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CORPORATE GOVERNANCE & M&As

[THESE NOTES SHOULD BE READ IN CONJUNCTION WITH THE
READING ASSIGNMENTS PER THE SYLLABUS]


PROF. HARVEY PONIACHEK
MERGERS & ACQUISITIONS
BARUCH COLLEGE, GRADUATE DIVISION
SPRING 2014
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DUTIES OF THE BOARD OF DIRECTORS
INTRODUCTION, CASE LAW & MAJOR ISSUES

TAKEOVERS CHALLENGED IN COURTS
PRODUCED JUDICIAL DECISIONS RELATING TO
THE DUTIES OF DIRECTORS OF THE BOARD, ANTI
TAKEOVER DEFENSES, AND CONCERNS ABOUT
DIRECTORS POTENTIAL CONFLICT OF INTEREST
MOST TAKEOVER CASES WERE ADJUDICATED BY
THE DELAWARE COURTS WHERE MOST OF THE
FORTUNE 500 ARE INCORPORATED


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DUTIES OF DIRECTORS
LEGALLY, MOST JURISDICTION DESCRIBE THE DIRECTORS AS
HAVING TWO FIDUCIARY DUTIES: 1. THE DUTY OF CARE, AND 2.
THE DUTY OF LOYALTY [SEE MONKS & MINOW, PP. 182]

DUTY OF CARE--REQUIRES A DIRECTOR TO EXERCISE DUE
DILIGENCE IN MAKING DECISIONS BY RELYING ON FULL
INFORMATION

DUTY OF LOYALTY--REQUIRES A DIRECTOR TO DEMONSTRATE
UNYIELDING LOYALTY TO THE COMPANYS SHs

ADDITIONAL AND MORE SPECIFIC DEFINITIONS OF THE BOARDS
DUTIES--BEYOND THE LEGAL DEFINITIONS CITED ABOVE--WERE
SUGGESTED BY THE BUSINESS ROUNDTABLE AND THE
AMERICAN LAW INSTITUTE [SEE MONKS & MINOW, PP. 183]


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DUTIES OF DIRECTORSCONT.
THE PRESUMED DUAL FIDUCIARY DUTIES OF DIRECTORS
CONSTITUTE THE BUSINESS JUDGMENT RULE OR STANDARD
THE BUSINESS JUDGMENT RULE IS THE STANDARD BY WHICH
DIRECTORS ARE JUDGED WHEN THEY EXERCISE THEIR
FIDUCIARY DUTIES TO SHs IN THE COURSE OF AN ATTEMPTED
TAKEOVER (RELATING TO PRICING AND PROCESS)
THE COURT WILL NOT SECOND GUESS A DIRECTORS BUSINESS
JUDGEMENT DECISION IF IT CAN BE DEMONSTRATED THAT
HE/SHE EXERCISED ALL POSSIBLE CARE AND ACTED WITH DUE
LOYALTY (NOTE THAT THE BURDEN OF PROOF SHIFTED TO THE
DIRECTOR)
IN THE M&A CONTEXT, SOME SPECIAL APPLICATIONS OF THE
BUSINESS JUDGMENT RULE HAVE DEVELOPED THROUGH
LITIGATIONS CHALLENGING DIRECTORS CONDUCT [SEE WHITE
& COOPERMAN]

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SEMINAL COURT CASES
ON CORPORATE GOVERNANCE

IN THE TRANS UNION CASE (1985) THE COURT RULED THAT
DIRECTORS HAD NOT MET THEIR DUTY AS FIDUCIARIES BY
AGREEING TO SALE THE COMPANY WITHOUT A SUFFICIENT
VERIFICATION PROCESS TO OBTAIN THE BEST TERMS
THE PRIMARY IMPLICATION OF THE TRANS UNION CASE WAS
THAT THE DECISION MAKING PROCESS AND NOT THE
SUBSTANCE OF THE DECISION WAS OF IMPORTANCE, AND THE
COURT DID NOT RULE ON THE BUSINESS JUDGMENT
FOLLOWING THE TRANS UNION DECISION, THE DELAWARE
LEGISLATURE AMENDED THE DELAWARE GENERAL
CORPORATION LAW RELATING TO DUTIES OF DIRECTORS IN
MERGERS / ACQUISITION CASES, AS FOLLOWS: 1. ONCE IT IS
RECOGNIZED THAT A COMPANY IS IN PLAY AND IT IS LIKELY
TO BE SOLD, DIRECTORS OBLIGATION IS TO OBTAIN THE BEST
PRICE FOR SHs; 2. DIRECTORS SHOULD BE FAIR TO ALL
BIDDERS; AND 3. SELF INTEREST SHOULD NOT IMPAIR
DIRECTORS DECISIONS [WESTON, PP. 38]

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SEMINAL COURT CASESCONT.
In Unocal v. Messa Petroleum (1985), UNOCAL ANTI
TAKEOVER DEFENSES INCLUDED A SELF TENDER OFFER IN
WHICH THE TARGET MADE A TENDER OFFER FOR ITSELF IN
COMPETITION WITH THE MESA OFFER
THE DELAWARE SUPREME COURT HELD THAT THE DIRECTORS
MAY HAVE ACTED IN THEIR OWN SELF INTEREST IN WHICH
THEY FAVORED THEIR OWN TENDER INSTEAD OF OBJECTIVELY
SEARCHING FOR THE BEST DEAL FOR SHs
IN SUCH INSTANCES, THE DIRECTORS ARE SUBJECT TO
ENHANCED SCRUTINY AND MUST DEMONSTRATE THAT (1)
BASED ON THEIR BUSINESS JUDGMENT THEY HAD REASONABLE
GROUNDS TO BELIEVE THAT THERE WAS A DANGER TO THE
PURSUIT OF A CORPORATE POLICY THAT WAS IN THE BEST
INTEREST OF SHs, AND (2) THAT THEIR DEFENSES WERE
REASONABLE IN RELATION TO THE THREAT
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SEMINAL COURT CASESCONT.
IN THE REVLON CASE (1985) THE COURT HELD THAT WHEN
IT BECOMES CLEAR THAT THE SALE OR BREAK UP OF A
COMPANY IS INEVITABLE, THE BOARD HAS THE
FIDUCIARY DUTY TO MAXIMIZE SHs WEALTH --BY
SHIFTING THEIR FOCUS AWAY FROM DEFENDING THE
COMPANY TO SELLING IT AT THE HIGHEST PRICE (THESE
DUTIES BECAME KNOWN AS THE REVLON DUTIES)
THE COURT ESTABLISHED THAT RATHER THAN PROMOTE
THE AUCTION PROCESS TO MAXIMIZE SHs VALUE,
REVLONS ANTI TAKEOVER MEASURES INHIBITED IT
IN THE REVLON AND UNOCAL CASES THE COURTS ADDRESSED
WHETHER UNDER CERTAIN CIRCUMSTANCES THERE WAS A
LIMIT TO THE ANTI TAKEOVER DEFENSES THAT A BOARD COULD
UNDERTAKE TO REBUFF AN UNSOLICITED OFFER TO ACQUIRE IT

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SEMINAL COURT CASESCONT.
IN THE PARAMOUNT v. TIME (1989) CASE, THE COURT
STATED THAT TIME-WARNER WAS A STRATEGIC MERGER
NOT INVOLVING A CHANGE IN CONTROL, THEREFORE,
THE REVLON DUTIES WERE NOT TRIGGERED AND THE
NORMAL BUSINESS JUDGMENT RULE STANDARD
APPLIED

IN THE CASE OF PARAMOUNT v. QVC NETWORK (1993) THE
SUPREME COURT OF DELAWARE HELD THAT THE
DIRECTORS OF PARAMOUNT VIOLATED THEIR FIDUCIARY
DUTIES IN NOT MAXIMIZING THE SELLING PRICE OF THEIR
COMPANY. THE BIDDING CONTEST PROCEEDED WITH
VIACOM ULTIMATELY ACQUIRING PARAMOUNT
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DETAILED DISCUSSION
TRANS UNION CASE
THE DIRECTORS DUTY--PROCESS & BUSINESS JUDGMENT

FACTS: SEE SMITH V. VAN GORKUM, 488 A.2
ND
858 (DEL. SUPR. 1985),
HTTP://WWW.SEAMLESSLAWWEB.COM/
MR. VAN GORKUM, THE CHAIRMAN OF TRANS UNION CORPORATION
WHO WAS APPROACHING MANDATORY RETIREMENT OF 65, CONSIDERED
PUTTING THE COMPANY UP FOR SALE
THE CFO EVALUATED THE COMPANY UNDER A LEVERAGE BUYOUT
ASSUMPTION, AND CAME UP WITH A PRICE RANGE OF $50-60 PER SHARE
VAN GORKUN OFFERED MR. PRITZKER, A TAKEOVER INVESTOR, TO
ACQUIRE TRANS UNION AT $55 PER SHARE, WHICH REPRESENTED A 60%
PREMIUM OVER MARKET
OTHER PARTIES, INCLUDING GE CREDIT AND KKR, WERE APPROACHED
BUT DECLINED TO BID
ULTIMATELY, PRITZKER OFFER WAS SUBMITTED TO VOTE AND WAS
APPROVED BY SOME 70% OF THE SHs
THE CLASS ACTION SUIT WAS BROUGHT AGAINST MR VAN GORKUM AND
THE BOARD OF DIRECTORS ALLEGING NEGLIGENCE
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TRANS UNION--COURT DECISION
IN THE CASE OF Smith V. Van GorkUm (1985), THE COURT RULED
THAT THE DIRECTORS VIOLATED THEIR FIDUCIARY DUTIES IN
THE SALE OF TRANS UNION BY APPROVING A DEAL WITHIN TWO
HOURS AFTER BEING INTRODUCED TO IT FOR THE FIRST TIME BY
MR.VAN GORKOM

THE DELAWARE SUPREME COURT FOUND ON APPEALS THAT
TRANS UNION DIRECTORS WERE GROSSLY NEGLIGENT
BECAUSE (1) THEY DID NOT ADEQUATE EVALUATE THE
OFFER, AND (2) THEY FAILED TO INDEPENDENTLY DETERMINE
WHETHER VAN GORKUM EVALUATED THE COMPANY
ADEQUATELY AND NEGOTIATED THE BEST MERGER AGREEMENT
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TRANS UNIONCONT.
THE SUBSTANTIAL PREMIUM OVER THE MARKET PRICE, THE
MARKET TEST PERIOD FOR ENTERTAINING OTHER OFFERS, THE
ADVISE OF COUNSEL THAT THEY MIGHT BE VIOLATING THEIR
FIDUCIARY DUTY IF THEY REJECT THE TRANSACTION AND THE
SHs APPROVAL--WERE ALL INSUFFICIENT TO COMPENSATE FOR
THE BOARDS FAILURE TO EVALUATE THE DEAL
INDEPENDENTLY

THE PRIMARY IMPLICATION OF THE TRANS UNION CASE WAS
THAT THE DECISION MAKING PROCESS AND NOT THE
SUBSTANCE OF THE DECISION per se WAS OF IMPORTANCE, AND
THE COURT DID NOT RULE ON THE BUSINESS JUDGMENT
STANDARD

COURT DAMAGES WERE ASSESSED AT THE LEVEL BY WHICH THE
FAIR MARKET VALUE (FMV) EXCEEDED $55, AND THE CASE WAS
ULTIMATELY SETTLED AT $ 23 MIL



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UNOCAL STANDARD
BUSINESS JUDGMENT RULE & ENHANCES SCRUTINY
SEE UNOCAL CORP V. MESA PETROLEUM CO., SUPREM COURT OF
DELAWARE, 493 A.2
ND
946 (1985),
HTTP://MAIL.LAW.MISSOURI.EDU/LAWLESS/M&A/BODY_UNOCAL.HTM
In Unocal v. Messa Petroleum THE DELAWARE SUPREME
COURT REVIEWED UNOCALS ANTI TAKEOVER STRATEGY
AGAINST THE UNSOLICITED TAKEOVER OFFER OF MESA

THE COURT WAS CONCERN WITH THE SPECTER THAT THE BOARD
WOULD ACT IN ITS OWN INTEREST WHEN FACED WITH A
TAKEOVER OFFER

COURTS NORMALLY GIVE DIRECTORS BUSINESS JUDGEMENT
GREAT DEFERENCE, HOWEVER, IN A TAKEOVER CASE DIRECTORS
HAVE THE BURDEN OF PROOF TO DEMONSTRATE THAT THEIR
DECISIONS WERE MADE IN GOOD FAITH, THAT THEY WERE
WELL INFORMED, AND THEIR DEFENSES WERE REASONABLE IN
RELATION TO THE THREAT
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UNOCAL STANDARDCONT.
UNOCAL ANTITAKEOVER DEFENSES INCLUDED A SELF TENDER
OFFER IN WHICH THE TARGET MADE A TENDER OFFER FOR
ITSELF IN COMPETITION WITH THE MESA OFFER
THE COURT STATED THAT THE DIRECTORS MAY HAVE ACTED IN
THEIR OWN SELF INTEREST--IN WHICH THEY FAVORED THEIR
OWN TENDER INSTEAD OF OBJECTIVELY SEARCHING FOR THE
BEST DEAL FOR SHs
IN SUCH INSTANCES, THE DIRECTORS ARE SUBJECT TO
ENHANCED SCRUTINY: 1. THEY MUST DEMONSTRATE THAT
THEY HAD REASON TO BELIEVE THAT THERE WAS A DANGER TO
THE PURSUIT OF A CORPORATE POLICY THAT WAS IN THE BEST
INTEREST OF SHs, AND 2. THAT THEIR DEFENSES WERE
REASONABLE IN RELATION TO THE THREAT
SUBSEQUENT COURTS HAVE REFINED THE UNOCAL STANDARD
TO FEATURE A TWO PART RESPONSIBILITY TEST, INCLUDING
REASONABLENESS AND PROPORTIONALITY IN RESPONSE TO A
PERCEIVED TAKEOVER THREAT


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REVLON DUTIES
BOARDS OBLIGATION & IMMINENT SALE



FACTS: SEE REVLON, INC. V. MacANDREWS HOLDINGS, INC.,
SUPREM COURT OF DELAWARE, 506 A.2
ND
173 (1985),
HTTP://MAIL.LAW.MISSOURI.EDU/LAWLESS/M&A/BODY_REVLON.HTM
RONALD O. PERELMAN, CH & CEO OF PANTRY PRIDE, MET WITH THE
HEAD OF REVLON IN JUNE 1985 AND SUGGESTED TO ACQUIRE THEM IN A
FRIENDLY TRANSACTION AT $45 PER SHARE
REVLONS INVESTMENT BANKER SUGGESTED THAT THE PRICE WAS TOO
LOW AND ITS BREAK UP COULD YIELD $70 PER SHARE
IN OCTOBER REVLON RECEIVED AN LBO OFFER FROM FORSTMANN
LITTLE AND ADLER & SHAYKIN AT $56 PER SHARE, WITH MANAGEMENT
GETTING A SUBSTANTIAL STOCK POSITION IN THE NEW COMPANY
REVLONS BOARD GRANTED FORSTMANN A LOCKUP OPTION TO
PURCHASE CERTAIN REVLON ASSETS; A NO-SHOP PROVISION TO DEAL
EXCLUSIVELY WITH FORSTMANN; AND A TERMINATION FEE OF $25 MILIN
REACTION TO PANTRY PRIDES OFFER OF $45 --[WERE THESE DEFENSES
REASONABLE IN RELATION TO THE TAKEOVER THREAT?]
ADDITIONAL COUNTERBIDING OCCURRED BY PANTRY PRIDE AND
FORSTMANN



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REVLON COURTS DECISION
THE DELAWARE SUPREME COURT RULED IN THE CASE OF Revlon v.
MacAndrews and Forbs Holdings THAT WHEN THE OFFER BY PANTRY WAS
RAISED TO $53, THE DEFENSIVE MEASURE WERE NO LONGER
REASONABLE BECAUSE THE BREAK UP OF REVLON WAS INEVITABLE,
AND THE DIRECTORS ROLE CHANGED FROM DEFENDERS OF THE
CORPORATION TO AUCTIONEERS CHARGED WITH GETTING THE BEST
PRICE FOR SHs
THE DELAWARE SUPREME COURT RULED THAT CERTAIN TAKEOVER
DEFENSES THAT FAVORED ONE BIDDER OVER ANOTHER WERE INVALID,
AND THE DIRECTORS CANNOT FULFILL THEIR UNOCAL DUTIES BY
PLAYING FAVORS WITH THE CONTENDING FACTIONS
IN INVALIDATING THE LOCK-UP OPTION AND NO-SHOP PROVISIONS, THE
COURT DID NOT INVALIDATE ANTI TAKEOVER DEFENSES
IN TAKEOVER THREATS, THE DIRECTORS MUST DEMONSTRATE THAT
THEY HAD REASON TO BELIEVE THAT THERE WAS A DANGER TO THE
PURSUIT OF A CORPORATE POLICY THAT WAS IN THE BEST INTEREST OF
SHs

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TIME-WARNER-PARAMOUNT
STRATEGIC MERGER, FOR SALE AND REVLON DUTIES
FACTS:
IN MARCH 1989, UPON CONCLUDING A STOCK-FOR-STOCK
MERGER AGREEMENT BETWEEN TIME INC AND WARNER
COMMUNICATION INC, PARAMOUNT COMMUNICATIONS, INC
MADE A HOSTILE TENDER BID FOR TIME, PRICED ABOVE THE
TIME-WARNER TRANSACTION
TIME RESPONDED WITH A TWO TIER TENDER FOR WARNER--51%
FOR CASH AND THE SECOND STEP AT STOCK-FOR-STOCK
PARAMOUNT SUED AND ARGUED THAT THE ORIGINAL MERGER
BETWEEN TIME AND WARNER CONSTITUTED AN IMPENDING
CHANGE IN CONTROL, THEREBY INVOKING THE REVLON DUTIES
OF DIRECTORS.
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THE COURTS DECISON
IN THE Paramount v.Time CASE, THE COURT REJECTED
PARAMOUNTS ARGUMENT THAT THERE WOULD BE A
CHANGE IN CONTROL, AND STATED THAT THIS WAS NOT
AN ACQUISITION BUT RATHER A STRATEGIC MERGER,
THEREFOR, REVLON DUTI ES WERE NOT TRIGGERED, AND
THE NORMAL BUSINESS JUDGMENT STANDARD APPLIED
THE SIGNIFICANCE OF THIS DECISION IS THAT THE
ANNOUNCEMENT OF A STRATEGIC MERGER BETWEEN
TWO PARTIES IS NOT A SIGNAL THAT EITHER OF THE
FIRMS IS FOR SALE, AND THE DIRECTORS ARE NOT BOUND
BY THE REVLON DUTIES
IN THE EVENT OF A HOSTILE BID, THE DIRECTORS MAY
CONSIDER ANTI TAKEOVER DEFENSES TO AVOID IT, WHILE
PROCEEDING WITH THEIR STRATEGIC TRANSACTION


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PARAMOUNT v. QVC NETWORK
FACTS:
FAILING TO ACQUIRE TINE INC IN 1989, PARAMOUNTS
SOUGHT IN 1993 TO BE ACQUIRED BY VIACOM, WHICH WAS
CONTROLLED BY SUMNER REDSTONE, WHO OWNED
ABOUT 90% OF THE COMPANY
THE TRANSACTION WAS STRUCTURED WITH AN ATTEMPT
TO AVOID THE SPECTER OF CHANGE OF CONTROL AND
THE REVLON TRIGGER
THE MERGER AGREEMENT PROVIDED VIACOM WITH A
LOCKUP AGREEMENT (VIACOM COULD PURCHASE 20% OF
PARAMOUNT COMMON SHARES AT $69.14 PER SHARE--IF
ANY OF THE TRIGGERING EVENT RELATED TO THE
TERMINATION FEE OCCURRED), NO-SHOP PROVISION AND
A TERMINATION FEE TO VIACOM OF $100 MIL
ON SEPT 12, 1993 THE PARAMOUNT BOARD APPROVED THE
MERGER
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PARAMOUNT v. QVC NETWORK
CONT.

BARRY DILLER, CEO OF QVC, BELL SOUTH AND
COMCAST PROPOSED A MERGER WITH
PARAMOUNT--PAYING $80 PER SHARE, WHICH
CONSISTED OF $30 IN CASH AND 0.9 COMMON
SHARES OF QVC
THE DELAWARE SUPREME COURT HELD THAT
THE DIRECTORS OF PARAMOUNT BREACHED
THEIR FIDUCIARY DUTYBY REFUSING TO
NEGOTIATE WITH QVC OR TO SEEK OTHER
ALTERNATIVES
A BIDDING WAR ENSUED WITH VIACOM
ULTIMATELY ACQUIRING PARAMOUNT
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PARAMOUNT v. QVC NETWORK
WHY WERE THE REVLON DUTIES TRIGGERED?
VIACOM WAS CONTROLLED BY SUMNER
REDSTONE, WHO OWNED ABOUT 90% OF
THE COMPANY
THE MERGER WOULD HAVE CHANGED
THE CONTROL OF THE TARGET,
THEREFORE, THE REVLON DUTIES ARE
TRIGGERED
QUESTIONWHY WAS THERE NO
CHANGE OF CONTROL?

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REFERENCES
Robert A.G. Monks and NELL Minow, Corporate Governance, 2
nd

Ed., Blackwell, 2001
Patrick A. Gaughan, Mergers, Acquisitions And Corporate
Restructuring, 4
th
Ed., Wiley 2007, Ch 3
J. Fred Weston Et Al, Takeovers, Restructuring And Corporate
Governance, 4
th
Ed, Prentice Hall, 2004, Ch 2 & 20
Bruce Wasserstein, Big Deal: 2000 And Beyond, Warner Bros., 2000
Students With Further Interest In The Cited Cases Could Obtain
Court Opinions Through Lexis Nexis--available At The Library
Fred B. White And Steven M. Cooperman, Fiduciary Duties Of
Directors In Corporate Takeovers, Mergers And Acquisitions: Recent
Development, Practicing Law Institute And Practice Handbook
Services, February 1997