather than the control premium theory which
they say offers little use in justifying DE‟s core takeover cases.
“Van Gorkom's surface message--that a board planning to sell its company must
diligently seek the best price for shareholders--is the same message that Revlon
reiterates and refines. The subtext of Van Gorkom, however, is that the board of
directors, and no one else, must determine the company's intrinsic value. The board
cannot rely on shareholder approval to discharge its duty, nor may it rely principally
on prices set by the stock market or the takeover market. Because others may miss the
company's hidden value, the board must value the firm itself, preferably with an
investment banker's assistance. The importance that Van Gorkom places on the
board's efforts to value the firm sets the stage for the hidden value model and the
three principal pillars of Delaware's current law of corporate takeovers: deferential to
a board's decision not to sell the company and install takeover defenses, yet willing to
closely examine the board's decision to sell the company for cash, yet again
- 43 -
deferential (by pretending that the company is not being sold) if the board sells the
company for stock instead of cash.”
The hidden value model can explain why Revlon should not apply to a merger of
equals, but should apply when a large company buys a smaller target, using its stock
Under the control premium theory if a an acquirer buys 100% of the stock of the
target with its stock, there is no change of control; But if the same acquirer only
acquires 98%, Revlon should apply (but its not clear whether it does), even
thought the viewed ex ante from the shareholders‟ perspective, the two
transactions are almost identical.
Contexts in which Revlon should apply, either b/c hidden value is unlikely, or b/c only an
implausible amount of hidden value can justify the board‟s decision.
Cash sales cash is cash (no hidden value); a board must always prefer more cash
over less cash.
Sales for cash and stock ambiguous, but as the cash component becomes
larger, the boards claim of hidden value diminishes.
Change in control transactions (cash or non-cash) The main idea is that if there is
no controlling shareholder, long-term shareholders will receive hidden value in due
time through a future takeover or ordinary business activities.
This same logic implies that Revlon should apply when a diffusely held acquirer
buys a controlling, but less than 100% interest in a target company and pays with
its own shares (Del courts have not yet considered this). [Also, seems unlikely
if the acquirer did this through a TO, such a TO would seem to be considered
coercive and the target board would be justified in using strong defenses]
Leveraged recapitalization and break up of the target
Hidden value likely to be low; shareholders will only benefit from the hidden
value in the unsold portion of the business and, since by breaking up the company
management is already conceding that their business plan has failed, what hidden
value there is likely to be small and go undetected by management.
Whale minnow mergers since the minnow‟s shareholders will receive only a small
fraction of any hidden value that arises from the minnow‟s stand alone value or
How much hidden value is plausible? According to the authors, claims that a 10-20%
premium undervalues the target can sometimes be plausible, while a claim that a 50-
100% premium undervalues the target is usually implausible.
The authors say that they prefer the visible value theory (“We prefer imperfectly
informed but unbiased shareholder decisions to better informed but sometimes biased
decisions by target boards”), which implies a larger governance roles for shareholders
and the takeover market, since the hidden value theory is based on faulty assumptions.
That the quality of the board‟s private information is very good
That the board is unable to communicate that information to shareholders and
That the magnitude of the boards private information is often very large
Hidden value can remain hidden for long periods of time
Boards are trustworthy, more so than shareholders believe
- 44 -
An investment banker‟s opinion is a credible check on the target board‟s claim of
Hidden value often cannot be captured in the takeover market
Long-term shareholders and short term shareholders have different interests and the
interests of long term shareholders should control
The interest of undiversified investors count less than those of diversified investors
(diversified investors care much less about hidden value since in the long run, they
are as likely to be acquirers and as they are to be targets).
They then propose a “second best” option (to switching to a visible value paradigm) that
board needs to get shareholder approval to make a final rejection of a bid.
Authors don‟t think this is radical, but Strine thinks it is. Stockholders don‟t have a
right to force a vote on fundamental transactions under DE law. They simply have a
right to ratify (or reject) board‟s decision.
Counter Argument now DE law says nothing about TOs; under the default
rules of DE law, shareholders have open access to TOs. Its only when board of
directors put of defenses that alter the default rules that shareholders don‟t have
unfettered access to TOs.
This theory would allow shareholders to vote on TOs (which is not provided for
under Delaware law now).
Controlling Stockholder Mergers I
Kahan v. Lynch Communications Systems (Del. 1994)
Lynch is a DE corporation in the business of telecommunications. Alcatel is a holding
company, affiliated with companies in the telecommunications business.
In 1981 Alcatel acquired 30.6% of Lynch‟s common stock pursuant to an SPA. As
part of that agreement Lynch amended its cert of inc to require an 80% affirmative
vote of its shareholders for approval of any business combination. The agreement also
prohibited Alcatel from holding more than 45% of Lynch‟s outstanding sock prior to
October 1, 1986.
By the time of this contested action, Alcatel owned 43.3% of Lynch‟s outstanding
stock; designated 5 of the eleven members of Lynch‟s board; two of the three
members of the executive committee; and two of the four members of the
In the spring of 1989 Lynch determined it needed a merger partner to remain
competitive. Management identified Telco Systems as a possible target. Because of
the supermajority provision, Lynch could not proceed with a combination with Telco
Systems w/o Alcatel‟s consent. Lynch‟s CEO and Chairman approached Alcatel‟s
parent company about this. The parent company said it opposed the merger and
suggested that Lynch merge with Celwave, an affiliate of Alcatel.
At a regularly scheduled board meeting on August 1, 1986, several directors
expressed interest in the Teleco combination, but the Alcatel representatives on the
board made it clear that such a transaction would not be considered before a
Lynch/Celwave combination. The board formed an independent committee to
negotiate with Celwave.
- 45 -
The independent committee‟s bankers felt that the price the board‟s bankers had come
up with was too low and on October 31, 1986, the independent committee
unanimously opposed the Celwave merger.
On November 4, 1986, Alcatel withdrew the Celwave proposal and made an all
shares all cash offer for the remaining 57% of Lynch for $14/share.
On November 7, 1986, the Lynch board revised the mandate of the independent
committee, authorizing it to negotiate a cash merger with Alcatel.
The independent committee decided that the $14/share was inadequate and its legal
advisors (Skadden) suggested that they review alternatives to a cash out merger with
After some negotiation between the independent committee and Alcatel, Alcatel
raised its offer to $15.50 per share.
At the November 24, 1986 meeting of the independent committee, one of the three
members (Beringer) advised the other two that if the committee did not recommend
(and the board did not approve) the $15.50/share price, Alcatel would proceed with
an unfriendly TO at a lower price. Beringer also advised other members of the
independent committee that the alternatives to a cash out merger with Alcatel that had
been investigated were impracticable (white knight would be blocked by Alcatel due
to supermajority provision; repurchase of Alcatel‟s shares would mean too much
debt; a shareholder rights plan would mean too much debt). The committee
unanimously decided to recommend the $15.50/share deal and the Lynch board (with
the Alcatel members abstaining from the vote) approved the merger with Alcatel.
[Note: not clear why they thought a shareholder rights plan would cause Lynch to
A shareholder owes a fiduciary duty only if it owns a majority interest in OR
exercises control over the business affairs of the corporation. Ivanhoe Partners v.
Newmont Mining Corp. (Del. 1987).
Alcatel owned only 43.3 % of Lynch but exercised control over (dominated)
Lynch‟s business, so it fiduciary duties to the other Lynch shareholders.
An Alcatel director opposed renewal of compensation contracts for 5
managers saying that the board had to listen b/c Alcatel was a 43.3%
shareholder. Alcatel also vetoed the merger with Teleco, saying that it did not
wish to be diluted as the main shareholder.
A controlling or dominating shareholder standing on both sides of a transaction, in a
parent subsidiary context bears the burden of proving its entire fairness. Weinberger
v. UOP (Del 1983).
“The concept of fairness has two basic aspects: fair dealing and fair price. The
former embraces questions of when the transaction was timed, how it was
initiated, structured, negotiated, disclosed to the directors, and how the approvals
of the directors and the stockholders were obtained. The latter aspect of fairness
relates to the economic and financial considerations of the proposed merger,
including all relevant factors: assets, market value, earnings, future prospects, and
any other elements that affect the intrinsic or inherent value of a company's stock.
However, the test for fairness is not a bifurcated one as between fair dealing
- 46 -
and price. All aspects of the issue must be examined as a whole since the question
is one of entire fairness.” (emphasis added)
Two things can shift the burden to the plaintiff to prove entire un-fairness (e.g. burden
of persuasion is shifted) (1) an affirmative vote of the majority of the minority
shareholders; (2) the negotiation of the deal/approval of a truly independent board
The mere existence of an independent special committee does not itself shift the
burden. At least two factors are required. (1) the majority shareholder must not
dictate the terms of the merger (2) the committee must have real bargaining power
that it can exercise with the majority shareholder on an arms length basis.
Note that burden of persuasion only really matters when the decision maker is
Here the court finds that the committee wasn‟t truly independent.
The real bargaining power of the independent committee was suspect from
the outset since the committee acceded to Alcatel‟s demands to abandon
the Teleco deal and look at Celwave at the August 1, 1986 meeting.
While the committee effectively discharged their fist task, rejecting a
merger with Celwave, in their second task they failed in that they accepted
a price from Alcatel that they belied was unfair b/c they believed that there
was no alternative. Although the committee successfully rejected the first
3 Alcatel offers, its ability to successfully negotiate at arms length was
compromised by Alcatel‟s threats to proceed with a hostile TO at a less
Independent committee can‟t use “no alternative” as an excuse for
accepting an unfair price.
“Although perfection is not possible, unless the controlling or
dominating shareholder can demonstrate that it has not only formed an
independent committee but also replicated a process as though each of
the contending parties had in fact exerted its bargaining power at arm's
length," the burden of proving entire fairness will not shift.”
There was this threat in the background of an ultimatum that if Lynch
didn‟t accept, Alcatel would do a hostile deal at a lower price (through
TO). The fact that the independent director rejected previous bids from
Alcatel and the contention that Alcatel wasn‟t truly prepared to go forward
with the hostile transaction, don‟t change that.
Court rejects the idea that the either of these two things could shift the standard
from entire fairness to BJR b/c minority shareholders may be coerced by the idea
that majority shareholders can do things like stop paying dividends or effect a
cash out merger on less favorable terms etc. Basically there is inherent coercion in
“Consequently, in a merger between the corporation and its controlling
stockholder--even one negotiated by disinterested, independent directors--no
court could be certain whether the transaction terms fully approximate what
truly independent parties would have achieved in an arm's length negotiation.
Given that uncertainty, a court might well conclude that even minority
shareholders who have ratified a ... merger need procedural protections
- 47 -
beyond those afforded by full disclosure of all material facts. One way to
provide such protections would be to adhere to the more stringent entire
fairness standard of judicial review.”
The exclusive standard of judicial review in examining propriety of an interested,
cash-out merger transaction by a controlling or dominating shareholder is entire
fairness. While having a majority of the minority vote OR negotiation of the deal by a
truly independent committee will shift the burden π to prove unfairness, neither will
result in BJR protection.
Here the committee wasn‟t truly independent so the burden of proof never shifted
Strine points out that you can either have a majority of the minority shareholders vote
or a truly independent shareholder vote but the controlling shareholder doesn‟t get
anything extra for doing both. Why still hold the controlling shareholder to entire
fairness (with burden shift)?
The lesson for this case is that Alcatel should have never gone to the board. It should
have just done a hostile TO.
This is good for minority shareholder plaintiffs defendant majority shareholders
are likely to settle b/c they have a high burden. You don‟t just need to prove that there
were independent directors you need to prove that they had real bargaining power
etc. In a normal derivative suit if you prove the there is a majority of independent
directors, normally case is dismissed. These are non-dismissible cases.
Settlement value is created whenever there is going to be discovery
Kahn is an oft suing shareholder
Glassman v. Unocal Exploration Corporation (Del. 2001)
Unocal owned 96% of Unocal Exploration Corporation. In December 1991 Unocal
and UXC formed special committees and negotiated a merger. The members of the
UXC special committee were Unocal directors but were not officers or employees of
Unocal. The UXC committee retained financial advisors and met 4 times before
agreeing to an exchange ratio of .54 Unocal shares for every 1 UXC share. Following
parent corporation‟s (Unocal‟s) “short form” (DGCL §253) merger with its subsidiary
(Unocal Exploration Corporation), the subsidiary‟s minority shareholder filed a class
action, alleging that the parent and its directors had breached their fiduciary duties of
entire fairness and full disclosure.
In a short-form merger, the parent corporation does not have to establish entire
fairness, but the duty of full disclosure remains.
Absent fraud or illegality, the only recourse for a minority shareholder who is
dissatisfied with consideration resulting from a DGCL 253 merger is appraisal.
§253 does not require any dealing at all, so the fair dealing prong of entire
fairness cannot be satisfied. The only thing left is fair price and that can examined
in an appraisal action.
Here the merger prospectus did not obtain any material misstatements or
omissions (no fraud).
- 48 -
“we also reaffirm Weinberger‟s statements about the scope of appraisal. The
determination of fair value must be based on all relevant factors, including
damages and elements of future value, where appropriate. So, for example, if the
merger was timed to take advantage of a depressed market, or a low point in the
company's cyclical earnings, or to precede an anticipated positive development,
the appraised value may be adjusted to account for those factors.”
Solomon v Pathe Communications (Del. 1996)
Credit Lyonaise Banque Netherlands lent $ to Pathe to acquire MGM. Loan was
secured by 89% Pathe stock and 98% of MGM stock. As a part of this transaction,
CLBN also acquired the right, under two voting agreements, to vote 89.5% of Pathe
stock and substantially all of MGM shares. There was a dispute/default and CLBN
foreclosed on the collateral. To speed this up CLBN made a public TO for Pathe for
$1.50 per share on May 1, 1992. It then initiated a foreclosure, saying that the
foreclosure would take place on May 7, 1992. πs (stockholders of Pathe) sued CLBN
claiming the TO ws coercive and that as a controling shareholder, CLBN of Pathe and
MGM, CLBN breached its duty of loyalty to Pathe minority shareholder and that the
Pathe board was under the control of CLBN and that it exhibited impropriatee by not
retaining independant financial advisors and assuring that no coflict of iterest existed.
Chancery court is affirmed; π‟s complaint is dismissed on the grounds that it failed to
state a claim upon which relief can be granted (Rule 12(b)(6).
“In the case of totally voluntary offers, as here, courts do not impose any right of the
shareholders to receive a particular price”
“[T]he determinative factor as to voluntariness is whether coercion is
present, or whether there is materially false or misleading disclosures made
to shareholders in connection with the offer. A transaction may be considered
involuntary, despite being voluntary in appearance and form, if one of these
factors is present. There is no well-plead allegation of any coercion or false or
misleading disclosures in the present case, however.”
The amended complaint “focuses mainly on conclusory allegations that
coercion was present.”
Independent committee plus the majority of a minority doesn‟t get controlling
shareholder out of entire fairness (Lynch), but a Tender offer does (Solomon) and
following the TO, the controlling shareholder can do a short form merger under
DGCL §253 which also doesn‟t fall under entire fairness. [check DGCL 203]
Shareholders are more likely to vote their views then express their views through
TO. In TO they are afraid that if they don‟t tender, they will be left out. What if
acquirer just leaves them in at 6% and the stock price goes down. Fear of being
stuck as stub equity.
Tough legal rules that say if controlling shareholder does it right (independent
committee and majority of the minority), minority shareholders have a non-
dismissible case with settlement value. Then Solomon says controlling shareholder
- 49 -
can do a TO and not run into any of these problems and then do DGCL 253 lets you
do a squeeze out minority.
Strine notes that it might be better if majority shareholder was required to do the
short form merger in the case of the TO b/c it prevents equity stub problem, which
is what coerces shareholders to tender.
But less attractive to do TO if you own less shares TO creates uncertainty
might not get enough shares to do squeeze out.
Note that independent committee and majority of the minority essentially
replicates the §251 merger process e.g. director approval then shareholder
SC has information and overcomes collective action problems of
shareholders (e.g. it can bargain).
MOM keeps check on SC; It would be embarrassing for them to
recommend if shareholders then voted it down.
DGCL §144 Basically says that if you have independent stockholders approving,
independent directors approving, or you prove that the transaction was fair, then, a
interested party transaction won‟t be voidable (court won‟t step in and reverse the
transaction because of the interestedness) on the ground that there were interested parties.
This statute has been held to have nothing to do with fiduciary duty even if you satisfy
§144, you can be Khan v. Lynched.
What regulation should there be of tender offers?
Disclosure property view of corporation. If shareholders have the relevant
information, they should be able to decide what to do with their shares. The
corporation belongs to them.
Kahn v. Lynch doesn‟t put much faith in independent committees or shareholders; then in
the TO context, Solomon says that the shareholders can decide for themselves.
Strine suggests two options; which do you prefer?
All cash all shares with promise to do back end or
Possible under DE law
Special Committee and Majority of Minority
Not going to be done b/c still need have entire fairness standard under DE law.
Strine suggests that Majority of Minority will insure that shareholders don‟t get a
horrible price, but in order to get a really good price, you need the special
committee b/c they are the ones who can negotiate.
Controlling Stockholder Mergers II
In re Siliconix Incorporated (Del. Ch. 2001)
Vishay owns 80.4% of Siliconix.
On February 22, 2001, Vishay announced an all cash TO for the remaining 19.6% of
Siliconix for $28.82 per share. It also announced that if it obtained over 90%, it would
consider a DGCL §253 merger for the same price. Vishay made no effort to do a
valuation of Siliconix; it determined the offer price by adding 10% to the market
price. The offer price was a 20.1% discount from Siliconix average closing price for
the 6 months preceding the announcement.
- 50 -
In response, the Siliconix board formed a special committee consisting of two
directors who had done extensive work with Vishay and were friends of Vishay
management. The committee members were to be paid a fee of $50,000 with an
additional special fee to be determined later (not clear whether this fee was designed
to be an incentive to agree with Vishay). The special committee retained independent
legal and financial advisors. The special committee met regularly with its advisors
and determined that $22.82/share was not a fair price for Siliconix and told Vishay
that price was inadequate. The special committee‟s financial advisors suggested that
they would endorse an offer in the $34 to $36 range.
On May 25, 2001, Vishay commenced an exchange offer (w/o approval of the special
committee) consisting of 1.5 shares of Vishay for every share of Siliconix (Unlike the
February 22 offer, no premium). Vishay‟s offer contained a non-waivable majority of
the minority provision providing that Vishay would not proceed with its tender offer
unless a majority of those stockholders not affiliated with Vishay tendered. Vishay
also noted that it intended to do a DGCL §253 merger following the TO, but that it
was not required to do so and that it might not do so.
On June 8, 2001, Siliconix filed its Schedule 14D-9 with the SEC on which it
reported that the special committee had decided to remain neutral with respect to the
TO. The special committee never requested that its financial advisors prepare a
fairness opinion as to the exchange offer.
πs are moving for a preliminary injunction to stop Vishay‟s TO thought its wholly
owned subsidiary for the 19.6% of Siliconix it doesn‟t already own. πs claim that the
Δs‟ disclosures to the minority shareholders contained materially misleading facts,
that the offer price is unfair, and that because of disclosure violations and the coercive
nature of the TO, Δs cannot prove fairness in price. Finally, as a result of the alleged
breaches in fiduciary duty and oppressive structure of the proposed TO, πs argue that
the TO must be judged under the entire fairness standard.
“In responding to a voluntary tender offer, shareholders of Delaware corporations are
free to accept or reject the tender based on their own evaluation of their best
interests…. However, this Court will intervene to protect the rights of the
shareholders to make a voluntary choice. The issue of voluntariness of the tender
depends on the absence of improper coercion and the absence of disclosure
violations. Thus, "as a general principle, our law holds that a controlling shareholder
extending an offer for minority-held shares in the controlled corporation is under no
obligation, absent evidence that material information about the offer has been
withheld or misrepresented or that the offer is coercive in some significant way, to
offer any particular price for the minority-held stock."
“In short, as long as the tender offer is pursued properly, the free choice of the
minority shareholders to reject the tender offer provides sufficient protection.”
When it comes to TOs, controling sharheolders do not have to demonstrate
entire fairness unless coercion or dislcosure violations are shown.
The Siliconix shareholders can reject the offer, but if the TO is successful then and
the short-form merger accomplished, then except for the passage of time, the rejecting
shareholders will end up in the same position as if they had tendered not coercive.
- 51 -
[But what if the short form merger isn‟t accomplished? That may not matter so
much here b/c the “minority” shareholders were already a numerical minority, but
what if the controlling shareholder formerly owned only 35% and the TO brought
it up to 90%?]
Why treat controlling shareholder TO differently than controlling shareholder
Accepting or rejecting a tender is a decision to be made by the individual
shareholder, and at least as to the tender itself, he will, if he rejects the tender, still
own the stock of the target company following the tender.
The acquired company in the merger context enters into a merger agreement, but
the target company in the tender context does not confront a comparable corporate
decision because the actual target of a tender is not the corporation (or its
directors), but, instead, is its shareholders. Mergers must be approved by the
board under DGCL §251, but TOs don‟t. TOs involve the sale of the
shareholder’s separate property which even when aggregated into a single
change of control action does not require corporate action and does not
involve distinctively corporate interests.
In McMullin v. Beran (Del. 2000) the court found that a target board in the context of
a controlling shareholder merger:
Has an affirmative duty to protect the minority shareholders‟ interests
Cannot abdicate that duty by leaving it to the shareholders alone how to respond
Has a duty to assist the minority shareholders by ascertaining the subsidiary‟s
value as a going concern so that the shareholders may better be able to assess the
acquiring party‟s offer, and, thus, to assist in determining whether to pursue
But the court noted that these were duties imposed by DGCL §251
To the extent that McMullin can be read to require that the subsidiary board guild the
majority shareholders in their decision on whether to accept or reject a controlling
shareholder TO, there may still be circumstances where there is no answer as to
whether to reject of accept. But regardless of whether the special committee had an
obligation to make a recommendation, on the Siliconix board disclosed the reasons
for the special committee not passing on the TO in its 14D-9, it had a duty to make
those disclosures filly and completely.
A majority stockholder tendering for the minority’s shares has a fiduciary duty
to disclose accurately all material facts surrounding the offer. The significance of
that is enhanced where, as here, the acquiring company effectively controls the
acquired company. The plaintiff has the burden of proving materiality.
The court then went through the contested disclosures in the registration statement
and found that π did not meet it bureden of materially mileading on any of them.
Of the fact that Vishay did not disclose the basis for the price it was offering, the
court said that “When a tender offeror is not under a duty to offer a “fair” price, it
is unclear why the offeror must reveal the basis for its pricing proposal.” But
found that in any event that was not the type of info that was likely to influence
the shareholder‟s decision not to tender.
- 52 -
The court says that the fact that Lehman had given a preliminary estimate of
Siliconix‟s value as being over $34 was not material since the number was
The fact the registration statement and the 14D-9 say simply that the special
committee members had a prior business relationships with Vishay and did not
disclose their friendships with Vishay executives or a limited amount a business
Vishay now does with one of their employers does not rise to the level of
materiality. Personal friendship is not an indication of disloyalty.
While more focus on the relative weight of the various factors that went in to the
special committee‟s decision not to make a recommendation would have been
helpful, the disclosure in the 14D-9 is not incomplete.
The timing of the offer (to take advantage of Siliconix‟s low mkt price) does not
make it coercive; although there may be circumstances in which the timing of an offer
could be deemed coercive because of market conditions.
The failure to commit to a second step merger is not coercive. [Really? What if
Vishay was going from being a 30% controlling shareholder to being a 90%?]
The threat of delisting is not coercive b/c the registration statement says that Vishay
intends to cause delisting following the completion of the TO AND the short form
merger; and that Siliconix “could be” delisted if the tender offer is completed but the
short form merger is not carried out. Another sections then explains the reasons for an
consequences of delisting. If there is a short form merger, there will be no public
stockholders to be effected by the delisting and the “could be” delisted statement is
not threatening or coercive but instead, it is the disclosure of a potential (adverse)
consequence to those shareholders who do not tender if the TO is successful.
“In some sense, Fitzgerald laments the position of a minority shareholder in a
corporation where one shareholder controls more than 80% of the stock. If the tender
is successful and he does not tender, Fitzgerald will either be a member of an even
smaller minority or his stock will be the object of a short-form merger that will divest
him of his pure stake in Siliconix. Perhaps these circumstances are not happy ones,
but they are allowed by law and inherent in the nature of his holdings and, thus, while
perhaps encouraging him to tender, do not constitute actionable coercion.”
Held that because there were no disclosure violations and the TO is not coercive,
Vishay was not obligated to offer a fair price in its TO.
In re Pure resource, Inc. Shareholders Litigation (Del. Ch. 2002) (Strine)
Unocal owns 65% of Pure Resources; The lead π is a large stockholder in Pure; πs
seek to enjoin Unocal‟s pending exchange offer through which it hopes to acquire the
rest of Pure‟s shares in exchange for shares of its stock.
At the time Unocal became a stockholder it also secured an anti-dilution agreement, a
Business Opportunities Agreement (limiting Pure‟s business to certain areas but
placing on reciprocal limitation on Unocal) and a voting agreement requiring
Hightower (Pure‟s largest stockholder other than Unocal (6.1%) and board member
and CEO) and Unocal to elect 5 Unocal designees, 2 Hightower designees, and one
joint designee to the Unocal board.
- 53 -
During the summer of 2001, Unocal explored the feasibility of acquiring the rest of
Pure. On August 20, 2002 Unocal sent a letter to the Pure Board out lining a proposed
exchange offer. Before this the Pure Board had been considering another transaction
called the Royalty Trust (which concerned Unocal for several reasons including that it
would have inflated management‟s put options without increasing the market price of
pure shares it would have complicated any acquisition of the rest of Pure by Unocal).
In response, the pure board formed a special committee comprised of two outside
directors with no material ties to Unocal (one was a Hightower designee and one was
the joint designee). The special committee retained legal and financial advisors. The
powers of the special committee were not clear but it seemed to have the power to
retain advisors, take a position on the advisability of Unocal exchange offer, and
negotiate with Unocal to see if it would increase its bid.
Unocal then commenced the exchange offer which had the following key features:
An exchange ratio of 0.6527 of a Unocal share for each Pure share.
A non-waivable majority of the minority tender provision, which required a
majority of shares not owned by Unocal to tender. Management of Pure, including
Hightower and Staley, are considered part of the minority for purposes of this
condition, not to mention Maxwell, Laughbaum, Chessum, and Ling.
A waivable condition that a sufficient number of tenders be received to enable
Unocal to own 90% of Pure and to effect a short-form merger under 8 Del.C. §
A statement by Unocal that it intends, if it obtains 90%, to consummate a short-
form merger as soon as practicable at the same exchange ratio.
At this point the special committee sought clarification of its authority. It wanted to
have full authority of the board under DE law to respond to the offer (which it could
have used to look for alternative transactions, to speed up the implementation of the
royalty trust, to evaluate the feasibility of a self tender, or to put a poison pill in
place). In response the Unocal nominees on the Pure Board took the lead in making
sure that the special committee‟s powers were limited to studying the exchange offer,
negotiating it, and making a recommendation on behalf of Pure in the required 14D-9.
The court notes that it‟s not clear why the special committee didn‟t stand up to
this. They seemed to think that their ability to put in a poison pill was limited by
Unocal‟s anti-dilution agreement but the court doesn‟t see why a rights plan
designed to keep stockholders at the same level of ownership would violate an
antidilution agreement. The court also notes that its ability to have confidence in
such justifications is weakened by the special committee‟s decision to invoke
attorney client privilege as to the discussions of these issues.
The court finds that the most reasonable inference to be drawn from the record is
that the special committee was unwilling to confront Unocal as aggressively as I
would have confronted a third party bidder.
Following this the special committee met and met with Unocal on a number of
occasions, but Unocal refused to increase its offer.
On September 17, 2002 the Special Committee voted not to recommend the offer
based on its analysis and the advise of its financial advisors. Hightower and Stanley
(another board member) both announced their intention not to tender; if they didn‟t
tender it would be almost impossible for Unocal to get 90%.
- 54 -
Of the fact that TOs by controlling stockholders followed by §253 mergers are treated
one way under DE law and §251 mergers with controlling stockholders are treated
differently under DE law, the court says: “This disparity in treatment persists even
though the two basic …pose similar threats to minority stockholders. Indeed, it can be
argued that the distinction in approach subjects the transaction that is more protective
of minority stockholders when implemented with appropriate protective devices--a
merger negotiated by an independent committee with the power to say no and
conditioned on a majority of the minority vote--to more stringent review than the
more dangerous form of a going private deal--an unnegotiated tender offer made by a
majority stockholder. “The latter transaction is arguably less protective than a merger
of the kind described, because the majority stockholder-offeror has access to inside
information, and the offer requires disaggregated stockholders to decide whether to
tender quickly, pressured by the risk of being squeezed out in a short-form merger at
a different price later or being left as part of a much smaller public minority. This
disparity creates a possible incoherence in our law.”
The court also notes that the while inherent coercion of the §251 merger discussed in
Lynch (that ex ante minority shareholders will fear retribution from the controlling
stockholder ex post) may still be present in the TO context “it is not even a
cognizable concern for the common law of corporations if the tender offer method is
employed.” In fact a TO may be even more coercive than a §251 merger b/c in a
merger, if the stockholder votes against, he still receives the merger consideration if
the merger succeeds, but an non-tendering shareholder in a TO risks holding an even
more thinly traded stock or being subject to a §253 merger at a lower price or at the
same price but at a later date (which given the time value of money effectively means
a lower price).
The court notes that there is a line of cases that say a controlling shareholder TO is
not coercive if (1) it has a majority of the minority condition and (2) it promises to
consummate a short form merger on the same terms as the TO. See e.g. In re Acquilla
(Del. Ch. 2000), but that that same protection is insufficient to displace entire fairness
review in a negotiated merger context.
The mere fact that the DGCL contemplates no role for target boards in TOs does not,
by itself, prevent the board from impeding the consummation of TOs through the use
of extraordinary defensive measures.
“In this same vein, the basic model of directors and stockholders adopted by our M &
A case law is relevant. Delaware law has seen directors as well- positioned to
understand the value of the target company, to compensate for the disaggregated
nature of stockholders by acting as a negotiating and auctioning proxy for them, and
as a bulwark against structural coercion. Relatedly, dispersed stockholders have been
viewed as poorly positioned to protect and, yes, sometimes, even to think for
Since TOs are not treated exceptionally in the third party context, why should they be
treated differently in the context of a controlling shareholder? Unocal answered this
by saying that in a merger the controlling shareholder is on both sides, where as in a
TO, the controlling shareholder is on one side and the minority shareholders are on
- 55 -
the other. But the court says that while this is right as a formal matter, it cannot bear
the full weight of the Lynch/Solomon distinction.
“As a general matter, Delaware law permits directors substantial leeway to block the
access of stockholders to receive substantial premium tender offers made by third-
parties by use of the poison pill but provides relatively free access to minority
stockholders to accept buy-out offers from controlling stockholders.”
“In the case of third-party offers, these advocates would note, there is arguably
less need to protect stockholders indefinitely from structurally non- coercive bids
because alternative buyers can emerge and because the target board can use the
poison pill to buy time and to tell its story. By contrast, when a controlling
stockholder makes a tender offer, the subsidiary board is unlikely--as this case
demonstrates--to be permitted by the controlling stockholder to employ a poison
pill to fend off the bid and exert pressure for a price increase and usually lacks
any real clout to develop an alternative transaction.”
The court doesn’t recommend expanding Lynch, but says courts should continue
to adhere to the more flexible approach of Solomon, while giving greater
recognition to the inherent coercion and structural bias concerns that motivate
the Lynch line of cases.
In a footnote the court also recommends easing Lynch to provide BJR when there is
an independent committee and a majority of the minority vote, noting that the would
reduce the risk of litigation and encourage controlling stockholders to go the merger
Legal Rule announced
The court says that a controlling stockholder acquisition should only be considered
non-coercive when: (but in a foot note the court notes that one can conceive of other
It is subject to a non-waiveable majority of the minority provision
The controlling stockholder promises to consummate a §253 merger at the same
price if it obtains more than 90% of the shares [note seems like its not the promise
to do the merger that the court is getting at but the promise to do the merger AT
THE SAME PRICE]
The controlling stockholder has made no retributive threats
[NB: since this is only the chancery court, the question of whether this test
will control is still open]
Majority stockholders have a duty to permit the independent directors both free reign
and adequate time to react to the tender offer by (at the very least) hiring their own
advisors, providing the minority with a recommendation as to the advisability of the
offer, and disclosing adequate information for the minority to make an informed
The independent directors have a duty to undertake these tasks in good faith and
diligently, and to pursue the best interests of the minority.
(1) the controlling stockholder‟s offer is coercive in its present form
It includes within the definition of the minority (for the purposes of the majority
of the minority provision) those stockholders who are affiliated with Unocal as
officers and directors and the management Pure, whose incentives are skewed by
- 56 -
their employment, their severance agreements, and their put agreements. This
coercive aspect can be cured by changing the condition to require a majority of
Pure‟s non-affiliated stockholders.
It does not follow from the fact that Unocal‟s offer is not altogether non-coercive
that πs have estabished probability of sucess on their claims that the pure board
should have blocked the offer with a poison pill or other measuers. The special
committee was given a free had to recommend against the offer, to negotiate for a
higher price, and to prepare Pure‟s 14D-9.
(2) the fillings submitted by the corporation and its controlling stockholder in
connection with the offer did not fairly disclose material information.
The disclosures required in the S-4 and 14D-9 were those material to the
questions of whether or not the Pure stockholders should tender and whether or
not they should then seek appraisal rights in the event of a DGCL §253 merger.
The 14D-9 fails to disclose any substantive portions of the analysis performed the
Special committee‟s bankers on which the special committee based its
recommendation not to tender. The court notes that there has been some
ambivalence in Delaware law on this subjects but says that it is time that the
question be resolved in favor of “a firm statement that stockholders are entitled to
a fair summary of the substantive work performed by the investment bankers
upon whose advice the recommendations of their board as to how to vote on a
tender or merger rely.”
This disclosure is especially necessary here since the board chose to leave it
up to the stockholders whether to say no as opposed to blocking the TO; if the
board had blocked the TO, then it might make sense not to reveal the i-
bankers work since that could reveal the board‟s reserve price and
disadvantage the board/stockholders in negotiations
The 14D-9 also fails to disclose that the special committee sought broader
authority and was rebuffed, which is a material fact.
The fact that the S-4 says that the Unocal board authorized an exchange at the
exchange ratio when really it authorized a higher ratio is not materially
misleading b/c it in no way implies that Unocal lacks the capacity or willingness
to offer more (but it is untrue). Unocal did not have a duty to disclose its reserve
price in its S-4;
The section of the S-4 listing the key factors motivating Unocal‟s decision to
commence the exchange offer is misleading b/c it leaves out the concern that the
Unocal directors who also served on Pure‟s board could face liability if Unocal
began to compete with Pure in its core areas of operations and the fact that Unocal
was concerned that Pure would purse the Royalty Trust.
Preliminary injunction granted pending an alteration of the offer to cure these 2
The special committee did not breach its fiduciary duties by not seeking the power to
block the bid.
Clements v. Rogers (Del. Ch. 2001) (Strine)
- 57 -
Texas Industries Inc. owned 84% of Chaparral Steel Company. The Chaparral board
consisted of 6 members; 4 of whom were also connected to TXI and two of whom
were outside independent directors.
On May 22, 1997, the TXI approved an offer for a merger with Chaparral (to obtain
the remaining 16% of Chaparral) at $14.25 per share.
The Chaparral board held a special meeting and formed a special committee
composed of the only two outside and independent directors. The special committee
hired legal and financial advisors. Their financial advisors were a small nationally
known firm experienced in the steel industry but which had never advised a steel
company in an M&A transaction.
On June 20, 1997 the special committee met to consider TXI‟s bid and their financial
advisors gave a presentation. Δs argue that the the presentation was not designed to be
a reliable valuation but to give the special committe the leverage they needed to reject
the bid. π (a shareholder) contests this. At this meeting they decided to reject the
$14.25 offer. Notes taken by one of the committee members indicate that the special
committee‟s financial advisors thought that $16 was fair.
TXI‟s bankers and the special commitee‟s bankers met to negotiate the deal (w/oTXI
representatives or the special committee). TXI‟s finally said $15 and the special
committee‟s finally said $16 so they decided to split the difference. There is evidence
that Chaparral‟s bankers indicated that they would give a fairness opinion at this price
and that the special committee would accept this price.
On July 29, 1997 the special committee met and its bankers gave it a considerably
less favorable presentation on Chaparrel‟s value than they had presented on June 20,
1997. The special committee members are unable to recall having considered the
updated work or the fact that it differed from the June 20th presentation. The special
committee approved the $15.50 price.
On November 28, 1997, Chaparral issued a proxy statement in connection of the
merger. Neither special committee member reviewed it before it went out.
The shareholder vote of course approved the merger (92.9 for and 0.4 against). π did
not vote, despite having already filed this suit, but did tender her shares and receive
the merger consideration.
π sued claiming inadequate disclosures in the proxy statment.
The court criticized π for moving slowly on her claim (e.g. depositions were taken 3
years after the fact; π sued before the merger was cosumated but didn‟t move for a
Δs are moving for summary judgment to dismiss all of π‟s claims.
On a motion for summary judgment the court draws all reasonable factual inferences
in favor of the non-moving party, if, after giving the non-moving party this benefit,
the undisputed facts support a judgment in the moving party‟s favor, summary
judgment is appropriate.
DE fiduciary duty law regarding disclosure claims
“It is well established that directors of Delaware corporations are under a
fiduciary duty to disclose fully and fairly all material information within the
board's control when it seeks shareholder action. An omitted fact is material if
there is a substantial likelihood that a reasonable stockholder would consider it
- 58 -
important in deciding how to vote. To prevail on a claim of material omission,
therefore, a plaintiff must demonstrate a substantial likelihood that, under all the
circumstances, the omitted fact would have assumed actual significance in the
deliberations of the reasonable stockholder. There must be a substantial likelihood
that the disclosure of the omitted fact would have been viewed by the reasonable
stockholder as having significantly altered the total mix of information made
Disclosures of non-material facts can sometimes trigger a duty to disclose
additional non-material facts in order to make the initial disclosure not
π‟s claims are not barred on the grounds of acquiescence unless she knew all the
material facts regarding the merger at the time she accepted the merger agreement; a
mere finding that she thought there were misleading statements in the proxy statement
at the time she accepted the merger consideration is not enough unless she knew the
content of the missing material facts.
This is consistent with Kahan v. Lynch‟s policy of giving a limited effect to a
stockholder vote due to the inherent coercion of controlling shareholder mergers.
“it would be somewhat paradoxical to hold that a stockholder who simply
accepted the transactional consideration in a squeeze-out merger…is barred from
challenging that transaction just b/c she had already concluded that the transaction
This is especially true b/c when π decided to forgoe apraisal and in forgoing the
right to seek fair value that is not dependant on a feduciary duty breach, she
became entitled to the merger consideration.
There is a material issue of fact regarding whether the proxy statement fairly
disclosed all material facts regarding the effectiveness of the special committee;
summary judgment denied.
E.g. the proxy statement says that the special committee understood their legal
responsibilities and that their task was to represent solely the interest of the
public stockholders, but in their depositions one of them indicated that he
thought that his responsibility was to be fair to both sides and to strike a deal
at the highest price TXI would offer (as opposed to working solely for the
interests of the minority shareholders and striking a fair deal to bring them as
much $ as possible). Also, the other member of the committee seemed to
support taking the $14.25 even after Chaparral‟s stock price had gone up to
There is a material issue of fact regarding whether the proxy statement is
misleading b/c it failed to disclose the more favorable June 20th presentation made
by the special committee‟s bankers.
Δ‟s contention that the June 20th presentation was merely a negotiating tool
may emerge as true at trial, but it is not backed up by enough unambiguous
contemporaneous evidence to support a motion for summary judgment.
The proxy statement‟s statement that the special committee‟s advisors assumed
that the assumptions provided by management were “reasonably prepared and
- 59 -
reflect the best currently available estimates and judgment of the Company‟s
management” is not misleading; it doesn‟t suggest that the bankers wouldn‟t
apply their own professional judgment in reaching their value determination;
summary judgment granted.
The proxy statement‟s reference to a bring-down opinion is not misleading;
summary judgment granted.
The proxy statement was not materially misleading in its description of how the
special committee‟s financial advisors were chosen; summary judgment granted.
The proxy statement was not misleading in omitting certain valuation materials
(DCFs) generated by the acquiring company‟s banker that were never presented
to the acquiring board and were not intended to be a reliable estimate of the
π‟s claim that the proxy statement is materially misleading in that failed to disclose
that it had decide that $16 was fair then accepted $15.50 is not best considered under
the disclosure rubric, but instead under the unfair dealing rubric.
“To prevail on this claim, Clements must prove that the Special Committee and
Robinson-Humphrey made a reasoned determination that $16 was in fact the
lowest fair price, and then turned around and accepted $15.50 because that is all
they could get out of TXI, using Robinson-Humphrey's analysis as cover for a
poor negotiating result. It is only when proof of this sort is demonstrated that the
Special Committee's focus on $16 becomes material. Because Clements'
disclosure claim is essentially no different than her unfair dealing claim, this issue
should be examined solely under the rubric of unfair dealing.”
The exculpatory provisions in Chaparral‟s charter (exculpating directors from duty of
care charges as permitted under DE law) exculpates the independent special
committee directors of Chaparral (since no duty of loyalty is charged) but not the
directors who were also directors, officers, or stockholders of TXI since even if they
didn‟t intend to breach their duty of loyalty, it is hard to see how they would not have
if it is found after trial that an unfair price was paid by TXI for Chaparral.
Deal Protections I
Leo Strine, Jr., Catagorical Confusion: Deal Protection Measures in Stock-for-Stock
Merger Agreements, 56 Bus. Law. 919 (2001)
Deal protections serve too functions
Economic compensation to the jilted party in the event that the other party decides to
Obstruction of disruption of the deal by another transaction
DGCL provides no barrier to a TO; note how differently the reality of the formidable
barriers boards can erect is from the default rules of DE law. Under the DGCL
stockholders do have an affirmative power with respect to at least one extraordinary
transaction – the transfer of control of a company through a TO.
When directors with a pill and other strong protections already in place decide to enter
into a merger contract with strong deal protections measures, they are deepening their
own role as their stockholders‟ market intermediary. Directors shouldn‟t complain that
the courts will look at their actions closely since it is they who have placed the
- 60 -
stockholders in a different position than they would be in under the default rules of DE
Change of control/Revlon doctrine
The difference between receiving cash or stock as merger consideration is trivial
compared to the great difference in “judicial standard that some practitioners would
contend applies to each.”
What if in a stock for stock merger both the target and the acquirer have the same
stock price, but the target‟s sales are twice as much as those of the acquirer. The
target shareholder would be worried that a merger would represent a transfer of
wealth from them to the acquirer‟s shareholders. In this case the exchange ration
would be critical to the target shareholders b/c it will fix their claim on the assets of
the combined company and thus their share of any future control premium. E.g. “the
merger will be their final opportunity to be afforded payment for their now exclusive
ownership of Zuckerman.
Are directors and managers really less likely to be able to be acting to preserve their
positions in a non-Revlon transaction?
The QVC change of control test serves an important but narrow function – “it creates
substantial certainty about those situations in which corporate directors are deemed to
have the singular duty to pursue the highest immediate value for shareholders.”
But it is less justifiable to use the QVC change of control test to determine whether
deal protections should be reviewed under Unocal or BJR.
The transaction in question was one that by law could be decided unilaterally by the
Time directors w/o the input of the Time stockholders. B/c the stockholders get to
vote to approve a merger, there is an obvious limit to the deal protections boards can
place in a merger contract; The Time court didn‟t have to deal with that.
The Moran court held that the adoption of a poison pill on a clear day would be
subject to Unocal; it would be paradoxical to hold that the adoption of deal protection
measures to protect a particular strategy should be analyzed under BJR.
“Quickturn can be read as articulating a fundamental corollary to the authority invested in
directors to manage their corporation's participation in the M&A marketplace: the
directors must be cautious not to abdicate that responsibility and leave the corporation
rudderless. Put another way, the directors cannot arrogate to themselves the authority to
determine when their stockholders may receive a tender offer, and then disable
themselves from exercising that same authority.”
Strine points out that a poison pill, no-talk, 18 months to termination, 1 year
before vote, termination fee combo can be leave the board with far less flexibility
than a 45 day slow-hand pill.
Reconciling Time-Warner with Quickturn Emphasis stockholder choice; Well
motivated directors should have the right to present their strategic merge to stockholders
and to protect the deal sufficiently to induce the other party to contract; if all the board is
asking is for its preferred merger to go first and for other bidders to required to wait for
the outcome of the stockholder vote, it seems likely to get that opportunity. At the same
time, stockholders have the right to vote yes or no without being compelled or coerced.
Stockholders can legitimately expect that the board bring its preferred deal to a
stockholder vote reasonably promptly so that the passage of time does not render it the
- 61 -
only viable option and a genuine, current recommendation from their board of directors
as to the advisability of the transaction.
James C. Morphy (Sullivan & Chromwell), Where Has Time Gone? A Case for Real
Protection of an Merger of Equals (2002)
The author argues that directors should be afforded greater latitude in erecting deal
protections to protect MOEs (“low- or no-premium stock-for-stock mergers that combine
the stockholder bases of both companies without the presence of a controlling
stockholder, and results in a board of directors of the combined company on which each
of the combined companies is substantially represented”) b/c they are so beneficial and
b/c by definition the best deal protection (a high acquisition price) is always missing.
He says that directors should be allowed to erect deal protections that essentially give the
stockholder the choice between (1) the deal in front of them and (2) continued
independence, at least for some period of time. He cites First Union v. Suntrust (NC.
Super. Ct. 2001) which upheld a provision in the merger agreement that made it
expensive for Wachovia to do a deal with a 3rd party for 18 mos for the proposition that
“there is no downside Wachovia shareholders if the merger is defeated. Wachovia has a
well-developed plan for independent growth…It could easily wait the 18 month period to
expire before considering any other merger….If it waits out the option period, it does not
even pay a termination period.”
If the Unocal/BJR debate ends in defensive measures being analyzed under Unocal, that
application should be done under the full wait of Time, which stands for the proposition
that well-informed directors‟ decisions concerning the company‟s long-term interests and
independence should not be easily cast aside.
In re. IXC Communications, Inc. Shareholders’ Litigation v. Cincinnati Bell (Del. Ch.
1999) [decided two days after Ace; vc probably didn‟t read ace]
IXC is a telecommunications company. On February 5, 1999 IXC announced that it
had retained Morgan Stanley to consider possible sale or merger options. However,
IXC made it clear that it did not want MS to make outbound solicitations that would
make it appear that the company must be sold. It didn‟t want to appear disparage. In
the ensuing months IXC had various negotiations and contracts with several
interested parties (including AT&T, WorldCom, Bell Atlantic and several others).
In late, May, Oak Hill Partners and Cincinnati Bell Inc (CBI) met with IXC‟s largest
shareholder to discuss the possibility of a merger btw CBI and IXC.
On August 20, 1999 IXC and CBI entered into a merger agreement with the
following relevant terms
The IXC shareholders would receive 2.097 shares of CBI for every one IXC
A mutual "no-solicitation" (or "no-talk") provision preventing the parties from
entertaining other potential deals. The provision also contained a fiduciary out,
permitting the board of IXC to ultimately oppose the merger, should it see fit.
This provision was later amended, to permit either side to consider "superior
A $105 million termination fee and a cross-option agreement (which would be
triggered with the termination fee) permitting CBI to purchase 19.9% of IXC's
shares of common stock for $52.25 per share, with a profit cap of $26.25 million.
- 62 -
CBI and GEPT made a side deal through which GEPT agreed to support the
merger on condition that CBI purchase one-half of its IXC holdings for $50 per
share. This deal consisted of two agreements: the GEPT Stock Purchase
Agreement and the GEPT Stockholder Agreement. The Stock Purchase
Agreement effectuated the CBI purchase of 50% of GEPT's IXC shares and the
Stockholder Agreement bound GEPT to support the merger. Apparently GEPT
conditioned its support for the Stockholder Agreement on CBI's agreeing to the
Stock Purchase Agreement. CBI conditioned its support for the Merger
Agreement on GEPT's signing the Stockholder Agreement. The entire Merger
Agreement rested upon this side transaction.
πs (sharehoders of IXC) seek to enjoin (1) the October 29, 1999 vote of IXC
shareholders on a proposed merger with CBI and (2) the enforcement of certain terms
of the merger agreement.
The court was not presented with facts that would allow it to conclude that the IXC
bard did not exercise its best judgment in deciding which suitors merited serious
consideration and which ones perhaps did not.
As for the claim that the board went forward with the CBI deal against the advise of
its counsel and financial advisors, board is obligated to heed the counsel of any of its
The assertion that the board willfully blinded itself by agreeing to the now defunct
no-talk provision is unpersuasive, particularly considering how late in the process this
“I am comfortable concluding that the IXC board met its duty of care by informing
itself over the nearly six months lasting from the February 5 public announcement to
the late July approval of the IXC-CBI merger, where the record reflects no incoming
interest from May 1999 and a fiduciary out provision in the merger agreement which
would have allowed the board to entertain any proposal superior to CBI's.”
3 members of the IXC board together hold 16.3% of IXC‟s shares; π has not
demonstrated how the rational self interest of these large shareholders differs from
those of ther rest of the shareholders.
The plaintiff‟s assertion that the board left itself willfully uninformed in order to
serve its “self-interest” in avoiding its duties under Revlon is unfounded – the court
can‟t imagine that directors would shirt their fiduciary duties and ignore their own
economic self interest just to avoid an artifice of perceived legal duties – “Plaintiffs
need a serious reality cheek.” (cheek is a typo in the opinion).
Vote buying agreements are not illegal per se, no not void, just voiable. “Only when
the vote-buying agreement defrauds or disenfranchise other shareholders can it be
said that the agreement is illegal and therefore void. Absent these deleterious
purposes, a shareholder may commit his vote as he pleases.”
It‟s hard to say that any termination fee is so excessive on its face that it is
unenforceable, but the court doesn‟t need to reach that question since the standard of
review is BJR.
The disclosures in the proxy materials adequately inform the shareholders not only
about the circumstances of the merger, but also specifically detail the concerns
alleged by plaintiff Crawford in his motion to enjoin the vote; and,
- 63 -
πs have not met their buren of showing that the actions of IXC‟s board triggered
Revlon and π‟s have not met their burden rebut the BJR presumption so the
preliminary injunction is not granted.
The agreement under which CBI agreed to purchase ½ of GEPT‟s shares (½ of 26%)
for $50 per share in exchange for GEPT voting the remaining shares for the merger
did not constitute impermissible vote buying b/c it did not defraud or disenfranchise
Doesn‟t disenfranchise nearly 60% of IXC‟s shareholders are independent; B/c
an independent majority of shareholders are still in a position to void the effect of
the vote buying transaction by voting against the merger, the court found that the
agreement did not disenfranchise shareholders.
Institutional investors constitute more than 60% of the shareholders of record.
The IXC board did not breach their fiduciary duty of loyalty by “blessing” the
voting agreement (not by approving it but by going through with the transaction).
The fact that the board approved the merger agreement after the fact of the GEPT
deal does not mean that they had a duty or the power to stop the GEPT deal,
which was arguably a 3rd party transaction.
This was an easy case b/c there was no 3rd party bidder.
Gives deal protections in merger agreement BJR b/c boards decision to enter into
merger agreement gets BJR.
Ace Limited v. Capital Re Corporation (Del. Ch. 1999) (Strine)
For more than a year Capital Re (a reinsurance company) has been exploring the
possible business combinations or capital infusions. In February 1999 Ace paid $75
million for newly issued Capital Re stock which amounted to 12.3%. In march of
1999 Moodies downgraded Capital Re from AAA to AA2, and consequently, in May
of 199, Capital Re approached Ace to discuss solutions including the possibility of a
On Jun 11, 1999 the two companies announced a binding merger agreement where by
Capital Re stockholders would receive .6 shares of Ace for each of their shares (at
that time .6 shares = over $17).
The merger agreement contained an no talk provision that provided that Cap RE
couldn‟t negotiate or even provided information to a 3rd party unless it met the
Capital Re's board concludes "in good faith ... based on the advice of its
outside financial advisors, that such Transaction Proposal is reasonably likely
to be or to result in a Superior Proposal";
Capital Re's board concludes "in good faith ... based on the written advice of
its outside legal counsel, that participating in such negotiations or discussions
or furnishing such information is required in order to prevent the Board of
Directors of the Company from breaching its fiduciary duties to its
stockholders under the [Delaware General Corporation Law]";
- 64 -
The competing offeror enters into a confidentiality agreement no less
favorable to Capital Re than its confidentiality agreement with ACE, a copy of
which must be provided to ACE; and
The company's directors provide ACE with contemporaneous notice of their
intent to negotiate or furnish information with the competing offeror.
At the time the Capital Re board executed the merger agreement, it knew that Ace,
which owns 12.3%, had stockholder voting agreements with stockholders owning
another $33.5% of Capital Re‟s shares. These agreements allowed Ace to secure 46%
of the majority vote needed going into the merger. Therefore the Cap Re board knew
at the time it executed the merger agreement that unless sit terminate the merger
agreement, Ace would have near certainty of the votes necessary to consummate the
merger, even if there was a better deal on the table.
By October 6, 1999 the value of the merger consideration Capital Re‟s Shareholders
were to receive from Ace dropped from over $17/share to under $10/share.
On October 6, 1999 (the day before the stockholder vote), Capital Re‟s board
received and all cash all shares offer from XL Capital Ltd. for $12.50/share.
In response the board convened an emergency meeting at which they received written
advice from counsel that entering into discussions with XL Capital would be
“consistent with their fiduciary duties.” In an affidavit explained that the opinion was
rushed (b/c of the time constraints of the situation) and that it didn‟t say that it was
required of the board‟s fiduciary duties b/c it saw that question as hinging on whether
Revlon or BJR applied. The board determined that the value of XL‟s proposal was so
much greater that they had a duty to negotiate.
As a result of those negotiations, XL raised its bid to $13. Capital Re‟s board heard
presentations from its investment bankers and decided that XL‟s bid was a “superior
proposal” and sent ACE notice that it intended to terminate the merger agreement
Ace increased its offer to a stock/cash combo worth at least $13.
XL raised its bid to $14.
Ace sued to enjoin Capital Re from terminating the merger agreement.
“This matter comes before me on ACE's motion for a temporary restraining order. A
TRO is an injunction, and the factors relevant to determining whether to issue a TRO
are similar to those relevant when determining whether to grant a preliminary
injunction. But these factors are ordinarily given different weight in the TRO context.
“This stems from the fact that when this court determines whether to grant a TRO,
it usually has little time to digest the merits. It therefore rightly concentrates on
whether the absence of a TRO will permit imminent, irreparable injury to occur to
the applicant and whether that possibility of injury outweighs the injury that the
TRO itself might inflict on the defendants. In a case where this balance tilts in
favor of the applicant and where a responsible consideration of the merits cannot
be had, this court will issue a TRO even though the applicant has only raised
claims that "are colorable, litigable, or ... raise questions that deserve serious
But b/c the facts of this case so allow, the court will give more attention to the
merits than courts traditionally do when deciding TRO motions.
- 65 -
Not a “change in control” in Revlon terms, but a significant transaction for Capital Re
Cap Re must satisfy 6.3 in order to be able to terminate the agreement under 8.3
Under ACE‟s interpretation of 6.3, Capital Re would be forbidden to enter into
negotiations with a third party unless it received advice from counsel that such action
was mandated by their fiduciary duties. B/c Capital Re did not receive such strong
advice, they breached by terminating.
Plain language requiring the board to “base” their judgment on the advice of
counsel does not preclude the board the board from concluding (in the event that
their counsel equivocates) that negotiations are mandated by their fiduciary
To read the provision as ACE does would make it likely invalid since promises of
fiduciaries to violate their fiduciary duties are generally unenforceable.
Paramount v. QVC ACE can‟t have vested contractual rights in contract
provisions which require the board to limit the exercise of their fiduciary duties
b/c such contractual provisions are invalid.
Also, ACE‟s reading might render the provision invalid under Unocal.
As a sophisticated party who bargained for §6.3, ACE was on notice as to its
possible invalidity, so its contractual rights can‟t take precedent over the rights of
the Capital Re shareholders, who could loose the XL bid as a result of the TRO.
While the court says that here it would not have been permissible for Capital Re to
agree to a lock-up of the ACE deal that would exclude it from entertaining other
offers, in FN 36 it suggests that such a provision might be permitted in a situation
where the board has actively canvassed the market [NSC later says boards can‟t
create total lock-ups]
ACE does face irreparable harm, but here that threat doesn‟t justify a TRO.
ACE is not asking for the right to have its agreement placed before Capital Re‟s
shareholders to face an uncertain outcome. Ace already has almost 50% of the bids
“Because Capital Re's argument that termination is permitted by the Merger
Agreement is the more plausible one; because ACE's contrary construction, if correct,
suggests that the Merger Agreement's "no-talk" provision is likely invalid; and
because the risk of harm to Capital Re stockholders outweighs the need to protect
ACE from irreparable injury, I deny ACE's motion.”
Strine notes that 33% who had signed merger agreements didn‟t approve the deal as
much as they gave their fiduciaries a strong hand if board continued to recommend
the merger, they would vote for it. [note it doesn‟t look like this agreement had a
force the vote provision]
Phelps Dodge Corporation v. Cyprus Amax Minerals Company (Del. Ch. 1999)
Facts: board didn‟t shop then signed no talk; But they can change recommendation and
read their mail.
Court says that the board simply should not have foreclosed its opportunity to talk to
other bidders as this is the equivalence of willful blindness which is a breach of a board‟s
- 66 -
duty of care. Fiduciary duties require boards to make informed judgments when deciding
whether to negotiate with third parties and no talk provisions threaten this.
Court denies the plaintiff‟s injunctive relief on the grounds that there is no need to protect
the shareholders since they are free to vote down the deal.
Court suggests that the termination fee stretches the range of reasonableness and finds the
no talk provison troubling b/c it interferes w/ the boards fiduciary duty to make an
informed decision but denied preliminary injunction on the grounds that no irreparable
injury would result b/c the shareholders would just vote it down.
But this doesn‟t seem to square with the fact that the court also suggests that the 6.3%
termination fee is extremely high.
Deal protections generally
Does Unocal (Ace) or BJR (IXC) apply to deal protections?
Unocal was concerned with the omnipresent specter of self interest this
concern is here as well concern that mangers may favor a bidder for self
interested reasons (e.g. they may be getting to stay at company with this bidder or
they may have personal animus with certain bidders).
Termination fees also have the potential of coercing stockholders to vote for the
deal b/c if the deal fails, they will have to give away a potentially significant
portion of the value of their company.
Danger that if these problems had to be addressed under BJR, there would be
pressure for courts to address salient facts under entire fairness and thus erode
Idea that if deal protections got BJR in non-Revlon transactions would put pressure on
courts to make stock for stock deals Revlon transactions, which would be dangerous.
Having a Unocal review of non-Revlon deal protections keeps Revlon limited. Allows
reasonableness review while still giving the board the flexibility for to consider long term
strategic considerations in stock for stock deals.
Deal Protections II: Omnicare
In re NCS Shareholders Litigation (Del. 2002) (note: 3/2 split)
NCS Healthcare was an insolvent provider of pharmacy services to long-term care
institutions. It had two classes of common stock: Class A entitled to 1 vote per share
and Class B entitled to 10 votes per share. In late 1999 changes in reimbursements by
the government and third party providers adversely effected the healthcare industry,
made it more difficult for NCS to collect accounts receivable and lead to a decline in
NCS stock. In February 2000 NCS hired UBS Warburg to identify potential acquires
and possible equity investors. UBS contacted about 50 potential investors, but didn‟t
have much success. In December 2000, NCS fired UBS Warburg and retained
Brown, Gibbons, Lang & Company as its financial advisor. By early 2001 NCS was
in default on about $350 million in debt including $206 million in senior bank debt
and $102 million in Convertible Subordinate Debentures (the “Notes”). NCS began
discussions with various groups regarding a restructuring in a pre-pack. On July 20,
2001 Omnicare sent NCS a written proposal to acquire NCS in a bankruptcy sale
- 67 -
under §363 for $225 million. Later in negotiations with the Ad Hoc Committee
(noteholders), NCS raised its bid to $313,750,000, but this was still less than the face
value of NSC‟s debt and provided no recovery to stockholders. In addition NCS had
suggested to Omnicare the idea of a merger and Omnicare had said it was not
interested in any transaction other than a §363 sale of assets.
In January 2002, Genesis, who had previously lost a bidding war with Omicare,
approached NSC. The NCS board formed an independent committee (neither
employees nor major shareholders) which retained the same legal and financial
advisors as the NCS board. Genesis made it clear to NCS that it would not engage in
negotiations with NCS as a stalking hoarse. On June 26, 2002, Genesis agreed to
offer repayment of NCS senior debt in full, full assumption of trade credit obligations
(b/c the transaction would be structured as a merger), an exchange offer or direct
purchase of the Notes (no including accrued interest), and $24 million in Genesis
stock for the NCS common stockholders (approximately $1 per share in value) and
told NCS that before it would continue in negotiations, NCS would have to enter an
exclusivity agreement with it. The independent committee July 3, 2002 and approved
the exclusivity agreement in light of Genesis‟s offer being far superior to any other
offer they had received.
On July 26, Omnicare faxed a letter to NCS offering an acquisition at $3 per share
and a retirement of NSC‟s senior and subordinated debt at par value plus accrued
interest. The offer had a due diligence condition. The exclusivity agreement
prevented the NCS Board from returning Omnicare‟s calls, but the independent
committee did meet to consider the offer and decided that given the due diligence
condition, Omnicare‟s past bankruptcy proposals, and earlier decision to negotiate
exclusively with the Ad Hoc Committee, the risk of loosing the Genesis proposal that
talking to Omnicare posed was too substantial.
However, in response to Omnicare‟s offer, Genesis offered substantially improved
terms including retiring the notes in accordance the terms of the indenture (e.g.
paying all accrued interest plus a small redemption premium and thus eliminating the
need for Noteholders to consent to the transaction), an %80 increase in consideration
to NCS shareholders (1 Genesis share for every 10 NCS shares), and a reduction in
the termination fee from $10 million to $6 million. The proposed deal also included
voting agreements with two Class B stockholders/directors of NCS who represented
65% of the votes (but only 20% of the equity) of NSC. Genesis gave the NCS board
till midnight the following day to approve the transaction. The independent
committee and the full NCS board met and informed themselves of the terms of the
transactions. They received a fairness opinion from their financial advisor and
reviewed Genesis‟s ability to finance the transaction. They did not read the final
merger agreement word for word, but the chancery court pointed out that this was not
a fiduciary duty breach per se under Van Gorkum and that the directors were aware of
the terms and the changes made.
The final merger agreement approved by the NCS board contained a DGCL §251(c)
force the vote clause (obligating the board to put the agreement to a shareholder vote
even if the boar subsequently decided not to recommend it), a no shop provision
(providing that NCS could not talk to third parties unless it got a bona fide unsolicited
written proposal that it believed in good faith was or was likely to result in a superior
- 68 -
deal), and a $6 million termination fee. The voting agreements with Outcalt and Shaw
provided that the two directors were acting in their capacity as NCS stockholders,
granted irrevocable proxy to Genesis to vote their shares in favor of the merger, and
provide that if these agreements were breached, Genesis would be entitled to
terminate the merger agreement and potentially receive the $6 million termination
fee. The board also approved the voting agreements for the purposes of DGCL §203.
On August 1, 2002, Omnicare filed a suit to enjoin the merger and announced that it
intended to launch a Tender Offer for NCS at $3.50 per share. Later the NCS
stockholders filed suit. On September 10, 2002 NCS requested and received a waiver
from Genesis allowing NCS to enter into discussions with Omicare w/o having to fist
determine that Omnicares proposal was or was likely to result in a superior deal. On
October 6, 2002 Omnicare irrevocably committed itself to a deal with NCS under
which it would acquire all of NCS class A and Class B common stock at $3.50 per
share and NSC‟s creditors would be treated the same as they would under the Genesis
agreement. As a result, on October 21, the board withdrew its recommendation of the
NSC/Genesis merger agreement.
Chancery Court Holding
Revlon does not apply so the NCS board‟s decision to merge with Genesis should be
analyzed under BJR.
[Strine the route of Revlon is the traditional duty of a fiduciary when selling a
trust asset to get the highest price. DE law hasn‟t taken the view that the stock
market is always right the best deal that a fiduciary can get may not be the deal
that the market prices most highly (e.g. market might prefer a higher cash deal but
synergistic stock deal might bring greater long term value). But this isn‟t a
synergy deal it‟s a desperation deal. Doesn‟t make sense that a company that
has marketed its self looking for a $ recovery for debt holders and equity holders
is not in Revlon just b/c in the end the transaction that results is a stock for stock
Unocal applies to the NSC/Genesis deal protections and that those deal protections
were not designed to preclude what they knew or should have known was a superior
transaction reasonable in relation to the reasonably perceived treat of the loss of the
Genesis deal followed by a downward spiral in NSC‟s stock price.
Outclaw and Shaw are getting special consideration b/c they will be kept on as
consultants are receive fees after the deal. The court says that basically the fees were
already stipulated by contract; they would have been paid in an omicare bid as well.
The Chancery Courts determination that BJR and not Revlon applies to the NCS
board‟s decision to merge with Genesis is not outcome determinative, and the Court
will assume arguendo that BJR applies and that the NCS board exercised due care.
In Paramount v. Time the court said structural safety vices alone do not implicate
Revlon and while Time‟s Board‟s decision to merge with Warner would be reviewed
under BJR, the deal protections would be analyzed under Unocal.
Unocal Analysis as refined by Paramount v. QVC and Unitrin
(1) NCS directors must demonstrate that “they had reasonable grounds for
believing that a danger to corporate policy and effectiveness existed. To satisfy
- 69 -
this burden NCS directors must show that they acted in good faith after
conducting a reasonable investigation.
(2) Two step proportionality analysis
(i) The NCS directors must first establish that the deal protections adopted in
response to the threat were neither preclusive nor coercive (both included in
the definition of draconian).
Coercive: “aimed at forcing upon stockholders a management sponsored
alternative to a hostile offer.” “Has the effect of causing stockholders to
vote in favor of the proposed transaction for some reason other than the
merits of the transaction.”
Preclusive: “deprives stockholders of the right to receive all tender offers
or precludes a bidder form seeking control by fundamentally restricting
proxy contests or otherwise.”
(ii) If the NCS directors are able to prove that the deal protections were
neither preclusive or coercive, then they must demonstrate that their response
was in a “range of reasonableness” to the threat perceived.
“Under the circumstances presented in this case, where a cohesive group of
stockholders wit majority voting power was irrevocably committed to the merger
transaction, “[e]ffective representation of the financial interests of the minority
shareholders imposed upon the [NCS board] and affirmative responsibility to protect
those minority shareholders‟ interests.” The NCS board could not abdicate its
fiduciary duties to the minority by leaving it to the stockholders alone to approve or
disprove the merger agreement because two stockholders had already combined to
establish a majority of voting power that made the outcome of the stockholder vote a
While §251(c) provisions and voting agreements are permitted under DE law, taking
action that is legally possible does not ipso facto comport with the duties of DE
directors in all circumstances.
“The latitude a board will have to adopt a defensive measure will vary according to
the degree of benefit or detriment to stockholders interest that is presented by the
value or terms of the subsequent competing transaction.”
[Strine is REALLY bothered by this. B/c it means that board latitude to adopt
deal protection measures ex ante depends on what happens ex post. How will
they know what will happen ex post.]
Chancery court‟s holding that Omnicare lacked standing to assert fiduciary duty
claims is dismissed as moot (since the stockholders sued as well)
The Chancery court‟s denial of the preliminary injunction is reversed since the
tripartite deal protections (DGCL §251(c) provision, 65% voting agreements, and
absence of fiduciary out clause) are both preclusive and coercive under Unitrin‟s
interpretation of Unocal in the sense that they accomplish a fait accompli (they make
it mathematically impossible and realistically unattainable for an superior transaction
to succeeded). Alternatively, the tripartite deal protections is invalid b/c they
prevented the board form discharging its fiduciary responsibilities to the minority
stockholders of NCS when Omnicare presented its superior transaction.
The NCS board did not have the authority to accede to an absolute lock-up.
- 70 -
Dissent, Veasey and Steele
The dissent criticize what is saw as rule that any merger agreement that locks up
shareholder approval and does not contain a fiduciary out is per se invalid. “Situations
will arise where business realities demand a lock-up so that wealth enhancing
transactions may go forward. Accordingly, any bright line rule prohibiting lock ups
could, in circumstances such as these, chill otherwise permissible conduct.”
The dissent also criticized the majority‟s application of Unitrin to the voting
agreements since the voting agreements, rather than being imposed on the
shareholders by the board, were approved by Shaw and Outcalt in their capacity as
shareholders. The class A stockholders were not meaningfully coerced since the votes
approving the merger were already cast and the pejorative Unitrin preclusion label
has no application here where the class A votes were simply precluded from
overriding the controlling vote in favor of the merger.
Under Unocal the protection measures were justified by the strong threat of a troubled
company loosing the only deal on the table.
“Delaware corporate citizens now face the prospect that in every circumstance,
boards must obtain the highest price, even if that requires breaching a contract entered
into in a time when no one could have reasonably foreseen a truly “Superior
Proposal.” The Majority‟s proscriptive rule limits the scope of the board‟s cost
benefit analysis by taking the bargaining chip of forging a fiduciary out “off the
table” in all circumstances.
Troubling b/c they deiced in 1 day and wrote an initial 3 page reversing; At lease had
they affirmed they would have been relying on the longer (more time) lower court
opinion. Same justice (Holland)wrote Unitrin and Quckturn.
Longer opinion put a different spin on the facts from the lower
Page 6 the NCS board “felt” it owed fiduciary duties to the whole entity;
emphasized a completely locked up transaction that would preclude a superior offer
from Omnicare; but in italics per se in no duty per se to read full merger agreement;
heading called Omicares Superior Bid;
Strine disagrees with this characterization of the fact as did a lot of practitioners.
Not preclusive Strine is also troubled by the fact that time-warner said that paramount
was not precluded b/c paramount could buy the combined entity. Even easier to buy this
smaller combined entity.
Doesn‟t make sense that its coercive Minority was coerced by majority voting their
DE Supreme court cites Schnell; but when the force the vote provision was passed, the
legislature knew that they would be used in combination with voting agreements.
What‟s good about Outcalt and Shaw is that once you have concluded that their interests
were in line, they are a good deal barometer. But you need a mechanisms under which to
look at that where as the minority looses sight of that by pushing for BJR.
Minority‟s argument that negotiating a transaction should be reviewed differently than
putting a poison pill in place, but how should they be reviewed? If they are given BJR,
they won‟t really be reviewed at all. What form should the review take?
- 71 -
Key move from BJR to Unocal is the move from rationality review to reasonablness
review. Strine doesn‟t think that minority gets this b/c if they did they might not be
opposed to Unocal review.
Majority loses sight of the realty of negotiations and the necessary incentives.
If you change the he NCS charter, you have no case; If Shaw and Outcalt had been able
to just act by written consent, they would have done so on the first day and we wouldn‟t
have had this case.
Maybe as a legislative rule we should take DGCL §251(c) of the table but courts apply
If you can‟t lock up a deal, bidders are not going to put their best bid forward b/c they
know they can do all this work then be out bid.
Can restrict legally authorized action if it‟s inequitable but nothing the directors did in
July was inequitable when they did it. In retrospect it would be nice NCS shareholders
could get the extra $ but had NCS not agreed to the lock up, neither deal could have
worked out and the creditors and the shareholders of NCS could have sued for breach of
fiduciary duties (e.g. b/c they walked away from sure deal for a sketchy bidder).
Notes From WLRK outline
In re Santa Fe Pac. Corp (Del Ch. 1995); The court declined to apply Revlon to a 33% cash
TO to be followed by a stock for stock merger.
Brazen v. Bell Atlantic (Del. 1997); The court upheld a $550 million termination fee saying
that it should have been analyzed as liquidated damages (by the chancery court which had
analyzed it under BJR), but that as such it was reasonable b/c it was w/in the range of term
fees that had been upheld by DE courts.
Investment Board v. Bartlett, et al. (Del Ch. 2000); Upholding a no-talk provision where the
seller had canvassed the market.
- 72 -