Angola's M_A Outline

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					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
     view. Examples:
      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 enterprise.
          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
               Long term.
           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
management‟s control.
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
             by law.
          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
         fairness opinion).
          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
          for directors.
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
        stock ownership.”
         [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
          Proxy fight
          Redemption
          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
      independent directors.
   (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
       Forstmann lock-up.
 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
       (inadequate price)
        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
   noncoercive TO.
    “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
       favorable transaction.
    “…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.
        Time decision.]
 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
         defensive tactics.
     “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
              corporate interests.”

                                              - 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
   proposal down.
 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
   do so.
 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
       with Paramount.
        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
             did it.
      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
    common stock.
   On October 24, the Paramount board approved an amended merger agreement and an
    amended stock option agreement with Viacom.
     New Provisions
         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
         its credibility.
      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.
 Notes
     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
    remained outstanding.
 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
        injunctive relief
    Balance of harms weighs in favor of granting π relief
 3 standards of review
    BJR
         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
        than 25%.
    (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
    Opportunity loss
    Structural coercion
    Substantive coercion
 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.
     Strine
         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
            owned 14.9%).
         Also, threat is substantive coercion (stupid shareholders) but repurchase is not
            preclusive b/c smart institutional shareholders hold high majority of contested
            votes. Contradiction.
         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.
         Financing
     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
         business judgment.”
      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
         this finding.
      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.”
(substance scrutiny).
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
directors out.
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
    the threat)

                                       - 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
    other hand.
     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
   to Chesapeake.
 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
   Shorewood board;
 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
   material issues;
 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
       it received.
 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
        premium TO.
    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
 Unocal
    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].
 Blasius
   “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
      of shareholders.
   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
      the buyer.”
   “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
         notice period.
          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
    as consideration.
     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
    minnow-whale synergy.
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
    potential acquirers.
 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
        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
        compensation committee.
      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
       incur debt]
 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
               favorable price.
                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
      these situations.
       “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
        from Δ.
      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.”
 Strine/Notes
       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
        appraisal rights.
         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
   non-coercive approaches)
    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 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
   preliminary injunction).
 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
        was unfair.”
    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.
 Disclosure claims
    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
              target‟s worth.
        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
         back out
      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.
Time Warner
 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

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      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.

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       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
   provision came.
 “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,

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      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
        other shareholders.
         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
        business combination.
      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
            following conditions:
             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]";

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         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
   under §8.3.
 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.

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      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
          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
   forgone conclusion.”
 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.

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      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.
      Dissent, Steele
       “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.
 Strine
      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?

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      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
     the law.
     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.
 Dissent
     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.

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