Urkevich M&A Outline
I. Duties and Risks of Sellers
a. Ways to acquire control:
i. Tender offer—SH level transaction. Two ways to do this:
1. Can do a TO for 60%, gain control, and elect directors; but then owe certain
duties to public SH. May decide to do another TO to get above 90% and follow
with a ? 253 short form merger.
2. Can form a merger under ? 251.
ii. ?? 251 and 253 are corporate level transactions.
1. ? 251: each company‘s board has to recommend it AND you need SH
approval—majority of OS shares for it to take place.
2. Get appraisal under ? 262 if cash is the merger consideration.
3. ? 253: short from merger—parent with more than 90% of the sub can acquire
the remaining shares w/o a meeting or w/o a vote, just by doing it—by sending
a notification to DE SHs notifying them.
4. If parent does a ? 251, applicable case is Weinberger. Need independent
negotiating structure to look after minority SHs. Raises question whether there
is a similar sort of 253 obligation; no, b/c the board of the sub is not acting—
unilateral action by the parent. (Glassman). Can you avoid Weinberger and get
into Glassman by doing a TO to get to 90% to do a short form Pure Resources
type of case. Not entire fairness obligation with a TO, nor is there one with a
short form in Glassman.
5. ? 271: sale of all or substantially all assets. B/c the company is selling itself,
there needs to be a recommendation of the BoD and a resolution adopted by the
majority of outstanding SHs.
6. Triangular merger—set up a merger subsidiary and have the sub merge with,
or into, the target company. Consideration can be cash or shares of the
parent—or even of a third company. Typically still 251 transactions. iii. In DE, if board is behaving properly, the DE will side with the board. iv. Three repeat scenarios to focus on and keep separate when reading:
1. Company A is minding its own business. Company B says they want to buy A
2. Company C is being sold (to Company D) and Company E comes in and says
they want to buy C (Revlon).
3. Somewhere between case A and B. Company A and B decide they want to
merge and now Company C comes in and says they are a better fit (Time
b. Loyalty Duties of Directors
i. Three kinds of self dealing in most of corporate law:
1. Basic self dealing
2. Executive compensation
3. Corporate opportunity
a. In each of these the conflict is very different.
ii. Kors v. Carey (p. 67)
1. United Whelan becomes a SH of Lehn & Frank, eventually acquiring up to
16%. UW is also a customer of L&F. L&F is worried UW will acquire some
intermediate level of control and throw its weight around.
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2. MGMT buys back the shares of UW at a premium of few dollrs—―greenmail‖
iii. Cheff v. Mathes (p. 67) (1964)
1. Family owned directors bought out insurgent SH—greenmail.
2. Court took intermediate position—gave directors discretion because their
decision was made ―in good faith after reasonable investigation.‖
3. Court held that good faith belief that they were pursuing a ―business purpose‖
that would benefit the corporation was sufficient to rebut any inference of
conflict of interest and to return plaintiffs to the position of producing sufficient
evidence to overcome the strong presumption of BJR.
4. Directors may not act solely or primarily out of a desire to perpetuate
themselves in office; court held that here, the board‘s actions were purely to
5. In both cases, allowing the greenmail payment means that some SHs get to sell
their stock back at a premium when other SHs are not offered the same
opportunity. Can be viewed as differential treatment of SH of the same class. 6. These cases stand in the background when Unocal comes along. thiv. Panter v. Marshall Field & Co (7 Cir. 1981)--―arguably taken for the benefit of
v. Is Unocal a response to the above two cases?
vi. Unocal Corporation v. Mesa Petroleum (p 73) (Del. 1985)
1. Issue: validity of a corporation‘s self-tender for its own shares which excludes
from participation a stockholder making a hostile TO for the company‘s
stock—selective exchange offer.
a. Mesa commences a two tier front loaded offer at $54 for 37% of Unocal‘s
stock—would be highly subordinated and change Unocal‘s cap structure.
i. Remember this two tier TO solves the collection action problem the
bidder for control faces and prevents SHs from free riding on
bidder—have to get rid of possibility that SHs will want to stay
around to get the $60 value that Pickens may ultimately bring to the
table by his mgmt skills; if no one tenders so they can wait, then he
will never get control.
b. Bd meets for 9.5 hours and concludes that the offer is wholly inadequate;
$60 minimum value. Conclude threat to Unocal.
i. When Ibanker decided that $60 was minimum value, he was looking
at the third party sales standard, not intrinsic value. So why a threat?
The SHs own shares in Unocal under current mgmt—Sachs says if
you sold it to a third party you might get $60. Couldn‘t you just say
that the company is NOT being sold—you want to keep the same
people running it? What reason do SHs have for believing that the
current mgmt is going to get the price up to $60/share?!
ii. Supposedly the 2 threats are:
1. Coercion of two-tier bid
2. Notion of ―substantive coercion‖—danger that SHs will be
confused and won‘t know that the company is really worth more
than $54/share even though it‘s never traded above $45/share.
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2. Court upholds validity of defensive device, board exercised sound business
judgment—will not substitute court‘s view with boards if board‘s contained
―any rational business purpose.‖
3. Authority from:
a. 141(a): business and affairs and
b. 160(a): authority to deal in its own stock
4. To get presumption of BJR, directors have to show that they had ―reasonable
grounds for believing that a danger to corporate policy and effectiveness existed
because of another person‘s stock ownership.‖ Proof is further enhanced by the
approval of a board comprised of a majority of outside independent directors. 5. Response must be reasonable in relation to threat posed.
6. Draconian—preclusive or coercive?
a. Court doesn‘t think so, but arguably, Unocal‘s self-tender was more
7. Bottom line—learn from Unocal that the company went through the right
a. Majority independent, outside directors.
b. Process—long meetings, eminent advisors
c. Surest guide to understanding DE law is that DE as a system believes in
board governance. Essence of DE jurisprudence seems to center around
ensuring that the board acts well and when it does—protecting it.
8. After Unocal, SEC enacted Rule 14d-10, the ―all holders rule‖ giving all
stockholders a right to the highest price in a TO.
vii. Mills Acquisition Co. v. MacMillan (p 84) (Del. 1989)
1. Court held that the trial‘s court failure to enjoin the lockup provision b/t
Macmillan and KKR had the effect of prematurely ending the auction before
the board had achieved the highest price reasonably available for the company. 2. Doesn‘t meet Revlon standards.
3. DE‘s concept of fairness includes both:
a. Fair dealing
i. Actual conduct of corporate fiduciaries in effecting a transaction
ii. Duty of candor owed by corporate fiduciaries to disclose all material
information relevant to corporate decisions from which they may
derive a personal benefit
b. Fair price
i. In an auction for corporate control must commit themselves
―inexorably, to obtaining the highest value reasonably available to the
SHs under all the circumstances.‖
4. When issues of corporate control are at stake, there exists ―the omnipresent
specter that a board may be acting primarily in its own interests, rather than
those of the corporation and its shareholders.‖ (Unocal). Because of this, an
―enhanced duty‖ must be met at the threshold before the board receives the
normal protections of the BJR. Directors may not act out of a sole or primary
desire to ―perpetuate themselves in office.‖ (Mathes).
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a. Bass group comes along as potential bidder. Board enters into an ESOP
and adopts a poison pill, golden parachute and splits company in two to
give management effective control of information.
b. Gets litigated in MacMillan I—different than Unocal because mgmt is self
interested in this transaction because they are going to end up with control.
In Unocal they just want to keep managing the company. In MacMillan
you have mgmt competing for control in MacMillan I—have an auction
going on and someone takes control in either case. Court enjoys it in
MacMillan I claiming the Bass offer is clearly superior.
c. Now, directors look to sell the company. Maxwell shows up again. Rock
says now have ―torpid‖ failures in the process—complete procedural
failure—how not to sell a company. Still cited to this day b/c it represents
such a vivid example of board governance gone awry.
i. Ct focuses on role of Lazard—banker. Not clear that they were
working for special committee—looks like they were working for
mgmt; mgmt picked bankers and spent 500 hours talking with
them—looks like they‘re working for mgmt, NOT the special
ii. Mgmt accepts KKR bid and decides not to shop for a potentially
higher bid from Maxwell.
viii. Williams v. Geier (p 83)
1. Doesn‘t trigger Unocal because approved by SHs. Unocal only triggered when
approved by board. If approved by SHs, either BJR or less than that. 2. Why give this sort of deference to a SH vote? Why would SH adopt a voting
structure that assured a controlling family group sufficient votes to ensure
defeat of any takeover attempt? ; Maybe think interests are aligned with
c. Contractual Approaches to Loyalty Issues
i. Controlling Mgmt Opportunism in Market for Corporate Control (p118) 1. Hypo: Client (Chairman) owns 45% of Cline stock and 100% of Major Corp;
transaction at issue is a prospective merger between Major Corp and Cline. 2. Four directors:
a. Chairman owns 45%
b. President, $5 million
c. Dr. X, $1 million
d. Mr. Consultant, $800k (all in annual compensation)
3. Who is least interested of the group?
a. Consultant? Worried that consultant‘s head will be turned by the stream
of earnings he receives which is controlled by the chairman. He‘s worried
about future payments.
b. Difference between interest in company and expectation of future
earnings—interests may change depending on expected value from
negotiations. Say max negotiator could get $60/share and minimum
negotiator $50/share. Difference is $400k. if can only get price at $52,
then someone who doesn‘t have a large stake in the company may be more
Urkevich M&A Outline
independent. But, if can get it at $80/share then the stock interests look
c. If these individuals—doctors and consultants—services are unique to the
company, then may have more control over the negotiations. But, if
they‘re not that important and contain a non-compete clause then the BoD
may have more control over him.
d. Rock says point here is that the conflict of interest cases are very fact
intensive. The chairman is easy b/c he has a positional conflict—stands
on both sides of the transaction. The other two examples have a
relationship conflict—their relation to the chairman can compromise their
4. Stock ownership can go a long way towards aligning the interests of managers and stockholders. Now, want to flip the question and start in a moment of calm in the company. The compensation committee says to look at mgmt‘s compensation to determine how to structure is to that if there is a potential change of control transaction the mangers will enthusiastically look at interest of SHs and moreover, will stock around through thick and thin. How do you structure this?
a. Normal: maximize SH value
b. ―Abnormal:‖ change of control transactions
i. Transactions close or transactions don‘t close
ii. Third party bid—nice and high or too low
iii. Company bid for a third party—too high or nice and low
iv. Mergers of equals
c. What are your concerns given this set of scenarios?
i. Want managers not to sell for too low.
ii. Mgrs not to buy for too high.
iii. Mgrs to agree to sell when price is high.
iv. Mgrs to agree when acquisition price is low
v. Mgmt team intact if transaction ； close; don‘t want them running off
to another company. Also want them to stay up until change of
control if deal does close.
d. How would you structure a compensation plan to address these concerns?
i. Going to be agency costs no matter what you do
1. Want performance based compensation to give a rough
alignment—can be cash and options
2. If give it all to them at once, they can leave
3. Have vesting at options to keep them around (x % vests every x
years) ; but, can cause another problem—don‘t want mgrs to not
agree to sell when they should just so their options vest—so could
put in an accelerated vesting provision that says if there is a change
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of control, all unvested options will immediately vest, but again,
may cause the managers to sell so they can vest early.
vi. Golden parachute—payment of three times salary and bonus on
change of control. This is std compensation agreement right now.
1. Contractually, good chance mgrs will agree to sell when price is
high with the standard compensation contract. Also goes a long
way towards keeping the management team intact. Between
accelerated vesting and golden parachute would be stupid to leave
on the eve of a change of control.
vii. What about other problems?
1. Don‘t want them to sell for too low. However, the accelerated
vesting provides a strong incentive to do some deal. If you want to
know what company is likely to be taken over—look to companies
where CEO is between 59 and 60 years of age.
2. If problem is a Revlon problem—two bids, one high, one low—
managers will clearly prefer high to low.
3. If question is selling today vs. selling in three years, this does
nothing at all to solve that problem.
4. Getting managers not to buy when the price of an acquisition is too
high is a very hard problem to solve.
viii. This is a contractual solution to an agency problem. Different ways to
solve this problem; can do so by legally prohibiting certain defenses
in the face of a bid. Or, may approach it contractually.
ii. Gaillard v. Natomas Company (p 125)
1. Hadn‘t written the optimal compensation agreement yet and a bid came along.
2. Board realizes that hadn‘t engaged in enough advanced planning and are afraid
that managers won‘t sell or won‘t stick around because of the stress.
3. Problem of negotiating the golden parachute t the same time they are
negotiating the acquisition price—look like self dealing—give an extra $10m to
officers and sell company for $1/share less.
4. Flom handles this by negotiating the golden parachute after they negotiate the
price. Can you negotiate this simultaneously with the deal? 5. Have two contrasting cases—in Gaillard the court says no and in Campbell the
court says yes.
6. It looks like managers are being bribed to act in the best way for SHs. 7. If there is any problem today similar to the problem in the 1980s it is that
managers are willing to sell companies. Managers get a huge payout at a sale
of control. Who is willing to say no? Outside directors; in a mid-cap company
costs about $150 to hire an outside director. People really like the money and
have usually worked hard to get there. Outside directors are arguably the ones
who have the financial incentives to ask hard question about whether right time
to sell the company.
iii. Campbell v. Potash Corp of Saskatchewan, Inc (supp 9)
d. Informational Duties of Directors
Urkevich M&A Outline
i. Problem, page 156: Great bid on the table. Issue is whether the board can accept an offer that precludes further shopping? If they wait a week to think about it, they lose the bid.
1. Offer to buy at 66x earnings; clearly the three-day deadline on the offer is to
force acceptance and to preclude any significant shopping.
2. How do you advise the board?
a. Not sure if they are really out of there in 3 days. You like the price, but
maybe you can get a better price from them or someone else.
b. If S v. VG stands for the proposition that as a matter of law, cannot sell a
company in three days then little pharm says to big pharm that they just
can‘t legally do it.
c. BUT, if VG stands for something else then you can‘t make this claim to
the bidder b/c the bidder‘s lawyers will call you out.
d. Matters a lot to negotiations how one understands S v. VG.
3. When looking at the deal, look to the amount of deliberation, presence and
analysis of investment bankers and lawyers.
a. Has there been enough process? In 72 hours you can come up to speed if
you know what you‘re doing.
4. Existence of 33% SHs also adds to the analysis
a. If this SH thinks 66x earnings is a great price, interests are aligned. 5. Can the board accept an offer that says ―no shopping?‖
a. This provision says you cannot cooperate with any other bid. Sometimes
can‘t solicit competing bids, but you can cooperate with any bids that
6. Within the three days a competing offer comes in. Does the company have to
issue a press release?
a. Suppose that big pharm says another condition is that they do not want to
publicize it. Not interested in getting into a bidding war. If issue a press
release, offer is void. Want to know if they have to issue a press release
and if they can accept the offer.
b. The bid won‘t always be a secret b/c will have to get SH approval—and
will have to issue a press release. Have obligations to disclose material
developments. At point there is a merger agreement there will be a press
release. When signing on to big pharm—does there have to be one?
i. No, probably not if sufficiently go through the process. Don‘t know
for sure if anyone else is willing to buy it; if they think it‘s a good
price and have a basis for it, then they should be able to accept the
deal, the no shop, and not publicize it.
ii. Smith v. Van Gorkom (p 142) (Del. 1985)
1. Facts: Merger of TU into Marmon. 45% premium over recent mkt price;
investment tax credits were unusable to TU, but valuable to an acquirer. 2. Quick holdings: Ct of Chancery applies BJR and says defendant wins. Said no
director liability unless: director conflicting interests, bad faith, action not on an
―informed basis,‖ and action is irrational.
a. Issue on appeal was whether BoD decision was informed; DE SC said
NO. Articulated the ―gross negligence‖ standard.
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b. The majority thought the BoD was just nodding along to the will of the
CEO/chair who promoted deal and set the price. Casual decision making;
didn‘t even have the merger agreement when voted. Approved in 2 hours
and relied only on VG presentation. Failure to obtain valuation study.
Merger agreement drafting failure. Discrepancies b/t what some directors
thought the agmt included and what was in actual agmt.
c. No duty of loyalty problems—no conflict of interests; were independent
d. Duty of care—aftermath was an outrage—DGCL ? 102(b)(7): charter
provisions preclude director monetary liability for duty of care... 3. Why can‘t the board obtain protections from reports or officers under 141(e) of
a. There wasn‘t a ―report‖ here—just VG‘s oral presentation which doesn‘t
arise to the requisite detail to count as a report.
4. Here, Pritzker is offering $55 and TU trading at $38. Not a big premium and
moreover, thought the premium was meaningless b/c knew that stock was
trading low b/c investment credits were not valued.
5. Why wouldn‘t the opportunity to consider other offers for 90 days not satisfy
the requirements for the board to inform itself about value.
6. Also applies to problem: Once a competing bid came along or the bd decided to
no longer recommend it, the court held that under ? 251 the board had but two
a. To proceed with the merger and the stockholder meeting, with the board‘s
recommendation of approval; or
b. To rescind its agreement with Pritzker, withdraw its approval of the
merger, and notify SHs that the proposed SH meeting was cancelled. 7. Why can‘t they just let SH decide? Why can‘t they change their
recommendation after they have already submitted it to SHs?
8. In VG, why wasn‘t the market test sufficient to inform the directors whether it
was a good bid? No one else came through w/ a better offer.
9. In original merger agreement, the board acknowledges that it may have
competing duties to SHs. Why wasn‘t that enough? Or, in the future, is there
an explicit fiduciary out? Generally cannot contract out of your fiduciary duties.
1. Client who is the largest franchisee of a franchise that has been experiencing
difficulties. Client possibly interested in buy all of it, but b/c doesn‘t have its
finances lined up, doesn‘t want to trigger the franchisor‘s Revlon duties. But,
needs access to confidential records. What would you say in a letter to the
franchisor‘s board proposing such access?
a. Maybe even though you‘re thinking about a cash bid, you‘re vague or you
say maybe a joint venture...or just interested in investing. The idea is that
the fast food company will know what you‘re saying but that there‘s
nothing in there to trigger Revlon, is this right?
iv. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (p 157) (Del. 1985)
1. Know that once in Revlon mode have to act as an auctioneer.
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2. This shift in fiduciary duty occurs when it becomes clear that SH are going to be cashed out.
3. Revlon made the mistake when they sought out Forstmann Little.
4. Rock says a better reading of this case is that Bergerac didn‘t want to sell. This was pre poison pill, before it was invented.
5. Granted Forstmann special privileges:
a. No shop
b. Lock up—give ability to purchase major assets of target company if
another acquirer gets X%
i. Can be structured as asset lock ups, straight up cancellation fees,
stock lockups. Ct ultimately invalidates it.
c. Break up fee.
6. A well incentivized board may in good faith grant a lock up or termination fee in order to encourage a bid by covering the sunk costs of bidding. But here, the lockup isn‘t encouraging Forstmann to bid because he‘s already incurred whatever the costs of bidding are. The concern here is that by paying a breakup fee to mgmt‘s favored bidder it will tilt the outcome of the auction in favor of mgmt‘s favored bidder b/c it raises the cost of bidding for other bidders. Rock says it’s a plausible argument, but it’s wrong—exactly what the intuition of
the court has, but doesn‘t work:
a. Assume the current market capitalization is $600 million.
b. There are three potential bidders, A, B, and C. Bidder A thinks the
company would be worth $800 million to it, Bidder B thinks $810 million,
Bidder C thinks $790 million.
c. From a matter of social policy, the socially optimal outcome is for Bidder
B to end up with the assets--they're worth the most in Bidder B's hands.
But you're worried management might have some preference for Bidder A. d. If there are no lockups, then up until $790 all three bidders will be bidding
against each other. At that point Bidder C drops out, until it caps $800,
when Bidder A drops out. Bidder B gets the company for $801 million,
even though up to $810 million it's still a valuable acquisition for Bidder B. e. Assume that Bidder B makes a bid at Time One for $650. Management
then turns to Bidder A and says if you bid $675 million, we'll promise you
a $20 million breakup fee. B now knows that if it acquires the company,
it's going to have to write a check for $20 million to A. Now, Bidder B
will only be willing to go up to $790. What's the maximum price that
Bidder A will be willing to pay?
f. Will Bidder A go up to $800 million? If it does, it gets zero profit, but if it
lets Bidder B prevail, it gets $20 million.
g. Bidder A therefore won't go higher than $780. Who wins the auction?
Bidder B. In other words, the $20 million breakup fee is a guaranteed
payment to Bidder A.
h. Once that's in place, it becomes an alternative scenario or an opportunity
cost for both Bidder A and Bidder B. It therefore reduces the reservation
price equally for both, and thus won't affect who wins the auction.
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i. If what you're worried about is the highest valuing bidder acquiring the
assets, it's not obvious that the second argument should convince you that
there's something wrong with the lockup.
7. But, if breakup fee were $300m it would shift the outcome in favor of mgmt‘s
preferred bidder. So long as the breakup fee is bigger than the difference b/t the
bid and the reservation price, it will be preclusive.
8. When the mgmt offers a break up fee to entice another bidder to come in, it cuts
into the profits that the bidder who identified the company in the first place will
make. By reducing his profits, you reduce his incentives to research.
v. Barkan v. Amsted Industries, Inc. (p 167) (Del. 1989)
1. What did they do in Barkan that they didn‘t do in Revlon? Why is Barkan good
but Revlon bad?
2. In Barkan, not only went with the first offer, but the mgmt offer. Didn‘t do a
market test. Mgmt came in and said it wanted to buy the company. If you‘re a
director with a lot of your money in the company this makes you nervous
because managers have an incentive to buy the company for the lowest possible
price they can; they also have access to absolutely all the information in the
a. If mgrs are trying to buy the company at X + 10, real concern that this is
not what the company is worth.
3. Given our concern about MBOs, what‘s the argument that the board can sell to
management without doing a full auction?
a. Because of tax benefits connected to the ESP nobody will be able to top
b. How do they know no one is willing to top it?
i. Could argue that it‘s been in play for 10 months and no bid has come
forward, ergo nobody‘s willing to pay a higher price.
ii. But, there‘s a poison pill in place. Is that going to drive away bidders?
1. Ct says lots of cases where the pill is in place and still get bids.
People bid all the time making them conditional on the board‘s
4. What about no-shop? Ct approves it, but with skepticism. The court approves
the entire settlement, but with intense skepticism about the way it was actually
approved. If you‘re running the next MBO and you‘re making sure it doesn‘t
get enjoined—these are the sort of things you pay close attention to; they are
the warning shots of the DE courts.
vi. For the next three cases, focus on the style and detail of their rulings. Consider this scenario:
1. Have two publicly traded companies, A and B.
2. A is willing to enter into a merger agreement with B for an exchange of stock. 3. Neither A nor B has a controlling SH.
4. Willing to do a stock for stock deal and call it a ―merger of equals.‖
5. Would also like to put in a ―no talk provision.‖—operates to prohibit the
corporation from soliciting, initiating, encouraging, or taking any action that
knowingly encourages offers from another; even providing information to a