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Agency
1. Agency-Agent Relationship
a. Rule: Fiduciary/agent must deal with the principal in total candor, account for all
profits flowing from the information the agent receives from the principal; the agent
must not disclose principals trade secrets; may not carry on a competing business
until after the relationship is terminated. Can set up logistically while at the
company, but cant compete- seek clients until leave. The agent must prefer the
principals interest over its own.
2. Non-competing agreement
a. Courts will enforce it if its reasonable in scope, geographic area, and duration
b. Remedy:
i.
Disgorging of the profits earned in competition
ii.
A constructive trust on the competitors property; or
iii.
Damages for injury to the corporation
3. Fiduciary duties
a. Total candor
b. Counting for total profits
c. Not use of principals trade secrets
d. Can compete after relation is terminated
4. Actual authority a principal manifests assent either expressly or implicitly to do the act
in question directly to the agent; e.g., expressly if a writing tells the scope of the agents
authority or the principal tells the agent to go negotiate a contract; impliedly if the
principal does not expressly authorize an agent to offer more than a 10% discount but the
agent does it repeatedly without objection by the principal, then the agent may be
impliedly authorized to make such offers in the future.
5. Apparent authority a principal manifests assent directly to a third party who is dealing
with the agent; a principal represents that a party is his agent, and a third party actually
and reasonably relies on this representation; third party must reasonably believe agent is
authorized to do the act in question.
6. Inherent authority an agent can bind a principal based on the agents role or position
as an agent even if the particular action has been forbidden by the principal if his intention
was to do the act on behalf of the principal and the act was usual or necessary for this
type of agent.
7. Ratification an agent does the act in question without the principal's approval, but later
the principal approves the agent's act in question
Partnership
1. General Partnership- Its a business association where there are two or more persons
with the intent to carry on as co-owners a business for profit; they share decision making.
a. Requirement- parties have intent
b. Subjective intent is irrelevant.
c. Need unanimous consent to make decisions outside of scope- extraordinary of
business
d. Partners are residual claimants, risk bearers, oversee business affairs
e. Majority vote for ordinary decisions.
2. Formation of GP
a. Doesnt require written agreement or governmental action, just statutorily specified
mutual manifestation of consent.
b. All is required is that the parties have the intent to carry on as co-owners a business
for profit.
3. Liability
a. Unlimited personal liability- all partners are jointly and severally liable for all
obligations of the partnership and there is no limit on potential personal liability.
i.
Liable for liabilities incurred by the partnership itself; and
ii.
For acts of other partners acting as agents of the partnership.
b. Default rule- share profits and losses equally.
4. Fiduciary duties - Each partner owes a fiduciary duty to other partners.
a. Total candor- cant lie.
b. Duty of loyalty- cant get rid of it but can change it.
i.
Punctilio of an honor the most sensitive, is then the standard of behavior.
c. Due care gross negligence or reckless conduct, intentionally misconduct
d. Good Faith and Fair Dealing- have an implied duty of this in every K.
5. Dissolution
a. If partnership wishes to terminate its associations w/a partner, it does so by
dissolving the partnership and paying the expelled member the value of their
interest in cash
b. Partners need to liquidate their assets sell everything
c. Pay the creditors first
d. Pay back capital investments
e. Split profits and loses equally
i.
Default rule- losses follow the profits, unless its otherwise stipulated in the
agreement
10.A partner cant compel another to come to any particular decision regarding partnership
business even if decision would benefit the partnership.
11.A partner violates the duty of loyalty and implied covenant of GF and FD when he unfairly
determines another partners profit share.
12.GP -> LLP
a. created to shield general partners in GPs from personal liability.
Limited Partnership
1. Formation
a. Its a business association that is composed of at least one general partner and one
limited partner.
b. Its formed by filing a certificate of LP with the secretary of state.
2. General Partners
a. Are agents of the partnership (in GP and LP)
b. Make management decisions
c. Share in profits of the firm
d. Have unlimited personally liability
e. Have pass thru taxations
3. Limited Partners
a. Liable for what they put into the company
b. Share in profits but can lose in their profits.
c. They are passive investors
d. Do not have management power
e. Can withdraw at will. Withdrawal doesnt trigger dissolution and liquidation of the
LP.
f. Do not have any obligation or duty of a GP
g. Protected from personal liability for the partnerships obligations or torts or
malpractice committed by other partners.
4. Tax
a. Enjoy pass through taxation taxed at the individual level not entity level.
5. LP -> LLLP - LIMITED LIABILITY LIMITED PARTNERSHIP
a. A LP can become a LLP/LLLP- Created to shield general partners in LPs from
personal liability.
b. In an LLP, general partners and limited partners have limited liability.
c. Is comprised of general partners who are not personally liable for the partnerships
obligations or torts committed by other partners.
d. Partners are only personally liable for their own tortious conduct
e. Can only lose whatever investment they contributed.
f. A Partner is not liable for claims against the other partner by third parties.
g. Enjoys pass through taxation, or no taxation at the entity level, just at the individual
level.
6. Loses follow the profits, unless K says otherwise.
7. Indemnification- the certificate of formation or P K may restrict the circumstances which
the LP indemnifies or advances expenses to a partner.
Look at practice problem #1
Dissolution
1. When the company dissolves
2. 801- when does dissolution occur
a. in at-will partnership, when one partner says he/she is leaving
b.
c.
d.
e.
sweat equity- dont get compensated for it, unless its in the
contract (Partnership K)
4. Dissolution = liquidation
Dissociation
1. Allows the Partner to leave, but the partnership continues.
2. It occurs when:
a. A P gives notice of express will to withdraw;
b. An event agreed to in K as causing Ps dissociation
c. Ps expulsion pursuant to P K
d. On application by judicial determination bc the partner engaged in wrongful conduct
that adversely and materially affected the business, the partner materially breached
the K or duty owed to the P, or the Ps conduct makes it not reasonably practicable
to carry on the P with the partner
e. Partners death
3. Dissociation typically = buyout
4. Firm may expel a partner:
a. For purely business reasons
b. To protect relationships both within the firm and with clients; or
c. Without breaching any duty in order to resolve a fundamental schism.
5. Wrongful Dissociation
a. Partner breaches express provision of the K
b. P withdraws or is expelled by judicial determination before the expiration of the
term or the completion of the undertaking.
c. Dissociation by means other than a partners express will to withdraw in an at-will
partnership typically results in a buy-out of that dissociating partners partnership
interest, and the buy-out price is based on the greater of the partnerships
liquidating or going-concern value
Corporations
1. Formation
a. Need AOC according to the requirements of state law.
b. Singing the AOI by one or more incorporators
c. Submitting the signed AOI to the states secretary of state for filing
2. Three Specialized Roles
a. Shareholders
i.
Risk bearers and residual claimants
ii.
iii.
iv.
v.
Vote
On fundamental corporate changes mergers, amending AOI,
and
Remove or select members of BOD
Sue
Derivative action suing BOD or officers on behalf of the
company for doing something improper
Direct action- want to get something for them- dividends Dodge
vi.
Problem 3-2 initiating amend to the AOR and bylaws
b. BOD can exclude proposals under 14(a)(8) that are not proper subject for SH action
under state law, unless theyre cast precatory/suggestion:
i.
Economic relevance test: proposals can be omitted that that relate to
operations accounting for less than 5% of the corporations total assets, gross
sales, and net sales if the proposal is not otherwise significantly related to the
companys business.
ii.
Ordinary business exclusion- proposals significantly relating to the ordinary
business of the company.
iii.
(dont need both? If it deals with a matter relating to the companys ordinary
business operations.
iv.
Lovenheim
c. Argue for SH proposal
i.
Its an ethical and social significant and its related to the business
ii.
A lot of what the company does is charitable contributions they have a list
of donors
5. Bylaws
a. Lay out the procedures and process how the BOD decides substantive decisions.
Dont say who makes decisions
i.
Fixed # of directors on the board
ii.
# required for quorum
iii.
voting requirements for board action
b. SH or BOD have to confirm power to initiate changes to the bylaws
6. Amending the Bylaws
a. Only BOD can initiate amendments to the AOF DL and Model Act
b. Operational decisions for the corporation cannot be made by SH, only by BOD
c. SH can initiate amendments to bylaws
Closed Corporations
1. Characteristics:
a. Small business
b. The stocks are not publicly traded
c. If SH do not like what is going on they cant sell their interest
d. No separation of roles roles are merged into SH, directors, and officers
2. Tax elect to be taxed as C corps or S corps
a. S Corp- use the pass thru taxation, like a partnership, avoid double tax
b. C Corp- taxed on income made in the company, and tax on dividends issued.
i.
Can avoid double taxation by not giving dividends and giving a salary to the
SH
3. Agreement freedom of K
a. Its used to put someone on notice- what parties can or cant do.
b. has to be approved by all SH
c. can eliminate BOD, restrict or limit their power
d. how authority is exercised
e. can say that SH can include restrictions, conditions, or anything they want in the
agreement.
4. Negative factors for SH
a. Can become minority SH and be removed from the board or frozen out
b. The shares are hard to value since theyre not publicly traded
i.
Hard to transfer them to someone
ii.
Shares may have restrictions, (i.e. only pass on to family)
5. Benefit- can become a public held corporation
6. Oppressive Conduct definition - Hodge
a. A burdensome, harsh and wrongful conduct;
b. Lack of probity and fair dealing in the affairs of a company to the prejudice of some
of its members; or
c. A visible departure from the standards of fair dealing, and a violating of fair play on
which every SH who entrusts his money to a company is entitled to rely.
Courts look at the business of the partnership and the Gral partners
ability to achieve that purpose in conformity with the partnership
agreement. It considers:
Members vote is deadlock at board level is it futile?
The operating K gives no means of navigating around deadlock
Fiduciary Duties
1. Punctilio of an honor standard
2. Duty of Total Candor
a. Just bc stockholders voted for it, doesnt completely protect the directors. It must be
informed
b. Gross negligence is the standard in the BJR
i.
SH ratification of the K is not enough to cure the directors vote.
3. Duty of Care
a. Decision making (BJR) need to be reasonably informed [gross negligence standard] Van Gorkom
i.
Van Gorkom- The presumption of the business judgment rule is based on the
directors acting on an informed basis in good faith, and in honest belief that
the action taken was in the best interest of the company. Directors are fully
protected in relying in good faith on reports made by other officers, but not
blind reliance.
b. Director oversight liability - Caremark
i.
Conditions predicate for director oversight liability:
That the directors knew or should have known that violations of law
were occurring, and
Fair price- same type of deal that individual would have negotiated
at arms-length?
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a. If does that, then the BOD loses the protection of the BJR, and
i.
Then the burden shifts to the BOD to show intrinsic fairness
Shareholder Actions
1. Derivative Suit breach of fiduciary duty and loyalty, self-dealing, recovering excessive
compensation, suits to recover economic benefit taken by a company director. MBCA 7.42:
a. SH must make a demand on the corporation before filing a derivative suit
i.
Have to make a demand on the board explaining the claims that SH wish be
investigated and remedied, before filing suit, unless you can show it would be
futile (DL)
ii.
To determine futility, the court will decide whether under the particularized
facts a reasonable doubt is created that
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Difficult for SH to retrieve the docs needed to provide the court the
particularity it demands
d. Once filed, the company has three options
i.
Go along with the suit- dont fight it
ii.
Seek stay (60 days) to conduct investigation; or
Determined in GF
Alter Ego- when the entity is person, not the corporation. The
individual is dominating, has total control, and uses the control. Courts
look at:
Ignoring corporate goals and formalities (mere sloppiness is not
enough) mere sloppiness is not enough
i. SH treats corp. assets as their own or pay private debts
using corp. assets
ii. Commingling of funds and assets
iii. Fails to hold SH meetings
iv. Fails to issue stocks
v. Has control (complete domination)
Analysis:
Purpose was to attempt to achieve equity
Alter Ego? No
i. Corp. formalities were not egregiously ignored
1. passive SHs
2. no commingling of accounts
3. not sing corp. assets for personal use
4. SH meetings occurred, even if informal
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Analysis:
Purpose was to prevent fraud and/or achieve equity
Alter Ego? Yes
i. Control
ii. Used same location repeatedly
iii. Used corps assets for personal gain
iv. Commingling used house as collateral for secured
interest loan)
Under Capitalization? N/A
Using Corp. to commit fraud & avoid existing obligations?
i. used name & location to convince business to continue
doing business with him.
Cases
Piercing the veil is not necessary when an individual is directly responsible for
committing a tortious act, even when acting as an officer or in the name of
the corp. It is necessary when directors or officers of SHs are not directly
involved in the tortious conduct
Western Rock v. Davis (Texas Law)
ii.
b. Tort
i.
ii.
iii.
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may be pierced and parent held liable for subs conduct when the
corp. form would otherwise be misused to accomplish wrongful
purposes, such as fraud, on the shareholders behalf
The parent has abused the privilege of the corp. by using the
subsidiary to perpetuate a fraud or injustice or to otherwise
circumvent the law (illegality)
Caused harm
ii.
Burden of Proof- must demonstrate (1) control by one corporation of
another, which is (2) used in a way that results in fraud or injustice; and
which (3) is the proximate cause of s alleged injury.
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iii.
gross undercapitalization
a. a transaction whereby two or more corporations are combined into one of the corps,
usually referred to as the surviving corporation
b. Dissenters Rights associated with voting for a merger. Only in closely held
corporations not publicly traded corporations- sell shares in the market.
i.
right of dissenting SH to have their shares purchased for cash at fair value
ii.
Can receive market value of their shares
iii.
Two approaches:
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consideration
2. Short-Form Merger
a.
b.
c.
d.
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e. NO SH VOTE
a. Trying to circumvent SH acquiring corp. from have appraisal and voting rights for
dissenters
b. Rule: If less than all assets are sold, corp. planners must determine whether the
transaction is quantitatively & qualitatively significant enough to require approval
not of ordinary purpose of business (no need for approval of sale of assets if done in
ordinary course of business)
c. Characteristics:
i.
Both boards must approve
ii.
SH votes:
4. De Factor Merger
a. The SHs who are denied voting or appraisal rights cause ask a court to intervene
and characterize the transaction as a merger
b. Characteristics:
i.
Set up different from, but appears to be, a merger
ii.
Both boards and sets of SHs must approve
iii.
Delaware independent legal significance theory
c. Applestein v. United Board (MBCA)
i.
Rule: It is proper for a court to disregard the form of a sale or purchase of
assets transaction when its characteristics are virtually identical to those of a
merger in order to order appraisal rights
ii.
Background: Acquiring company was United Board. Interstate was the
target company. Epstein owned all the shares of Interstate. The plan involved
a stock exchange Epstein would own 40% of Uniteds shares for his
Interstate stock the assets & liabilities of Interstate would be acquired by
United, Interstate would dissolve, and none of Interstates officers and
directors would remain. United advised SHs that those who voted against the
plan would not be entitled to appraisal of their stock.
iii.
Analysis: The transaction between United and Interstate was considered a
de facto merger because factors present in a merger were found in the plan:
Pooling of interests
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ii.
Background: Used Sale of Assets (Acro to Loral) and Dissolution (of Acro
after sale)
5. Cash-Out Merger
Rule:
If self-dealing or beach of duty of candor, then go to the entire
fairness review. Challenger alleges specific acts of fraud,
misrepresentation, or other items of misconduct to demonstrate
unfairness. BOP is originally on majority SH to show that
transaction is fair. (Weinberger v. UOP)
i. Fair Dealing (duty of candor / cannot mislead)
1. Factors:
a. timing of transaction
b. how it was initiated
c. hot it was structured
d. how it was negotiated
e. how it was disclosed to directors
f. how approvals of BODs & SHs were obtained
ii. Fair Price
1. Take into account all relative factors
a. assets
b. market value
c. earnings
d. future prospects
e. other elements that affect value of stock
2. Should not take into account speculative elements
that may arise from expectation of merger
BOP shifts to minority SH if corp. action has been approved by
an informed vote to show that transaction was unfair
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ii. Should take into account all relevant factors, except for
speculative elements of value that may arise from
accomplishment and expectation of merger
b. Appraisal Remedy & Cash-Out Mergers
i.
Long-Form Mergers (Second Tier = Cash-Out Merger)
Technicolor Case
Rule: Appraisal value is as of the date of the merger: the value
added to the going concern by the acquiring company during
the transient period of a two-step merger accrues to the benefit
of all SHs and must be included in the appraisal process on the
date of the merger
Background: MAF was going to acquire Technicolor using a twostep merger (cash-tender followed by a cash-out). MAFs
controlling SH had a plan to dismember some of Technicolor
businesses after the tender offer, including its failing One Hour
Photo businesses. The two-step takeover included an all-cash
tender offer of $23/share. The plan was operative on the date of
the merger. By not including the plan the court understated the
fair value in the appraisal action.
ii.
Short-Form Mergers
Glassman v. Unocal
Rule: Entire fairness standard is not applicable in short-form
mergers; appraisal is the only remedy unless there is a showing
of fraud or illegality. Duty of Disclosure is required minority
shareholders must be given all information that is material to
their decision on whether to accept or seek appraisal.
Background: Unocal owned 96% of UXCs shares and decided
to eliminate the minority shareholders. Both companys hired
committees to consider a merger and a plan was announced: .54
shares of Unocal for each UXC share. Minority SHs argued that
Unocal breached fiduciary duties of fairness and full disclosure.
iii.
Stringer Case:
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Hostile Takeovers
1. Hostile Takeovers Occur when/thru tender offer or proxy fight
a. Acquiring company seeks control without the BOD of target companys approval
because
i.
theyd possible be removed (conflict of interest), or
ii.
it could completely change company
b. Two-tier Tender-Offer
i.
Seeks control by offering too low of a price in initial offer, coercing
shareholders to accept initial offer or risk having to tender shares for an even
lower price or junk bonds in the second tier
ii.
Creates a prisoners dilemma- lack of information given to shareholders is
biggest problem
c. Proxy Fight
i.
Seeks authority to vote sufficient shares to gain control of board
2. Vocab
a. Bidder/ Raider: acquiring company
b. Bust-up: seeking to break up target and sell it off in pieces
c. Junk Bonds: bonds that are higher risk and bear a higher interest rate
d. Target: company sought to be acquired by raider
e. White Knight: a second bidder, friendly to the target, who makes an offer to rescue
the target from a hostile bidder does not acquire control but acquires a large block
of stock
f. Front-end loaded tender offer: the consideration in the tender offer is worth more
than the consideration in the second-step so that shareholders who do not tender in
the first step will be forced to accept less for the untendered shares
g. Golden Parachutes: a means of keeping executives when a company is in play
lucrative compensation and benefits
h. Greenmail: a targets repurchase of its own shares from a raider where the target
pays a premium for the shares to induce the unwanted suitor to go away (Cheffs
Case)
i. Lock-ups: (action by the crown jewels) gives the white knight a right to purchase the
corp.s move valuable assets
i.
Increase dividends to make a take-over less attractive
ii.
Buy off a bidder by paying green mail
iii.
Run off debt to make company less attractive
iv.
Poison pill
j. Crown jewels: companys most valuable assets
k. Poison Pills: stock rights or warrants issued to a potential target shareholders,
triggered by some event, prior to takeover get the right to redeem shares in target
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for a price above market price or right to purchase shares of acquiring company at a
reduced price after merger
i.
Flip-In Plan: rights are given to shareholders to purchase additional shares of
stock in the corporation, at a discount. The raider cannot purchase.
ii.
Flip-Over Plan: rights are given to target shareholders to purchase shares in
any company into which the target company is merged at a discounted share
iii.
Poison pills dilute shares, forcing Raider to buy more
3. Unocal
a. Applies to target companys BODs defensive measures
b. Rule:
i.
Before the BJR can be applied, the Directors have the burden of proof to show
questions of illegality
risk of non-consummation
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quality of securities being offered in the exchange
iii.
Not a threat: an all-cash, all-shares offer, failing within a range of values that
a SH might reasonably prefer
f. Directors are not obliged to abandon a deliberately conceived corp. plan for shortterm shareholder profit unless there is clearly no basis to sustain the corp. strategy.
Responsive action enacted as corps goal of carrying out a pre-existing transaction
may be reasonably related to a threat. (The Time Case)
g. Unocal v. Mesa
i.
Background: Unocal held a BOD meeting to discuss an offer from Mesa (a
two-tier tender offer for $54/share with junk bond securities in the second
tier). Took 9 1/2 hrs, majority were independent outside directors, discussed a
minimum $60, and discussed defensive strategies (self-tender at $70-75
/share). At the second meeting they rejected the offer. Held another meeting
to approve the self-tender. Took 2 hours, had a detailed presentation, decided
on $72/share, and would go in affect in Mesa acquired 64 million shares
(Mesa already owned 13%). Did not allow Mesa to participate in self-tender.
ii.
Analysis: Court found that the measure was reasonably related to the threat
by Mesa (raider), a company with a national reputation as a greenmailer
(presumptively coercive). The exclusion of Mesa from the self-tender was
justified reasonably related to threat posed. If the raider could participate it
would have meant Unocal was funding Mesas own takeover.
h. Cheff Case (reasonable grounds & good faith)
i.
Rule: Where there is a conflict of interest the BOP is on the BOD to show the
action was in good faith with reasonable investigation. There is no penalty for
honest mistakes of judgment if it was reasonable at the time.
ii.
Background: A deritvative suit was filed against Hollan corp. for losses
resulting from improper use of corp. funds to purchase shares of the
company. Hollan was owned by P.T Cheff, Wife (12k shares together), and
Nephew (24k shares) and a few other officers. The companys marketing
methods were currently under FTC investigation and sales were down.
Hazelbank corp. owned a large number of Holland shares. Cheffs wife and
nephew owned a majority of Hazelbank shares. Maremot, president of
Maremot Auto, had an interest in merging his company with Holland.
Maremot said he had no interest once it wasnt going to be feasible but he
owned 55k shares, increasing to 100k after several months. He demanded to
be put on the BOD, but Cheff refused. Maremot had plans that were different
from the current structure of the business and the idea of Maremot taking
over created unrest amongst employees. Maremot also had experience with
liquidating companies. Mrs, Cheff personal bought Hollan stock. Maremot
attempted a buy-sell offer with Hazelbank. To keep Maremot from getting a
hold of more stock, there was an agreement to purchase Maremots stock
(greenmail) at $14 per share and had to borrow a large sum to do so. Court
found that Hollands BOD showed that they reasonably believed there was a
threat and performed with good faith and reasonable investigation.
i. Moran v. Household (Unocal applied to defensive mechanism)
i.
Background: Household was concerned it was vulnerable to a takeover due
to the current environment of bust-up takeovers occurring in the financial
industry. One of its directors, Moran, also a chairman of D-M-K, suggested a
leveraged buy-out of Households stock, which never progressed. Instead the
BOD approved a Rights Plan with two Poison Pill options (one flip-in and one
flip-over). The trigger was 20% of shares being acquired by anyone. The
Shareholders would then have the right to purchase 1/100 of a share of
preferred stock. If no merger occurred then the holder of the shares can
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ii.
purchase $200 worth of common stock for only $100. The BOD met with two
firms (Goldman & Sachs and Watchell, Lipton) to go over the plan. It involved
extended conversations and Moran voiced his concerns at that time.
Analysis: BOD were authorized to adopt the plan. 1) BOD showed good faith
in adopting the plan because it was in reaction to what it perceived to be a
viable threat and not to protect themselves. They were reasonably informed
since they met with the two firms to discuss it, therefore not grossly
negligent. 2) And the plan was reasonably related to the threat.
4. Revlon
a. Applies to target companys BODs actions and whether they breached their duty to
SHs
b. Revlon Duties:
i.
maximize immediate shareholder value, and
ii.
auction company fairly
c. Two instances that triggers Revlon Duties (but not only):
i.
Change of Control
When, in response to a bidders offer, a target abandons its longterm strategy and seeks an alternative transaction involving the breakup of the company
if Boards reaction to a hostile tender-offer is only a defensive
response and not an abandonment of corp.s continued
existence, then no Revlon duties attachonly Unocal duties
Use of lock-up agreements, no-shop clauses, and dry-up
agreements that prevent shareholders from obtaining a
premium and making the sale of a company inevitable is
insufficient evidencesubject to Unocal
d. Revlon Rule: When there is a pending sale of control, the BODs role changes from
defenders of the corp. to auctioneers and their fiduciary duty is to get the best price
for the stockholders at a sale of the company
i.
inevitable dissolution or break-up is not necessary
ii.
See The Time Case: No change of control the company would be owned by
a fluid aggregation of unaffiliated SHs both before and after the merger so
that neither corp. could be said to be acquiring the other
e. Obligations:
i.
act diligently and vigilantly in examining transactions and offers
ii.
act in good faith
iii.
to obtain and act with due care on all material information to determine
which action could provide best reasonable value available to SHs
iv.
to negotiate actively and in good faith with both bidders
f. No-Shop provisions cannot define or limit fiduciary duties
g. Sale of control implicated enhanced scrutiny:
i.
threatened diminution of the current SHs voting power,
ii.
the fact that an asset belonging to the public SHs is being sold and may
never be available against, and
iii.
actions which impair or impede SH voting rights
h. Competing Bidders not treated equally:
i.
whether the BODs properly perceived that SH interests were enhanced, and
ii.
action must be reasonable in relation to the advantage sought to be
achieved, or
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to the threat which a particular bid allegedly poses to SH interests
i. Revlon Case
i.
Background: Revlon was the target company, had 14 board members,
majority of which were interested. Pantry pride was the raider, made an offer
beginning at $46 and continued to raise during the bidding war to $56.
Forstman was the white knight that offered $57 upon several conditions
(Lock-up option to purchase Revlons crown jewels, no-shop provision, and
$25 million cancelation fee). Revlon created poison pills plans.
ii.
Analysis: The initial defensive tactics (poison pill and repurchase) were
permitted. Once Pantry Prides offer was $50 a takeover was inevitable and
Revlon Duties kicked in. Therefore, the agreements with the White Knight
breached Revlon BODs fiduciary duties because they allowed considerations
other than the maximization of the SHs profit to affect their judgment.
j. Paramount v. Time (The Time Case)- no Revlon Duties triggered
i.
Rule: Two triggers for Revlon Duties: selling of the corp. or change of corp.
control
ii.
Background: Time prepared a tender-offer for 51% of Warner shares after
Paramount offered an all-cash purchase of Time shares for $175/share.
Paramount and Time filed suit to enjoin the tender offer claiming it breached
Revlon & Unocal duties. Discussions about a joint venture between Time and
Warner had been going on for some time. Eventually Negotiations led to a
plan that there would 24 BODs (1/2 of each corp.), with the president of Time
taking over once Warners retired, and the exchange rate for shares. Time
also adopted several defensive tactics: stock exchange, no-shop clause, dryup agreements with banks. Once the plan was announced, and before SH
mtg, Paramount announced an all-cash offer for $175/share subject to
conditions: terminate merger with Warner, stock-exchange, and defensive
measures. Time believed its value was worth more than $175 and concluded
the offer was inadequate. The merger was recast as an acquisition: 51%
acquired for $70/share for Warner shares with remaining for securities and
cash. Time would have to take on debt to do so. Paramount then raised its
offer to $200. The BOD still found the amount to be inadequate because the
acquisition with Warner would have a greater benefit.
iii.
Analysis: (1) Abandoning an existing plan will not trigger Revlon duties, but
may trigger Unocal duties. Also, Time was going to maintain control of the
corp. and it would not break up. shareholders, unless there is clearly no basis
for sustaining the strategy. No Revlon triggers were triggered. (2) Directors
were not obligated to abandon a plan for a short-term profit for The Board to
meet its Unocal duties:
The measures were reasonably related to the threat because its goal
was to carry out a pre-existing plan, which did not preclude Paramount
from making an offer
k. The QVC Case Fiduciary Duties under Revlon
i.
Ruled: Obligations
Reasonably Informed
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ii.
iii.
Insider Trading
1. Classic Insider Trading:
a. Corporate Insider
i. Classic Insider
1. corporate officer, director or employee
ii. Constructive Insider
1. attorney, accountant, consultants, etc.
b. who has material nonpublic information about the enterprise
i. material information a reasonable person would attach importance in
determining choice of action, including any fact that may affect value of stock
c. has Duty to either
i. abstain from trading, or
ii. disclose the nonpublic information
1. requires giving public enough time to react
2. Violation of 10(b)
a. Chargeable conduct involves
i. a deceptive device or contrivance used
ii. in connection with the purchase or sale of securities
3. Liability Based on Classic Insider Trading
a. Rule: Corporate insider must abstain from trading in the shares of his corporation
unless he has first disclosed all material insider information known to him (Cady,
Roberts & Co.)
b. Insider particularly officers, directors, or controlling stockholders
c. Duty arises when:
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