MultiCorp International Inc (MCIC)

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This is the interesting part - No rulings were requested and no opinion is expressed about the limitations and modifications that may result from the application of the personal holding company provisions of the Code. Therefore, all of the above rulings are effective only to the extent that they are not modified by the provisions of the Code relating to personal holding companies including section 541 to 547 and 316(b). See, Weiss et al. v. United States, 75 - 2 U.S.T.C. para. 538 (N.D.Ohio 1975).
And this is what we were talking about, very interesting. Thanks to the longs that did the DD on how this connects.

Two corporations combine to form single entity
i. Survivor gets assets, liabilities, rights, and obligations of constituent corporations
ii. Approval Requirementsà?check statute AND certificate of incorporation
1. Board and Shareholders approval of both parties except in short-form
a. Board = unanimous b. Shareholders
i. Delaware – majority of shares but not majority of quorum at shareholder meeting
ii. California – majority shares of each class
iii. MBCA – majority quorum [at meeting]If any asset of P that is distributed in kind to H and W is subsequently sold, no opinion is expressed about whether P or H and W will be deemed to have made the sale (see Commissioner v. Court Holding Company, 324 U.S. 331 (1945), and Rev. Proc. 85-22, 1985 - 12 I.R.B. 13, 15, section 3.0121)."

No opinion is expressed about the tax treatment of the proposed transaction under other provisions of the Code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from, the proposed transaction that are not specifically covered by the above rulings.
Specifically, no opinion is expressed about the tax treatment of any distributions to H and W other than in the partial liquidation of P as described above.
No rulings were requested and no opinion is expressed about the limitations and modifications that may result from the application of the personal holding company provisions of the Code. Therefore, all of the above rulings are effective only to the extent that they are not modified by the provisions of the Code relating to personal holding companies including section 541 to 547 and 316(b). See, Weiss et al. v. United States, 75 - 2 U.S.T.C. para. 538 (N.D.Ohio 1975).
Temporary or final regulations pertaining to one or more issues addressed in this ruling have not yet been adopted. Therefore this ruling will be modified or revoked by adoption of temporary or final regulations, to the extent the regulations are inconsistent with any conclusions in this ruling. See section 17.04 of Rev. Proc. 85-1, 1985 - 1 I.R.B. 21, 31. However, when the criteria of section 17.05 of Rev. Proc. 85-1 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances.
This ruling letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent."
(a) The liquidation of S will not be preceded or followed by the reincorporation, transfer or sale to a recipient corporation of all or part of the business or assets of S where more than a nominal amount of the stock (that is, more than 20 percent in value) of S and the recipient corporation are owned by the same shareholders. For purposes of this representation, ownership will be determined by application of the constructive ownership rules of section 318 of the Internal Revenue Code, as modified by section 304(c)(3). (12) Except as provided in the recapture provisions of the Code and similar rules of law, including but not limited to sections 47, 291(a)(1), 311(b), 311(c), 311(d), 341f, 453B, 541, 617(d), 904(f)(3), 995, 1245, 1248(f), 1250, 1252, 1253, and 1254 of the Code, the assignment of income doctrine, the clear reflection of income doctrine of section 446(b) and 482, and the tax benefit rule (see, Hillsboro National Bank v. Commissioner, 460 U.S. 370 (1983) and Rev. Rul. 74-396, 1974 - 2 C.B. 106), no gain or loss will be recognized to P on the distribution of its property in partial liquidation to the holders of "qualified stock" as provided in ruling (15) (section 311(d)(2)). The information submitted for consideration is summarized below.
P, a domestic corporation, functions as a holding company which owns all of the outstanding stock of S, a domestic corporation, which is engaged in the L, M and Q businesses. S also provides management services for P's seven other subsidiaries. P owns all of the outstanding stock of these seven other domestic corporations, each of which engages in the R business. P has outstanding Value 1 shares of common stock, Value 3 of which are held by H and W, and Value 2 shares of preferred stock, Value 4 of which are held by H and W. P was formed in 1981 when H, W, their son A, and A's children, B and C, contributed to P their shares of stock in S and the seven other corporations now owned by P in a transaction which has been represented to have been a non-taxable one (viz. one governed by section 351). H, W, A, B, and C own, and have owned since its incorporation in 1981, all of the outstanding stock of P.
Pursuant to a plan of complete liquidation, S will be merged with P in accordance with state law. P will be the surviving corporation and will acquire all the assets and assume all the liabilities of S. The separate corporate existence of S will cease. P will then distribute all of the assets of the L business to H and W in exchange for a portion of their P stock and P will cease to engage in the L business. H and W will continue to operate the L business after the distribution. P will, after the distribution, conduct active trade or business through the continued operation of the N and Q businesses and will continue to provide management services to its subsidiaries.
Financial information has been received which indicates that the L, M and Q businesses have had gross receipts and operating expenses representative of the active conduct of a trade or business for each of the past five years immediately preceding the proposed transaction.
In connection with the liquidation of S into P, the following representations have been made:
(a) The liquidation of S will not be preceded or followed by the reincorporation, transfer or sale to a recipient corporation of all or part of the business or assets of S where more than a nominal amount of the stock (that is, more than 20 percent in value) of S and the recipient corporation are owned by the same shareholders. For purposes of this representation, ownership will be determined by application of the constructive ownership rules of section 318 of the Internal Revenue Code, as modified by section 304(c)(3).
(b) No assets of S will have been distributed in kind or sold to P within three years before the adoption of the plan of liquidation of S.
(c) After the first liquidating distribution, S will cease to be a going concern and its activities will be limited to winding up its affairs, paying its debts, and distributing its remaining assets to P.
(d) S will retain no assets following its final liquidating distribution.
(e) The fair market value of the assets of S will exceed the sum of its liabilities (including any amounts owed to P) assumed by P plus the liabilities to which the assets transferred are subject both on the date of the adoption of the plan of liquidation of S and at the time of the first liquidating distribution is made.
(f) As of August 31, 1984, P was indebted to S in the approximate amount of $Y. The entire amount will be cancelled pursuant to the plan of complete liquidation of S. No indebtedness between P and S was issued or acquired at a discount and, except as described above, none will be cancelled, forgiven, or discounted in connection with the proposed transaction.
(g) On the date of the adoption of the plan of complete liquidation of S and at all times until the final liquidating distribution of S, P will own at least 80 percent of the stock of S.
(h) S will not have acquired assets in any non-taxable transaction during the three year period preceding the adoption of the plan of complete liquidation.
(i) No shares of stock of S will have been redeemed during the three years preceeding the adoption of the plan of complete liquidation.
(j) There is no plan or intention to liquidate P completely, and P will continue to operate the N and Q businesses directly and the R business through its subsidiaries after the proposed transaction.
(k) All the liquidating distributions will be made within one taxable year.
(l) S will distribute no assets representing earned but unreported income.
(m) Both P and S employ the accrual method of accounting for federal income tax purposes.
(n) S has not adopted formal or informal plans of liquidation other than the current transaction.
(o) No shares of capital stock of S have been redeemed within three years of the adoption of the plan of liquidation of S or since the acquisition of S stock by P.
(p) The stock of S was acquired by P in March of 1981 pursuant to a transfer by H and W of their S stock to P in exchange for P voting preferred and voting common stock, in a transaction described in section 351(a) of the Internal Revenue Code.
(q) Each of the taxpayers will pay those expenses of the proposed transaction which are attributable to it.
(r) Neither P nor S has or expects to incur an operating loss or a deficit in accumulated earnings and profits.
The following representations have been made with respect to the distribution of the L business in partial liquidation of P:
(a) The assets of the L business to be distributed by P have been actively used for the past five years in the operation of the business to be distributed or are improvements of assets actively used or will be replacements of assets actively used for such period.
(b) The partial liquidation of P will not be preceded or followed by the reincorporation in or transfer or sale to, a recipient corporation of any of the business or assets of P, where persons holding more than 20 percent in value of the stock of P also hold more than 20 percent in value of the stock in such recipient corporation. For purposes of this representation, ownership will be determined by application of the constructive ownership rules of section 318 of the Internal Revenue Code, as modified by section 304(c)(3).
(c) There is no plan or intention to completely liquidate P.
(d) There is no plan or intention for P to re-enter the L business or to enter any new line of business other than through normal internal growth.
(e) No part of the assets of the L business will be received by H or W as a debtor, creditor, employee, or in any capacity other than that of a shareholder of P.
(f) There is no plan or intention on the part of H or W to reinvest in P any proceeds of the distribution in partial liquidation.
(g) The distribution pursuant to the plan of partial liquidation of P will consist of the assets associated with the L business.
(h) All distributions pursuant to the plan of partial liquidation of P will be made within the taxable year in which the plan of partial liquidation is adopted or in the succeeding tax year.
(i) There are no declared but unpaid dividends on any P stock, and none will be declared before the distributions.
(j) The fair market value of the assets to be distributed to H and W, less the amount of liabilities to which assets will be subject will equal the fair market value of the P stock surrendered in exchange therefor.
(k) P does not maintain a reserve for bad debts.
(l) The fair market value and the basis of the assets to be distributed will, in each instance, exceed the liabilities to be assumed, or to which the distributed assets are subject.
(m) There has been no unusual or abnormal increases in working capital, extraordinary sales, purchases, replacements, or renovations of fixed or operating assets, or shifts, transfers, or loans of assets (including working capital) from one business activity to another, or termination or contraction of a business, and no substantial changes in assets of P and its Subsidiaries during the past five years other than those occuring in the normal course of business and other than the contribution by H, W, A, B, and C of their stock of the subsidiaries to P in exchange for P stock in the organization of P in 1981.
(n) The assets to be distributed are not from any of the following sources: (i) a reserve for expansion no longer needed; (ii) a mere decline in loss of business; (iii) a mere decrease in need for working capital; (iv) proceeds from the sale of a business which is nominal in relation to the entire business of P or S; or (v) a business operated at a loss which acquired assets from another business of S or P.
(o) There is no other outstanding capital of P, including bonds, debentures, notes, warrants, options, or other securities, which should be considered a stock interest, nor is there any outstanding indebtedness indebtedness that was not incurred in the ordinary course of business.
Based solely on the information submitted and on the representations set forth above, subject to any limitations and modifications that may result from the application of the personal holding company provisions of the Code, it is held as follows:
(1) For federal income tax purposes, the merger of S with and into P pursuant to applicable state law will be treated as distributions by S in complete liquidation within the meaning of section 332 of the Code (section 1.332 - 2(d) of the Income Tax Regulations).
(2) Provided that the requirements of section 332(b) of the Code are met, no gain or loss will be recognized by P upon the receipt of the property of S distributed in complete liquidation (section 332(a); Rev. Rul. 74-54, 1974 - 1 C.B. 76).
(3) The basis of the property of S to be received by P will be the same as the basis of such property in the hands of S immediately prior to the liquidation (section 334(b)(1)).
(4) The holding period of the property of S in the hands of P will include the holding period of that property in the hands of S immediately before the liquidation (section 1223(2)).
(5) No gain or loss will be recognized by S on the distribution of its property to P in complete liquidation (section 336).
(6) As provided in section 381(c)(2) of the Code and section 1.381(c)(2) - 1 of the regulations, P will succeed to and take into account the earnings and profits or deficit in earnings and profits of S as of the date of the transfer. Any deficits in earnings and profits of S will be used only to offset the earnings and profits accumulated after the date or dates of the transfer.
(7) The liquidating distribution will not subject S to any investment credit recapture pursuant to section 47(b).
(8) The distribution by P of the assets of its L business in redemption and cancellation of the stock of H and W pursuant to a plan of partial liquidation will qualify under section 302(e)(2) of the Internal Revenue Code.
(9) The maximum amount of property that will be considered to be distributed in partial liquidation will consist of the assets used in the terminated L business distributed by P to H and W, less all liabilities attributed to that business (including any taxes and expenses incurred in connection with that distribution), plus that amount of working capital reasonably attributable to the terminated activities. A determination as to that portion of the working capital that may be included in a distribution cannot be made until the tax returns for the years involved are filed and examined by an Internal Revenue Agent (see Rev. Rul. 60-232, 1960 - 2 C.B. 115; Rev. Rul. 71-250, 1971 - 1 C.B. 112; Rev. Rul. 76-279, 1976 - 2 C.B. 99; Rev. Rul. 76-289, 1976 - 2 C.B. 100).
(10) The distribution made by P pursuant to the plan of partial liquidation, to the extent indicated in ruling (9) above, will be treated as a distribution in partial liquidation under section 302(b)(4) of the Code and will be treated as in full payment in exchange for the P stock redeemed as provided in section 302(a) of the Code.
(11) To the extent that property distributed by P is in excess of amounts specified in ruling (9) above, such excess, if any, may be treated as distributions of property under sections 301 and 316 of the Code.
(12) Except as provided in the recapture provisions of the Code and similar rules of law, including but not limited to sections 47, 291(a)(1), 311(b), 311(c), 311(d), 341f, 453B, 541, 617(d), 904(f)(3), 995, 1245, 1248(f), 1250, 1252, 1253, and 1254 of the Code, the assignment of income doctrine, the clear reflection of income doctrine of section 446(b) and 482, and the tax benefit rule (see, Hillsboro National Bank v. Commissioner, 460 U.S. 370 (1983) and Rev. Rul. 74-396, 1974 - 2 C.B. 106), no gain or loss will be recognized to P on the distribution of its property in partial liquidation to the holders of "qualified stock" as provided in ruling (15) (section 311(d)(2)).
(13) Gain or loss will be recognize by H and W to the extent of the difference between the amount distributed in partial liquidation and the adjusted basis of the shares of P stock surrendered in exchange therefor. Provided that (a) the P stock constitutes a capital asset in the hands of H and W, and (b) section 341(a) (relating to collapsible corporations) is not applicable, the gain or loss, if any, will be considered capital gain or loss subject to the provisions and limitations of Subchapter P of Chapter 1 of the Code.
(14) Regardless of the number of shares of P stock surrendered for redemption, the number that will be considered redeemed to determine gain or loss for purposes of the partial liquidation will be the number determined in accordance with the principles set forth in Rev. Rul. 77-245, 1977 - 2 C.B. 105. To the extent that the fair market value of the distribution in partial liquidation received by H or W exceeds the fair market value of the P stock surrendered in exchange therefor, the additional shares considered redeemed pursuant to Rev. Rul. 77-245 will be determined in accordance with the principles set forth in Rev. Rul. 68-348, 1968 - 2 C.B. 141 and Rev. Rul. 85-48, 1985 - 16 I.R.B. 5.
(15) The shares of P stock surrendered by H and W in the partial liquidation will be treated as "qualified stock" under section 311(e)(1) of the Code.
If any asset of P that is distributed in kind to H and W is subsequently sold, no opinion is expressed about whether P or H and W will be deemed to have made the sale (see Commissioner v. Court Holding Company, 324 U.S. 331 (1945), and Rev. Proc. 85-22, 1985 - 12 I.R.B. 13, 15, section 3.0121).
No opinion is expressed about the tax treatment of the proposed transaction under other provisions of the Code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from, the proposed transaction that are not specifically covered by the above rulings.
Specifically, no opinion is expressed about the tax treatment of any distributions to H and W other than in the partial liquidation of P as described above.
No rulings were requested and no opinion is expressed about the limitations and modifications that may result from the application of the personal holding company provisions of the Code. Therefore, all of the above rulings are effective only to the extent that they are not modified by the provisions of the Code relating to personal holding companies including section 541 to 547 and 316(b). See, Weiss et al. v. United States, 75 - 2 U.S.T.C. para. 538 (N.D.Ohio 1975).
Temporary or final regulations pertaining to one or more issues addressed in this ruling have not yet been adopted. Therefore this ruling will be modified or revoked by adoption of temporary or final regulations, to the extent the regulations are inconsistent with any conclusions in this ruling. See section 17.04 of Rev. Proc. 85-1, 1985 - 1 I.R.B. 21, 31. However, when the criteria of section 17.05 of Rev. Proc. 85-1 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances.
This ruling letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent."
The Board of Directors (the “Board”) of Multicorp International Inc. (the “Company”) has established
the following guidelines for the Board’s conduct and operation. These guidelines are designed to give
directors and management a flexible framework for effectively pursuing the Company’s objectives for the
benefit of shareholders. That is why these guidelines should be interpreted in the context of all applicable
laws, the Company’s charter documents, and other policies.
A. BOARD COMPOSITION AND SELECTION
Size of the Board
The Board will establish the number of directors in accordance with the certificate of incorporation
and bylaws of the Company. The Boards nominating and corporate governance
will periodically review the appropriate Board size, which may vary to accommodate the availability of
suitable candidates and the Company’s needs.
Independence of Directors
There will at all times be a majority of independent directors on the Board. An “independent director” is a
person who meets the definition of independent director under rules of the stock exchange on which the
Company’s securities are listed and does not have any other relationship with the Company that, in the
opinion of the Board, would interfere with the exercise of independent judgment in carrying out director
responsibilities.
Periodically as required by the rules of the Securities and Exchange Commission or listing
standards of the exchange that lists the Company’s capital stock (the “Exchange”) and based on
information provided by Board members and advice of counsel, the Board or the Nominating Committee
will affirmatively determine director independence. Directors may be asked from time to time to leave a
Board meeting when the Board is considering a transaction in which the director (or another organization
in which the director is a director or officer) has a financial or other interest.
Management Directors
The Board anticipates that the Chief Executive Officer will serve on the Board. The Board also anticipates
that other members of management, who can assist the Board in fulfilling its responsibilities based on
their experience and role at the Company, may also serve on the Board.
Board Leadership
The Board may select a chairperson of the Board in the manner and on the criteria that the Board deems
appropriate. In the event that the Company does not have an independent chairperson of the Board, the
independent directors will designate a lead independent director. The name of the chairperson or lead
independent director will be listed in the Company’s proxy statement.
The independent chairperson or
lead independent director will be responsible for coordinating the activities of the independent directors.
In addition to the duties of all Board members, the specific responsibilities of the independent
chairperson or lead independent director are to:(i) work with the Chief Executive Officer to develop and
approve an appropriate Board meeting schedule;(ii) work with the Chief Executive Officer to develop and
approve Board meeting agendas;(iii) provide the Chief Executive Officer feedback on the quality,
quantity, and timeliness of the information provided to the Board;(iv) develop the agenda and moderate
executive sessions of the independent members of the Board;(v) preside over Board meetings when the
Chief Executive Officer is not present or when Board or Chief Executive Officer performance or
compensation is discussed;(vi) act as principal liaison between the independent members of the Board
and Chief Executive Officer;(vii) convene meetings of the independent directors as appropriate;(viii) be
available for consultation and direct communication with shareholders as deemed appropriate; and (ix)
perform other duties as the Board may determine from time to time.
Selection of Directors
The Board will be responsible for nominating members for election to the Board by the Company’s
shareholders. The Board is also responsible for filling any vacancies on the Board unless the vacancy is
filled by the shareholders. The Nominating Committee is responsible for identifying, reviewing,
evaluating,
and recommending candidates to serve as directors of the Company, in accordance with its charter and
these guidelines.
Our Board is divided into three classes. As a result, approximately one third of the Board will stand
for election for a three-year term by the share of the Company each year at the Company’s annual
meeting of shareholders. Each year, at the Company’s annual meeting of shareholders, the Board will
recommend a slate of directors for election by the shareholders. In accordance with the Bylaws, the
Board will also be responsible for filling vacancies or newly-created directorships on the Board that may
occur between annual meetings of shareholders. The Nominating Committee is responsible for identifying
and screening candidates for Board membership.
The Company’s Secretary will be notified of all persons proposed to serve as potential candidates
for nomination to the Board. For nominations of potential candidates made other than by the Board, the
shareholder or other person making such nomination must comply with the Company’s Bylaws, including
without limitation, submission of the information or other materials required with respect to proposed
nominees. Each potential candidate must provide a list of references and agree (i) to be interviewed by
members of the Nominating Committee or other directors in the discretion of the Nominating Committee,
and (ii) to a background check or other review of the qualifications of a proposed nominee by the
Company.
Prior to nomination of any potential candidate by the Board, each member of the Board will have an
opportunity to meet with the candidate. Upon request, any candidate nominated will agree in writing to
comply with these Corporate Governance Guidelines and all other policies and procedures of the
Company applicable to the Board.
Board Membership Criteria
The Nominating Committee works with the Board to determine periodically, as appropriate, the
desired Board qualifications, expertise and characteristics, including such factors as business experience,
diversity factors (including race, ethnicity, gender, age and sexual orientation, among others),
professional background, education, skill, and other individual qualities and attributes that contribute to
the total mix of viewpoints and experience represented on the Board.
The Nominating Committee and the Board evaluate each director in the context of the composition
of the Board overall, with the objective of having a Board that can best perpetuate the success of the
business and represent shareholder interests through the exercise of sound judgment using its diversity
of background and experience. Each director should be an individual of high character and integrity. In
determining whether to recommend a director for reelection, the Nominating Committee also considers
the director’s past attendance at meetings, participation in and contributions to the activities of the Board
and the Company.
Each director must ensure that other existing and anticipated future commitments do not materially
interfere with the director’s service as a director. Any employee director must submit his or her offer of
resignation from the Board in writing to the Nominating Committee upon termination of employment with
the Company. Upon change of his or her principal employer, any non-employee director must submit his
or her offer of resignation from the Board in writing to the Nominating Committee.
The Nominating
Committee will determine whether to accept or reject such resignation and will make a recommendation
to the Board as to whether to accept or reject the offer of resignation, or whether other action should be
taken. Candidates for director nomination are evaluated in the context of the current composition of the
Board, its operating requirements, and the long-term interests of our shareholders. In conducting this
assessment, the Nominating Committee Board considers character, integrity, judgment, diversity factors
(including race, ethnicity, gender, age and sexual orientation, among others), skills and areas of
expertise, and other factors that they deem appropriate to maintain a balance of knowledge, experience,
and capability. A third-party search firm will be engaged and requested to furnish a list of possible
candidates. They will be also be instructed to include women and candidates from underrepresented
communities who meet the applicable business and search criteria.
Term Limits
Term limits may result in the loss of long-serving directors who over time have developed unique
and valuable insights into the Company’s business and therefore can provide a significant contribution to
the Board. Because each director is periodically subject to election by the Company’s shareholders, the
Board does not believe, it is in the best interests of the Company to establish term limits at this time.
Limits on Other Board Memberships
Directors should advise the Nominating Committee of any invitations to join the board of directors
of any other public company prior to accepting the directorship. No director should serve on more than
four additional public company boards without the approval of the Board. The Nominating Committee will
review the continued service of the director who has changed his/her role, position, areas of
responsibility he or she held. In addition, service on other boards and/or committees should be consistent
with the Company’s conflict of interest policies.
Directors Who Have a Change in Job Responsibility or Other Circumstances
When a director, including any director who is currently an officer or employee of the Company, becomes
aware of circumstances that may adversely reflect upon a director, any other director, or the Company,
the director should notify the Nominating Committee of such circumstances. The Nominating Committee
will consider the circumstances, and may, in certain cases, request the director to cease the conflicting
activity, or in more severe cases, request that the director submit his or her resignation from the Board if,
for example, continuing service on the Board by the individual is not consistent with the criteria deemed
necessary by the Board.
A director who retires or materially changes his or her present job (other than a
promotion), should notify the Board and the Nominating Committee. While the Board does not believe
any director who retires or materially changes his or her present job should necessarily leave the Board.
There should be an opportunity for the Nominating Committee to review their continuing qualifications.
B. ROLE OF THE BOARD OF DIRECTORS
Shareholders select directors to provide oversight and strategic guidance to senior management. A
director’s responsibility is to fulfill his or her fiduciary duties of care, loyalty, and to exercise his or her
business judgment in the best interests of the Company and its shareholders. Board service requires
significant time and attention. More specifically, the Board has responsibilities to review, approve, and
monitor fundamental financial and business strategies, assess our major risks, and consider ways to
address those risks, select and oversee management, and establish and oversee processes to maintain
our integrity.
To fulfill their duties, directors must prepare for meetings and discussions with
management, participate in Board meetings, review relevant materials, and serve on committees. The
Company expects directors to maintain an attitude of constructive involvement and oversight, ask
relevant and incisive questions, and demand honest and accurate answers. Directors must act with
integrity and demonstrate a commitment to the Company, our values, business, and long-term
shareholder value.
C. DIRECTOR ORIENTATION AND EDUCATION
The Nominating Committee may implement an orientation process for directors that include
background material on our policies and procedures, meetings with senior management, and visits to our
facilities. We may also offer continuing education programs to assist the directors in maintaining the level
of expertise necessary to perform their duties.
D. DIRECTOR COMPENSATION
The Compensation Committee of the Board will review and recommend to the Board, the type and
amount of director compensation for Board and committee service for non-management directors in
accordance with applicable legal and regulatory guidelines. Compensation for non-management directors
and committee members should be designed to be aligned with the long-term interests of the
shareholders and consistent with market practices of similarly situated companies. In determining
compensation, the effect of such compensation arrangements on a director’s independence and
objectivity will be considered. Company employees will not receive additional compensation for their
service on the Board.
E. BOARD MEETINGS
Attendance and Preparation
The Board will meet on a periodic basis, in person or by teleconference, as such times and places
as the Board determines. In addition, special meetings may be called from time to time. Directors are
expected to attend each meeting to invest the time and effort necessary to understand the Company’s
business and financial strategies and challenges. The basic duties of the directors include being prepared
for and attending Board meetings and actively participating in Board discussions. Directors are also
expected to make themselves available outside of Board meetings for advice and consultation. A director
who is unable to attend a Board or committee meeting should notify the chairperson of the Board or lead
independent director or committee chairperson, as applicable, and the Chief Executive Officer in advance
of the meeting.
Agenda
The Chief Executive Officer and chairperson or lead independent director will create a schedule of
topics to be discussed during the year and an agenda for each Board meeting. Each Board member is
encouraged to suggest topics for the agenda at any time, and each Board member is free to raise
subjects that are not on the agenda.
Advance Receipt of Meeting Materials
Information regarding the topics to be considered at a meeting is essential to the Board’s
understanding of the business and the preparation of the directors for a productive meeting. To the
extent feasible, the meeting agenda and any written materials relating to each Board meeting will be
distributed to the directors sufficiently in advance of each meeting to allow for review of the agenda and
materials. Directors are expected to have reviewed and be prepared to discuss all materials distributed in
advance of any meeting.
Annual Meeting of Shareholders Attendance
Each director is strongly encouraged to attend the Company’s annual meetings of shareholders.
Attendance of Non-Directors
The Board encourages invitations to management and outside advisors or consultants from time
to time to participate in Board and/or committee meetings to (i) make presentations and provide insight
into items being discussed by the Board that involve the invitee and (ii) bring managers with high
potential into contact with the Board. Attendance of any non-directors at Board meetings is at the
discretion of the Board.
Executive Sessions
The non-employee directors will meet in executive sessions without management directors or
management present on a periodic basis but no less than once a year. “Non-employee directors” are
all directors who are not Company employees, including both independent directors and such directors
who are not independent directors by virtue of a material relationship, former status or family
membership, or for any other reason. In addition, if the non-employee directors include directors who are
not independent directors, the independent directors will also meet on a periodic basis but no less than
once a year in an independent director executive session.
Committee Reports
At each regular Board meeting, if requested by the Board, each committee will present a brief
summary of the principal subjects discussed, any conclusions reached, along with final actions of the
committee. The chairperson of the appropriate committee, if present, will make such report. Minutes of
committee meetings will be maintained in the minute books of the Company and will be available to any
director.
F. BOARD COMMITTEES
TBD
G. BOARD ACCESS TO MANAGEMENT; USE OF OUTSIDE ADVISORS
The Board and each committee of the Board will have the power to hire, at the expense of the Company,
independent legal, financial, or other advisors that they may deem necessary or advisable in performing
their responsibilities, without consulting or obtaining the advanced approval of any officer.
H. ANNUAL SELF-EVALUATION
The Nominating Committee will oversee an annual self-evaluation by the Board and each committee
of the Board. The Nominating Committee will be responsible for establishing the evaluation criteria and
implementing the process for this evaluation, as well as considering other corporate governance
principles that may, from time to time, merit consideration by the Board.
The Nominating Committee will utilize the results of the Board evaluation process in assessing and
determining the characteristics and critical skills required of prospective candidates for election to the
Board and for current directors seeking re-election in an effort to further the interests of the Company
and its shareholders in a manner consistent with the Company’s mission and core values.
I. LEADERSHIP DEVELOPMENT
TBD
J. SHAREHOLDER-DIRECTOR COMMUNICATIONS
The Board believes that shareholders should have an opportunity to send communications to non-
management members of the Board. Any such communication should be made in accordance with the
Company’s Policies and Procedures for Shareholder Communications to Independent Directors.
K. BOARD RESPONSIBILITIES
A director should discharge his or her duties, including duties as a member of any committee of
the Board on which he or she serves, in good faith and in a manner the director reasonably believes to
be in the best interests of the Company and its shareholders. Board members will comply with the laws
and requirements of the Exchange and other applicable regulatory agencies and with all policies and
guidelines of the Company, including without limitation, the Company’s Code of Business Conduct and
Ethics.
Each director is expected to disclose promptly to the Board and respond promptly and accurately
to periodic questionnaires or other inquiries from the Company regarding any existing or proposed
relationships with the Company, including compensation and stock ownership, which could affect the
independence of the director. Each director is also expected to promptly inform the Board of any material
change in such information, to the extent not already known by the Board. Directors have an obligation
to protect and keep confidential all of our non-public information unless the Company has authorized
public disclosure or unless otherwise required by applicable law.
Confidential information includes all non-
public information entrusted to or obtained by a director by reason of his or her position on the Board.
This includes information regarding our strategy, business, finances, and operations, and will include
minutes, reports, and materials of the Board and committees, and other documents identified as
confidential by the Company.
The obligations described above continue even after service on the Board
has ended. Directors may not use such confidential information for personal benefit or to benefit other
persons or entities other than the Company. Unless authorized by the Company or applicable law,
directors will refrain from disclosing confidential information to anyone outside the Company. These
obligations continue even after service on the Board has ended. Any questions or concerns about
potential disclosures should be directed to the Company’s General Counsel, who then may communicate
with the Chief Executive Officer or the Nominating Committee regarding the potential disclosures.
L. REVIEW OF GOVERNANCE GUIDELINES
The Board and the Nominating Committee will periodically review and assess the adequacy of these
guidelines and recommend any proposed changes to the Board for approval.
iii. Vote Buying (Schreiber v. Carney)
1. Per se void if
a. Defrauds or disenfranchises other shareholders
b. When potential injury or prejudicial impact to other stockholders
2. Swing votesà?possibility of holdout
a. A swap contract allows the shareholder to transfer the
economic risk of the shares he holds
b. Crown v. EMAK Partners – When economic interests are aligned with voting rights, a shareholder can sell his or her shares to a buyer, and such sale would not be void
i. SH with swing votes sold his shares to bidder for higher than market price
iv. MBCA § 11.07 – Effects of merger
1. Corporation designated in merger agreement as surviving entity
continues its existence
2. Separate existence of corporation or corporations that are merged into survivor ceases
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3. All property owned by, and every contract right possessed by, each constituent corporation is vested in the survivor
4. All liabilities of each constituent corporation are vested in the survivor
5. Surviving corporation’s name may be substituted in any pending legal proceeding for the name of any constituent corporation that was a party to the proceeding
6. Articles of incorporation and bylaws of survivor are amended to the extent provided in merger agreement
7. Articles of incorporation documents of any entity created by merger becomes effective
8. Shares of each constituent corporation are converted into whatever consideration was specified in the merger agreement and the former shareholders of the constituent corporations are entitled only to the rights provided them in the merger agreement or by statute
v. Filing with Secretary of State specifying who and how they’ve been merged if they’ve merged with a foreign corporation
b. Triangular – acquiring corporation sets up a shell subsidiary
i. Shell is capitalized with consideration to be paid to target shareholders in
acquisition
1. Shell then merged with target corporation
ii. Non-tax benefits – maintain target company as continuing entity under different ownership and a separate entity for liability limitation
iii. Acquiring company is not one of the constituent parties to transaction BUT the target and the acquirer subsidiary with which target is merged
iv. Acquiring company makes a subsidiary and then subsidiary forms with target company
1. Consent: subsidiary and target company
a. Weird: Acquiring Company gives its stock to the Merger Subsidiaryà?requires SH approval for issuance of additional stock
i. SH approval where acquiring Company issues 20% or moreà?shareholder approval
2. Approval: BOD + Shareholders
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v. Compare variations
1. Reverse Triangular – target company survives
a. Ex: target’s name maintained because there’s some good will 2. Forward Triangular – merger subsidiary [shell] is surviving entity
c. Short Form - shareholders of both corporations that are parties to a statutory merger must vote to approve the merger
d. Special Veto Rights in Mergers
i. Vote required for merger: check the statute and the certificate of incorporation
ii. Dissenting Minority – shareholders who vote against the merger may exercise dissenters/appraisal rights
iii. Advance that overcame the holdout problem
iv. Usually in public-public merger: shareholders of target do not get appraisal rights (DE rule)
2. Asset Purchase – selected assets of target are purchased by acquiring company a. Approval
i. BOD – both sides
ii. Shareholder
1. Target – when all or substantially all assets are sold a. Substantially all is difficult to achieve
2. Buyer – only when assuming more than 20% of shares
a. Using cash does not need to go because it’s a board issue
iii. Dissenter Rights – at most fiduciary b. Best Practices
i. An acquisition subsidiary;
ii. Adequate capitalization of the subsidiary;
iii. Observe formalities of the subsidiary:
1. Note: to avoid veil piercing
c. Insurance up to the amount of the initial capital contribution 3

d. BOD essentially maintains an unconstrained authority to sell, lease, mortgage, or otherwise dispose of corporate assets except where the board attempts to dispose of all or substantially all of the corporate assets – see defacto merger doctrine
i. Gimbel v. Signal Companies (turns quantitative test into qualitative test)
1. Quantitatively vital to the operation of the corporation
2. Out of the ordinary, and
3. Substantially affects the existence and purpose of the corporation
4. Implications
a. Small, non-diversified businesses will likely trigger the shareholder approval requirements in a sale of assets.
b. The accumulation of businesses – conglomeration – can result in no shareholder approval requirement when those businesses are later spun-off
ii. Katz v. Bregman – taken together, the nature of the transaction plus the fairly high percentage of assets being sold, satisfied all or substantially all and therefore required shareholder approval
1. Turning to qualitative measures, the switch would be a radical departure by which the corporation would sell off the core part of its business in order to go into an entirely new line of business
e. Liabilities
i. Successor - Where one company sells or transfers all of its assets to another, the second entity does not become labile for the debts and liabilities including the torts of the transferor (Antiphon) EXCEPTIONS
a. Assumes liability i. Express
ii. Implied – relies on intention on part of buyer to pay debts of seller . . . factors:
1. Effect of transfer on creditors of predecessor corporation
2. Admissions of liability on part of officers or other spokespersons of successor corporation
b. Ramirez – strict tort liability succeeds to purchaser for defects in units of the same product line previously manufactured and distributed by the seller (minority0
c. Rationale: remedies destroyed by the sale of assets 4

d. Transaction amounts to consolidation or merger
e. Transaction is fraudulent and intended to provide an escape
from liability
f. Purchasing corporation is a mere continuation of selling company
g. Policy Consideration
i. Whether innocent tort victims bear business risks of
others (i.e. “externalities”)
1. Victims left without a remedy always raise questions about the virtue (or non-virtue) of limited liability regimesà?personal injury
ii. Statutory (will follow acquirers of property, assets, or employers, and any agreement between the merger parties will not be effective against the government or the affected employees)
1. Environmental
a. Note: impose transaction costs and therefore deter
2. Potential continuity of union agreements or requirement to recognize union
3. Certain countries may have their own statutory liability – severance obligations
iii. CLEANSE – wash an asset sale though a bankruptcy proceeding
iv. Effect of Non-Negotiable Liabilities
f. Taxable events
i. Mergers may not necessarily tax g. De Facto Corporation Doctrine
i. Situation: shareholders say it’s a merger (dissenters’ rights) vs. company says it’s an asset purchase
1. Farris v. Glen Alden – substance over form
2. Hariton – form over substance (DE)
ii. Sale achieves same result as a merger
iii. Does the transaction so fundamentally change the nature of the business as to cause the shareholder to give up his shares in one company and against his will accept shares in a different enterprise?
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1. Sale of more than 75% of balance sheet assets by market value vs. 25%
iv. Factors
1. Distribution of consideration to SH
2. Change in board composition
3. Change in shareholder composition
4. Significant changes in share value
5. Significant changes in company’s line of business
h. Compare to Merger
i. Bidder buying assets does not assume the liabilities of the selling corporation
ii. Asset sales are taxable events, while most mergers will not necessarily be recognized as taxable events
3. Tender Offer – purchase of shares from shareholders
a. Acquiring company goes directly to target company’s shareholders
i. Friendly – made through the board to the SH
ii. Hostile – directly to the SH
iii. Consideration is paid directly to target company’s SH, not dealing with target’s directors
b. Acquiring company owns stock so target becomes subsidiary
c. Premium – acquiring company has to pay above market price to get shareholders to
budge
d. Without all SH approval – dissenters become minority SH
i. To whom majority owe fiduciary
ii. Get rid of them via squeeze-out merger
4. Payment in Acquisition
a. Cash c. Notes
b. Stock
d. Mere promises
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e. Earnouts – payments based on f. Other rights performance of the company/people
after the deal closes
5. Major Themes
a. Regulation: Does corporate law serve regulatory function or enabling function
i. Should consent requirements apply equally to any transaction that achieves the same result?
1. Substances over form OR
2. Sophisticated parties knowing forms can select to restrict or allow certain transactions
ii. Should exchange or SEC add further approval requirements to state corporate law?
b. Consent– see pg. 68-69 for appraisal rights and majority voting requirements i. Statutory
1. CA Corp.
a. § 1101
b. § 1200
c. § 1201
d. CA requires vote for each class of stock for merger
2. Del. Corp. §
a. Put everyone together and get the majority
ii. Agreements are contractual BUT cannot vary statutory
6. Options and Rights to Acquire Stock
a. Usually requirement to notify option-holders some time before closing
b. Notice period may be after record date for determining which shareholders have a right to vote
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i. Option-holders may not have notice to exercise to become shareholders in order to vote
c. No statutes or anything for option-holders (just contractual)
7. Preferred Stock
a. Silicon Valley Preferred Stock (Venture Preferred) almost always has a veto of some kind on mergers, asset sales, and sales of control
b. Traditional Preferred is usually a debt-like instrument and does not usually have a veto on mergers
Standard of Review For Arms Length Mergers
8. Court will defer to judgment of board a. If board acted in
i. Good faith
ii. Informed manner
iii. Disinterested
b. Unless decision is shown to be irrational (not attributable to any business purpose) or there was a conflict of interest
i. Motive to remain in office is one that pervades all directors’ decisions and is not by itself enough to prove conflict
Delaware uses three basic tests for judging the actions of a selling firm’s board in an acquisition: 1. Business Judgment Rule: Applied in Smith v. Van Gorkom.
2. Enhanced Scrutiny (Unocal): Applies to actions when a seller favors one bidder over another, and in other circumstances. See Revlon.
3. Intrinsic Fairness Test: Applies when directors are operating under conflicts of interest. (Mills Acquisition Co. v. Macmillan & Cede & Co. v. Technicolor.)
8

Buyer’s Search for Information: Due Diligence
1. Overview
a. Determining what the seller really owns and what rights and obligations it has, and what the buyer is buying
b. Having seller make accurate representations
i. Have buyer make representations when buyer stock is being issued in the transaction
c. What are the consequences to seller of misrepresentation
d. Ideally, the buyer will “see the business through the eyes of the seller
e. Buyer wants information to be symmetrical so it knows what it is buying and can properly price the assets
f. Parties want to determine what is known and what is not known about the business
g. Parties may want to negotiate the known liabilities, and allocate the risks of unknown liabilities
h. If the seller is getting stock of buyer, then buyer will want information on seller
i. During diligence process, the definitive agreement is being drafted;
j. Multiple diligence investigations are going on (technical, financial, legal, business);
k. Communication is imperative among the team;
l. There may an international or specialized component to the investigation;
m. The prospects of the business are crucial, and will impact the “material adverse change” provision of the acquisition agreement
2. Process
a. Begins with a confidentiality agreement (NDA), or a letter of intent
i. Seller agrees to grant access to buyer (certain conditions may apply)
ii. Parties may agree on non-solicitation of employees/consultants
1. May also agree on “no shop” or exclusivity for some period of time
iii. If LOIà?a tentative price and some terms of the acquisition are established
iv. Definitive agreement is being drafted; 9

v. Multiple diligence investigations are going on (technical, financial, legal, business);
vi. Communication is imperative among the team;
vii. There may an international or specialized component to the investigation;
viii. The prospects of the business are crucial, and will impact the “material adverse change” provision of the acquisition agreement
b. Negotiating points
i. Facts can be represented and unknown risks can be allocated by warranties and through covenants
ii. Two main qualifications that are negotiated in representations and warranties:
1. To the knowledge of seller... (e.g. page 1146, fn 35). 2. Materiality
3. Due Diligence Defense
a. No person other than the issuer, shall be liable . . . who shall sustain the burden of proof
i. (3)(A) as regards any part of the registration statement not purporting to be made on the authority of an expert he had after a reasonable investigation, reasonable ground to believe and did so believe at such part of the registration statement became effective, that the statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make other statements therein not misleading and re: registration statement – he had no reasonable ground to believe and did not believe at such the time the registration statement became effective had no reasonable ground to believe and did not believe that the statements therein were untrue
b. Red Flags
i. Contingent liabilities;
ii. Off-balance sheet obligations;
iii. Inter-company transactions.
iv. Concept: The representations and warranties are intended to bring out this information to price the purchase accurately; they do this by providing a remedy for misrepresentation
v. Materiality is for securities but not in M&A context except where there’s a security sale within the M&A deal
2. Generally
e.
The Acquisition Agreement
PRICING
a. Information can be obtained so the price can be based on all material information
b. Main Issue: parties may have different perceptions of value of target company
3. Earnouts - buyer agrees to pays the valuation of business as it stands now in the buyer’s estimation and agree to pay more if the earnings increase as much as the seller projects
a. Creates post-closing contingent payment obligation that becomes effective in the event the seller meets certain targets or exceeds predetermined thresholds with respect to revenue, profitability, market acceptance, technical achievements, or regulatory approvals
b. Traditional way to bridge the “valuation gap”
c. Where buyer and seller have differences over their respective expectations of the seller’s future performance or differences over the relevant period in time over which the value will be generated, these differences can lead to significant divergences in the valuation of seller
i. By agreeing to defer resolution of these differences until the future after the seller’s actual performance becomes known the earnout can help the buyer and the seller align their time horizons, thereby permitting the parties to efficiently price the asset for sale
d. Trouble – create incentive for acquirer to hold down earnings during the earnout period and only take full advantage of its newly acquired business once the earn out period ends
i. Difficult to ensure the target’s former shareholders can effectively monitor compliance with its obligations
e. Example: In the one year period after the acquisition, the key employees will receive 10% of all gross revenue from the sale of the target companies products up to $20M
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i. Issues: Should the earnout be for the key employees only or for all shareholders of the target? Is this a shift in value away from shareholders?
f. Considerations
i. Measuring period (shorter the better);
ii. Measuring criteria (simpler the better);
iii. Budget control (clearer the better);
iv. Decision-making (clearer the better);
v. Type of agreement – general principles or detailed operating plan (depends on trust between the parties);
vi. Who receives the payments
g. O’Tool v. Genmar – earnout agreements must be carried out in good faith and with fair dealing
i. Buyer must refrain from arbitrary or unreasonable conduct that deprives the former target shareholders of the fruits of its bargain
ii. Good Faith
1. Court will look at the spirit of the agreement
2. Seller should be given a fair opportunity to operate the company to maximize the value of the earnout
4. Stock Price Movements
a. When payment is in stock, parties deal with movements in the price:
i. No adjustment
ii. Fix a value and issue a number of shares at that that required value
iii. Provide for an adjustment with limits (collars)
1. A collar on the price is used in public company transactions based on stock of one or both of the parties
a. Ensure that a certain value of stock is delivered at closing
b. Public Companies: press release issued on transaction immediately after signing a material definitive acquisition/merger agreement
c. Big Changes between signing and closing
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5. Proceed Distribution
a. Liquidation Preferences
i. Preferred (C) gets first, then Series B and then Common – it’s a waterfall down
ii. Conversion – preferred holders have conversion rights to convert their Series C stock into Common Stock
b. Options and Warranties
i. Stock transactions vs. cash
ii. Options – buyer assumes options
1. Option vesting accelerates
2. Exercisable
iii. Always inquire how the options and warrants are being treated.
1. Not like stock where their treatment is “automatic.” iv. In the Money vs. Out the Money
1. In the Money – options where the stock price is greater than the exercise price
a. Cerberus Int’l v. Apollo Mgmt - Absent any provision, the options and warrants would be exercised and share in the Merger Consideration (thus, diminishing the amount for each share, and the cash from exercise would just add to the company’s cash at closing
2. Out of the Money – options where the stock price is less than the exercise price
v. Assumption of options compared to non-assumption of opinions
1. Assumption of Options – buyers assumes options of seller and converts them into the options of the buying company
2. Buyers assume options
a. Option vesting accelerates and options are exercisable
b. No acceleration and options are exercisable
i. If options are not exercisedà?terminate6. Generally
a. Representations can become untrue;
b. Consents may not be received;
c. Litigation may commence;
d. Employees may quit;
e. Customers may leave;
f. The economy may worsen
7. Material Adverse Changes - Should the buyer have to buy something at the original price if the item has materially worsened?
a. Give effect to intent of parties
i. From language of contract and without respect to parol evidence unless there is ambiguity
b. When words are clear and unambiguous and lead to no absurd consequences, no further inquiry may be made into the parties’ intent
i. Fact that in hindsight, create dispute as to meaning does not render provision ambiguous
ii. Court must give ordinary meaning of words and may not create an ambiguity where none exists
c. Burden of Proof: acquirer has heavy burden to establish existence of material adverse change
i. DE Courts have never found material adverse effect to have occurred in merger agreement context
d. 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
i. Court interpreted the paragraph to address matters in control of management, not external matters like ratings
e. Esplanade Oil v. Templeton Energy – condition said “no adverse material change to properties or seller’s interest therein”
i. Properties were not unchanged by oil price change – NO material adverse change
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f.
ii. Letter of Intent
1. Non-binding LOI can be enforced
a. Non-executed ones may pass because may implicate oral agreement
2. Usually require corporate approval (BOD + SH)
IBP v. Tyson Foods – The provision is to be interpreted “in context” – a company’s
long-term strategy Best Efforts
i. Consequential to the company’s earnings power over a commercially reasonable period
1. Blips do not count - One bad financial quarter
ii. Standard: Buyer can walk away: A general provision protects a buyer from an unknown event that “substantially threatens the overall earnings potential of the target in a durationally-significant manner
g. Solutions to MACs
i. Buyer can simply pay a termination fee and terminate the transaction (“no
cause” termination).
1. Termination Fee usually upheld via liquidated damages test – damages amount must be uncertain and amount agreed upon has to be reasonable
a. Objective test for liquidated damages vs. penalty:
i. If damages must be uncertain ex ante in order for it to be liquidated damages
b. Damages must also be reasonable.
i. The real anticipated losses by the parties if the deal falls through, and
ii. The difficulty in calculating the loss
2. “Reverse termination fees” because they were paid by buyer rather than seller terminating a deal to take a higher price
8. Best Efforts Clauses
a. Generally 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
b. Other areas
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i. For target board’s to secure shareholder approval;
ii. For buyer or target to obtain third party consents;
iii. For buyer to consummate the transaction
c. Requirements Generally
i. All reasonable means for obtaining the promised goal;
ii. Commercially reasonable efforts.
iii. Some courts have held
1. Illusory provisions (good faith/fair dealing)
2. Factual matters for the jury
d. Breach Damage Claims
i. Asset sale: claim is made by the corporation,
1. NOT shareholders
ii. Merger agreement is an agreement between two entities
REPRESENTATIONS & WARRANTIES
9. Generally
a. Representation – a statement of a past or current fact about an aspect of the business;
b. Warranty – seller’s promise that the thing being sold is as represented or promised
i. Promise that an existing fact or future fact is or will remain true, or will be of a certain character or quality.
ii. For a matter on which the facts are not known, what is often given is a warranty
c. Survival – period when party receiving representation or warranty may make a claim of misrepresentation or breach of warranty
i. Period for which claims may be asserted post-closing:
ii. But based on the state of affairs when represented (typically when the acquisition is signed and at closing).
iii. Public company acquisitions, representations/warranties expire at closing.
iv. Note: buyer wants longest possible survival period vs. seller is shortest
v. If the target is a privately-held company, then the reps and warranties can survive for some negotiated period of time
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vi. Negotiable
1. Effect of qualifiers on the representations and warranties – “material”
and “knowledge”
10. Knowledge Qualifier
a. All about disclosure and risk allocation b. Examples
i. “None of seller’s intellectual property or products being sold infringes the rights of third parties.”
ii. “To the seller’s knowledge, none of seller’s intellectual property or products being sold infringes the rights of third parties.”
iii. “There is no litigation threatened against the company.”
iv. “To the seller’s knowledge, there is no litigation threatened against the company.”
11. Materiality Qualifiers
a. Buyer wants NO materiality qualifiers
i. Seller wants every representation qualified by materiality 12. Termination Provisions
a. After signing, but before closing, one party may be able to terminate the agreement (“walk”) for a material misrepresentation or breach of warranty by the other party
i. Negotiated provisions
1. May be a cure period
2. Breach may have to be material
b. The may be a provision for the seller to terminate for a higher offer and pay a break- up fee to the buyer, unrelated to a misrepresentation or warranty
c. Mutual “walk-away” rights with a capped termination fee provides certainty
i. But also enables termination
d. United Rentals v. Ram Holdings – upheld right to terminate and pay a fee
i. Contained specific performance remedy and freedom to termination provision
combined with a walkaway fee
POST-CLOSING INDEMNIFICATION
13. Generally
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a. Conditions to satisfy before closing
b. Deal may be conditional on buyer obtaining financing
c. Usually corresponding covenant to use best efforts to satisfy conditions
i. ConAgra v. Cargill – parties recognize that there was a continuing fiduciary duty owed by each board of directors to its respective shareholders which could not be contracted away
d. Failure to satisfy condition will allow other party to walk (refuse to close)
e. Misrepresentation gives rise to indemnification
14. Indemnification
a. From whom aggrieved party get remedy is negotiable:
i. Usually all parties receiving merger consideration
1. EXCEPT bankers, lawyers, service providers, and government
ii. Joint Liability – buyer may get entire remedy from one selling SH
iii. Several Liability – buyer gets pro-rata share from all selling SH
b. Recovering from disparate shareholders
i. Escrow portion of acquisition consideration
ii. Holdback portion of acquisition consideration
c. Negotiate
i. Litigation or investigation costs
ii. Nickel and diming sellers
iii. Larger than amount of merger proceeds
d. Baskets – agreement between the parties that the buyer will bear the first specified dollars of damages, aggregated from all breaches of warranties in the agreement, once the basket is full the seller bears the additional liability
i. Sellers want to avoid being sued for trivial amounts after the closing and typically want a minimum amount of damages before a buyer can sue
THIRD-PARTY CLAIMS FOR BREACHES OF ACUQISITION AGREEMENT
15. Hexion – Intentional/Knowing Breach
a. Deliberate act intended to breach agreement
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b. Illustrative of how to make a deal more likely to close by requiring certain actions of the parties between signing and closing see material adverse changes
16. Force Majeure – gives party right to suspend efforts to close or terminate a. Material adverse change basically
FEDERAL SECURITIES LAWS: REPS & WARRANTIES
17. Generally
a. If stock is being purchased, the securities laws attach to that transaction
i. N/A for cash-for-asset sales
b. 10b-5 protection is not waivable
c. One Communications v. JP Morgan - Buyer sues sellers’ major stockholders for alleged misstatements in pre-agreement representations – claim defeated because integration clause demonstrated “no reasonable reliance.”
d.
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Defensive Measures
1. Accepting / Rejecting Bids a. DE says BOD
2. Regular Review Standards
a. Interested director transactions – burden on directors to prove “fairness” of
transaction
i. Can shift the burden by getting independent approval
b. Non-interested director transactions – business judgment rule protection
3. Delaware OLD Law: Primary Purpose / Business Purpose
a. Directors initially receive benefit of BJR
b. If p provides evidence for court to infer directors’ primary purpose was to preserve their positionsà?burden shifts to directors show they had reasonable grounds to believe that a danger to corporate to policy and effectiveness existed
i. Good faith and reasonable investigation c. Business Purpose Test
i. BJR applies
1. Plaintiff needs to show by preponderance of evidence that directors
acted solely or primarily to retain controlà?BJR REBUTTED
a. Plaintiff must show sole and primary purpose was to retain
control
4. Unocal Standard – Review Standard for Antitakeover Defense Measures
a. BOD has authority to oppose takeover
i. Must not act out of a sole or primary purpose to entrench themselves
ii. May protect corporate enterprise from harm reasonably perceived
b. Applies when board unilaterally (without SH approval) adopts a defensive
measure in reaction to a perceived threat
i. DOES NOT APPLY unless there is unilateral board action
ii. NOTE: many states apply BJR instead of Unocal so analyze under both 20

c. Test: judicial examination at the threshold before BJR protections apply
i. Threat – directors must show that they had reasonable grounds for believing
a danger to corporate policy and effectiveness existed
1. Satisfied: Good Faith – being informed, intention to serve corporation AND Reasonable Investigation of true plans of acquiring person
a. Proof enhanced when majority of board is independent 2. Unreasonable
a. AC Acquisition v. Anderson Clayton – when a current shareholder who elects not to tender would experience a substantial loss in market value
b. SEC Rule 14d-10 – all holders/best price rule – tender offer open to all holders and all holders get the best price
ii. Proportionality/Balance – must be reasonable in relation to threat posed
1. Utrin – If measure is not draconian/harsh, then the question is whether
the defense falls into a range of reasonableness
a. Court has to decide if defensive measures are draconian (coercive or preclusive),
i. Coercive: Causes stockholders to vote in favor of the transaction for some reason other than the merits of the transaction.
ii. Preclusive: Deprives stockholders of the right to receive all tender offers or fundamentally restricts proxy contests.
1. And if not, then as long as it is in the “range of reasonableness” it’s ok.
iii. THEN BJR: absent showing of fraud, illegality, or conflict of interest, the court must abstain from reviewing the director’s decision
1. Directors are entitled to exercise their honest business judgment on information before them and to act within their corporate powers
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5. Golden Parachutes (Gaillard v. Natomas)
a. Employment K between company and key employees which provides severance
payments to employee in event he is fired in a change of control in the company
b. Money paid to managers who lose their jobs as a result of the corp being taken over
i. Can be seen as last minute appropriations of corporate assets
c. Can align interests of managers with shareholders, but not in the midst of takeover negotiations
6. Nature of the Bidding Market
a. Two-tier offers (with different payments) can be made subject to pro rata allocation
among tendering shareholders;
b. “Rush” offers can no longer be made;
c. Transactions costs for the bidder are thus larger;
d. If there is a defense by target management, then transactions costs are larger, and an auction is possible (further diminishing the value for the bidder)
e. Bidder might offer a higher price initially in a friendly offer to avoid an auction
i. But state law may require an auction or “market check”
f. Target Side: some corporations used to adopt super-majority provisions for effecting mergers, or fair price provisions to avoid two-tier offers.
i. Not necessary any longer because Williams Act requires highest price for all shareholders “in the tender offer”
g. Note: The maker of the offer is still in control of his/her offer, and may offer to purchase only a majority.
h. Pro rata payments to shareholders required if offer is over-subscribed
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7. Protecting the BOD from Proxy Fights
a. Blasius Standard – There must be a compelling justification for interfering with SH
voting rights.
i. This is a very rigorous and demanding test (like strict scrutiny)
ii. Board cannot act for the primary purpose of reducing the voting power of a control shareholder
iii. Must be “compelling justification” for such action
iv. Board bears the burden of proof when the election machinery appears to have been manipulated
b. This rule even applies when
i. Board control is not at stake
ii. Board makes provisions that a change in control would destroy company
8. Filling Board Vacancies
a. DE – power to fill vacancies unless provided otherwise in charter or bylaws
b. CA – power to BOD for vacancies except for removed directors
i. If BOD does not fill position, SH can do so
DEFENSIVE MEASURES: SHARK REPELLENT & POISON PILLS
9. Standard
a. Liability for directors sued by unhappy shareholders is BJR
i. BOD not liable for ordinary negligence but must be grossly negligent b. To get BJR must past Unocal
10. Shark Repellent
a. Amendment to firm’s articles of incorporation/bylaws designed to get potential
bidders to look elsewhere
i. Classified / Staggered Board – divide into class of three where only one is elected annually
1. Two annual meeting cycles before it elects majority of board
ii. Super Majority Vote Requirement
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11. How Poison Pills Work
a. A right to purchase a unit of a new series of stock is issued to current stockholders,
and the right has a high (out-of-the-money) exercise price.
b. Rights are not immediately exercisable, and they trade with the common stock during this time
i. For the time being, the rights are redeemable on target Board approval for a nominal amount.
c. The rights separate from the common stock, become exercisable, and trade separately, upon a “distribution event” – typically when a bidder becomes the owner of (e.g.) 20% of the target Company’s stock, or a tender offer is made for (e.g.) 30% or more of the target Company’s stock.
d. The rights are typically redeemable when just a bid is made, but not redeemable when an actual purchase beyond the threshold is made.
e. The rights become exercisable at a discount to the market price, for Company stock (“flip-in”) or stock of bidder (“flip-over”) upon the bidder acquiring a certain percentage of the Company’s stock (e.g. 50%).
f. The rights are inactive in the hands of the bidder (discriminatory treatment against the bidder – OK under Unocal)
12. What is a Poison Pill?
a. Takeover defense giving target company shareholders’ right to purchase additional target or bidder stock at a discount if a change in control takes place.
i. Deterrent effect comes from resulting increase in bidder’s acquisition cross and/or dilution of bidder’s existing shareholders’ holdings.
ii. Target BOD typically can cancel its defensive tactics by resolution to permit the acquisition to go forward
b. Key Element: The rights are void in the bidder’s hands.
c. Effect of Pill if triggered: dilutes bidder’s ownership; makes acquisition more expensive.
d. Grants holders the option to purchase new shares of stock in the issuing corporation
i. Flip In – permitting rights holders, except Acquiring Persons, to purchase stock and/or debt of the issuer at a bargain price prior to, or regardless of, a subsequent business combination
1. Buyer acquires specified percentage of the stock
2. Enable common stockholders of the issuer, except for Acquiring Persons, to purchase stock and/or debt in the issuer at a discount following certain triggering events (e.g., acquisition of a specified
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amount of the issuer's common stock), in the absence of or prior to certain business combinations involving the issuer
3. Rights become exercisable for the target’s common stock and at a discount to the market price
4. Existing shareholders, but not acquiring shareholders, are allowed to purchase shares in the target company at a discount.
a. Dilutes the value of the shares purchased by the acquiring company by flooding the market with new shares, while also allowing investors who purchase the new shares to profit instantaneously from the difference between the discounted purchase price and the market price
ii. Flip Over – permits rights holders to purchase stock in an Acquiring Corporation at a bargain price following a merger
1. Common stockholders of the issuer typically receive a pro rata dividend consisting of a right or warrant to purchase common or preferred stock, or both, of the issuer.
2. Prior to triggering event – redeemable by the board of directors for a nominal price, trade with the underlying common stock and cannot be exercised.
iii. Redemption – articles or bylaws will probably say that only the continuing (sitting) directors can redeem the pill. Redeeming the pill = the board gets cashed out
1. Quickturn - Pill redemptions are a board decision, and the board is held to the same fiduciary standard as when adopting the pill
2. Dead Hand – deprive any such newly elected directors of the power to redeem the pill
e. Pills only rarely triggered: Crown Zellerbach partially triggered, and Selectica was triggered (p.370 of casebook).
f. Consequences of triggering event:
i. Cash would come into the target on exercise of the rights attenuating
somewhat the cost of the dilution;
ii. The pill dilutes the bidder, but it might not be enough to deter the bidder
13. Variations on the Pill
a. Poison Put Plan – gives shareholders right to have their shares redeemed at a certain
premium price after a triggering event
b. Chewable Pill – gives shareholders ability to terminate pill or automatic termination of pill if certain criteria are met
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OTHER DEFENSES MEASURES
14. White Knights - Person or entity friendly to target company that makes a tender offer in competition to the initial bidder
15. Standstill Agreements - once the acquirer gets confidential info, can oust target management, so has to enter agreement that will not initiate hostile takeover for some period of time
a. Ivanhoe Partners v. Newmont Mining - found no breach of duty, target board was entitled to enter into that kind of agreement, actions were reasonable given threats faced and entitled to BJR
i. Goldfields signed standstill agreement with Newmont – would not acquire over 33% unless a third party acquired 9.9%+; Ivanhoe acquires 9.95%, makes hostile bid, attempts to enter deal with Goldfields; Newmont board modifies standstill agreement so Goldfields can buy more stock (up to 49%) and board releases dividends to all SH
VOID DEFENSES
16. Ability of hostile bidder to wage successful proxy contest for control of board
a. Quickturn v. Shapiro – dead hand provisions that completely disable new board from ever waiving a poison pill are presumably void
i. Invalid a poison pill plan that could not be waived by a newly elected board for six months after election
ii. Infringement of board’s statutory power to manage affairs of firm
b. Blasius – invalidates any takeover defense that impairs target SH right to vote unless the board can show a compelling justification
STATE TAKEOVER LAWS
17. State Takeover Laws
18. Other Constituencies
19. Requirement Board to be Informed
WHEN DEFENSE IS NOT AN OPTION
20. Generally (Smith v. Van Gorkom)
a. Court applies the BJR to evaluate the conduct of the BOD of the selling corporation
in a negotiated acquisition
i. If rule applies, BOD decision are protected from second-guessing by court
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ii. BJR does not apply if there is proof of fraud, bad faith, or self-dealing, or uninformed decision making
iii. If BJR is not available, court evaluates the merits of the deal under the intrinsic fairness test
1. Deal must be entirely fair to the shareholders
2. Investigation into procedure and investigation into fair price
b. To overcome BJR, plaintiff must alleged sufficient facts to create an inference of gross negligent with respect to the board being informed
i. Burden then shifts to ? to show they were not grossly negligent 1. If gross negligentà?usually dispositive of entire case
c. It’s all about board process because BOD duty to negotiate a merger
i. Valuation information
ii. Market testsd. A corporation is worth what someone will pay for it. The market value reflects the price for a share of stock; a buyer’s price would reflect a “control premium” to acquire the entire company
e. Speed is justified if there is a crisis or emergency, and that might excuse less than perfect process
Revlon & Paramount confront the issue of when and how a target board can favor one bidder over another in an auction for a firm.
21. Duty to Auction Company: Revlon Duties
a. When break-up of a company is inevitable or change in control
i. BOD duty changes from defenders of corporate bastion to auctioneers charged with getting the best price for the stockholders at the sale of the company
ii. Corporation puts itself up for sale when it initiates an active bidding process, when it initiates a bust-up of the company’s divisions, or when it initiates a transaction that results in a change of control
1. When there is no longer a threat to corporate policy and effectiveness or to stockholder interests, question of defensive measures becomes moot.
2. Directors’ role changes from defenders to auctioneers
a. Target directors are not passive observers in a takeover contest
b. Defensive measures are moot when company is for sale
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3. Central duty then is obtaining highest price for the stockholders.
4. Directors cannot play favorites with contending bidders
a. Duty to stockholders not bidders
5. In a sale, considering interests of noteholders (or other impermissible considerations) constituted a breach of the duty of loyalty
iii. “When a board ends an intense bidding contest on an insubstantial basis, and where a significant by-product of that action is to protect the directors against a perceived threat of personal liability for consequences stemming from the adoption of previous defensive measures, the action cannot withstand the enhanced scrutiny which Unocal requires of director conduct.”
i. Target initiates an active bidding process in which the target sells itself in a clear attempt at a breakup of the corp.
ii. Target abandons a long-term strategy and seeks an alternative transaction involving the breakup of the corp., or
iii. Approval of the transaction results in a sale or change of control of the corp.
i. Target corp cannot favor one bidder over another
ii. Target corp must maximize SH value.
iii. If Revlon duties are not imposed, then BJR applies
22. Methods to Satisfy Revlon
a. Auction and Market Tests – Not essential, although a “market check” enhances the good faith of the board in seeking the best price
b. Dollar Thrifty – allows for post-signing topping bids
i. Selecting the best overall deal, not necessarily the highest price if that price
has additional risk:
1. Dollar Thrifty had anti-trust and termination fee risk that Hertz addressed
2. “Closing certainty” is valuable
c. Favoring One Bidder (Compare Situations)
i. Novell – charges of favoring one bidder state a claim of bad faith
ii. BJ’s Wholesale Club – excluding bidder who was channel competitor and
who had no history of acquisitions is OK 28
b. There is no single blueprint that a board must follow to fulfill its duties
c. Revlon does not demand that every change in the control of a Delaware corporation be preceded by a heated bidding contest
d. Revlon duties apply where:
e. The Revlon duties:

d. Pennaco – CEO conducted all face-to-face negotiations and no BOD members were directly involved in negotiations
i. OK to allow officers to negotiate
ii. OK to not have pre-signing market check, provided there is no lock-up
iii. Strong deal protections could tilt an analysis to a conclusion that board’s negotiations were unreasonable
23. Sales Trigger Revlon
a. A corporation puts itself up for sale when it initiates
i. An active bidding process
ii. Bust-up of the company’s division
iii. Transaction that results in a change of control
1. Does not occur merely because a diffuse body of SH of purchasing party in a merger ends up with a majority of the stocks in the surviving entity
b. Once a firm has put itself up for sale, the standard for favoring one bidder over another is high
i. Firm must meet entire fairness test, which usually means it must sell to the highest bidder unless
1. Boards actions can satisfy Unocal standard a. Threat + Proportionality
24. Paramount - Is Company for Saleà?Revlon applies in at least two situations a. In an auction context when a board puts the corporation up for sale;
i. When a target seeks an alternative transaction that demonstrates the break-up of the company is inevitable.
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Definitive Agreements
1. Letters of Intent
a. Intermediate agreements that memorialize the terms of the deal as agreed to thus far, not binding unless there is a formal agreement
b. Usually say parties contemplate negotiating a definitive agreement
2. Definitive Agreements
a. Agreement still requires recommendation by BOD to SH and SH approval before closing
3. Conditions to closing
4. No-Talk Provisions
5. Bonding Performance
6. Lock-Ups – any arrangement or transaction by which the target corporation gives the favored bidder
7. Break-up Fees – specified payments on termination of agreement
a. Can be structured in a variety of ways
i. Pay legal fees associated with failed bid
ii. Specified fee
iii. Topping fee – usually based on the value of the new bid over the disappointed buyer’s bid
iv. Crown Jewel lock-up
8. Brazen v. Bell Atlantic - the definitive agreement provided for a two-tier break-up fee if stockholder approval were not obtained and/or the agreement was terminated.
a. Termination fees are contractual liquidated damages provisions .
b. Note that the law disfavors penalties for breach of contract.
c. Structures
i. Liquidated damages,
1. Will be upheld if the damages are uncertain and the amount is reasonable
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ii. BJR is not used to evaluated liquidated damages
1. Reasonableness = test à? NOT BJR (NO more than 3-4%)
2. Is it coercive?
a. Vote for transaction other than on merits!
iii. Termination fees that are reasonable (usually no more than 3-4% of value of target) can be agreed upon as remedies for breach or termination
1. Give certainty to damage remedy
2. Allow for company to accept higher bid
3. Compared to exclusive agreement: termination fees are less restrictive
iv. Certain deal protection measures are OK if they do not prevent the board from recommending a higher bid
1. Do not prevent SH approving a higher bid d. Test for Wrongful Coercion
i. Action taken have effect of causing stockholders to vote in favor of proposed transaction for some reason other than the merits of the transaction
ii. Termination fee reasonable in amount is not wrongful coercion
9. Exclusivity
a. Unocal is the appropriate standard even in connection with deal protection devices
include in a negotiated acquisition – standard for reviewing exclusivity agreements
b. Under Unocal, court must find the protective devices not preclusive or coercive
before looking at a range of reasonableness under proportionality prong of Unocal
c. DE – hostile to exclusivity agreements
d. CA – allows board to enter into binding merger agreements and exclusivity agreements until SH vote does not conflict with BOD’s fiduciary duties
i. SH still free to accept or reject agreement (Jewel v. Payless)
1. Jewell – if court finds that second bidder induces selling firm to breach valid and enforceable contract with initial bidder, second bidder is liabile to the frustrated first bidder
a. Expected loss if merger does not occur AND
b. Difficulty of calculating loss
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a. BOD may lawfully agree in a merger agreement to not seek a competing offer until SH vote on the first offer occurs
10. Unocal Standard for Deal Protection Devices
a. [Unocal Threat] Reasonable grounds to perceive a threat – loss of the deal
b. [Omnicare Additional Step] Two step analysis
i. Need to establish that devices adopted are NOT preclusive or coercive
1. Coercive: Causes stockholders to vote in favor of the transaction for some reason other than the merits of the transaction.
2. Preclusive: Deprives stockholders of the right to receive all tender offers or fundamentally restricts proxy contests.
c. [Unocal Proportionality] THEN demonstrate response was within a range of reasonable responses
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Shareholder Conflicts
1. Majority Shareholder – Control
a. Majority shareholders can influence sale decisions in at least two principle ways
i. Board representation – it may have elected majority of board
ii. May control shareholder vote needed for transaction
b. Informal influence over the board
2. Majority Shareholder Influence
a. Shareholders (minority too) can sell their stocks as they see fit
i. Risk of being minority is that one is subject to being dragged along by majority
ii. Exceptions: selling to a looter, fraud, misuse, confidential information, or wrongful appropriation of corporate assets
3. Influence: Board
a. Board’s duties are still the same in a sale even when there is a majority shareholder
i. Except – when majority shareholder is buying, board’s decision should be independent
1. Revlon does not attach because no sale of control
4. Influence: Conflicts, Board Duties
a. Holders of large blocks of stock complicate target board’s duties to other SH
i. Major holders often direct or significantly influence sale process, impacting board’s process
ii. Major holders often have a seat on the board and thus board must operate through a special committee
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5. Sales by Majority Shareholders
a. Orman v. Cullman – voting agreements are permissible in spite of Ominicare
i. Threat to losing the deal but
1. NO coercion by something other than merits of transaction
a. Board free to recommend against the transaction and public shareholders free to reject the transaction
6. Sales of Control
a. Abraham v. Emerson Radio – majority owner can sell control for premium
i. If sale is known looter, major owner (seller) may be held liable
ii. No statutory common law tag along right for minority SH
APPRAISAL REMEDY
7. Shareholder Appraisal Rights
a. All states give shareholders who dissent a right to petition a state court for fair cash
value of their shares in certain types of acquisitions
b. If substantial minority block of SH demands cash in these proceedings and constituent firms in a stock swap acquisition are cash poor . . .
i. Mere notice by dissenting shareholders that they might assert their appraisal rights can terminate acquisition
c. Give shareholders who dissent from a merger the right to have the fair value adjudicated and paid to them in cash (even if the merger only promises stock).
d. However, dissenting shareholders must follow statutory procedures.
e. Appraisal statutes vary greatly. State law is varied in this area.
i. In many states, appraisal is available for a number of fundamental corporate changes, sometimes even certain amendments to the articles.
ii. DE however provides appraisal in only statutory mergers, but not all such mergers
1. If the stock is publicly traded and the company has more than 2,000 record shareholders, no appraisal rights are available, subject to certain qualifications (e.g. the consideration is something other than stock or cash).
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f. Appraisal is “almost always” the exclusive remedy after an acquisition.
i. An exception is if the proxy or stockholder voting materials is materially misleading or inaccurate.
8. Scope
a. DE – dissenting SH in statutory mergers, in which minority SH do not have right to
vote, have appraisal right
b. CA – appraisal rights to selling firm SH in stock-for-asset acquisitions but not cash- for-asset acquisitions, regardless of whether selling firm dissolves
9. Procedures
a. A shareholder must “perfect” his/her appraisal rights by following certain steps:
i. In some jurisdictions a shareholder must send a notice to the corporation stating his/her intention to invoke appraisal rights and not vote in favor of the transaction;
ii. In some jurisdictions, the shareholder must actually vote against the transaction.
iii. Appraisal in most jurisdictions is the shareholders’ exclusive remedy after the merger, absent fraud, non-disclosure, etc.
b. Delaware
i. Corporation contemplating transaction that gives rise to SH appraisal rights must notify SH of these rights 20 days before corporation submits transaction for SH approval
1. Then each dissenting SH demanding appraisial rights must so notify the corporation before the vote on the transaction
ii. If SH ratify transaction, corporation must notify dissenting SH that right to appraisal is avaialable
1. Must occur within 10 days of transaction’s effective date
a. Then SH must within 20 days of second notice demand corporation appraisal of shares
iii. If SH is unsatisfied, must within 120 days of transaction’s effective date, file petition in court of chancery demanding determination of value of his stock
10. Valuation & Pricing
a. Valuation results in a range, and the court should find the valuation within a reasonable range
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b. Court recognizes that the courts are not very good at these types of determinations because the judicial task is to find a reasonable valuation within a range.
c. Fair value
i. Judges value shares using proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court
1. Apportioned pro rata among SH d. Market price isn’t correct
i. DE courts have said that fair value is measured by “fair value of the business” divided by number of shares outstanding
11. Exclusivity
a. DE courts allow SH to file additional requests for relief if they uncover evidence in course of discovery of pending appraisal case to support claims beyond those of garden-variety fiduciary breaches (Technicolor)
i. Weinberger – appraisal remedy is not appropriate where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross or palapable overreaching are involved
b. Remedy in non-appraisal proceedings is limited
i. Injunctive relief
ii. Recissory damages – put SH in same financial position they would have occupied had transaction not taken place
12. Control Premiums
a. Paying a premium for the control of the company
i. Boards have enhanced duty to trade the premium carefully
13. Non-Traded Stock Marketability
a. When valuing non-traded stock, courts may recognize a discount for lack of
marketability.
i. Since there is no market, any premium to “market” is not readily apparent. A premium to the “last round price” is the only immediate metric.
ii. What is the right lack of marketability discount? 36

14. Freeze-Out Mergers
a. Where subsidiary has minority SHà?controlling SH may wish to force minority to
sell their stock
i. Accomplished by merging subsidiary with parent or with a wholly owned subsidiary of a parent pursuant to a merger agreement
1. By which minority SH receive cash or securities of parent
b. Controlling shareholder causes the corporation to buy out minority through a merger, even if minority objects.
c. Mergers converts the shares into whatever consideration is specified in the merger agreement
i. Usually cash, notes, or contingent consideration
d. Minority may not block the merger assuming sufficient majority obtained
e. Freeze-out mergers always involve the majority buying out the minority.
i. Entire fairness is the standard of review.
ii. Burden of proving unfairness can be shifted to plaintiffs if independent committee approves transaction or majority of minority vote is obtained, with full disclosure (i.e. candor).
iii. Buyer Board can get business judgment rule protection with independent Committee and non-waivable majority-of-the-minority vote.
15. DE Freeze-Out Rules a. Entire Fairness
i. First on plaintiff to demonstrate some basis for attacking the fairness of the transaction;
ii. Then to the majority shareholder (and/or board) to show entire fairness 1. Independent director approval is helpful here
iii. Where informed vote of the majority of the minority was obtained, burden entirely shifts to plaintiff to show transaction was unfair to the minority.
iv. An independent director approval, alone, would also shift the burden under DGCL, Section 144.
1. With both protections, business judgment rule can apply. 37

b. Cash-out merger, remedy of shareholders in appraisal remedy
i. Exception: Where there was fraud or misrepresentation, or conflicts of interest, then appraisal remedy may not be adequate
1. Up to court to fashion remedy if needed
c. Kahn v. Lynch – approval of transaction by independent director committee or disinterested
i. Shifts from dominating to minority (Pg. 147)
d. Weinberger – when directors are on both sides, still must satisfy entire fairness but their remedy must be made my means of appraisal proceeding (statutory bar kicks in)
i. Same DOL standard applicable in conflicted-director transactions
ii. In freeze-outs, the court elaborated that ENTIRE FAIRNESS means, “fair dealing and fair price.”
iii. F AIR DEALING:
1. Common directors must be loyal to both corporations, and cannot favor one over the other.
a. The common directors owe fiduciary duties to both corporations.
b. Arledge and Chitea used their position on UOP’s board to benefit Signal by preparing a report that only Signal used.
2. Duty of candor: fully disclose all material facts to the minority.
a. In this case, disclosure of the Arledge-Chitea report was required to the independent directors or to the minority.
b. What is a “material” fact: the reasonable investor would consider both the information and how it was prepared important in deciding how to vote.
3. Arm’s-length bargaining.
a. The record should show bargaining as an independent special committee would bargain.
b. If the process is rapid, there should be a rationale for lack of deliberation.
c. In this case, four business days with a hurried fairness opinion did not demonstrate deliberation.
iv. F AIR PRICE
v. Involves the minority or independent board acting on full information 38

1. A fairness opinion must be a careful study, not a hurried report
2. In this case, the court provides a broad appraisal remedy for determining a fair price so that all information about the price can be evaluated
a. This remedy would involve valuation reports
b. Note: This remedy inclines planners to attempt to arrive at a fair price in the transaction itself rather than through an expensive litigation process post-transaction
e. Conflict of interest is imputed to target-subsidiary board i. Merger is treated like a self-dealing transaction
f. DE § 144 – Interested Director Transaction
i. (a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation...in which 1 or more of its directors or officers, are directors or officers...shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the...transaction...if:
1. (1) The material facts as to the director's or officer's relationship or interest and as to the...transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
2. (2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders...
a. AKA majority of minority vote
i. Obtaining this vote in most cases will shift the burden of proof to plaintiffs.
ii. Without this vote, the burden of proving fairness is on the directors;
iii. With this vote, the complainant bears the proving that the transaction was unfair.
iv. In a new case in DE – a nonwaivable majority of minority vote with an indep. special committee can confer business judgment rule protection.
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v. To be valid:
1. The shareholder vote (or the vote of the disinterested directors if using subsection (1) of Section 144) must be “an informed one.”
2. Thus, candor (disclosure of all material facts) is required to validate this vote
16. BJR as opposed to Entire Fairness
a. Court holds that business judgment would apply if:
i. The transaction were recommended by a disinterested, independent special committee; and
ii. Approved by a non-waivable majority-of-the-minority stockholders
b. ****When the controlling shareholder is not the buyer, with the right procedures business judgment rule could apply;
c. Otherwise, entire fairness will apply (with the right procedures the burden of proof could be shifted to plaintiffs).
d. Payment of a different form of consideration to the majority holder is not per se a breach of a fiduciary duty.
17. The Appraisal Bar
a. The statutory appraisal remedy is exclusive (subject to certain narrow statutory
exceptions), and there is no ability to collaterally attack the merger.
b. Even most fiduciary duty claims are essentially about price and must be adjudicated through the appraisal process.
c. Fraudulent or deceptive practices could take the issue outside of appraisal, and a court could fashion alternative remedy.
i. E.g. non-disclosure in proxy materials.
18. Summary
a. Majority stockholder decision to sell or not sell is up to the majority stockholder
(he/she cannot be required to sell).
b. If majority is selling to a third party, the board is the fiduciary to the minority. (JQ Hammons)
i. With the right procedures, the board can obtain business judgment rule protection.
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c. If the minority is selling to the majority, board is the fiduciary to the minority, and entire fairness will apply. (Weinberger).
i. Board may be able to shift burden;
ii. Board may bet business judgment rule protection.
d. Appraisal may be available for those opposing the transaction.
e. Assuming biz. judgment rule applies, or the transaction is fair, and full disclosure is made, appraisal will be the only remedy for a stockholder opposed to the deal.
f. Appraisal isn’t fun because it is a court debate on value.
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Securities Laws Overview
1. Rule 145
a. Securities laws apply to issuance of stock in a merger
i. Register stock ii. Exemption
1. For companies with a California nexus is the California fairness hearing.
a. This provides a federal exemption, and
b. Constitutes state securities law compliance as well
2. Mergers with large numbers of target stockholders
a. Will require a registration of the shares.
i. Often done on a “joint proxy/registration statement” on a Securities Act Form called an S-4
3. Federal Overlay to Takeover Law
a. Williams Act – Regulates tender offers (usually cash, but could be any consideration)
i. Tender Offer – offer to purchase shares made by bidder directly to SH of target company, sometimes subject to minimum/maximum that bidder will accept, communicated to SH by means of newspaper ads and/or general mailing to list of all SH with a view toward acquiring control
1. Hostile when used to circumvent resistant board
b. Proxy Regulations – regulates proxy fights (changing the board);
c. Negotiated Mergers – if for stock, issuer stock registration rules will apply.
d. A negotiated merger for cash is still largely free of federal regulation except for the shareholder approval process, which will be regulated by the proxy regulations for a public company.
e. Thus, negotiated merger for cash of a private company is usually free of federal regulation
f. Securities Law Overview
g. The Williams Act: Two parts:
i. Beneficial ownership disclosure (Section 13 of the ’34 Act); and 42

ii. Tender Offer regulation (Section 14 of the ’34 Act).
h. The Williams Act was passed in 1968 in response to a wave of cash tender offers that constituted the “conglomerate wave”.
4. Williams Act
a. Regulated all acquisitions of greater than 5% of the outstanding shares of a target
company;
b. Regulated all tender offers.
c. Did shareholders need any protection in a cash tender offer?
d. What kind of protection did they need? Was disclosure needed?
e. Some risk presented by financing delay in a transaction, especially if the shares were irrevocably tendered.
f. The Williams Act gave all shareholders revocation rights until closing.
g. Prevented stampeding shareholders by requiring disclosure and mandatory waiting periods before closing on the tender.
h. Required pro rata acceptance if the tender was over-subscribed (“all holders”/”best price”).
i. Beneficial ownership regulation:
j. An acquisition of greater than 5% of the voting securities of a public company required certain disclosures.
k. “They already thought of that” – even certain voting agreements or options required disclosure if the control exceeded 5%.
5. Williams Act: Tender Offer Regulation
a. Goal: Protect target shareholders, through disclosure and timing of offers.
i. There is some debate about whether target shareholders are protected and/or whether the mandatory disclosure is a forced transfer of wealth from bidders to target shareholders and subsequent bidders.
ii. There is some debate this might hurt shareholders overall in that is may deter bids.
b. What is a Tender Offer i. Eight Factor Test
1. Active and widespread solicitation of public shareholders
2. Solicitation for substantial percentage of issuer's stock,
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3. Offer to purchase made at premium over prevailing market price,
4. Firm terms of offer
5. Offer contingent on tender of fixed number of shares
6. Offer only open for limited period of time
7. Subjecting offerees to pressure to sell
8. Public announcements of a purchasing program concerning the target company precede or accompany rapid accumulation of large amounts of the target company's securities
ii. Two Part Test
1. Do the persons selling need the protection of the rule or can they fend for the themselves - “sophistication” AND
2. Is there a “substantial risk” that the solicitees lack information needed to evaluate the proposal
c. Overview Rules
i. Procedural Rules:
1. Shareholders can withdraw from the tender any time prior to closing;
2. Bidder must keep offer open for minimum 20 days;
3. An additional ten days is required if the bidder raises it price or changes a material term;
4. If a partial tender, the bidder must accept shares on a pro rata basis;
5. All tendering shareholders get the best price
6. Probability Magnitude Test
a. Probability of the event occurring;
b. Magnitude of the event.
c. A merger is a large magnitude event.
7. Materiality
a. Total mix – reasonable shareholder considers it important