Portfolio 7-3rd: Corporate Stock Repurchases and Going Private

I. Introduction
A. Preliminary Observations
B. Scope of the Portfolio
C. Principal Definitions

II. Why Corporations Repurchase Stock
A. The Public Corporation
1. Advantages to issuer
a. Good investment
(1). Use of excess cash
(2). Leveraged repurchase
(3). Leveraged employee stock ownership plan (ESOP)
b. Improve financial statements
(1). Increase per share earnings and book value
(2). Avoid earnings and book value dilution
c. Cost savings—avoid Exchange Act registration
d. Support the market price of stock
2. Advantages to management
a. Avoid shareholder suits
b. Fund warrant and option obligations
c. Attention to basic corporate goals
d. Eliminate conflicts of interest between parent and outside shareholders of a subsidiary
e. Remove pressure to pay dividends
f. Reduce dependency on stock market prices
3. Other advantages
a. First step toward going private
b. Reduce threat of a takeover
B. The Private Corporation
1. Shareholder restructuring
2. Eligibility for `S' corporation status
3. Eliminate minority stockholders
4. Repurchases pursuant to stockholder agreement
5. Payment to retiring stockholder
C. Disadvantages of Corporate Repurchases
1. Lost benefits of public ownership
2. Impact on `pooling of interests' accounting for acquisitions
3. Detriment to the public interest
4. Exposure to SEC violations

III. How Corporations Repurchase Stock
A. The Public Corporation
1. Voluntary transactions
a. Open market purchases
b. Regulation 14D tender offers
c. Negotiated block purchases
d. Duty to offer pro rata repurchases
2. Involuntary transactions: Going private
3. Merger following a successful self-tender
4. Merger of a parent corporation with an affiliate
B. The Private Corporation
1. Voluntary transactions
a. Negotiated purchases
b. Regulation 14E tender offers
c. Duty to offer pro rata repurchases
2. Involuntary transactions: The private corporation `going more private'

IV. State Law
A. State Statutory Capital Impairment Provisions
B. Enforceability of Agreements to Repurchase Stock
1. The standard for measuring surplus: accounting principles or fair value
2. Avoiding prejudice to creditors
3. Methods of repurchasing stock where capital is impaired
4. `Parent only' or consolidated capital
C. Fiduciary Duty of Directors
1. Duty of care
2. Duty of loyalty
3. The business judgment rule and general board protections
4. Entire fairness and business purpose
a. History of business purpose and entire fairness
b. The entire fairness standard
(1). Fair dealing
(2). Fair price
c. The broad application of entire fairness
d. The business purpose test
e. Selective redemption
5. Appraisal and other minority shareholder protections
D. Applicable State Law to Going Private Transactions
1. History of Rule 13e-3
2. Board protections
3. Independent committees
4. Neutralized voting
5. Investment banker opinions
6. Advisers
7. State anti-takeover statutes and going private procedures
a. Anti-takeover statutes
b. State going private statutes
E. Change of Control: The Auction Requirement

V. Federal Regulation in Going Private and Repurchase Transactions
. Introductory Material
A. Rule 13e-3
1. Transactions to which the rule applies
2. Exceptions to the rule
3. Relationship to other disclosure rules; form of disclosure document
B. Mechanics of the Schedule 13E-3
1. Filing requirements; timing
2. Optional and mandatory incorporation by reference; cross reference sheets
3. Who must file
4. Filing fees
C. Item-by-Item Analysis of Schedule 13E-3
1. Items 1, 2, and 3: Summary term sheet, subject company information, and identity and background of filing person
2. Item 4: Terms of the transaction
3. Item 5: Past contacts, transactions, negotiations and agreements
4. Item 6: Purposes of the transaction and plans or proposals
5. Item 7: Purposes, alternatives, reasons, and effects; Item 8: Fairness of the transaction; and Item 9: Reports, opinions, appraisals, and negotiations
a. Reasons for the transaction; fairness
b. Reports, opinions, appraisals, and negotiations
6. Item 10: Source and amounts of funds or other consideration
7. Item 11: Interest in securities of the subject company
8. Item 12: The solicitation or recommendation
9. Items 13, 14, and 15: Financial statements; persons/assets retained, employed, compensated, or used; additional information
10. Item 16: Exhibits
D. Projections
E. Exceptions to Rule 13e-3
1. Cleanup transactions
2. Issuance of Exchange Act registered securities
3. Other exceptions set forth in the rule
4. Interpretive exception regarding multistep transactions
F. Litigation Under Rule 13e-3; Private Right of Action
1. Rule 13e-4: Issuer self-tender
2. Manipulation: Regulation M and Rule 10b-18
3. Federal tender offer disclosure rules
4. Proxy disclosures
5. Anti-fraud: Rule 10b-5
G. Resolving Particular Disclosure Problems in Issuer Tenders
1. Purpose of the transaction
2. Conflicts of interest
3. Availability of surplus and offering price
4. Plans of insiders to tender their shares
5. Plans to go private
6. Recent earnings
7. Projections and contemporary asset valuation
8. Disadvantages of the offer
H. Curing Deficiencies in Proxies and Repurchase Offers
1. Curing procedures
2. Curing deficiencies

VI. Tax Considerations
. Introductory Material
A. Characterization of the Repurchase
B. Constructive Ownership of Stock and Other Issues
C. Section 302 Tests
1. Complete termination test
2. Substantially disproportionate test
3. Not essentially equivalent to a dividend test
D. Corporate Shareholder Dividend Treatment
E. Public Corporation Redemption Offers: Conditional Tenders

VII. Miscellaneous Issues
A. The Internet
B. Stock Exchange Regulation
C. Press Releases
D. Margin Rules
E. Loan Agreement and Indenture Covenants
F. Changes in Ownership Ratios
G. Fraudulent Conveyances

VIII. Recent Developments
A. Small Companies
B. Recent Going Private Transactions
C. Recent Cases
D. SEC Rule Changes