corps shareholder remidies-dibadj-spring 2005.doc

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corps shareholder remidies-dibadj-spring 2005.doc

    Corporations Attack Plan

    Dibadj Spring 2006




    i) Defined: Corporate Officers and Directors must act w/ the care of an ordinarily prudent person

    in the same or similar circumstances.

    ii) Policy: Why Have a Duty of Care?

    (1) Want to encourage directors to become informed and make decisions in best interest of

    corporation and discourage director passivity.

    (2) Create high standard for breach of duty b/c want to discourage risk averse directors. iii) Standards to Evaluate Breach of Duty of Care:

    (1) Business Judgment Rule: No clear statement. Look for disinterested directors who are

    informed and act in good faith to advance corporate interests. Defer to their judgment.

    (a) Courts use BJR to move Breach standard from Negligence ? Gross Negligence.

    (b) Van Gorkom: Absent self-dealing, directors breach their duty of care only if they are

    “grossly negligent” (not acting in good faith).

    (2) Entire Fairness: Fair Price + Fair Dealing

    (a) If Π makes prima facie showing of breach of duty of care (under gross negligence

    standard), NOT required to establish causation and damages. BoP on ? to show EF

    iv) Refining the Duty of Care Analysis:

    (1) Immunizing D&O from Duty of Care Liability:

    (a) State can enact exculpatory provisions (DGCL ? 102(b)(7)) immunizing D&O’s from

    liability for duty of care breach unless intentional, bad-faith, or self-dealing.

    (b) If statute, get BJR unless Bad Faith.

    (2) The Strongest Breach of Duty of Care Argument: Board Passivity

    (a) Standard to Determine Passivity: Recklessness/Gross Inattention/Super Negligence

    (i) Unless cause for suspicion, Board has no duty to monitor.

    (ii) Only sustained/systematic failure to monitor = necessary bad faith for liability.

    (b) Policy: BJR doesn’t protect Board inaction b/c want to incentivize risk-taking, not passivity.


    i) Defined: Corporate fiduciaries must exercise institutional power over corporate processes &

    property (including info) in a good faith effort to advance corporate interests.

    (1) Fiduciaries cannot benefit at corporation’s expense.

    (2) Fiduciaries must fully disclose all material facts and deal w/ corporation on terms that are

    intrinsically fair in all respects.

    ii) Policy: Why have a Duty of Loyalty

    (1) Want those w/ control over corporate property to exercise that control solely in the best

    interests of the corporation and all SH’s.

    (2) Don’t want those w/ control using corporate processes/information for personal gain.

    iii) The Quintessential Duty of Loyalty Conflict: Self-Dealing Transactions

    (1) The Standards:

    (a) If it is an interested transaction ? Entire Fairness (Unless Disclose + Disinterested)

    (b) If Disclose + Disinterested ? Go to Removing the Taint Section

    Shareholder Remedies: Sue 1 12.19.2011

    Corporations Attack Plan

    Dibadj Spring 2006

    (2) Controlling Shareholders: Fiduciary duty imposed on controlling SH’s b/c of power over corporation and ability to affect interests of other SH’s.

    (a) Control: Practical rather than formal standard.

    Look for 50%+ OR signs SH actually exercised control.

    (b) The Threshold Test for Entire Fairness Review:

    (i) If interested SH receives something to the exclusion of minority SH’s ? EF

    (ii) IF interested SH receives nothing to exclusion of minority SH’s ? BJR.

    (3) Removing the Taint: Disclosure + Disinterested Review

    (a) The Disclosure Requirement

    (i) Interested fiduciary must make full disclosure of all material facts of which she is

    aware at the time of authorization of the conflicted transaction.

    (ii) Even if a deal is “fair”, No disclosure = Violation of Duty of Loyalty.

    (b) Subjecting Transaction to Disinterested Review

    (i) Review by Disinterested Board Members

    1. Standard: Tug of War b/t DE Supreme Court and Chancery Court:

    a. Supreme Court ? Entire Fairness w/ Burden Shifting

    b. Chancery Court ? BJR

    2. Theory: If disinterested Board approves, must be in corp’s best interest.

    (ii) Approval by Special Committee of Independent Directors

    1. Standard: If Special Committee is effective EF w/ Burden Shifting.

    2. To be Effective Special Committee must be . . .

    a. Properly charged by the Board

    b. Comprised of Independent Directors

    c. Vested w/ all resources necessary to accomplish task.

    d. Mission must be best available deal.

    (iii) Shareholder Ratification

    1. Standard: It depends Is there an Effective ratification of Board Action?

    a. If SH ratification is NOT effective ? Entire Fairness

    b. If SH ratification IS effective and interested DIRECTOR ? BJR

    c. If SH ratification IS effective and interested SH ? EF w/ burden shifting

    2. Ratification is Ineffective if . . .

    a. Majority of SH’s affirming action are conflicted

    b. Affirmed Action = Corporate Waste

    (Can only be ratified by unanimous SH vote)

    (4) Corporate Opportunity Doctrine: DoL Breached if take a Corporate Opportunity (a) Broz v. Cellular: Corporate Opportunity if . . .

    (i) Corporation is financially able to exploit the opportunity

    (ii) Opportunity is w/in corporation’s line of business

    (iii) Corporation has an interest/expectancy in the opportunity AND

    (iv) By taking the opportunity for his own, the corporate fiduciary will thereby be placed in a

    position inimicable to his duties to the corporation. (b) If you want to take an opportunity: DISCLOSE IT TO THE BOARD!

    Shareholder Remedies: Sue 2 12.19.2011

    Corporations Attack Plan

    Dibadj Spring 2006

    II) Procedure: Manner of Pursuing a Fiduciary Duty Claim

    a) Direct Suit: SH’s combine claims w/ common aspects against Board. Often Class Action.

    b) Derivative Suit: Assertion of a corporate claim. Recovery goes to corporation.

    i) Policy: Why have Derivative Suits?

    (1) Help alleviate Collective Action Problem: Make it easier for SH’s to sue on corporate claims,

    which bring them little/no individual recovery but might substantially increase corporate value.

    (2) Problem: Need to balance w/ discouraging Strike Suits (Frivolous Suits)

    ii) Standing Requirements: The Π’s First Hurdle

    (1) Federal Rule 23.1: Four Standing Requirements

    (a) Π is SH for duration of the action

    (b) Π must have been SH at time of alleged wrong

    (c) Π must be able to fairly and adequately represent SH interests (no obvious conflict)

    (d) Complaint must specify what action Π has taken to obtain satisfaction from Board or state w/

    particularity reason for not doing so (The Demand Requirement) (2) Where the Action Is: The Demand Futility Requirement

    (a) Two-Pronged Test to Show Demand Futility

    (i) Is the Board disinterested/independent?

    (ii) If not, are there particularized facts sufficient to create a reasonable doubt the challenged

    transaction was the product of valid business judgment?

    1. Must be sufficient to rebut BJR Presumption = Bad faith/gross negligence

    2. Policy: Form over Function If they followed procedural hurdles they are ok.

    (b) Universal Non-Demand Rule: IF make a demand, conceding first prong. BAD.

    (c) Rales: If the present Board is not the Board that made the decision, ONLY look at first

    prong b/c doesn’t make sense to evaluate second.

    iii) Special Litigation Committees: The Π’s Second Hurdle

    (1) After get past 23.1 Motion, Corporation forms SLC to decide if suit should proceed. (2) The Zapata Two Step: Is SLC decision not to proceed w/ suit legit?

    (a) Is the committee independent and did they act in good faith? If YES ?

    (b) Court should determine, by applying ITS OWN INDEPENDENT business judgment, if

    decision of the SLC not to go forward is legitimate.

    (i) Disney: To show not valid business judgment, have to show lack of good faith (bad

    faith) BUT bad faith is defined as sustained, systematic, intentional dereliction of

    duty SO the “good faith” standard doesn’t really help us.

    nd(ii) BUT the 2 Prong of Zapata is w/ discretion of Chancery Court (Kaplan).

    nd(iii) Policy: Why have the 2 Prong of the Zapata Test?

    nd1. Use 2 prong to catch instances where corporate actions appear independent

    but the outcome doesn’t satisfy spirit of inquiry.

    2. Could be an Inversion of usual Form over Function (maybe) OR might be the DE

    SC using its own Form over Function, knowing it will get watered down in

    Chancery Court.

    Shareholder Remedies: Sue 3 12.19.2011

    Corporations Attack Plan

    Dibadj Spring 2006

    III) Control Transactions

    a) Background Rule: NO DUTY to Minority Shareholders.

    i) Market Rule: Sale of control creates rights and duties b/t parties but, absent looting of corporate

    assets, conversion of a corporate opportunity, fraud, or other acts of bad faith, does not create

    rights in the minority SH’s.

    ii) Controlling SH can pursue a PREMIUM for sale of control.

    b) Analysis for SELLER of Control Block of Stock

    i) Accepted Standard is the Market Rule

    (1) Controlling SH can sell for a control premium UNLESS special situation.

    (2) If Special Situation (Feldmann Plan) then follow procedures (negotiate to take interests of

    Minority SH into account) and you will be fine.

    ii) Or can try to argue Controlling SH is using corporate machinery for personal gain.

    (1) Must show egregious & unfair = Violation of Fiduciary Duty (Courts don’t define)

    (2) If agreeing to recommend Buyer’s Board argue Vote Buying.

    iii) Or can argue Sale of a Corporate Office (If slight premium for 10% stock, OK; If significant

    premium for 4% stock, NOT OK).

    iv) Or can argue Transaction amounts to Looting (Controlling SH has a duty to conduct reasonable

    investigation when alerted that a buyer might be shady).

    c) Analysis for BUYER of Control Block of Stock

    i) Williams Act: Four Regulatory Elements

    (1) Early Warning System

    (2) Disclosure of Identity, Financing, and Future Plans of Tender Offeror

    (3) Anti-Fraud Provision

    (4) Substantive Regulations

    ii) Problem: Tender Offer not defined. (8 Factor Test)

    iii) Waiting Periods (15 days cash, 30 days open market etc.)

    Shareholder Remedies: Sue 4 12.19.2011

    Corporations Attack Plan

    Dibadj Spring 2006

    IV) M&A Transactions

    a) Policy Why a Merger?: Increase Efficiency (Economies of Scale/Scope, Vertical Integration)

    b) Structuring the Transaction

    i) Shareholder Franchise

    (1) Target Shareholders: Always Vote (unless Stock Acquisition + Short Form Merger)

    (2) Acquiring Shareholders: Vote UNLESS the merger has so little impact on SH’s of acquiring

    company that it doesn’t justify the outlay of expense for a vote.

    ii) Control the Risk: Due Diligence, Representations & Warranties, Covenants, Deal Protection.

    iii) Tax: Avoid declaring capital gains.

    c) Dissident Shareholder Remedy: The Appraisal Remedy

    i) Defined: Minority SH has court determine fair price, makes remaining SH’s purchase @ at price.

    ii) The Market Out Rule: In DE, Appraisal Remedy only required when . . .

    (1) Close corporation w/ less than 2000 SH’s

    (2) Publicly Traded if SH’s receive anything other than a fluid security as consideration. iii) Valuing the “Fair Price” of a Dissident SH’s Shares:

    (1) Does NOT include any value conferred by merger.

    (2) Determined by weighing advice of expert testimony.

    d) De Facto Merger: DE values Form over Function. If you call it asset acquisition, so do we.

    e) Duty of Loyalty in Controlled Mergers:

    i) Baseline: A controlling shareholder on both sides of a transaction has the burden of proving

    entire fairness for the interested transaction.

    (1) If SH doesn’t exercise CONTROL ? BJR for interested transactions.

    (2) If SH has Control BUT ratified by Independent Directors/SH ? EF w/ burden shifting

    (3) In 2 Step Cash Out Merger: Controlling SH has burden to prove Fair Price. ii) Remedies Available

    (1) Appraisal Remedy AND

    (2) Breach of Fiduciary Duty (Loyalty)

    iii) Controlling SH’s Duty in a Two-Step Tender Offer

    (1) If you use Corporate Machinery ? Entire Fairness

    (2) If you go directly to SH’s for Approval ? No review UNLESS Coercive

    (a) Not coercive if . . .

    (i) Subject to non-waiveable majority of minority condition

    (ii) ? 253 merger will be at same price as Tender Offer

    (iii) No retributive threats

    (b) Diverges from Kahn, which recognizes the inherent coerciveness of being a controlling

    shareholder, requires Fairness review (w/ possible burden shifting)

    Shareholder Remedies: Sue 5 12.19.2011

    Corporations Attack Plan

    Dibadj Spring 2006

    V) Proxy Contests

    a) Policy: Control Contest Pros and Cons

    i) We Like Contests for Control b/c they are a Constraint on Managers ii) But Board might have a legitimate reason for Blocking offer (long term strategy) and the offeror

    might be out to make a quick buck (not good for the market).

    b) The Standards

    i) BJR: State law, no clear definition. Look for informed, disinterested and directors acting in good

    faith and defer to their judgment. Pretty much just can’t be gross negligence.

    ii) Unitrin: Board’s defensive action cannot be draconian (not preclusive or coercive) and must be

    w/in “range of reasonableness.”

    iii) Unocal: Board’s defensive measure must be reasonable in relation to threat posed. iv) Blasius: Must have a compelling justification to mess w/ the Shareholder Franchise. v) Entire Fairness: Fair Price + Fair Dealing

    vi) Revlon: Duty to maximize short term value for SH’s.

    Triggered (1) Sale/Reorganization of Company or (2) Abandon long term business plan.

    c) Defense Mechanisms

    i) The Poison Pill

    (1) Defense mechanism against hostile takeovers. If triggered, dilutes stock market by

    triggering rights in SH’s that will be financially devastating for acquiring company.

    (2) Policy: Is this good for SH’s?

    (a) Yes: Protect from hostile takeovers & corporate raiders by allowing management to

    protect the long term best interest of the company.

    (b) No: Misused by management to protect status quo, insulate ? Enron.

    (3) Timing: When Pill is Enacted Affects the Standard Applied

    (a) If before a Threat ? BJR

    (b) If in response to a Threat ? Unocal (Moran)

    (c) If after bidding has commenced ? Revlon

    ii) Selling Stock to Friendly Buyers ? Unocal (If in reaction to Threat, Alter legal rights?) iii) Selling Corporate Assets ? Unocal (But is it a Fundamental Transaction?)

    iv) Moving the Annual Meeting ? Blasius/Schnell (Dumbass, don’t do it)

    d) Choosing a Merger/Buyout Partner

    i) The Revlon Duty: Once you put company up for sale, duty to get highest value for your SH’s.

    (1) Triggered When:

    (a) Sale of Control or break-up of company.

    (b) In response to a bidder’s offer, corporation abandon’s long term strategy.

    (2) If Revlon is NOT triggered ? Unocal to evaluate defensive measures.

    ii) Protecting Yourself: Lock-Ups/No Shops & Fiduciary Out Clauses.

    e) State Anti-Takeover Statute: Hostile acquirer may not be able to perform ‘business combination’.

    f) Responses: The Takeover Arms Race

    i) Dead Hand Pills: Can only be redeemed by current board (DE: NO. Agency issues) ii) Mandatory Pill Redemption Bylaws: Don’t know what DE Thinks

    (1) ? 141: Board discretion in daily activities, SH shouldn’t be able to enact.

    (2) Rule 14(a)-8: Town Meeting Proposal.

    Shareholder Remedies: Sue 6 12.19.2011

    Corporations Attack Plan

    Dibadj Spring 2006


    a) Policy: Is Insider Trading Good or Bad?

    i) Chicago School: Good b/c drives up stock prices. Closer reflection of actual worth. ii) Counter-Argument: Agency. Agent can’t personally benefit from corporate information.

    b) SEC ? 16 and Rule 16

    i) Rule 16(a): Designated Persons must file public reports of any transactions in corporations’ securities.

    (1) Designated: Directors, Officers, 10% Shareholders

    (2) Timeline: Used to be long, now Sarbanes-Oxley makes it shorter.

    ii) Rule 16(b): Strict liability rule designed to discourage statutory insiders from trading on inside info.

    (1) Must disgorge all profits made on transactions w/ short-term turnovers (6 months)

    (2) Statutory Insiders: How did they come by the info?

    c) SEC ? 10 and Rule 10(b)-5

    i) Rule 10(b): SEC can create rules to regulate securities trading on national exchanges to prevent

    any manipulative or deceptive device or contrivance in contravention of such rules and

    regulations as the Commission may proscribe.

    ii) Rule 10(b)-5: It shall be unlawful

    (1) To employ device/scheme/artifice to defraud

    (2) To make an untrue statement of material fact or to omit something that is misleading

    (3) To engage in an act, practice, etc. that is a fraud on anyone in connection w/ sale of a security. iii) Elements of 10(b)-5:

    (1) False or Misleading Statement/Omission

    (a) Misappropriation: If the person trading owed a fiduciary duty to the source of the

    information, it is misappropriation and they are liable under Rule 10(b)-5. (O’Hagan)

    (b) Derivative Trading? (If Tipper/Tipee ? Dirks)

    (2) Materiality: The Probability Magnitude

    (3) Scienter: Intent to Deceive

    (4) Standing: Must have ACTUALLY bought or sold to have standing.

    (a) Practice Exam: Forced future sellers have standing?

    (5) Causation/Reliance: Argue Fraud on the Market

    (a) Reliance: Presumption of reliance if fraudulent info released to market.

    (b) Causation: Must cause transaction and loss.

    (6) Remedies: Out of Pocket, Actual Damages, or Disgorgement?

    d) Rule 14(e)-3: Special Regulation of Tender Offers

    i) Imposes a duty on anyone who obtains inside information about a tender offer from either the

    offeror or the target to disclose or abstain from trading.

    ii) The TSG Standard (equal access to info) applies in the case of Tender Offer information.

    Shareholder Remedies: Sue 7 12.19.2011

Corporations Attack Plan

Spring 2006 Dibadj

Shareholder Remedies: Sue 8 12.19.2011

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