I intro to Law of Enterprise Organization

§262 h no element of value arising from the accomplishment or expectation of the merger.

But wee Weinberger v. UOP which trashes this sort of.

Market Out rule DGCL §262(b) appraisal in a statutory merger (if you dissent)

1. 
   §262(b)(1)No appraisal rights if your shares are market-traded, or company has 2K plus SH, or SH vote not required for merger.
   
2. 
   §262(b)(2) Yes appraisal rights if your consideration is not shares in the survivor, or shares in an exchange traded/2k SH company.
   
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Valuation

1. 
   Del SH entitled to Pro Rate claim on Corp. as a going concern
   
2. 
   Del Block Method looks at
   
   1. 
      Mkt value of shares
      
   2. 
      Earnings value last 3 years
      
   3. 
      Asset Value
      
3. 
   Weinberger v. UOP approved DCF method
   

In Re vision Hardware Del 1995 p. 456 HH 162

1. 
   Vision nearly bankrupt TCF, major creditor, exhanges debt for assets, and cashes out minority at $125,000
   
2. 
   Court holds TCF didn’t have to convert to equity, and company was worthless
   
3. 
   SH entitled to no element of value arising from the transaction
   

Hariton v. Arco Electronics Del 1963 p. 460 HH 163

1. 
   Loral buys Arco in arms length asset acquisition
   
2. 
   Loral gets Arco assets and Arco gets Loral stock, which it distributes
   
3. 
   Arco SH wants appraisal b/e of De facto merger
   
4. 
   Del doesn’t recognize de facto mergers
   
5. 
   No right to appraisal b/e leg didn;’t explicitly provide one
   
6. 
   RMBCA gives appraisal rights in all restructurings
   

Loyalty in controlled Mergers Singer v. Magnavox Del 1977 HH 164

1. 
   Challenging a freeze-out merger on breach of fiduciary duty of fairness
   
   1. 
      Can bring class actions in addition to appraisal
      
2. 
   A freeze-out w/o a colorable business purpose breaches fairness duty per se
   
   1. 
      Getting rid of minority not a legit purpose
      
   2. 
      Minority SH remedy recissory dmgs
      

Weinberger v. UOP Del 1983 p. 465 HH 164

1. 
   Signal owns majority of UOP
   
2. 
   2 common directors make a proposal to buy UOP
   
3. 
   determine it’s a good value up to $24
   
4. 
   Interested directors negotiate deal and propose it
   
5. 
   Independent directors approve at $21
   
6. 
   Π challenges as breach of fiduciary duty
   
7. 
   Obvious breach by not sharing all info
   
8. 
   Widens acceptable valuation methods to include DCF
   
9. 
   Allows some concept of merger added value into valuation process
   
10. 
    Arm’s length process strong evidence  fairness
    

Remedies p. 475

1. 
   Where Fiduciary duty as in
   
   1. 
      Parent subsidiary
      
   2. 
      Interested directors
      
   3. 
      2-step
      
2. 
   Appraisal is not only remedy, can bring action for entire fairness
   
3. 
   But not in an arms length one step
   
4. 
   Fair price gets at the value created by the merger
   
5. 
   Rabkin v. Hunt p. 473
   
   1. 
      Self dealing  Entire fairness claim
      

Cede v. Technicolor HH 165

1. 
   2 step merger process, Perlman had begun reorganization
   
2. 
   Controller owes fiduciary duty to minority in a 2 step
   
3. 
   Original price not presumptively fair b/e Perlman had begun implementing plan
   

Kahn v. Lynch Del 1994 p. 476 HH 166

1. 
   Alcatel, 43.3% owner wants to buy rest
   
2. 
   IC caves to a 15.50 price on threat of a hostile bid
   
3. 
   “any semblance of arms length bargaining ended when IC surrendered to ultimatum”
   
4. 
   even at 43.4% Alcatel exercised control  entire fairness burden
   
5. 
   with a controlling or dominant SH on both sides, it must prove entire fairness
   

In Re Western p. 482

1. 
   Existence of standstill agreement  not controlling
   
2. 
   Merger gets BJ rule
   

In Re Siliconix Del 2001 p. 483 HH 166

1. 
   Majority SH no duty to offer fair price in a tender offer unless
   
   1. 
      Actual coercion or disclosure violations
      

In Re Pure Resources p. 483 HH 167

1. 
   Entire fairness not applicable to tender offers
   
2. 
   Controlling SH tenders cannot be coercive
   
3. 
   Not coercive when
   
   1. 
      Subject to nonwaivable majority of minority requirement and
      
   2. 
      Controlling SH promises prompt and equivalent cash out and
      
   3. 
      CSH has made no threats
      
4. 
   Controlling SH owed duty to allow D’s free reign & time to react
   
5. 
   D’s have a duty to hire their own advisors
   
   1. 
      Provide minority w/ recommendation
      
6. 
   14ad-9 SH entitled to a fair summary of substantive advice of I-Bankers upon whose advice the Board relies
   

XIII. Contests for Corporate Control
Flip-In Poison Pills

• 
  Board adopts a rights plan
  
• 
  Distributes options to SH
  
• 
  Worthless unless trigger (someone buys >10% w/o Board approval)
  
• 
  Then options become options to buy Co’s stock for ½ price
  
• 
  Flip-over gives a right to buy acquirer’s assets
  

1. 
   Unocal v. Mesa Del 1985 p. 500
   
   1. 
      Discriminatory self tender offer, tender offer to everyone but Mesa
      
   2. 
      Mesa threatening coercive tender offer
      
   3. 
      In acquiring shares a corp can deal selectively if primary purpose is not entrenchment.
      
   4. 
      When defending against a take-over  Enhanced BJ review
      
   5. 
      Board must demonstrate action was
      
      1. 
         Reasonably (proportionally) related to
         
      2. 
         A Reasonably perceived risk
         
   6. 
      If if meets these criteria  BJ rule
      
2. 
   UNOCAL THREATS HH 170
   
   1. 
      Structural coercion –front loaded 2 tier
      
   2. 
      Opportunity loss – hostile takeover threatens to rob SH of right to reap greater value under a mgt alternative
      
   3. 
      Substantive coercion – SH just don’t know how much they’re worth
      
3. 
   Moran v. Household Del 1985 p. 508 HH 168
   
   1. 
      Flip-over pill
      
   2. 
      Approved meets Unocal
      
4. 
   Smith v. Van Gorkom Del 1985 p. 513 HH 169
   
   1. 
      Gross negligence by board in not evaluating offer properly
      
      1. 
         No attempt to value enterprise
         
      2. 
         A premium alone is not sufficient bases for determining fairness
         
      3. 
         Need an independent appraisal/ commissioned valuation
         
5. 
   Revlon v. Macandrews Del 1986 p. 520 HH 169
   
   1. 
      Board shoots itself a bit in the foot in order to placate some bondholders who wanted to sue
      
   2. 
      Concern for non-stockholder interests not relevant in a bidding war
      
   3. 
      Lockups and other methods only to be used to increase bidding
      
6. 
   REVLON DUTIES HH 169
   
   1. 
      Level playing field among bidders
      
   2. 
      Market check
      
      1. 
         When board considering a single offer without reliable grounds to judge its adequacy, fairness demands a canvas of the marketplace to determine if higher bids may be elicited.
         
   3. 
      Limited exception
      
   4. 
      REVLON TRIGGERS
      
      1. 
         When a corp. initiates an active bidding process to sell itself or a business re-org involving a clear break up
         
      2. 
         Where, in response to a bid, it abandons its long term strategy and seeks an alternative transaction involving break up
         
      3. 
         Change in control (30% or so threshold for control) QVC
         
7. 
   Paramount v. Time Del 1989 p. 524 HH 170
   
   1. 
      Time and Warner agree to a stock for stock merger
      
   2. 
      Paramount tries to acquire Time, to avoid SH vote time issues bonds and buys warner
      
   3. 
      Claim unreasonable under Unocal and Revlon duties active
      
   4. 
      Unocal: threat of SH making a mistake found to be enough to justify response
      
   5. 
      This guts Unocal
      
   6. 
      Revlon no change of control foundb/e control was with market and will stay with market.
      
8. 
   Paramount v. QVC Del 1994 p. 530 HH 171
   
   1. 
      Paramount agrees to be acquired by Viacom
      
   2. 
      QVC tried to buy
      
   3. 
      Revlon duties triggered by initial decision towards change in corporate control
      
   4. 
      Viacom lockups not justified
      
   5. 
      Cant claim protecting corp vision when you’re selling control
      
9. 
   Revlon Mode more likely when HH 172
   
   1. 
      Consideration is cash instead of assets (Revlon)
      
   2. 
      Acquirer is larger in comparison to Target (Revlon)
      
   3. 
      Acquirer has a controlling SH (QVC)
      
10. 
    Deal Protections and lockups p. 544
    
11. 
    CTS v. Dynamics Corp. US 1987 p. 549 HH 174
    
    1. 
       Dynamics makes hostile offer for CTS
       
    2. 
       Challenges Indiana anti-takeover statute
       
    3. 
       Statute upheld
       
       1. 
          Non discriminatory
          
       2. 
          Not in conflict w/ Williams act
          
12. 
    DGCL § 203 Bars business combination between A and T for 3 years after A gets 15% unless
    
    1. 
       §203(a)(1) advance board approval
       
    2. 
       §203(a)(2) A gets over 85% in first step
       
    3. 
       §203(a)(3) Board approval and 2/3 disinterested SH approval
       
13. 
    Proxies:
    
    1. 
       In order to circumvent the pill, a proposed avquiror must gain board control to have it redeemed.
       
14. 
    Schnell v. Chris-Craft Del 1971 p. 559 HH 177
    
    1. 
       Dissidents negotiating to avoid costly proxy fight
       
    2. 
       Mgt strings them along, then moves up the meeting to leave them too little time to organize.
       
    3. 
       Get an injunction delaying meeting
       
15. 
    Blasius v. Atlas Del 1988 p. 560 HH 177
    
    1. 
       Blasius plans to launch proxy war to gain control of Board
       
    2. 
       Atlas creates 2 new board positions and fills them
       
    3. 
       Court holds D not entitled to BJ rule when Fucking w/ SH franchise
       
16. 
    Unitrin v. American General Del 1995 p. 564 HH 178
    
    1. 
       AmGen makes hostile takeover bid
       
    2. 
       Board institutes morning after pill and repurchases 20% of shares
       
    3. 
       Gives D’s a 28% stake and gives them a veto over a freeze-out
       
    4. 
       Makes a proxy test pretty tough (but they had enough before anyway?)p. 566
       
    5. 
       QVC test is under a range of reasonableness
       
    6. 
       If measures are proportionate (non draconian) BJ rule
       
       1. 
          Draconian –coercive/preclusive
          
       2. 
          Π’s must show motive was:
          
          1. 
             entrenchment
             
          2. 
             bad faith
             
          3. 
             uninformed
             
    7. 
       preclusive is mathematically impossible or realistically unattainable
       
    8. 
       erodes Unocal
       
17. 
    Hilton v. ITT Nev. 1997 p. 571 HH 178
    
    1. 
       ITT does the 3 way split and distribution and gives the prime spin-off a classified board
       
    2. 
       Classified Board found to be preclusive
       
18. 
    Structural Defenses HH 180
    
19. 
    Poison pills HH 182
    
20. 
    Mentor Graphics Del 1998 p. 573
    
    1. 
       Hand pills in which board limits power of future boards are illegal
       
21. 
    Mandatory pill redemption by laws – generally not gonna work p. 575 HH 182
    

XIV. Trading in the Corporations Securities

1. 
   Goodwin v. Agassiz Mass 1933 p. 578 HH 186
   
   1. 
      Π’s had knowledge of a geologists report suggesting mineral deposits
      
   2. 
      Buy shares from Π
      
   3. 
      Since theory was speculative, not required to disclose it to SH
      
   4. 
      Not found illegal
      
2. 
   Freeman v. Decio 7^th Cir. 1978 p. 583 HH 186
   
   1. 
      Decio resigns as CEO
      
   2. 
      2 months later Skyline announces unexpected 17% earnings drop
      
   3. 
      Freeman alleges past earnings had been overstated, and Decio inter alia sold stock with that knowledge
      
   4. 
      Corporation suffers no injury???
      
   5. 
      Holding????????????????????? 10b-5 better claim??????????
      
3. 
   §16(a) Statutory insiders (Ds, Os, and 10% SHs) must file reports of any trades w/in 2 days
   
   1. 
      Officer status = access to nonpublic information in course of employment
      
   2. 
      §16(b) insiders must disgorge any profits made on purchases and sales w/in any 6 month period
      
      1. 
         exemption for unorthodox transactions ie cash out merger (involuntary sale)
         
   3. 
      Calculating the 6 month swing under Gratz. V. Claughton as incriminatingly as possible
      
4. 
   SEC §10 p. 590 unlawful to use or employ in purchase or sale of any security, any manipulative or deceptive device or contrivance in contravention of such rules as the Comission may proscribe as necessary or appropriate in the public interest.
   
   1. 
      P. 590 §10b-5 it shall be unlawful
      
      1. 
         To employ any device, cheme or artifice to defraud
         
      2. 
         To make any untrue statement or material fact or omit a material fact necessary in order to make statements made, in the light of the circumstances, not misleading, or
         
      3. 
         To engage in any act, practice or course of business which operates or would operate as fraud or deceit on any person, in connection with the sale or purchase of any security
         
      4. 
         Private right of action found in Kardon v. National Gypsum p. 591
         
5. 
   SEC v. Texas Gulf Sulphur 2^nd Cir. 1968 p. 592 HH 190
   
   1. 
      TG employees buy on information about a mineral deposit
      
   2. 
      Insiders not trading on an equal footing
      
   3. 
      Violation of 10b-5
      
6. 
   3 theories of 10b-5 liability
   
   1. 
      Equal Access – all traders must disclose or refrain from trading on non-public corporate info. (Tex Gulf Sulfur)
      
   2. 
      Fiduciary Duty – must show a specific pre-existing legal relationship of trust and confidence between insider and counterparty (Chiarella, Dirks)
      
   3. 
      Misappropriation – a person who has misappropriated nonpublic info has an absolute duty to disclose or refrain from trading (Burger dissent in Chiarella)
      
7. 
   Santa Fe Industries v. Green US 1977 p. 598 HH 191
   
   1. 
      Santa fe buys 95% of green and the executes a short form
      
   2. 
      Morgan Stanley appraises assets at $640/share and stock at $125/share
      
   3. 
      SF discloses stock valuation and offer $150
      
   4. 
      Π’s bring 10b5 complaint
      
   5. 
      Supreme court holds no fraud was here and doesn’t want to fold fiduciary claims into 10b-5 claims, Π’s msut sue in state court on the fiduciary issue.
      
8. 
   Goldberg v. Mentor 2^nd cir. 1977 p. 603
   
   1. 
      Brings it back to reality
      
   2. 
      10b-5 claim exists where there is misrepresentation or non-disclosure
      
9. 
   Chiarella v. US US 1980 p. 608 HH 192
   
   1. 
      Chiarella works in a print shop deciphers deals, and trades on them
      
   2. 
      Consent decree w/ SEC agreeing to return profits to SH
      
   3. 
      Supreme court overturns conviction b/e 10(b) doesn’t say that silence is a manipulative or deceptive device
      
   4. 
      Cady obligation to disclose applies to statutory insiders
      
   5. 
      Its only fraud to not disclose info if you’re under duty to do so
      
   6. 
      Must have a relationship of trust and confidence RETAC
      
   7. 
      Maybe he breached a duty to the corp. who gave him the info dicta
      
10. 
    Dirks v. SEC US 1983 p. 612 HH 193
    
    1. 
       Former officer of Equity tells an investment advisor the Equity has overstated its assets
       
    2. 
       Dirks clients sell their shares
       
    3. 
       Must have abreach by the tipper to have a breach by the tippee
       
    4. 
       If tipper doesn’t gain  no breach
       
11. 
    Going forward p. 616
    
    1. 
       SEC finds benefit by tippee from personal relationships
       
    2. 
       If trader “overhears” something he’s not an intended beneficiary
       
12. 
    US v. Chestman 2^nd Cir. 1991 p. 619 HH 194
    
    1. 
       Telephone game of telling people about the Waldbaum sale everyone told not to repeat it, Loeb(married into the Waldbaums as his broker knows) tells his a stockbroker
       
    2. 
       Broker, Chestman sys he can’t make any recommendations to Loeb
       
    3. 
       Chestman buys for himself and his clients including Loeb
       
    4. 
       Loeb rolls over and repays 25K in profits and pays 25K fine
       
    5. 
       Finds 14e3 is w/in SEC’s reasonable scope
       
    6. 
       Dismisses §10b-5 b/e it requires
       
       1. 
          Breach of duty by tipper
          
       2. 
          Known by tippee
          
    7. 
       Finds no fiduciary duty in Loeb, govt failed to show
       
       1. 
          Loeb was in family inner circle
          
    8. 
       Sec adopts 10b5-2 extending the liability to persons who
       
       1. 
          Agree to maintain a confidence
          
       2. 
          Are in a relationship where confidences are routinely exchanged
          
       3. 
          When he gets it from a spouse or family member unless he can show no duty of trust or confidence
          
13. 
    Rule 14e-3
    
    1. 
       It is a violation of the ’34 securities act to purchase or sell securities on the basis of information that the possessor knows or has reason to know is non-public and originates with the tender offerror or target or their officers
       
    2. 
       D, also violation for possessor to communicate such information under circumstances in which tippee is likely to trade on it
       
14. 
    US v. Carpenter 1987 US HH195
    
    1. 
       WSJ reporter shares and trades on some info she learns
       
    2. 
       Splits on 10b-5 under misappropriation but upholds mail and wire fraud convictions
       
15. 
    US v. O’Hagan US 1997 p. 624 HH 196
    
    1. 
       Grant Met hires DW to represent it in acquisition of Pillsbury
       
    2. 
       Ohagan a Pner not involved in the deal buys stock
       
    3. 
       DW withdraws from representation, and GM Makes the offer
       
    4. 
       SEC brings criminal charges against ohagan, 8^th cir. Reverses conviction
       
    5. 
       Supreme Court upholds conviction and the misappropriation theory
       
16. 
    Elements of a 10b-5 action
    
    1. 
       False or misleading statement or omission: Chiarella, Dirks, O’Hagan
       
    2. 
       Materiality: what would a reasonable shareholder would consider. Basic – probability x magnitude test.
       
    3. 
       Scienter: specific intent to deceive, manipulate, or defraud (Ernst & Ernst), though may be inferred from reckless or grossly negligent behavior.
       
    4. 
       Standing: must be a purchase or sale of securities (Blue Chip Stamp).
       
    5. 
       Reliance/Causation: presumption of reliance on the integrity of market price (Basic).
       
    6. 
       Injury/Damages: disgorgement rule (Liggett).
       
17. 
    Basic v. Levinson US 1988 p. 629 HH 197
    
    1. 
       Basis in merger negotiations w/CE for 2 years
       
    2. 
       Rumors circulate and Basic flatly denies them
       
    3. 
       SH sell after first public denial sue claiming a 10b-5 misleading statement
       
    4. 
       Court finds it material
       
    5. 
       An omitted fact is material if there is a substantial likeliehood that a reasonable SH would consider it important in deciding how to vote –TSC Northway
       
       1. 
          Must be a substantial likeliehood that the disclosure of the omitted fact would have been viewed by the investor as significantly altering the “total mix” of info made available
          
18. 
    10b5-1 Trading pursuant to a preexisting plan HH 14 OK if can demonstrate
    
    1. 
       ordered sale, or written plan to do it before getting the info and
       
    2. 
       contract, instruction or plan specified the number and price or an algorithm for determining such or didn’t permit the person to influence it and
       
    3. 
       trade conducted pursuant to plan
       
19. 
    Elkind v. Liggett & Meyers 2^nd Cir. 1980 p. 640 HH 199
    
    1. 
       Lm tells analysts about negative earnings for next day
       
    2. 
       Analysts sell clients stock stock drops 5546
       
    3. 
       SH bring class action against LM
       
    4. 
       Finds damages to be disgorgement
       
    5. 
       Out-of-pocket measure: Price paid minus “true value” when bought. Here, P can recover ($48 - $40) * 10,000 shares = $80,000.
       
    6. 
       Causation-in-fact measure: Price decline caused by D’s wrongful trading. Here, P can recover ($50 - $48) * 10,000 shares = $20,000.
       
    7. 
       Disgorgement measure: Post-purchase decline due to disclosure, capped at gain by tippee. Here, same as out-of-pocket measure by assumption ($80,000), capped at gain by tippee ($50,000) = $50,000.
       
20. 
    ITSA 1984 and ITSFEA 1988 amendments to 1934 act HH 200
    
    1. 
       §20A creates private right of action for any trades opposite an insider trader with dmgs limited to profit gained or losses avoided (disgorgement)
       
    2. 
       §21(a)(2) civil penalties up to 3 times gain
       
    3. 
       §21(a)(1)(B) controlling person may be liable if controlling person knew or recklessly disregarded the likelihood of insider trading and failed to take preventative steps
       
    4. 
       §21A(e) “bounty hunter” allows SEC to provide 10% of recovery to those who inform on insider traders.
       
21. 
    Hierarchy of remedies
    
    1. 
       §21(d) SEC can seek disgorgement
       
    2. 
       §21A(a) if SEC fails to act, or if any profits are left over after SEC acts, contemporaneous traders can seek disgorgement as well
       
    3. 
       §21A(a)(2) SEC can seek civil penalties up t 3x gains in addition to disgorgement
       
22. 
    Arguments against insider trading rules p. 646 HH 201
    
    1. 
       Compensation - Insider trading increases incentives to create valuable information
       
       1. 
          Doesn’t the fiduciary duty do that?
          
    2. 
       Comunication – it provides a valuable and credible mechanism for communicating information to the marketplace
       
    3. 
       Not unfair – people will pay less for securities because of the danger so they’ll get the same rate of return
       
    4. 
       Enforcement – impossible to enforce?
       
       1. 
          Maybe.
          

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