Portfolio 6-3rd: Responses to Takeover Bids: Corporate, SEC, Tactical, and Fiduciary Considerations

I. Introduction
A. Contextual Framework
B. Words of Caution

II. Advance Planning
A. Every Company Is a Potential Target
1. Maintaining independence as a goal
2. The importance of the board of directors
B. Regulatory Framework
1. The interplay of federal and state laws and regulations
2. Tender offer regulations
a. SEC rules and Schedule TO
b. Other SEC rules applying to a bidder's tender offer
c. All-holders and best-price rules and Rule 14e-5 (formerly Rule 10b-13)
d. Rules applying to the target and Schedule 14D-9
e. Tender offer anti-fraud rules
C. First Steps
1. Debt instruments
2. Current financial data and appraisals
3. Structure of business
4. Credit lines
5. Liability insurance policies
6. Retention of law firm
D. Defensive Review
1. Structural protections
a. Poison pill
b. Charter and bylaws
c. Employee benefit and severance programs
2. Financial and business strategies
3. Acquisitions that create regulatory or antitrust problems
E. Management's Disclosure Obligations
1. Federal securities law principles
2. Basic v. Levinson and the recommended ‘no comment’ policy

III. Directors' Fiduciary Duties
A. General Principles
1. Directors' fiduciary duties in takeovers and mergers
a. Duties in opposing takeover attempts
b. Unocal/Unitrin principles for defensive measures
c. Revlon principles for a sale of control
d. Entire fairness defense if duty is breached
e. Consideration of stockholder voting rights
f. Effect of stockholder approval
g. Duties of directors of an acquiring corporation
2. To whom directors owe fiduciary duties
a. Potential conflicts of interest
b. Preferred stockholders
c. Warrant holders
B. Fiduciary Principles for Takeover Defense
1. Unocal Corp. v. Mesa Petroleum Co.
2. Unocal applied
C. Standards and Procedures for Board Approval of Defensive Actions
1. Decision-making objectivity under Unocal's first prong
a. Timetable of decision-making process
b. Neutrality
c. Independence of the board
d. Informed decision-making and use of expert advisors
e. Serving corporate and stockholder interests
2. Substantive economic rationality: Unocal's second prong
a. The threat: the nature of the bid and the bidder
b. Proportionality: the nature of the response

IV. State Takeover Statutes and Other Regulations
A. Introduction
B. Strategic Considerations
C. Business-Combination Statutes
1. Delaware
2. New York
3. Wisconsin
4. Georgia
5. Virginia
6. Maryland
D. Control-Share Statutes
E. Cash-Out Statutes
F. Fair-Price Statutes
G. Defensive Internal-Affairs Regulation
H. Reincorporation

V. Stockholder Rights Plans (Poison Pills)
A. Preeminence of the Pill Defense
1. How the pill works
2. No stockholder approval requirement for adoption
3. No material impact on the company from adoption
B. The Pill's Effectiveness and Limitations
1. Takeover deterrence, but not preclusion
2. Vulnerability to and effect on proxy contests
3. Certain strategic issues
a. Shareholder anti-pill proposals
b. Shareholder resolutions for binding bylaw amendments
C. The Status Flip-In Pill
1. Basic operation
2. The flip-in
a. Selection of appropriate flip-in level
b. Reducing the initial level by amendment
c. Adverse-person provision
d. Treatment of existing stockholders
e. Inadvertent-triggering exception
3. Duration of rights
4. Pricing issues
5. Redemption provisions
a. The permitted-offer exception
b. ‘Dead Hand,’ ‘No Hand,’ and deferred redemption pills: Provisions against redemption by an insurgent board
D. The Legality of the Poison Pill
1. The board's authority to adopt a pill
2. Validity of discriminatory rights
3. Charter restrictions
4. The board's fiduciary duties in adopting and using a pill
a. Pre-planned defensive measure
b. Responsive defensive measure
c. Legislative alterations to the governing judicial standard
5. Shareholder challenges to pill adoption and amendment
E. Procedures for Implementing a Poison Pill
1. Summary of implementation steps
2. The rights agreement
3. Board deliberations
F. Redemption of Poison Pills

VI. Charter and Bylaw Protections
A. Introduction
B. The Practicalities of Adoption and Approval
1. Obtaining shareholder approval
2. Proxy solicitation issues
C. Self-Regulatory Organizations (SROs) One Share/One Vote Policy
D. Restricting Changes in the Board of Directors
1. Classified board
2. Removal ‘for cause only’ and related restrictions
3. Limits on cumulative voting
E. Shareholder-Action Provisions
1. Limitations on stockholder power to call special meetings
2. Limitation of shareholder ability to act by written consent
3. Regulating stockholder nominations and proposals
F. Consideration of Social, Economic, and Other Factors in Evaluating a Bid

VII. Responding to a Raider
A. Responding to a Share Accumulation
B. Responding to Proposals
C. Stockholder List Request
D. Standstill Agreements
1. Standstill provisions
2. Judicial opinions
a. Enterra Corp. v. SGS Associates
b. Ivanhoe Partners v. Newmont Mining Corp.
E. Buybacks from Raiders and ‘Greenmail’
1. Cases upholding buybacks
2. Cases questioning buybacks
3. Tax implications

VIII. Responding to a Tender Offer
A. Board Evaluation of Takeover Bids and Tender Offers
1. General principles and the board process
2. Timing of the bid
3. Price of the bid
4. Impact on the target and its constituencies
B. Schedule 14D-9
1. Procedures and timing
2. Management disclosure requirements
3. Disclosure of negotiations
4. Amendments
C. Rule 14d-5 Bidder Mailing Rights
D. Target Stockholder Agreements
E. Counter Tender Offer
1. Defenses of original bidder
2. Impact of state statutes

IX. Litigation Against Raiders
A. Strategic Considerations
B. Suing an Accumulator
1. Section 13(d) litigation
a. Control-intent claims
b. Funding claims
c. Background and integrity claims
d. Corrective disclosure
2. Undisclosed group claims
3. Unconventional tender offer litigation
a. The eight-factor test
b. Statutory-purpose analysis
C. Challenging a Tender Offer
1. Margin claims
2. Inside information and breach of confidentiality claims
3. Disclosure claims
a. Plans and purposes
b. Who is a ‘bidder’?
c. The bidder's financial condition
d. The bidder's financing of the tender offer
e. The bidder's integrity and competence
D. Special Defenses Against Foreign Raiders
1. Exon-Florio
2. Foreign acquisition of protected industries
3. Disclosure defenses

X. Antitrust Considerations
A. Introduction
B. The Role of Government Antitrust Enforcement
1. Federal enforcement
a. Bidder negotiations with government
b. No bidder negotiations with government
c. Balancing test
d. Recent FTC policies
2. Merger guidelines
3. The Hart-Scott-Rodino Act
a. Transactions subject to Hart-Scott-Rodino Act
b. Filing and waiting-period requirements
c. Exemptions from Hart-Scott-Rodino Act
d. Federal and private enforcement
4. Tunney Act
5. State enforcement
C. Antitrust Litigation Against Raiders
1. General principles
2. Target standing
3. Strategy and venue

XI. Recapitalizations and Restructurings
A. Introduction
B. Changing the Capital Structure
1. Form and use as a takeover defense
a. Merger or reclassification structure
b. ‘Stub’ stock
c. Shift in stockholder profile
d. Terms in financial documents
e. Response to unsolicited bids
2. Solvency issues
3. Treatment by the courts
C. Spin-Offs, Sales of Divisions, and Liquidations
1. Spin-offs
2. ‘Crown jewel’ sales
3. Liquidation
4. Timing and shareholder approval requirements
D. White Squires
1. Practical considerations
2. Cases approving white-squire transactions
3. Cases questioning white-squire arrangements
E. Stock Purchase Plans and Self-Tenders
1. Unitrin
2. Issuer tender offer
3. Treatment in the courts
4. Practical problems

XII. Selling or Merging the Company
A. Introduction
1. No fiduciary duty to sell the company or negotiate
2. Consideration of merger alternative to hostile bid
a. Communications with a hostile bidder
b. Exclusive negotiating agreement with a potential merger partner
3. The Revlon doctrine: duties in a sale or breakup of the company
B. When Does ‘Revlon Mode’ Generally Occur?
1. Time-Warner
2. Paramount Communications, Inc. v. QVC Network, Inc.
3. What is a ‘change of control’?
4. Merger with a subsidiary and majority stockholder duties
5. Stock-for-stock mergers—Time-Warner and Paramount
6. The recapitalization cases
C. Consequences of the ‘Revlon Mode’
1. Overview of ‘Revlon’ duties
2. No duty to shop
3. Market check alternative to auction
D. Auctions
1. In general
2. Auction procedures in Paramount
3. Conduct of auction
E. Deal Protection
1. No-shop/no-talk clauses
a. No-shop provisions
b. “No-talk” provisions
2. Fiduciary outs
a. No-talk restrictions
b. Commitments to recommend: submission to stockholder votes; termination outs
3. Fees and expense reimbursement