M&A Yablon Spring 2019 Outline

MERGERS, ACQUISITIONS, AND TAKEOVERS
Table of Contents
TYPES OF MERGERS, APPRAISAL RIGHT, AND THE VOTING REQUIREMENTS. ........................................3
FORMALITIES FOR ASSET ACQUISITIONS (including when SH vote is needed or not) ............................8
"ALL OR SUBSTANTIALLY ALL" .............................................................................................................. 9
DE FACTO MERGERS. ........................................................................................................................ 14
LETTERS OF INTENT .......................................................................................................................... 14
United Acquisitions v. Banque Paribas .......................................................................................... 15
Siga v. PharmAthene; Best Effort. ................................................................................................. 17
DUE DILIGENCE (WHAT CAN BE DONE BY THE BUYER?) ..................................................................... 22
Confidentiality Agreement ........................................................................................................... 22
Registration Statements: .............................................................................................................. 22
PURCHASE AGREEMENTS, AND PRICE TERMS. .................................................................................. 24
Purchase Price Adjustments ......................................................................................................... 24
Earn-outs ..................................................................................................................................... 24
MATERIAL ADVERSE CHANGE [Should the buyer have to buy something at the original price if the item
has materially worsened?] ............................................................................................................... 27
Who Caused the Event: ................................................................................................................ 27
Burden of Proof: .......................................................................................................................... 27
Breadth of MAC Provision: ........................................................................................................... 28
SUMMARY ................................................................................................................................... 28
SHAREHOLDERS SUING TO ENFORCE MERGER: ................................................................................. 29
BEST EFFORTS CLAUSES. ................................................................................................................... 30
Definition of “best effort” in agreements: ..................................................................................... 30
Courts Interpretation of BE Clause: ............................................................................................... 30
YOU GET WHAT YOU SIGN UP FOR. .................................................................................................. 32
Financing Outs & Solvency Outs ................................................................................................... 32
Contract Interpretation > Reps & Warranties: ............................................................................... 32
GRANTING INJUNCTION DUE TO BANK INVESTORS’ GREED (IN RE DEL MONTE) ................................. 32
DEFENSES TO TAKEOVERS. ............................................................................................................... 35
Motives behind defenses: ............................................................................................................ 35
Reasonable means of which to accomplish defenses: ....................................................................... 36
“Draconian” defenses: ................................................................................................................. 38
Blocking SH Votes as a Defense: ................................................................................................... 40
SH Voting Powers; Generally .............................................................................................................. 40
Blasius Review .................................................................................................................................... 40
Blasius Review overlap with Unocal Review ...................................................................................... 41
POISON PILLS ................................................................................................................................... 43
Authority to adopt PP: ................................................................................................................. 43
Review Standard of PP is BJR: ....................................................................................................... 43
PP does not limit Proxy Efforts: .......................................................................................................... 44
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PP Illegally Applied: ............................................................................................................................ 44

REVLON DUTIES: .............................................................................................................................. 47
Change of Control Definition: ....................................................................................................... 47
What is NOT Change of Control: ........................................................................................................ 47
Change of Control in 3 situations: ...................................................................................................... 48
LIMITATIONS ON REVLON: ............................................................................................................... 49
Board has latitude to engage in transaction without having to bid the market. ............................... 49
Board is allowed to adopt termination fees, and matching rights even if it will fend off bidders. ... 49
Board is allowed to negotiate with just one bidder. .......................................................................... 50
NO SHOP CLAUSES AND FIDUCIARY OUTS. ........................................................................................ 51
HOW LIMITING CAN THE “NO-TALK” PROVISION BE? ....................................................................... 51
Corporation doesn’t have Revlon duties just because it is going private. ......................................... 52
LOCK-UPS ........................................................................................................................................ 54
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TYPES OF MERGERS, APPRAISAL RIGHT, AND THE VOTING REQUIREMENTS.
It is difficult to structure a transaction in a way that eliminates voting rights on the part of
the target's shareholders. A short form merger will do the trick, but works only as to parent-subsidiary
mergers in which the parent already owns 90% or more of the target's stock. 253 A tender offer followed
by a freeze-out merger to eliminate any remaining minority shareholders eliminates a meaningful target
shareholder vote, but introduces fiduciary duty complications.
Avoiding acquiring company shareholder voting, however, is easier. For example, in a purchase of
all or substantially all of the target's assets, the acquiring company shareholders get no vote. Further, buyer
shareholder vote is not required, if the consideration is in cash or less than 20% of acquirer stock is issued
in the transaction. 251(f). Finally, in a triangular merger, nothing changes from the target's perspective.
Exactly the same approval process must be followed. From the acquiring corporation's perspective,
however, much has changed. Only shareholders of a constituent corporation are entitled to vote or to
exercise appraisal rights. In a triangular transaction, the constituent parties are the target and the shell. As
a result, the parent acquiring corporation is not a formal party to the transaction, and its shareholders are
entitled neither to voting nor appraisal rights.
The one potential hitch for the acquirers comes when the acquiring company intends to use its own
stock as consideration for the target shares. The state corporate law rules discussed above don't change. If
the acquirer does not have enough authorized shares in its certificate of incorporation to effect the deal, it
will need a shareholder vote to amend its articles of incorporation to authorize issuing new shares. Although
that's technically not a vote on the merger, shareholders will be voting on the amendment will full
knowledge that the amendment is necessary to effect the deal as structured. So it's a de facto referendum
on the deal.
For NYSE-listed corporations, however, there is a further complication. A transaction that results in a 20-
percent or more increase in the number of shares outstanding requires shareholder approval. This is so
because NYSE Listing Standard 312.03 provides that:
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(c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into
or exercisable for common stock, in any transaction or series of related transactions if:
(1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of
the voting power outstanding before the issuance of such stock or of securities convertible into or
exercisable for common stock; or
(2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of
20 percent of the number of shares of common stock outstanding before the issuance of the common stock
or of securities convertible into or exercisable for common stock.
1. What is the advantage of a “short form” merger?
No shareholder vote required. Discretion is left to the BOD of the parent. But §253 requires 90% of asset
control by the parent company to conduct a short-form merger (not easy to do in a tender-offer).
However, there is Top-Up option where the target Corp agrees to issue new shares so that they
acquirer buys enough to reach the 90%.
 Note that shareholder vote to issue new shares is not required in Top-Up b/c vote is only required
when issuing new shares to the public.
Regarding appraisal right in short form mergers, if the parent does not own 100% “stockholders of the
subsidiary Delaware corporation party to the merger shall have appraisal rights” (253(d)). But if they were
getting shares as the pay for the new merger, and the company was publicly held, they don’t get appraisal
right anyway pursuant to 262(b).
2. The CEO’s of A and B, both publicly traded Delaware companies, have tentatively agreed to a
merger. The deal being contemplated is a “merger of equals.” Each shareholder of a and b will
receive shares in the new entity, ab, in a 60/40 ratio, to reflect the relative size of the two companies.
As a matter of Delaware law, what legal steps must take place before the merger can be
consummated?
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ANSWER: This is a §251 transaction. A merger of equals is when two firms of about the same size come
together to form a single new company; Shareholders from both firms surrender their shares and receive
securities issued by the new company. Thus: (1) BOD make a resolution; (2) Probably sign the merger
agreement; (3) shareholders from both firms vote.
3. Will either company’s shareholders receive appraisal rights if the merger goes ahead as originally
contemplated?
Yes, pursuant to Del. GCL § 262. But §262(b)(i) says that where corporations were listed in national
securities exchange, and the merger gives the shareholder new shares pursuant to the new merger, no
appraisal rights. §262(b)(2)(B) says it even applies to reverse triangular mergers as well if they get shares
of that sub (“shares of any stock”). However, if the stockholders were to get Cash, or anything other than
shares, for the value of their shares pursuant to the new merger, you get appraisal rights.
 NOTE: Back in the day, if you brought an appraisal proceeding you were awarded purchase price
of the date of the merger, plus guaranteed 5%. But given the low interests rate, people started taking
advantage of the 5% so Delaware changed the fixed 5%. Thus, 262(h) now allows a surviving
corporation to pay to the dissenting shareholders an amount in cash at any time before judgment is
entered in the appraisal proceeding, thus stopping the accrual of interest on the amount so paid
by the surviving corporation. Thereafter, interest will only accrue on the sum of (a) the difference,
if any, between the amount so paid and the fair value of the shares as determined by the Court of
Chancery, and (b) interest already accrued at the time of the payment.
4. If it becomes a reverse triangular merger?
ANSWER: The Delaware Court of Chancery held that the state’s corporation law does not provide
appraisal rights to shareholders of the parent of a party to a merger, as the parent is not a “constituent
corporation.” the provisions that use it “clearly imply that ‘constituent corporations’ are entities that actually
were merged or combined in the transaction and not a parent of such entities.”
5. What are the likely tax effects of the merger on individual taxpaying shareholders of both
companies?
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ANSWER: It seems like an “A” Reorganization because they swapped stocks in a way such that the two
companies ended up becoming one new company with an agglomerated store of assets and equity, rather
than outright sold, assets and equity. In our case, it is a statutory consolidation, where two or more
corporations contribute all of their assets and liabilities to a new corporation formed to affect the transaction,
and the preexisting corporations are dissolved. This structure is appropriate for mergers of equals.
Acquirer and target shareholders have the same voting and appraisal rights as in a statutory merger.
6. The CEO of A tells you that some of the larger shareholders of a have expressed misgivings about
the proposed transaction and the CEO is not sure he can win a shareholder vote. Can you propose
a deal structure which might avoid having to hold a shareholder’s vote of a shareholders?
ANSWER: Reverse Triangular Merger without issuing the new shares. For consideration of the merger
between the Sub and B, they give B 40% of A-shares. Then, B swallows Sub, and A renames its company
to AB. However, under the NYSE 312.03(c), anytime a company issues more than 20%, we need
shareholder votes.
7. Are there any circumstances under which a vote of the shareholders of B might be avoided?
ANSWER: Virtually no way-out.
8. Assume that a 25% shareholder of B CO., is in a position to block a proposed merger. Can the
management of B remove her as an impediment to the deal by paying a $ 1 million to purchase her
shares prior to the vote (assuming this is consistent with their fiduciary duty)?
ANSWER: Yes. But if you want the right to vote according to the time limit set to new buyers of shares,
you have to specify in the Purchase Agreement that you’re buying the seller’s right to vote as well.
However, the buyer’s economic interests must be aligned with the purchase of votes. Crown EMAK
Partners, LLC v. Kurz, (There was no improper vote buying because the economic interests and the voting
interests of the shares remained aligned.”) In this case, it passes muster because “under the terms of the
agreement, purchasing stockholder bore the economic risk from the shares, and thus, Delaware law
presumed that he could exercise the right to vote those shares.”
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9. Can the management of B pay her $1 million to vote in favor of the merger (assuming this is
consistent with their fiduciary duty)?
ANSWER: Vote-buying is not per se illegal unless done for the purpose of defrauding and disenfranchising
other shareholders. Schreiber v. Carney.
10. A CORP makes a tender offer for TARGET at $20 per share. When the tender offer closes, A owns
60% of TARGET stock. A then seeks to merge TARGET into a wholly owned subsidiary of A,
with TARGET as the surviving entity. Are any shareholder votes required for this transaction?
ANSWER: “[N]o vote of stockholders of a constituent corporation shall be necessary to authorize a
merger with or into a single direct or indirect wholly-owned subsidiary of such constituent corporation
if: (1) such constituent corporation and the direct or indirect wholly-owned subsidiary of such constituent
corporation are the only constituent entities to the merger.” §251(g). But 251(g) only applies to “wholly
owned” and 60% is not, so you will need a vote.
11. Can a 10% shareholder vote against the merger for purely selfish reasons, even if she believes the
merger would be in the best interest of the corporation?
Yep!
NOTE: California law does not heed to internal affairs doctrine: California law applies to business activities
of corporations, directors, and officers doing business in California, this is particularly so in the case of
sale, distribution or transfer of stock. Western Air Lines. Inc. v. Sobieski (1961). The “management and
method of [a foreign corporation's] business affairs in California with the citizens and residents thereof are
not internal affairs and must conform with California laws. Id. The Court of Appeal noted that the U.S.
Supreme Court held: “When a corporation sells or encumbers its property, incurs debts, or give securities,
it does business; and a statute regulating such transactions does not regulate the internal affairs of the
corporation.”
DGCL § 251(f) permits a merger to be effected without shareholder approval if the corporation is the sole
surviving corporation, the shares of stock of the corporation are not changed as a result of the merger, and
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the total number of shares of stock issued pursuant to the merger does not exceed 20% of the shares of the
corporation outstanding immediately prior to the merger. § 251(f).
FORMALITIES FOR ASSET ACQUISITIONS (including when SH vote is needed or not)
1. A seeks to buy all of B’s assets for cash. Can A buy all the assets and not buy the liabilities? How will
that affect the price?
What separates an asset purchase from a merger or a stock acquisition is that the company doing the
purchasing is not buying any of the stock or ownership in the target company. Instead, the purchasing
company is paying cash or giving its own stock to the seller for the title to what the other company owns.
So instead of buying the company that has five coffee shops in town, the purchasing company will buy all
of the espresso machines, the furniture, the lease rights to the space and perhaps the trademarks, business
permits and licenses or franchise rights owned by the target company. Del. §271.
 Successor liability in asset purchases is applicable many times in tort actions (as opposed to contract
liability) depending on the court
2. What board approvals are required?
“As its board of directors or governing body deems expedient and for the best interests of the corporation”
Del. §271. But Del. §271 only mentions the seller’s BOD; The acquirer BOD and stockholders only have
to vote pursuant to basic fiduciary duties laws.
3. What shareholder votes are required?
When it changes the heart of the company, “majority of the outstanding stock.”
4. Who gets appraisal rights?
In Delaware, transactions that may be the economic equivalent of a merger do not trigger appraisal rights.
This is because §262(b) does not mention §271 acquisitions.
5. Rolls-Road company is a very old and well-respected Delaware corporation. For many years it was
known for making high quality, high priced automobiles, which many considered the best in the world. In
recent years, however, its share of the luxury automobile market has dropped substantially, and its
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automotive assets now represent only 30% of its net worth, with most of the remainder involved in
manufacturing jet engines. Would a sale of the automotive division require a vote of the rolls-road
shareholders?
"ALL OR SUBSTANTIALLY ALL"

ANSWER: Delaware law Section 271 requires a corporation to obtain stockholder approval when it
disposes of all or substantially all of its assets. Because these statutes do not define "all or substantially all,"
counsel must look to court decisions for guidance when advising on an asset sale.
 The percentage of assets sold is not the determining factor in the analysis, though courts
do weigh the quantitative factors. For example, in Hollinger Inc. v. Hollinger Int'l, Inc., the court
found that the sale of a major division of the company that comprised 56% to 57% of the company's
asset value did not satisfy the quantitative test because the company would continue as a profitable
enterprise even after the sale even assuming that the asset sold was the "single most valuable asset,".
 In Gimbel, the sale of a subsidiary representing only 26 percent of the company’s assets, 41 percent
of its net worth, and 15 percent of its revenues was deemed not to be the sale of substantially all of
the corporation’s assets.
 In Katz, the court held that 51% percent (quantitative) and the fact that the Plant planned to move
away from its steel-drum business and begin making plastic drums (qualitative) was enough to
meet the "all or substantially all" of 271.
 In Hollinger, subsidiary that owned a leading newspaper and magazine in the United Kingdom
was not “qualitatively vital” to corporation under the Gimbel test such that shareholder approval
was required. Although newspaper that subsidiary owned was one of the world's most highly
regarded newspapers, plaintiff misinterpreted the qualitative part of the Gimbel test which focused
primarily on economic quality not aesthetical superiority. Sale of “quality” newspaper did not strike
at corporation's “heart and soul.” No investor in corporation would have assumed that any of
corporation's assets were sacrosanct, and after sale the corporation would still retain valuable assets
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9. Suppose clever Corp creates 10 separate wholly owned subsidiaries and transfers 10% of its assets to
each one. It then enters into a transaction with an independent company under which subsidiaries 1 through
8 will sell all their assets to the independent company. Will a shareholder vote of clever Corp be required
under Delaware law?
ANSWER: Section 271 provides, in relevant part, as follows:
Every corporation may at any meeting of its board ... sell, lease or exchange all
or substantially all of its property and assets, including its goodwill and its
corporate franchises ... as its board of directors ... deems expedient and for the
best interests of the corporation, when and as authorized by a resolution adopted
by the holders of a majority of the outstanding stock of the corporation entitled
to vote thereon ...
By expressly referring to "the corporation," "its board of directors," "its property and assets," and
the approval of a resolution by the holders of a majority of the outstanding stock of that "corporation," the
express terms of Section 271 suggest that the statute only triggers a stockholder vote at the corporation
which is selling its assets. In light of the literal terms of Section 271, many Delaware practitioners had
concluded that there was no reasonable basis on which to construe the literal language of the statute to
require the approval by stockholders of any entity other than the selling corporation (i.e. excluding voting
requirement of subsidiary.)
Even if the assets to be sold by a subsidiary are deemed to be owned directly by the parent
corporation, a vote of the stockholders of the parent corporation would be necessary only if the assets
constitute all or substantially all of the assets of the parent corporation. The decision of the Court of
Chancery in Gimbel v. Signal Cos., Inc. is the leading case by a Delaware court as to what constitutes "all
or substantially all" of a corporation's assets for purposes of Section 271 (see supra).
10. B, a publicly traded Delaware company, seeks to acquire all the shares of Gaggle, an internet based
humor company, which is also incorporated in Delaware and trades publicly on Nasdaq. B has agreed to
exchange 2 shares of B stock for each outstanding share of Gaggle, which will require the issuance by B of
an additional 30% of its authorized shares. The companies have informally agreed on a price. You are the
lawyer for B. B’s CEO tells you she wants to do the deal as quickly as possible, with no vote of B
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shareholders. She also wants to avoid giving appraisal rights to Gaggle’s shareholders, if possible. Also,
Gaggle licenses a great deal of its technology and under the terms of those licenses, if Gaggle is dissolved
or ceases to exist, the license is terminated and must be renegotiated.
ANSWER: Again, RTM. No vote required under Del. Law because it falls under 251(f). But under
NASDAQ 5635(a)(1)(A) you need stockholder vote when common stock has/will equal 20% of new issued
stock. Regarding appraisal rights, since the shareholders are getting shares as the pay for the new merger,
and the company was publicly held, they don’t get appraisal right anyway pursuant to 262(b).
 NOTES: If a company can't pay dividends on cumulative preferred stock (stock that entitles the
holder to a fixed dividend, whose payment takes priority over that of common-stock dividends) due
to a cash shortage, the amount of that dividend is put into an arrears account. "Arrears" is a term
given to payments that are past due and must be paid before any other payment to preferred or
common stock holders is paid out. However, the right to be paid in full for such dividends,
notwithstanding provisions in the charter contract, may be eliminated by means of a merger which
meets the standard of fairness. Langfelder v. Universal Labs., 68 F. Supp. 209, 211 (D. Del.
1946), aff'd sub nom. Langfelder v. Universal Labs., Inc., 163 F.2d 804 (3d Cir. 1947)
 PAGE 138 NOTES: “Notwithstanding subsection (a) of this section, except to the extent the
certificate of incorporation otherwise provides, no resolution by stockholders or members shall be
required for a sale, lease or exchange of property and assets of the corporation to a subsidiary.” 271(c).
Thus:
a) Based on 271(c), it is clear under Delaware law that a vote of a parent corporation’s
stockholders is not required to authorize the drop down of all or substantially all of the assets of that
parent corporation to a wholly owned and controlled subsidiary.
b) 271(c) also makes it clear that a vote of the parent corporation’s stockholders would be
required before its wholly owned and controlled subsidiary sells, leases or exchanges assets that (on
a consolidated basis) constitute all or substantially all of the assets of the parent corporation. (See
above for definition of “all”)
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c) It is worth noting, however, that the reasoning of Hollinger still applies to an asset sale by
a subsidiary that is not wholly owned or controlled. As a result, a vote of the parent corporation’s
stockholder might be required if the parent corporation directed and controlled the disposition and the
assets constituted all or substantially all of the parent’s assets (on a consolidated basis).
1. What are cumulative convertible preferred shares?
With cumulative preferred stock, the company must keep track of the dividends it chooses not to pay to its
preferred shareholders. If it later decides to start paying dividends again, cumulative preferred shareholders
are entitled to receive all of their previous missed dividend payments before the company can pay common
shareholders anything. To calculate the accumulated dividends, you look back to the last paid dividend and
then count how many dividend payments the company skipped.
2. What was the transaction involved in the Natomas case?
According to the plan, a new holding company, New Diamond, was to be formed, which in turn would
form two wholly owned subsidiaries, D. Sub, Inc., and N Sub, Inc. In two reverse triangular “phantom”
mergers, D Sub, Inc., would merge into Diamond Shamrock, and N Sub, Inc., into Natomas; New Diamond
would issue New Diamond common shares to common shareholders of Natomas and Diamond Shamrock
in exchange for their shares. New Diamond would thus become the sole shareholder of Natomas' common
shares.
3. Why was it being entered into?
In May 1983, Diamond Shamrock Corporation, through a wholly owned subsidiary, commenced a hostile
tender offer for Natomas common stock and stated its intention to propose a merger between Natomas and
the subsidiary. Shortly thereafter, the boards of Diamond Shamrock and Natomas approved a plan and
agreement of reorganization between the two companies, and the tender offer was terminated.
4. What rights did the Natomas preferred shareholders get? Why did they sue? What was their legal
theory?
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“Plaintiffs urge that as a matter of law defendants breached their fiduciary duty by denying the preferred
shareholders their statutory right to vote on the merger and by depriving them of voting and other rights
granted under the certificate of determination.” [Although, usually preferred stocks don’t get voting rights.]
Plaintiffs claimed that since their company will become “New Diamond” they did fall under the
1201 exception class of shares remain unchanged b/c it would change to “New Diamond” and thus they
were entitled, under § 1200, to vote (“a reorganization shall be approved by the outstanding shares”).
California statute: “The principal terms of a reorganization shall be approved

by the outstanding shares ... of each class of each corporation the approval of
whose board is required under Section 1200 ... except that (unless otherwise
provided in the articles) no approval of any class of outstanding preferred
shares of the surviving or acquiring corporation or parent party shall be
required if the rights, preferences, privileges and restrictions granted to or
imposed upon such class of shares remain unchanged....”
Plaintiffs also insist that the preferred had no real choice but to approve the merger. Plaintiffs reason that
the reorganization plan made it economically unfeasible for the preferred shareholders to remain as
shareholders of Natomas because as a practical matter the conversion value and marketability of
their Natomas shares would vanish with the merger. The preferred shareholders were thus forced to
approve the reorganization and accept the alternative which granted them preferred shares in New
Diamond. Plaintiffs' rights and privileges argument rested on the premise that as preferred shareholders,
they had a right to the continued existence of a public market for their shares.
5. Would you say the holding in this case represents form over substance or substance over form?
FORM OVER SUBSTANCE b/c the court upholds the validity of the form of merger called reverse
triangular phantom merger.
Holding: Preferred stockholders had no absolute right under California law or under certificate of
determination to continued existence of public market for their preferred shares. Therefore, reorganization
structured as “reverse triangular phantom merger,” which preserved existing corporate identity of target
corporation, did not require vote of preferred stockholders.
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Fiduciary duty of directors did not include obligation to structure reorganization such that preferred
stockholders would receive rights and privileges specifically in “Natomas” … “New Diamond” is good
enough.
DE FACTO MERGERS.
In certain corporate transactions, such as a merger and consolidation, the dissenting shareholders
can use the appraisal statutes to obtain the “fair value” of the shares that have been taken. This is usually
straightforward in a statuary merger, since approval by votes of the board and shareholders of both
corporations are required. See Section 262 of the DGCL.
But what happens when two companies merge by “practical mergers?” The court in Farris v. Glen
Alden held that under the de facto merger doctrine, where the sale of assets between two corporation’s
result in the same consequences that a statutory merger would, a shareholder is entitled to his opportunity
for appraisal rights. In PA, to determine whether a de facto merger has occurred (as opposed to simply
buying or selling assets) we look if the corporation with the dissenting shareholders “lost its essential nature
and altered the original fundamental relationships of the shareholders among themselves and to
the corporation.” Farris v. Glen Alden
 In Farris, the court held that under the agreement, (1) List Alden would be engaged in numerous
activities (theatre, real estate, etc.) that Glen Alden was not originally engaged in; (2) List Alden
would have seven times the long-term debt of Glen Alden; (3) and stock in List Alden would only
be worth $21 per share, as opposed to the value of Glen Alden, $38 per share. As a result, proper
notice of the merger and of the Glen Alden shareholders’ appraisal rights should have been given
to Farris and the other shareholders.
Contrast with Hariton v. Arco Electronics, Inc., where the Delaware Supreme Court affirmed
the rejection of a similar de facto merger argument where the seller liquidated and “distributed to its
stockholders all the ... shares received by the sale of its assets.” The court expressly held that the
reorganization “accomplished through §271 and a mandatory plan of dissolution and distribution is legal”
and did not give rise to any successor liability by virtue of a de facto merger (i.e. appraisal rights).
LETTERS OF INTENT
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A letter of intent sets forth the material terms that the parties each believe are vital in order to be willing to
consummate an acquisition. LOI states that most its provisions are non-binding, describes contemplated
timing, details certain binding provisions, and lays out, either in the letter or in an exhibit, a list of material
terms. Nonetheless, the letter of intent is binding with respect to certain, specific provisions such as the no-
shop, choice of law, and an agreement to move forward with good faith dealings and negotiation towards
reaching a definitive agreement. See, e.g., Siga v. Pharmathene (infra). Finally, a purchaser will also want
a letter of intent because of the no-shop that is usually granted in a letter of intent, requiring that target not
solicit, or entertain, any material transaction with third parties for a period of time.
United Acquisitions v. Banque Paribas
1. In United Acquisitions v. Banque Paribas, how did the three European banks wind up as “sole
shareholders” of URI?
ANSWER: Paribas, Paribas Swiss, Royal Bank had become the sole owners of URI through foreclosure in
august 1985. The banks then appointed their own nominees to the URI board, one of them being Ris.
2. What were the banks presumably trying to do with URI?
It was understood that URI was for sale.
3. If Catsimatidis’ offer of November 15, 1985 had been accepted, would the letter to Paribas of that
date have been a binding agreement?
ANSWER: No because there are material terms yet to be discussed such as: No reps and warranties.
The November 15 letter expressed the intent of UAC to “enter into an agreement (the
“Agreement”) pursuant to which the Banks shall sell and UAC shall purchase”, the
common stock of URI for a price of $2.5 million. The letter stated further, in pertinent part:
“UAC and the Banks shall immediately direct their respective attorneys to commence
preparation of a mutually satisfactory form of Agreement” [meaning there was still work
to be done].
4. According to Catsimatidis, when did his deal become binding?
ANSWER: When they said we’ll close for $4M and he said $4M it is. But agreeing to a price is just an
initial step.
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According to Catsimatidis, as the meeting was ending, Catsimatidis said he would try
to come up with all cash “whether we do it three and one or four all cash.” (Catsimatidis
102). After the meeting, officials from Paribas began their credit inquiries. In the
meantime, Catsimatidis who had gone to Chemical Bank decided to improve the offer
and telephoned a $4 million cash offer to Ris. Later that day, Ris called Catsimatidis to
tell him that “Michael [Jacquet] says $4 million all cash you got a deal, it’s a deal
finished, complete.” (Catsimatidis 105) Ris testified that when he told Jacquet that
Catsimatidis had $4 million and wanted to know if he had a deal (Ris 150), Jacquet
replied “Yes, at $4 million.”
5. According to the Court, is a formal agreement necessary to bind the parties?
ANSWER: Yes.
The Second Circuit has held that under New York law ‘there are still situations where
the absence of a signed, formal agreement is fatal to an argument that a contract exists’
… If the parties intend not to be bound until they have executed a formal document
embodying their agreement, they will not be bound until then; and second, the mere fact
that the parties contemplate memorializing their agreement in a formal document does
not prevent their informed agreement from taking effect prior to that event.
6. What were the factors the Court considered in determining the intention of the parties?
ANSWER: While no single factor is decisive, each provides significant guidance to whether parties
intended to be bound only by writing agreement. The four factors are: (1) whether a party has explicitly
stated “that it reserves the right to be bound only when a written agreement is signed.” (2) “whether one
party has partially performed, and that performance has been accepted by the party disclaiming the
contract”; (3) “whether there is literally nothing left to negotiate or settle so that all that remained to be
done was to sign what had already been fully agreed to”; and (4) “whether the agreement concerns those
complex and substantial business matters where requirements that contracts be in writing are the norm
rather than the exception.”
7. Were they “forthright reasonable signals of an intent not to be bound?”
ANSWER: Yes. (1) Catsimatidis, after learning that there was a “deal” at $4,000,000 cash, instructed his
attorney to prepare written agreement, rather than tell him not to continue adding terms. (2) Paribas officials
never accepted the certified check offered by Catsimatidis. (3) Catsimatidis’ written agreement would have
required seller to make numerous representations and warranties that had not been subject of any
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discussions during previous negotiations. Thus, sale of stock controlling corporation was complex matter
which would normally be expected to be in writing.
This court finds the evidence to be clear, indeed overwhelming, that the “deal” reached
orally on December 5 was only as to the price of the transaction for the sale of the
company and that both parties fully expected there to be executed a written agreement
embodying not only that term, but also the outcome of subsequent negotiations as to the
representations and warranties sought by the buyer and the release and indemnification
sought by the seller. United Acquisition Corp. v. Banque Paribas, 631 F. Supp. 797,
808 (S.D.N.Y. 1985).
Siga v. PharmAthene; Best Effort.
Facts: SIGA needed money. Underwent diligent, two-month negotiations with Pharma regarding initial
term-sheet. Then, a bridge-loan contract that specifies that in return for money, Siga will not license to
others. Then, there was a merger agreement. LATS terms that specified to “negotiate in good faith with the
intention of executing a definitive License Agreement” were incorporated in both loan and merger docs.
Siga backs out since they never closed. Merger isn’t completed until contracts is signed, board approval
and voting occurs … Siga gets “cold-feet” Pharma sues saying Siga did not negotiate in good faith.
Holding: SIGA breached its contractual obligation to negotiate in good faith in accordance with LATS
terms, since incorporation of the LATS into the merger and bridge loan agreements reflected an intent on
the part of both parties to negotiate toward a license agreement with economic terms substantially similar
to the terms of the LATS if the merger was not consummated. SIGA’s new proposal was without giving
any meaningful weight to the dollar amounts or percentages SIGA had negotiated earlier; The new proposal
was drastically different and significantly more favorable to SIGA, and there was evidence that SIGA began
experiencing seller's remorse during the merger negotiations for having given up control of what was
looking more and more like a multi-billion dollar drug.
Rule: Termsheet and Letter of Intent has force to force parties negotiating in good faith when parties
negotiate extensively to uphold it. Where the parties to an agreement to negotiate in good faith have a
preliminary agreement, which does not commit the parties to their ultimate contractual objective, but rather
to the obligation to negotiate the open issues in good faith in an attempt to reach the alternate objective
within the agreed framework, and the trial judge makes a factual finding, supported by the record, that the
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parties would have reached an agreement but for the defendant's bad faith negotiations, the plaintiff is
entitled to recover contract expectation damages.
1. What kind of business is SIGA in? What is their business problem? Who owns SIGA?
ANSWER: Siga is in biodefense R&D. It was running out of money after having bought drug for smallpox,
and NASDAQ threatened to delist their shares. Through all this, Siga’s largest shareholder, MAF refused
to help them raise the $16M Siga needed.
2. What was SIGA’s “past experience” with Pharmathene that supposedly led it to seek a license deal
rather than a merger?
ANSWER: PharmAthene's Vice President, Richman, of Business Development and Strategies desired a
merger between the two companies, but SIGA resisted because of its past experience with PharmAthene;
Near the end of 2003, SIGA and PharmAthene had discussed a potential merger, but those discussions
failed as a result of PharmAthene's board members' reservations.
3. Why did SIGA “begin experiencing seller’s remorse?”
ANSWER: Basically, they didn’t need Pharma’s help any longer b/c they got financed elsewhere.
SIGA began experiencing seller's remorse after SIGA received a $5.4-million-dollar grant from the
National Institutes of Health. In September 2006, the National Institutes of Health awarded SIGA $16.5
million to develop the drug. After receiving this grant, SIGA representatives expressed remorse over having
agreed to the merger.
4. What was the significance of the PharmAthene Board’s “approval” of the license agreement term
sheet (LATS)? How significant is the fact that the “footer” on both pages of the term sheet said
“non-binding terms?”
ANSWER:
a) The footer is not dispositive.
b) The LATS approval is what makes the case b/c the express contractual language in the
Bridge Loan and Merger Agreements obligated the parties to “negotiate in good faith with the intention
of executing a definitive License Agreement in accordance with the terms set forth in the” LATS.
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c) The nest question is, what does with the terms set forth in the” LATS mean? Since the
negotiated hard for the LATS terms, and incorporated them in both contracts …:
We look to the totality of the negotiations, which include the Bridge Loan, Merger
Agreement, and “the extent to which the parties negotiated the economic terms of
the LATS. In light of SIGA's cash needs at the time, it doesn’t make sense to say “that
the parties would have wasted time and money negotiating specific economic terms for
the LATS without intending to give those terms significance in later negotiations.” It is
also “unlikely that the parties would have incorporated the LATS into the subsequent
Bridge Loan and Merger Agreements if they intended the LATS to provide only a rough
and easily modified outline of the basic structure of the licensing agreement.”
 On January 3, 2006, Richman sent Konatich and Dr. Dennis Hruby, SIGA's Chief
Scientific Officer, a proposed term sheet based on his discussions with SIGA about a license agreement
for ST–246.
 On January 4, Hruby replied: “Thanks for the prompt response. We are most interested in
trying to make this a mutually agreeable term sheet and moving on to the next step.” After a few back-
and-forths, and a few revisions, Siga’s chairman, told Richman that if the changes were acceptable to
PharmAthene, then “[w]e have got a deal on the termsheet, and it's ready to present to your board for
approval.”
 On January 19, Richman again spoke with Drapkin and told him that the PharmAthene
board had approved the license agreement term sheet with Drapkin's two proposed changes.
 On January 26, a clean copy was made of the two-page license agreement term sheet
incorporating Drapkin's two changes (the LATS). The LATS recites that the parties intended to
“establish a partnership to further develop & commercialize [ST–246] for the treatment of smallpox
and orthopox related infections and to develop other orthopox virus therapeutics.” The LATS also sets
forth terms relating to, among other things, patents covered, licenses, license fees, and royalties.
However, the LATS was not signed, and a footer on both pages states, “Non Binding Terms.”
 On November 6, the parties met to discuss the license agreement. Given the clinical
progress made since the parties last negotiated, PharmAthene emphasized the need to revise some
of the LATS's economic terms. PharmAthene's representatives expressed confusion about
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SIGA's new emphasis on a partnership and maintained that the LATS's terms bound the parties.
Nevertheless, PharmAthene was willing to listen to SIGA's proposal in order to avoid a dispute.
SIGA then proposed a $40–45 million upfront payment and a 50–50 profit split.
 Pharma asserted that the Agreement's terms were “radically different from the terms
set forth in the [LATS],” but that PharmAthene was “willing to consider” changes to the LATS,
including a 50/50 profit split. SIGA disputed that the LATS was binding because of the “Non
Binding Terms” footer, and it never addressed PharmAthene's proposed profit split. SIGA issued
an ultimatum on December 12: unless PharmAthene responded by December 20 that it was
prepared to negotiate “without preconditions” regarding the LATS's binding nature, the parties
had “nothing more to talk about.” On December 20, 2006, PharmAthene filed suit in the Court
of Chancery.
5. What is “bridge loan financing?” Who provided it to who is this case?
ANSWER: A bridge loan is a short-term loan used until a person or company secures permanent financing
or removes an existing obligation. It allows the user to meet current obligations by providing immediate
cash flow. Bridge loans are short term, up to one year, have relatively high-interest rates and are usually
backed by some form of collateral, such as real estate or inventory.
On March 20, 2006, SIGA and PharmAthene entered into a Bridge Loan Agreement in which
PharmAthene loaned SIGA $3 million for expenses relating to the merger, developing ST–246, and
overhead. The Bridge Loan Agreement designates New York law as its governing law.
6. Was the Bridge Loan agreement a binding agreement? What did SIGA agree to do in exchange for
the Bridge Loan?
ANSWER: The BL was binding. SIGA agreed that for a period of 90 days during which the definitive
license agreement is under negotiation, it shall not, directly or indirectly, initiate discussions or engage in
negotiations with any corporation, partnership, person or other entity or group concerning any Competing
Transaction without the prior written consent of the other party or notice from the other party that it desires
to terminate discussions hereunder.
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DUE DILIGENCE (WHAT CAN BE DONE BY THE BUYER?)
Confidentiality Agreement
In the due diligence context, the free flow of information is necessary to enable parties to a transaction
to meaningfully evaluate whether to proceed. Much of the information disclosed will inevitably be
confidential and/or proprietary. Confidentiality agreements can do many things, but on a basic level, a
confidentiality agreement serves the provider by protecting the confidentiality and trade secret status of its
information. For the recipient, a confidentiality agreement is necessary because without it, the provider may
not be willing to share confidential and proprietary information.
Such agreements serve two fundamental purposes: (1) They limit the use of information deemed
confidential by a counterparty in a transaction, where often the counterparty may be a direct competitor
or someone who could benefit economically from unfettered use of confidential information. (2) They
prohibit the disclosure of information deemed confidential to other parties, which disclosure could
defeat legal protections of such information and cause economic harm to the provider.
Most of the duties in a confidentiality agreement burden the recipient of information. Therefore, it
may seem logical that a recipient would desire a shorter, less comprehensive agreement than the provider
desires. However, a recipient, in fact, benefits from the clarity provided from a well-drafted, comprehensive
confidentiality agreement.
What is a “standstill agreement”? Does the Confidentiality Agreement contain one?
 A Standstill Agreement is when a buyer or an investor is restricted from purchasing the target's
stock or taking any other actions that may lead to a business combination unless the target company's
board and management are included in the process. These types of standstill agreements, usually
contained in the confidentiality agreement, help the target company to control the deal process
and prevent a hostile bid for the company after the buyer or investor has had the benefit of the
target company's confidential information.
Registration Statements:
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a) In connection with a public offering of securities, an issuer must prepare a registration
statement to give potential investors a reasonable basis upon which to make an investment decision. Rule
404(a) of the Securities Act.
b) The seller submits a registration statement with false information: Under the due
diligence defense of Section 11(b), an individual will not be liable for material false statements or
omissions in a registration statement if he acted like “a prudent man in the management of his own
property” (a/k/a “reasonable investigation”). This essentially means he had reasonable grounds to believe,
and did believe, that the assertions in the registration statement were true and that there were no omissions
of material facts. However, where the individual’s investigation into the truthfulness or falsity of the
assertions is merely cursory, he will be liable.
 Escott v. BarChris held that failure to (1) read thoroughly minutes of subsidiaries; (2) examine
contract orders; (3) consult with bookkeepers before ascertaining that debts were paid; and (4)
examine delinquencies records (instead relying on treasurer’s word), was enough to invalidate
Section 11(b) defense although “There was no valid basis for plaintiffs' accusation that Grant
knew that the prospectus was false in some respects and incomplete and misleading in others.”
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PURCHASE AGREEMENTS, AND PRICE TERMS.
The asset purchase agreement is the main transaction document for an asset acquisition. It sets out what is
being sold, details the sale process, and sets out the liabilities and obligations of the parties. In most private
M&A transactions, the purchase price offered by the buyer is based in part on the most recently
prepared financial statements (usually the end of the most recent quarter or fiscal year) of the target
company or business. Howevrr, there are two methods of adjusting the future “price-tag” of a target
company.
Purchase Price Adjustments
Complex M&A transactions can take a significant period of time to negotiate and finalize. As a result,
buyers often use purchase price adjustments to protect themselves against any decreases in the value (or a
depletion in the working capital) of the target company or business during the period between the date the
target company or business was initially valued and the closing of the transaction. The parties agree to
subsequently adjust the purchase price based on the occurrence or non-occurrence of certain events (for
example, if the closing does not occur by a specified "drop dead" date). For these types of adjustments, the
purchase price is generally increased or decreased by a fixed amount.
Earn-outs
If the buyer is purchasing assets that comprise a business (as opposed to a discrete group of assets), future
performance of the business may determine part of the purchase price. This is called an earn-out. An earn-
out is commonly used when the buyer and seller cannot agree on the value of the target business. If there is
an earn-out, the buyer pays part of the purchase price at closing and the rest gets paid in one or more stages
if the business achieves certain financial or operational targets. The parties typically negotiate the targets
and how to measure performance.
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 Advising Client: The buyer should try to ensure it has total freedom to operate the target
company or business and that it is not obligated to achieve the earn-out. Many jurisdictions recognize
an implied duty to use reasonable efforts towards operating the business and achieving the earn-out in
certain circumstances, including when a substantial portion of the total consideration is contingent on
achieving the earn-out targets.
 See, e.g., O’Tool v. Genmar. Although there was no express provision not to do those acts, there
was sufficient evidence that acquiring company had acted with dishonest purpose to prevent
president from realizing sales-based and thus violated the “implied covenant of good faith and
fair dealings” by: (1) immediately changing name of brand bought; (2) purposefully prioritize
other produces; (3) impose significant costs of product development; (4) “flip” dealers away from
the acquired company). The legal test for implying contractual obligations is: whether it was
“clear from what was expressly agreed upon that the parties who negotiated the express terms of
the contract would have agreed to proscribe the act later complained of as a breach of the implied
covenant of good faith—had they thought to negotiate with respect to that matter”.
 However, O’tool only applies when the contract says nothing about the extent parties will
work to fulfill the earn-out. The implied covenant requires a contractual “gap,” and thus “does
not apply when the contract addresses the conduct at issue.” Where “existing contract terms”
address the conduct alleged to inhibit earn-outs, those terms control, because “implied good
faith cannot be used to circumvent the parties' bargain.” See Lazard, (“Section 5.4
specifically addressed the requirements for an earn-out payment and left the buyer free to conduct
its business post-closing in any way it chose so long as it did not act with the intent to reduce or
limit the earn-out payment).
 Contingent Payments in NY: Having failed to state a viable claim for breach of the Best
Efforts Clause, the plaintiffs may not manufacture a breach through invoking the duty of
good faith and fair dealing. In order to find that the defendant has breached its duty it would be
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necessary to read into the Agreement an obligation that the defendant make business choices
with the growth of the DAF Division in mind. Wurtsbaugh v. Banc of Am. Sec. LLC
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MATERIAL ADVERSE CHANGE [Should the buyer have to buy something at the original price if
the item has materially worsened?]
Who Caused the Event:
In John Borders v. KRLB – Contract said “adverse changes which would impair the operations of the
radio stations” but since contract did not specifically mention the decline in Arbitron ratings, no material
adverse changes found. Also, Court interpreted the paragraph to address matters in control of management,
not external matters like ratings.
 When seller is at fault: But see, Pan Am Corp. V. Delta Airlines (quoted by IBP in footnote)
where NY court held that Delta did not have obligation to invest in Chapter 11 PanAm-airline's
reorganization plan since Pan Am did not satisfy conditions precedent to any airline funding
obligation. Among other things, Pan Am did not attempt to confirm reorganization plan by
December 5, 1991, Pan Am only reached new collective bargaining agreement with one of its
five unions, though all five agreements were required to be “in full force and effect,” Pan Am
failed to reach agreement with Internal Revenue Service (IRS) to discharge debtor from any
liability with respect to any employee benefit plan, and there was a material adverse change in
both debtor's business and business prospects of the reorganization plan.
Burden of Proof:
Acquirer has heavy burden to establish existence of material adverse change. And since the rule is “when
the words of the contract are clear and unambiguous and lead to no absurd consequences, no further inquiry
may be made into the parties' intent,” proving MAC is an arduous challenge. “The fact that one party can,
in hindsight, create a dispute about the meaning of a contractual provision does not render the provision
ambiguous.” Esplanade Oil & Gas v. Templeton Energy Income Corp.; See also Hexion (“[I]t seems
the preferable view, and the one the court adopts, that absent clear language to the contrary, the burden
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of proof with respect to a material adverse effect rests on the party seeking to excuse its performance
under the contract.”)
 Esplanade held: Clause in purchase agreement, providing that defendant would be obligated to
purchase plaintiff's mineral interest at set price at closing only if there was no “adverse material
change to properties” in interim, was concerned only with changes in properties themselves or in
plaintiff's interests and did not relieve defendant of obligation to purchase merely because price of
oil had dropped precipitously in interim.
Breadth of MAC Provision:
Even where a Material Adverse Effect provision in a merger agreement is broadly written, that provision is
best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially
threaten the overall earnings potential of the target in a durationally-significant manner. A short-term
hiccup in earnings should not suffice, rather the Material Adverse Effect should be material when viewed
from the longer-term perspective of a reasonable acquiror. In re IBP, Inc. Shareholders Litig.
SUMMARY
1) Three-Pronged Evidentiary Test for Proving An MAC. The Chancery Court concluded that in
the absence of contract language to the contrary, for an event to constitute an MAE, it must be
shown that: (a) the event was unknown to the party asserting the MAE claim and (b) the event
substantially threatened the financial condition of the target (c) for a “durationally significant”
period.
2) Short Term Impact Event Not Sufficient. The court commented that it was influenced by the
fact that even good companies invariably experience periods of low level performance. The point
being that events having a short term impact (a cyclical decline in earnings) do not necessarily
change the strength and value of the company from a long-term perspective. The court viewed a
“durationally significant period” as being a period of time measured in years not in months. Thus,
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if a buyer would not have agreed to an acquisition if it knew that a particular problem of short-term
duration would be encountered, it should take care to identify that matter as being an MAE.
3) Burden of Proof. The IBP court held that the party seeking to terminate the agreement has the
burden of proving that an MAE has occurred. The court observed: “Practical reasons lead me to
conclude that a New York court would incline toward the view that a buyer ought to have to make
a strong showing to invoke a Material Adverse Effect exception to its obligation to close.”
SHAREHOLDERS SUING TO ENFORCE MERGER:
Party must be an intended beneficiary of the pre-merger consideration (e.g. termination fees) to
compel performance, or sue for damages due to MAC breach. See Consol. Edison, Inc. v. Ne. Utilities.
SH of target corporation did not have right as third-party beneficiaries to sue prospective acquiring
corporation for its alleged breach of contractual undertaking to merge with target. Although shareholders
could have enforced contractual obligation of acquiring corporation under merger agreement to pay them
merger premium, that right did not accrue until merger became complete and acquiring corporation
terminated agreement prior to agreed upon time for completion.
Further, under New York law, the prevention doctrine, which holds that there is an implied
understanding on the part of each party to a contract that it will not intentionally and purposely do anything
to prevent the other party from carrying out its part of the agreement, exists to serve the intent of the parties,
and does not operate at cross-purposes to that intent. Thus, if parties to a contract specifically intended
3rd party beneficiary’s rights to begin post-merger, they cannot circumvent that intent by claiming
equity claims such as the prevention, or good faith doctrine. Id.
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BEST EFFORTS CLAUSES.
1. Generally: Best Effort clauses require target boards to use their best efforts to secure SH
approval of mergers and sales, subject to their fiduciary duties to keep SH informed if a better
offer appears. Also, it requires the buyer commits to use its best efforts to secure 3rd party
approvals, as from antitrust or other regulatory agencies.
2. Advise Client that Signed Clause: Thus, if your client, let’s say CEO, comes to you and wants to
exit a merger but has a “best effort” clause advise him/her to inform the SH that a better deal may
be there pursuant to fiduciary duties. If your client is the buyer, advise him/her to delay the
submissions to 3rd parties (but that’s riskier.)
Definition of “best effort” in agreements:
Under New York law, contract need not explicitly define “best efforts” for its “best efforts” provision to be
enforceable. “All reasonable means for obtaining” the promised goal, and whether such an obligation has
been fulfilled “will almost invariably ... involve a question of fact.”
 Thus, in USAirways Grp., Inc. v. British Airways PLC, in deciding a motion to dismiss, held that
USAir stated claim for breach of duty of good faith and fair dealing, by that BA allegedly agreed with
AA not to seek liberalization of Bermuda II so that USAir would not be able to obtain DoT approval
for Phases Two and Three of the Investment Agreement.
 Language Construction: Even though Article V of the Investment Agreement left all transactions
contemplated by the “Integration Clause” subject to the ultimate discretion of BA's directors, BA's
discretion under Article V was limited by the covenant of good faith and fair dealing implied in
every contract.
Courts Interpretation of BE Clause:
 No Definition in Clause: If the contract does not define the term or provide a relevant standard for
judging the efforts, the Best Efforts Clause generally obligates both parties to “use all reasonable
efforts to ... consummate and make effective, in the most expeditious manner practicable, the
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transactions contemplated by this Agreement.” In New York, for example, federal courts
interpreting New York law have held that best efforts and reasonable efforts are interchangeable
terms that impose an obligation to act with good faith in light of one's own capabilities. See Bloor
v. Falstaff (buyer was not entitled to emphasize profits for its other business without fair
consideration of effect on beer sales under seller's brand name when contract required buyer to use
best efforts to promote and maintain high volume of sales).
 Clause sets Limitations of the BE Clause: Courts generally first considers how the parties defined
the efforts term in the contract. The next case if a perfect illustration:
 Facts: BofA signed agreement to buy DAFC a “clearing firm” (completing transactions by delivering
securities to the purchasing broker-dealer and by making money payments to the selling broker-dealer).
DAFC became DAF a division of BofA. On top of the $50M, there was an earn-out provision if the
DAF Division met certain performance goals. The parties signed a “Reasonable Best Efforts Clause.”
However, after the Agreement had been signed, but a week before the sale was to close, Banc of
America entered into an agreement “SEC” to divest itself of its clearing operation, thus having no need
for DAF and didn’t pay the contingent payments (earn-out). Pursuant to the Best Effort clause, Plaintiff
expected that BofA due all reasonable efforts to promote DAF’s success as their division.
 Holding and Rule: The court, Wurtsbaugh v. Banc of Am. Sec. LLC read the language of the clause
and stated: The Best Efforts Clause provides that nothing in the Agreement shall be read “to limit in
any manner whatsoever the ability of [Banc of America] to conduct” its “businesses” or “to control”
the DAF Division's business or operations. To require Banc of America to utilize the DAF Division in
particular ways just to benefit the seller, would impose limitations on both the conduct of Banc of
America's business and its control of the DAF Division.
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YOU GET WHAT YOU SIGN UP FOR.
Financing Outs & Solvency Outs
Failure to negotiate “financing outs” coupled with specific performance clauses leaves buyers with little
excuse to escape from a deal if they suffer from buyer’s remorse. The following case, Hexion Specialty
Chemicals, Inc. v. Huntsman Corp illustrates the force of contract provision, or the lack thereof.
 Facts and Holding: Hexion actively attempted to avoid consummation of financing, in breach of
covenant to use reasonable best efforts to consummate financing for purchase. When Hexion
became concerned that corporation was not performing as expected, rather than take action to
consummate financing, Hexion attempted to use the purported insolvency of the combined entity
as an escape hatch to its obligations under the merger agreement.
 A financing out provision would’ve been 10/10 for Hexion since it had proof that the banks
wouldn’t lend the money since Huntsman became insolvent. In the alternative, Hexion should’ve
negotiated a “solvency out” “which would make Hexion’s obligations to close contingent on the
solvent of the combined new entity.”
 Aftermath: Court didn’t force specific performance since Huntsman was on brink of
bankruptcy, but forced all other covenants agreed therewith. In the end, Huntsman settled with
Hexion for $1 billion.
Contract Interpretation > Reps & Warranties:
Courts will read the agreement of merger clauses to nullify reliance on prior representations or warranties
that may be inconsistent with the agreement. See One Commc'ns Corp. v. JP Morgan SBIC LLC.
(holding that a reasonable investor failed to plead reliance when the parties' contract contained a
provision “specifically disclaiming the ability ... to rely on representations or warranties that
were ‘inconsistent with or in addition to the representations and warranties' set forth in the
agreement”). “Where the plaintiff is a sophisticated investor and an integrated agreement between the
parties does not include the misrepresentation at issue, the plaintiff cannot establish reasonable reliance on
that misrepresentation.” Id.
GRANTING INJUNCTION DUE TO BANK INVESTORS’ GREED (IN RE DEL MONTE)
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Facts: In re Del Monte Foods Company Shareholders Litigation dealt with an investment bank alleged
to have “manipulated the sale process to engineer a transaction that would permit [it] to obtain lucrative
buy-side financing fees.”
Barclay’s, Del Monte’s financial advisor, started bringing to plans to be acquired by private equity
interests. Barclays would receive large feed for sell-side advice.
Barclays, however, convinced KKR, Centerview and Vestar (the potential buyers) to band together
in contravention of the confidentiality agreements, and bid to acquire Del Monte. This would “speed-up”
the process since they wouldn’t fight each other. KKR, Centerview and Vestar would also pay Barclays big
fees for buyside loans to complete the buy-out. Thereafter, the Del Monte board, advised by Barclays,
approved a sale of the company to this private equity consortium for $19 per share in a transaction
announced in November 2010.
Plaintiffs stepped in to challenge the transaction and halt this scheme. During discovery and
depositions, they discovered Barclays scheme and amended their complaint to aiding and abetting.
Ruling: To obtain a preliminary injunction, a plaintiff must demonstrate three elements: (i) the probability
of success on the merits; (ii) that plaintiffs will suffer irreparable injury if an injunction is not granted; and
(iii) that the balance of the equities favor the issuance of an injunction. With respect to the first element,
the Court first noted that the Boards’ actions were subject to enhanced scrutiny and analogized the instant
case to the Court of Chancery’s decision in In re Toys “R” Us, Inc. S’holders Litig. Vice Chancellor
Strine ultimately determined that the banker’s appearance of conflict did not have a causal influence on the
board process, but cautioned that “it is advisable that investment banks representing sellers not create the
appearance that they desire buy-side work...”
Applying those principles to the facts at hand, Vice Chancellor Laster concluded that Barclays’
activities “went far beyond” what took place in Toys “R” Us, observing that Barclays sought permission to
provide buy-side financing while price negotiations were still ongoing. The Court was also troubled by
Barclays active concealment of Vestar’s role in the process, which “materially reduced the prospect of price
competition for Del Monte,” and the potential that Barclays’ conflict tainted the go-shop process.
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Board Violates Fiduciary Duties Enough to Grant Injunction: The Board’s consent to Barclays’
request was, in the Court’s view, unreasonable. “But while the directors may face little threat of liability,
they cannot escape the ramifications of Barclays' misconduct. For purposes of equitable relief, the Board is
responsible.” It was not reasonable for the board to accede to KKR’s request and give up its best prospect
for price competition without making any effort to obtain a benefit for DM and its stockholders. It was
unreasonable for the board to permit BB to take on a direct conflict when still negotiating price (the conflict
tainted the go-shop process). The board did not take “an active and direct role in the sale process.” However,
this does not mean that any director necessarily will face money damages.  
 Aftermath: Continued litigation efforts after the injunction resulted in a settlement payment by
Barclays and the buyout group totaling $89.4 million, one of the largest post-merger common funds
ever recovered in Delaware or anywhere else.
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DEFENSES TO TAKEOVERS.
Motives behind defenses:
Although the board can buy and sell its own stock pursuant to DGCL §160(a), there are times where
overbuying its own shares may be an “improper use of corporate funds.” In cases where shares are
purchased by a corporation with corporate funds to remove a threat to control (self-tender), the
burden is on the directors to justify. Unocal v. Mesa (“Because of the omnipresent specter that a board
may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there
is an enhanced duty which calls for judicial examination at the threshold before the protections of the
business judgment rule may be conferred.”) But the business judgment rule kicks in when the directors
prove a good faith and reasonable investigation behind their decision which is dependent on the
motives and the reason behind the purchase.
First Protection against a creeping acquisition of effective control when it is to
maintain what the board believed to be proper business practices, and/or to maintain the company
as a viable corporate entity. See Paramount Commc'ns, Inc. v. Time Inc. (Board of directors, in
responding to tender offeror's uninvited all-cash, all-shares, “fully negotiable” tender offer, did not
breach its duties under business judgment rule; board's responsive action to tender offer was not
aimed at “cramming down” on its shareholders a management-sponsored alternative, but
rather had as its goal the carrying forward of preexisting transaction in altered form and was
reasonably related to the threat.); See also Cheff v. Mathes, (holding that the board reasonably
perceived a threat “to the continued existence of [target company], or at least existence in its present
form, by the plan of [shareholder] to continue building up his stock holdings”).1
1
In that case, the Holland board of directors had many reasons to believe that Maremont's share purchases were a threat to Holland's existence.
Maremont had a reputation of entering, taking over, and liquidating companies; Maremont had indicated that he did not like the unique sales
technique used by Holland, and thus likely would have gotten rid of it had he assumed control; Maremont had actually misled Cheff by telling him
that he was not interested in Holland while at the same time purchasing Holland shares on the open market; and Maremont demanded and was
refused a place on the Holland board, at which point he increased his purchasing of Holland shares on the open market.
35
Second Another reasonable reason is to protect shareholder from a terrible tender-offer
because based on game-theory they will always end up accepting the bad deal. See Unocal.
Directors, however, may not act primarily out of a desire to perpetuate themselves in office. See
Cheff.
 NOTE: “A Unocal analysis should be used only when a board unilaterally (i.e. without SH
approval) adopts defensive measures in reaction to a perceived threat.” Williams v.
Geier (1996). In Geier, a controlled corporation was recapitalized to provide for “tenure voting”
for all shares, whereby each outstanding share would have ten votes but, on sale or transfer of the
share, the share would revert to having just one vote until it was held by its owner for three years.
The SH approved the plan. The plaintiff argued that entire fairness should apply because the
recapitalization favored the controller by entrenching its control. Del SC held that the Unocal test
was “inapplicable b/c there was no unilateral board action.”
Reasonable means of which to accomplish defenses:
The method offered has to be reasonably related to the threats posed; This is determined in a balancing test
entailing an analysis by the directors of the nature of the takeover bid and its effect on the corporate
enterprise, versus the amount to pay, and how much shares to buy. Factors to consider: “inadequacy of the
price offered, nature and timing of the offer, questions of illegality, the impact on “constituencies” other
than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), and
the quality of securities being offered in the exchange.” Unocal v. Mesa
 In Unocal, the court found reasonable to incur $6 billion in debt, and reduce exploratory
drilling because they wanted to protect their shareholders from a bad tender-offer of Mesa
which the board concluded was “grossly inadequate” and “coercive.” There were various
meetings, various consultations, and many different options made available. Mesa submitted a
“two-tier” cash tender offer for an additional 37 percent giving them 50% control since they owned
13 percent. The Unocal board of directors determined that the Mesa offer was completely
inadequate as the value of Unocal stock on the front end of such a sale should have been at least
$60 per share, and the junk bonds on the back end were worth far less than $54 per share. To oppose
the Mesa’s offer and provide an alternative to Unocal’s shareholders, Unocal adopted a selective
36
exchange offer, whereby Unocal would self-tender its own shares to its stockholders for $72 per
share. The Unocal board also determined that Mesa would be excluded from the offer to not
effectively subsidize Mesa’s attempts to buy Unocal stock at $54 per share.
 See also, Paramount v. Time where the board was allowed to initiate defenses and reject an
amazing offer under Unocal and the BJR b/c “Time's board concluded that Paramount's eleventh
hour offer posed threats … 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. The open-ended analysis mandated by Unocal is not intended to
lead to a simple mathematical exercise: that is, of comparing the discounted value of Time–
Warner's expected trading price at some future date with Paramount's offer and determining which
is the higher.
37
“Draconian” defenses:
If defensive measures are either preclusive or coercive they are draconian and impermissible. A response
is “coercive” if it is aimed at forcing upon stockholders a management-sponsored alternative to a hostile
offer. A response is “preclusive” if it deprives stockholders of the right to receive all tender offers or
precludes a bidder from seeking control by fundamentally restricting proxy contests or otherwise. See
generally, Unitrin.
 In Unitrin, the target's board had (a) adopted a poison pill, (b) had a provision included in the COI
that required a vote of a majority of continuing directors or a 75% SH vote, and (c) initiated a
Repurchase Program for up to 10M outstanding shares in the market. The chancery court found the
latter “unnecessary” in light of the poison pill, but the Supreme Court reversed holding that the review
should be based on whether or not the defenses are “draconian” (i.e., those that are “coercive or
preclusive”) not whether they were “unnecessary.” Thus, the adoption of the poison pill and the
limited Repurchase Program––although each made a takeover more difficult, individually and
––was not coercive and the Repurchase Program may not be preclusive. This is b/c the defenses
would not appear to have a preclusive effect upon AG’s ability to successfully marshal enough
shareholder votes to win a proxy contest. The repurchase program is not a “show stopper” because
they had a viable alternative notwithstanding the poison pill, the voting provision, and the repurchase
program. AG, or any other 14.9% shareholder bidder, could win a proxy contest with a 90%
turnout if they present an attractive enough price.
 Cf. AC Acquisitions v. Anderson, Clayton & Co. In AC Acquisitions, coercion was found where,
in response to a hostile takeover offer for $56 per share to be followed by a short-form merger at
the same price, the target company's board of directors caused the target to commence a self-tender
for approximately 65% of the target's stock at less than $60 per share, with the non-tendering
shareholders left holding shares of a heavily indebted company, which debt was incurred to
finance the self-tender. In Eisenberg, the court found coercion where the company told
38
preferred stockholders that it “intend[ed] to request delisting of the Shares from the NYSE”
upon completion of the tender offer in effect forcing the SH’s to take it or leave.
Holding & Facts of AC Acquisitions v. Anderson, Clayton & Co.: Tender offerors (BS/G) brought
action against target corporation (AC), former director, and directors of target corporation to obtain
preliminary injunction against target corporation's purchase of its own stock and resale of stock to newly
formed employee stock option plan. The Chancery Court held:
1. Plan to sell repurchased stock to newly formed employee stock ownership as defensive measure
against tender offer, served valid corporate purpose of creating alternative for shareholders and had
reasonable ground for believing that danger to corporate policy or effectiveness existed, as required
to justify action, where rational shareholder might prefer tender offer at $56 per share or benefits of large,
tax-advantaged cash distribution together with continuing participation in newly structured, highly
leveraged target corporation.
2. Nevertheless, target corporation's decision to buy 65% of outstanding stock at $60 per share and sell
stock to employee stock ownership plan coerced shareholders to reject tender offer at $56 per share, was
not reasonable in relation to threat posed.
I conclude that an Anderson, Clayton stockholder, acting with economic

rationality, has no effective choice as between the contenting offers as presently
constituted. Even if a SH would prefer the BS/G bid at $56, he/she may not risk
tendering into that proposal should the offer not close, and thereby risk being
frozen out of the front end of the Company Transaction (i.e. AC’s self-tender
defense).
AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 112–13 (Del. Ch. 1986). That is b/c
the shares were to drop down to $32 after the self-tender.
Difference between Unocal & Anderson: Although in both cases the board restructured through its
repurchase and issuance of new shares, in Unocal the total value of the SH was increased by $2.1B due
to the repurchase program. In AC Acquisitions the record was uncontradicted that the value of the
Company's stock following the effectuation of the Company Transaction will be materially less than $60
per share. The various experts differ only on how much less. Shearson, Lehman opines that the Company's
stock will likely trade in a range of $22–$31 per share after consummation of the Company Transaction.
First Boston is more hopeful, informally projecting a range of $37–52.10 What is clear under either view,
however, is that a current shareholder who elects not to tender into the self-tender is very likely, upon
consummation of the Company Transaction, to experience a substantial loss in market value of his
39
holdings. The only way, within the confines of the Company Transaction, that a shareholder can
protect himself from such an immediate financial loss, is to tender into the self-tender so that he
receives his pro rata share of the cash distribution that will, in part, cause the expected fall in the
market price of the Company's stock. The repurchase program can increase shareholder value per
share by reducing the number of shares outstanding, but if borrowed money is used for the
purchases, it increases the leverage of the entire company and reduce share value. A lot depends
on the price the company pays to repurchase the shares.
Blocking SH Votes as a Defense:
SH Voting Powers; Generally

Under Section 228, the shareholders could amend the bylaws without a meeting and without a vote
if there is written consent signed “by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.” The board may also have
concurrent power to amend the bylaws if the corporation in its certificate of incorporation confers
on the board the power to adopt, amend, or repeal the bylaws.
Blasius Review
Despite the general deference to the board’s decision-making under the business judgment rule, any
board action that interferes with shareholder voting will be closely scrutinized. The shareholder
franchise is the source of the board’s power. When the board restricts shareholder voting, it changes the
allocation of power between the board and the shareholders. Ordinarily, agents cannot unilaterally
determine the scope of their power vis-à-vis their principal. See generally, Blasius v. Atlas.
I cannot conclude that the board was acting out of a self-interested motive in
any important respect on December 31. I conclude rather that the board saw
the “threat” of the Blasius recapitalization proposal as posing vital policy
differences between itself and Blasius. The real question is whether the
board––even if it is acting with subjective good faith––may validly act for the
principal purpose of preventing the shareholders from electing a majority of
new directors. The question thus posed is not one of intentional wrong (or
even negligence), but one of authority as between the fiduciary and the
beneficiary (not simply legal authority, i.e., as between the fiduciary and the
world at large).
40
Thus, in Blasius, deferential business judgment rule did not shield from scrutiny directors' decision to add
two new members to board of directors in response to shareholder's proposal to increase board from 7 to
15 members and elect eight new members through consent solicitation, even though directors were acting
with subjective good faith to prevent implementation of recapitalization proposal that members reasonably
feared would cause great injury to corporation; decision interfered with effectiveness of shareholder consent
process.
Judicial review of such action involves a determination of the legal and

equitable obligations of an agent towards his principal. 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.
 Facts: Blasius Industries, Inc. (Blasius) (plaintiff) held 9 percent of the stock of Atlas Corp.
(defendant). Blasius proposed that Atlas sell off some of its assets, issue bonds, and distribute a large
one-time dividend to shareholders (leveraged restructuring). The directors of Atlas believed this was
not in the company’s best interest and rejected the idea. On December 30, 1987, Blasius formalized
their proposal and also requested the election of eight new board members pursuant to the power
under 228 (see infra). This would increase the size of the board from eight to 15, the maximum
allowed under the corporate charter. Fearing a takeover by Blasius, the board held an emergency
meeting the next day and amended the bylaws to add two additional board members. This move was
designed to prevent Blasius from seizing an eight to seven advantage on the board at the next election.
Blasius sued Atlas, seeking to void the board’s December 31, 1987 action as inequitable.
Blasius Review overlap with Unocal Review

The Delaware Supreme Court stated: the Blasius “burden of demonstrating a ‘compelling justification’ is
quite onerous, and is therefore applied rarely.” It is not easy in most cases to determine whether
the Blasius standard should be invoked. It is important to remember that it was undisputed
in Blasius that the board's actions precluded the election of a new board majority and that the board
intended that effect. As such, Chancellor Allen had no difficulty in concluding that the “board acted for
the primary purpose of thwarting the exercise of a shareholder vote.”
The Delaware Supreme Court and this court have both recognized the high
degree of overlap between the concerns animating the Blasius standard of
review and those that animate Unocal. For example, in Stroud v. Grace, the
41
Delaware Supreme Court held that Unocal must be applied to any defensive
measure touching upon issues of control, regardless of whether that measure
also implicates voting rights. Notwithstanding the application of the
Unocal analysis (as opposed to Blasius), 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.”
Chesapeake Corp. v. Shore, (Del. Ch. 2000).
42
POISON PILLS
A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by
a corporation's board of directors against a takeover. Typically, such a plan gives shareholders the right
to buy more shares at a discount if one shareholder buys a certain percentage or more of the
company's shares. The plan could be triggered, for instance, if any one shareholder buys 20% of the
company's shares, at which point every shareholder (except the one who possesses 20%) will have the right
to buy a new issue of shares at a discount. If every other shareholder is able to buy more shares at a discount,
such purchases would dilute the bidder's interest, and the cost of the bid would rise substantially. Knowing
that such a plan could be activated, the bidder could be disinclined to take over the corporation without the
board's approval, and would first negotiate with the board in order to revoke the plan.
Authority to adopt PP:
Sections 157 and 151(g) of Delaware’s corporate law authorize a board to issue rights to buy stock
and preferred shares. Section 141(a) grants the board inherent powers to manage the business.
Delaware law thus provides authority for a board to enact a poison pill to prevent hostile takeovers.
 See Moran v. Household Int'l, Inc. Board of directors had authority to adopt takeover defense, a
preferred share purchase rights plan (i.e. PP), whereby common stockholders were entitled to issuance of
one right per common share upon announcement of tender offer for 30% of corporation's shares or
acquisition of 20% of corporation's shares by any single entity or group and, if right was not exercised and,
thereafter, merger or consolidation occurred, rights holder could exercise each right to purchase $200 of
common stock of tender offeror for $100.
Review Standard of PP is BJR:
Pre-planning for the contingency of a hostile takeover might reduce the risk that, under the pressure of a
takeover bid, management will fail to exercise reasonable judgment. Therefore, in reviewing a pre-
planned defensive mechanism it seems even more appropriate to apply the business judgment rule.
Id.
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PP does not limit Proxy Efforts:

While a PP does deter the formation of proxy efforts of a certain magnitude, it does not limit the voting
power of individual shares. In Moran, we pointed to “recent corporate takeover battles in which insurgents
holding less than 10% stock ownership were able to secure corporate control through a proxy contest or the
threat of one.” Many proxy contests are won with an insurgent ownership of less than 20%,” and that “the
key variable in proxy contest success is the merit of an insurgent's issues, not the size of his holding. See,
e.g., Selectica v. Versata (“The mere adoption of a garden-variety pill is not in itself preclusive under
Delaware law. This is despite the fact that a poison pill ‘dilutes the would-be acquirer's stake in the company
and increases the costs of acquisition. That a combination of defensive measures makes it more difficult for
an acquirer to obtain control of a board does not make such measures preclusive.”)
PP Illegally Applied:
1. No True Business Model = No Right to Adopt PP:
Jim and Craig, founders of craiglist.com had a communal vision to provide free services. However, eBay,
a minority shareholder, wanted to make profits. Jim and Craig adopted PP to prevent eBay from buying
them out. The court in eBay Domestic Holdings v. Newmark held: Providing free on-line classified
advertisements to the community was not evidence that corporation possessed a palpable, distinctive,
and advantageous culture that sufficiently promoted stockholder value to support the indefinite
implementation of a poison pill. Rather giving away services to attract business was a sales tactic, and the
rights plan neither affected when minority shareholder could sell its shares nor affected when the corporate
culture could change, so it had no reasonable connection to directors' professed goal of preserving corporate
culture. “I find that there is nothing about craigslist's corporate culture that Time or Unocal protects” and
thus there is no rights to implement a PP.
2. Dead-Hand Provision = Coercion:
Definition: To overcome a poison-pill defense, a hostile bidder typically launches a proxy contest to elect
a slate of directors who might redeem the poison pill. To block this tactic, many companies adopted so-
called “dead-hand” redemption provisions in their stockholder rights plans. These provisions barred anyone
but the directors who adopted the dead-hand feature from redeeming the pills. This defensive measure
44
would allow continuing directors to prevent the acceptance of an unsolicited offer, regardless of stockholder
wishes or the views of newly elected directors.
Dead-Hand is a provision included in some poison pill rights plans that provides that the poison pill
rights may only be redeemed by the directors who created them. If allowed to stand, a dead hand
provision would prevent new board members from avoiding the negative consequences of the poison
pill by redeeming the rights.
 FACTS: Toll Brothers, Inc. concluded in the late 1990s that it had become an attractive takeover
candidate. In June 1997, the company adopted a poison pill defense plan (the Rights Plan). Toll
Brothers was not facing a specific threat, but stated that it wanted to protect its shareholders from
coercive or unfair tactics that might accompany a takeover bid. The Rights Plan granted options to
all shareholders that would trigger the dilution of the company’s stock if any acquiror obtained or
made a tender offer to obtain 15 percent of Toll Brothers’ stock. The Rights Plan was accompanied
by a dead hand provision, which stated that the Rights Plan could not be redeemed by anyone other
than the current board members or their designated successors. Toll Brothers’ certificate of
incorporation did provide that directors may have varying degrees of voting authority.
In denying the motion to dismiss complaint, Carmody v. Toll Brothers held that the shareholder has stated
a valid claim both under the statutory ultra vires doctrine and for breach of the duty of loyalty.
 First, by adopting the dead hand provision, which plainly granted powers to some directors
(incumbent) that it denies to others (future elected members), the board violated Section 141
which states: “right to elect 1 or more directors who shall ... have such [greater] voting powers” is
reserved to the stockholders, not to the directors or a subset thereof. Absent express language in the
charter, nothing in Delaware law suggests that some directors of a public corporation may be created
less equal than other directors, and certainly not by unilateral board action. Vesting the pill redemption
power exclusively in the Continuing Directors transgresses the statutorily protected shareholder right
to elect the directors who would be so empowered.
 Second, the dead-hand is subject to a Blasius/Unocal/Unitrin analysis b/c it “disenfranchises” the SH’s
powers. “The disenfranchisement would occur because even in an election contest fought over the issue
of the hostile bid, the shareholders will be powerless to elect a board that is both willing and able
45
to accept the bid, and they ‘may be forced to vote for [incumbent] directors whose policies they
reject because only those directors have the power to change them.’”
 The invalidity of adopting a dead-hand need not be perpetual as in Toll Brother. As Quickturn
Design Sys., Inc. v. Shapiro illustrates, even a By-Law amendment under which no newly elected board
could redeem the Rights Plan for merely six months after taking office, violates the statutory ultra vires
doctrine.
The Delayed Redemption Provision prevents a newly elected board of directors

from completely discharging its fiduciary duties to protect fully the interests of
Quickturn and its stockholders.” In this case, the Quickturn board was
confronted by a determined bidder that sought to acquire the company at a price
the Quickturn board concluded was inadequate. Such situations are common in
corporate takeover efforts. 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. Because the Delayed
Redemption Provision impermissibly circumscribes the board's statutory
power under Section 141(a) and the directors' ability to fulfill their
concomitant fiduciary duties, we hold that the Delayed Redemption
Provision is invalid.
46
REVLON DUTIES:
When it becomes apparent that breakup of company is inevitable, and the bidder threatens to fully control
the target 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. Revlon v. M&F. When Revlon duties
are triggered, selective dealing to fend off a hostile but determined bidder is no longer a proper objective.
Instead, obtaining the highest price for the benefit of the stockholders should have been the central theme
guiding director action.
In Revlon, there was essentially an auction ongoing between Forstmann and Pantry Pride for
Revlon’s shares and the granting of the lock-up option to Forstmann effectively ended the auction rather
than letting the auction play out to obtain the highest bid for the Revlon stockholders.2 The Revlon board
put its own legal interests first to the detriment of the stockholders. This constitutes a breach of the board’s
duty of loyalty3 and therefore the board is not entitled to the deference of the business judgment rule
Change of Control Definition:
“Change of Control” is an element of a Revlon claim.
What is NOT Change of Control:

First, the court made clear that Revlon duties are NOT triggered “simply because [the corporation] might
be construed as putting a corporation either in play or up for sale.” Second, “the adoption of structural safety
devices alone (e.g. lock-up agreement, no-shop clauses) does not trigger Revlon. Rather, such devices are
properly subject to a Unocal analysis.” When the target company will remain as a “large, fluid,
changeable and changing market” capable of rejecting the merger and maintaining its identity there
is no duty to obtain the highest price.
2
Revlon argued that since the noteholders threatened to sue because their notes dropped down in value when the board decided to make Forstmann
the offer, that they had to mitigate that suit by offering the lock-up option to Forstmann which in turn guaranteed par value for the Note holders.
But this only fortifies the fact that the Revlon board of directors had their own legal interests in mind, rather than the maximization of Revlon
shareholders’ benefits.
3
See also Jim Brown v. Brett Brewer where the court held that there were enough factual disputes to defeat the SJ motion regarding duty of
loyalty violations b/c board could’ve been found to have acted in bad faith when “decisions were made with knowledge that they lacked material
info” regarding the bids proposed.
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Change of Control in 3 situations:

The directors of a corporation “have the obligation of acting reasonably to seek the transaction offering the
best value reasonably available to the stockholders” in at least the following three scenarios: (1) “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”; (2) “where, 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”; or (3)
when approval of a transaction results in a “sale or change of control” that does away with the corporations
structure and control (i.e. control of both companies do not remain in
a large, fluid, changeable and changing market.)
 Thus, in Paramount v. QVC, the court put emphasis on the ownership structure of the acquirer
when ruling that Revlon duties were triggered. In QVC, the shareholders were to effectively lose
control and their essential identity if sold to Viacom, since Viacom was dominated by 85%
majority shareholder Sumner. Thus the duty of the Board was to get the best price possible.
 In Time Warner, by contrast, “Time had [n]either abandoned its strategic plan or made a sale
of Time inevitable.” Quite the opposite, the merger between Time and Warner was designed
specifically to proliferate their current business models and expand “Time culture” by
securing the independence, and position of the senior editor of Time magazine. Thus, although
Paramount had offered Time SH’s $200 per share “Time was convinced that Warner would provide
the best fit for Time to achieve its strategic objectives.” Hence, Unocal’s BJR analysis governs the
transaction.
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LIMITATIONS ON REVLON:
Board has latitude to engage in transaction without having to bid the market.
C&J, is a case where an inversion transaction to obtain Bermuda tax benefits (a merger structured such that
C&J would acquire a subsidiary of Nabors, with Nabors retaining a majority of the surviving company’s
equity). The Delaware Supreme Court vacated an injunction issued by the Court of Chancery and held on
an expedited appeal that a board of directors was not per se required “to conduct a pre-signing active
solicitation process” in order to satisfy its fiduciary duties under Revlon. Revlon does not require a board
to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the
board approves a change of control transaction. The Supreme Court stated that “when a board exercises its
judgment in good faith, tests the transaction through a viable passive market check, and gives its
stockholders a fully informed, uncoerced opportunity to vote to accept the deal, [the Court] cannot conclude
that the board likely violated its Revlon duties.” Id.4
 FACTS: CJ stockholders sued to enjoin the merger of CJ (US) and N (Bermuda). CJ wanted the
acquisition to evade taxes—use a merger to shift the nationality of the merged company to a non-US
company. In addition, C thought N would be a good fit operationally, culturally, and strategically.
The record showed that C attempted to protect the shareholders by using strategic negotiation tactics,
and sincerely believed that the deal would be valuable to them. Chancery court enjoined deal because
they did not affirmatively run an auction. Is there an affirmative duty in every Revlon case to run an
auction? No, because this case came out the other way. This is the kinder and gentler Revlon, which
concedes to management (costs to shareholders were special as well).  
Board is allowed to adopt termination fees, and matching rights even if it will fend off bidders.
In re Dollar Thrifty was a case brought by Dollar Thrifty (“DF”) SH seeking a preliminary injunction
preventing Hertz from buying all the shares of its smaller rental car industry rival DF. SH criticized the DF
4
This case may also stand for the proposition that a company selling itself is not required to conduct an active marketing process for its board to
satisfy its duties under Revlon.
49
board for failing to pre-sign auction. Even worse, SH claimed, the Merger Agreement included a
Termination Fee and Matching Rights that had a quelling effect on any topping bidder. Lastly, they argue
that Avis proposed a higher price. Court denied injunction: DT goes with Hertz, and DT shareholders argue
that Avis presented a better offer. Court says DT’s actions are valid—H proved that it was serious with the
merger, unlike A. Further, H says that if DT doesn’t give them exclusivity, they would walk away (hence
the reverse termination fee). The deal protections in the agreement did not prevent A from presenting
a competing bid—it did not constitute a material impediment for any topping bidder who wished to
make a serious superior offer. This is evident in that DT decided to go with H, but reserved the opportunity
to consider a post-signing topping bid.
Board is allowed to negotiate with just one bidder.
See Pennaco, where although the target board focused on only one bidder, it satisfied its Revlon duties by
limiting the deal protection and ensuring that the initial deal would not close for a period of time, thereby
providing an effective post-signing market check. The case holds that the target board can agree to some
deal protection even in such a situation (a 3% equity value termination fee, and matching rights in
Pennaco). Accordingly, the deal protection measures approved in Pennaco and MONY, where there
had been no prior shopping, are, presumably, per se valid without regard to the degree of shopping so
long as there remains a post-signing market check.
the court cannot say that it was unreasonable for the Pennaco board to
deal with Marathon on an exclusive basis. Marathon was a major industry
player with great financial clout. As all of the investment banks seeking
Pennaco's business pointed out, there is no risk-free approach to selling a
company, and dealing with one bidder at a time has its own advantages. Thus,
the mere fact that the Pennaco board decided to focus on negotiating a
favorable price with Marathon and not to seek out other bidders is not one
that alone supports a breach of fiduciary duty claim.
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NO SHOP CLAUSES AND FIDUCIARY OUTS.
A No Shop Provision is a clause included in an agreement between the seller and the buyer that
prevents the seller from soliciting purchase proposals from other parties for a given duration of time.
In essence, the provision limits the seller from seeking other potential buyers.
HOW LIMITING CAN THE “NO-TALK” PROVISION BE?
RULE: In ACE Limited, the Delaware Court of Chancery reviewed, in the context of a motion for
temporary restraining order, the terms of a merger agreement that purported to limit the Board's fiduciary
duties to consider other potential offers. The court held, in interpreting the 6.3 provision, that forbidding
any discussions with a competing offeror without a written opinion from outside counsel is
unenforceable. Capital’s board still owed duties of care and loyalty to its shareholders and was required to
protect its shareholders’ interests in a merger.
 Nevertheless, the court held that, even if the provision at issue in the merger agreement were
potentially invalid, the rest of the agreement remained enforceable, including a $25 million
termination penalty.
 FACTS: Ace Limited (Ace) (plaintiff) paid $75 million to Capital Re Corp. (Capital) (defendant)
for 12.3 percent of Capital stock. Ace and Capital then negotiated a merger agreement. Under the
agreement, Capital would retain control, but Capital shareholders would receive .6 of a share of
Ace stock in exchange for each share of Capital stock. The agreement included a “no-talk”
provision (§ 6.3) that barred Capital from negotiating or giving information to a third party about
a possible proposal unless (1) Capital’s board determined that the proposal was likely to produce a
better deal, (2) the board “in good faith…based on the written advice of its outside legal counsel”
concluded it was required to negotiate or risk breaching fiduciary duties, (3) the party signed a
confidentiality agreement, and (4) Ace was given notice that Capital intended to negotiate. Ace had
shareholder agreements with 33.5 percent of Capital’s shareholders. Therefore, unless Capital’s
board acted to terminate the agreement, Ace was practically guaranteed enough votes for the
merger, even if a better offer was made. Capital entered discussions with XL Capital (XL)
about a competing offer without written advice of outside counsel. Capital’s board wanted to
terminate the agreement with Ace and accept a better offer from XL. Ace requested a
51
temporary restraining order against Capital from the Delaware Chancery Court barring Capital
from terminating the agreement.
HOLDING: First, the court held, based on contract interpretation that ACE argues that in that better
interpretation of “no talk” clause, it left the ultimate good faith judgment about whether the board's fiduciary
duties required it to enter into discussions with other offeror to the board itself, though under the agreement
the board must base its judgment on the written advice of outside counsel. “The language of the contract
does not preclude the board from concluding, even if its outside counsel equivocates (as lawyers sometimes
tend to do) as to whether such negotiations are fiduciarily mandated.” ACE Ltd. v. Capital Re Corp.
Second, even if we adopted ACE’s interpretation, ACE should know that such an interpretation of the clause
was so restrictive that corporation's board of directors could not properly agree to it due to public policy
with respect to the fiduciary duties. “As a practical matter, it might therefore be possible to construct
a plausible argument that a no-escape merger agreement that locks up the necessary votes constitutes an
unreasonable preclusive and coercive defensive obstacle within the meaning of Unocal (a defensive
measure that is preclusive and coercive in relation to a threat is invalid).” Id.
Corporation doesn’t have Revlon duties just because it is going private.

RULE: Lear held that Shareholders challenging merger that would take corporation private were not likely,
for purposes of a preliminary injunction, to succeed on their Revlon claim that board breached its duty to
secure highest price reasonably available––though board allowed chief executive officer (CEO) to negotiate
merger agreement and merger would allow CEO to cash out his significant equity stake and obtain an early
payout of his otherwise unsecured retirement benefits––as the board's overall approach to obtaining the best
price was reasonable. Board had previously signaled a willingness to ponder the merits of unsolicited
offers by eliminating poison pill, proposed buyer had already increased value of corporation by
purchasing a significant stake in it, board rejected an open auction because it risked losing buyer's
bid, agreement contained a 45 day go-shop period as a market check, and termination fee of 2.4% of
enterprise value if a superior deal emerged was not unreasonable.
52
 FACTS: L was engaged in restructuring to keep itself solvent (restructuring debt and divesting
underperforming business units). Icahn purchased $200M of Lear’s stock, raising the stock price up
24%. Icahn suggested that a private transaction was in L’s best interest. Board formed special
committee, which authorized CEO to negotiate merger terms with I. I’s highest price was $36 per
share. I allowed a pre-signing auction, but he would pull his offer if so. L could freely shop for bidders
after signing, during the “go-shop period” so long as I would receive 3% termination fee. Board
feared that if they rejected I’s bid, the stock would fall back down and he would come in at a lower
price. L’s financial advisors engaged in a quick search for other buyers, but no serious interest
appeared. JP Morgan gave opinion that $36 was fair. Board approved go-shop, window-shop, and
termination fee provisions. L’s shareholders seek to enjoin the merger, arguing that the board
breached its Revlon duties and failed to disclose material facts necessary for the stockholders to cast
an informed vote.
HOLDING: Board obtained I’s agreement to vote his equity position for any bid superior to his own that
was embraced by the board (voting agreement), thus signaling I’s own willingness to be a seller at the right
price. Termination fee and matching rights (ability to match superior bid within 10 days) protected I, since
his offer was used as a stalking horse, if a superior offer was presented. The amount of the fee depended on
the timing of the termination. If terminated during go-shop period, L pays $73M plus up to $6M in
reasonable expenses. If terminated after go-shop period (“no-shop” or “window-shop” period), L pays
$85M plus up to $15M in reasonable expenses. To Lear’s benefit though, they negotiated a go shop
provision permitting them to actively solicit interest from third parties for 45 days, plus a fiduciary out
permitted the board to accept an unsolicited superior third-party bid after the go shop period ended.
The Lear board had sufficient evidence to conclude that it was better to accept
$36 if a topping bid did not emerge than to risk having Lear's stock price
return to the level that existed before the market drew the conclusion that Lear
would be sold because Icahn had bought such a substantial stake. Putting
aside the market check, the $36 per share price appears as a reasonable one
on this record, when traditional measures of valuation, such as the DCF, are
considered. More important, however, is that the $36 price has been and is
still being subjected to a real-world market check, which is unimpeded by bid-
deterring factors.
53
LOCK-UPS
The term “lock-up” was used more frequently to refer to structural changes or contractual
commitments which would bind a target to a transaction with a favored party. In conjunction
with Revlon-style auctions, lockups were considered as a form of inducement to a new bidder to enter
a contest.
 FACTS: Genesis (defendant) entered into negotiations to acquire NCS (defendant). At the urging
of Genesis, the parties entered into an exclusivity agreement, which prevented NCS from
engaging in any negotiations in regards to a competing acquisition or transaction.
Subsequently, Omnicare (plaintiff) contacted NCS about a proposed transaction. NCS did not
respond due to the exclusivity agreement with Genesis, but NCS did use Omnicare's proposed
transaction to negotiate more favorable terms with Genesis. Complementary to Genesis’s merger
proposal was a voting agreement under which Jon Outcalt, Chairman of the NCS board, and
Kevin Shaw, NCS President and CEO, agreed to vote all of their shares—combined, a
majority of NCS shares—in favor of the merger agreement. This voting agreement effectively
meant that NCS shareholder approval of the merger was guaranteed even if the NCS board did not
recommend its approval. However, the merger agreement did not contain a fiduciary out
clause, which would have given the NCS board the opportunity to opt out of the agreement if
it needed to do so to discharge its fiduciary duties to the corporation. Meanwhile, before the
official—although futile—NCS shareholder vote on the Genesis merger proposal, Omnicare
submitted a merger proposal that was superior to that of Genesis. At that point, the NCS
board withdrew its recommendation that the shareholders vote in favor of the Genesis merger
agreement. However, the Genesis merger agreement provided that the proposal still must be
submitted to a shareholder vote and, because of the Outcalt/Shaw voting agreement and the
omission of a fiduciary out clause, that meant that the merger agreement was going to be approved
no matter what. Omnicare brought suit.
 HOLDING: The Supreme Court held that under the “enhanced scrutiny of Unocal” 5 a stockholder
voting agreement accounting for a majority in voting power, coupled with a provision
requiring the merger agreement to be submitted to the stockholders for approval, constituted
a “draconian” “lock-up” of the merger transaction since minority SH couldn’t in any way be
protected/represented. The Supreme Court determined that, on the facts presented, this arrangement
resulted in an irrevocable lock-up of the merger, and consequently, in the absence of a fiduciary
5
It was Unocal and not Revlon review b/c it was a “stock-for-stock” deal and thus no “change of control”
54
out clause, the directors were precluded from exercising their continuing fiduciary obligations to
seek a transaction that would yield the highest value reasonably available to the stockholders. 6
 Advice: Although “lock-ups” are not per se illegal, they do often foreclose further bidding to
the detriment of shareholders, and end active auctions prematurely. Thus, it must always have
a fiduciary-out. The board may want to implement in the alternative, for example, a provision
allowing the board to terminate the Merger Agreement without paying a termination fee
if stockholder approval is not received that way causing the no-solicitation clause to be “of
little moment” because the board is able to back out of the agreement if consents are not
obtained. Due note, that if there is no superior offer there is no case to be brought b/c enjoining
the one and only deal, will be denying stockholders the opportunity to accept any transaction.
6
NOTE: Why didn’t Genesis buy-out Outcalt/Shaw stocks, appropriate the voting rights and proceed with a “freeze-out” thus avoiding
any legal fiduciary problems? Outcalt/Shaw had class B shares with the power of ten votes and their majority. But the COI of NCSindicated that
selling those shares converted them into A shares with just the power of one vote thus making the “freeze-out” unattainable.
55

M&amp;A Yablon Spring 2019 Outline

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M&amp;A Yablon Spring 2019 Outline

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MERGERS, ACQUISITIONS, AND TAKEOVERS

PP Illegally Applied: ............................................................................................................................ 44

TYPES OF MERGERS, APPRAISAL RIGHT, AND THE VOTING REQUIREMENTS.

shareholder vote, but introduces fiduciary duty complications.

entitled neither to voting nor appraisal rights.

because NYSE Listing Standard 312.03 provides that:

exercisable for common stock; or

or of securities convertible into or exercisable for common stock.

1. What is the advantage of a “short form” merger?

acquirer buys enough to reach the 90%.

when issuing new shares to the public.

right anyway pursuant to 262(b).

agreement; (3) shareholders from both firms vote.

4. If it becomes a reverse triangular merger?

ANSWER: Virtually no way-out.

presumed that he could exercise the right to vote those shares.”

consistent with their fiduciary duty)?

other shareholders. Schreiber v. Carney.

ANSWER: “[N]o vote of stockholders of a constituent corporation shall be necessary to authorize a

owned” and 60% is not, so you will need a vote.

merger would be in the best interest of the corporation?

corporation outstanding immediately prior to the merger. § 251(f).

FORMALITIES FOR ASSET ACQUISITIONS (including when SH vote is needed or not)

that affect the price?

liability) depending on the court

2. What board approvals are required?

to vote pursuant to basic fiduciary duties laws.

3. What shareholder votes are required?

4. Who gets appraisal rights?

This is because §262(b) does not mention §271 acquisitions.

"ALL OR SUBSTANTIALLY ALL"

the corporation’s assets.

meet the "all or substantially all" of 271.

under Delaware law?

ANSWER: Section 271 provides, in relevant part, as follows:

or ceases to exist, the license is terminated and must be renegotiated.

certificate of incorporation otherwise provides, no resolution by stockholders or members shall be

parent corporation to a wholly owned and controlled subsidiary.

above for definition of “all”)

1. What are cumulative convertible preferred shares?

then count how many dividend payments the company skipped.

2. What was the transaction involved in the Natomas case?

3. Why was it being entered into?

California statute: “The principal terms of a reorganization shall be approved

triangular phantom merger.

corporation, did not require vote of preferred stockholders.

corporations are required. See Section 262 of the DGCL.

the corporation.” Farris v. Glen Alden

United Acquisitions v. Banque Paribas

2. What were the banks presumably trying to do with URI?

It was understood that URI was for sale.

date have been a binding agreement?

4. According to Catsimatidis, when did his deal become binding?

rather than the exception.”

7. Were they “forthright reasonable signals of an intent not to be bound?”

which would normally be expected to be in writing.

Siga v. PharmAthene; Best Effort.

looking more and more like a multi-billion dollar drug.

entitled to recover contract expectation damages.

to help them raise the $16M Siga needed.

rather than a merger?

failed as a result of PharmAthene's board members' reservations.

3. Why did SIGA “begin experiencing seller’s remorse?”

agreed to the merger.

M&A Yablon Spring 2019 Outline

M&A Yablon Spring 2019 Outline