Corporate Practice Series Portfolio No. 6-4th, Responses to Takeover Bids: Corporate, SEC, Tactical, and Fiduciary Considerations, provides a comprehensive discussion of the law of takeover defense that will guide readers through the legal and strategic issues that confront target companies and other participants in takeover and merger situations. Principal consideration is given to the concerns and problems of public companies that are actual or potential takeover targets. The discussion also focuses on the complex scheme of rules that will shape a corporation's objectives.
Portfolio 6-4th: Responses to Takeover Bids: Corporate, SEC, Tactical, and Fiduciary ConsiderationsI. Introduction . Introductory Material A. Contextual Framework and the Board Process B. Words of CautionII. Advance Planning A. Which Companies Are the Most Likely Targets? 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 and exchange offer regulations a. Cash tender offers b. Exchange offers c. All-holders and best-price rules d. Rules applying to the target and Schedule 14D-9 e. Tender offer anti-fraud rules f. Regulation FD C. First Steps 1. Potential restructuring defenses 2. Credit lines 3. Liability insurance policies 4. Antitrust 5. Outside advisors D. Defensive Review 1. Structural protections a. Poison pills and state takeover laws b. Charter and bylaws c. Employee benefit and severance programs 2. Financial and business strategies E. The Target's Disclosure Obligations 1. Federal securities law principles 2. State law and exchange rules 3. Disclosure of merger negotiations: the recommended ‘no comment' policy III. Directors' Fiduciary Duties A. General Principles 1. Directors' fiduciary duties in takeovers and mergers a. Duties in evaluating takeover attempts (1). Duty of care (2). Duty of loyalty (3). Good faith as part of the duty of loyalty (4). Business judgment rule applicability to the consideration of takeover bids 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 shareholder 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. Warrantholders and convertible debtholders d. Creditors B. Fiduciary Principles for Takeover Defense 1. Unocal Corp. v. Mesa Petroleum Co. 2. Continued deference and Unitrin teaching C. Standards and Procedures for Board Approval of Defensive Actions 1. Decision-making objectivity under Unocal's first prong a. Timetable of the 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 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. Disgorgement Statutes F. Defensive Internal Affairs Regulation G. ReincorporationV. Stockholder Rights Plans (Poison Pills) A. Preeminence and Recent Decline 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. Intentional triggering of the pill C. The Standard 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
1. The ‘denouement': the Airgas battle
2. The history of cases before Airgas VI. Charter and Bylaw Protections A. Introduction
B. The Practicalities of Adoption and Approval 1. Tactical considerations 2. Obtaining shareholder approval 3. Proxy solicitation issues C. Self-Regulatory Organizations (SROs) One Share/One Vote Policy D. Controlling Changes in the Board of Directors 1. Classified board 2. Removal ‘for cause only' and related restrictions 3. Limits on cumulative voting 4. Majority voting standard 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 a. Advance-notice bylaws b. Information requirements for nominations and proposals c. Form of advance notice bylaws F. Consideration of Social, Economic and Other Factors in Evaluating a BidVII. Responding to a Share Accumulation A. Raiders' Motives and Possible Adverse Effects on the Target B. Responding to Proposals 1. ‘Casual passes' 2. ‘Bear-hugs' and unsolicited bids C. Stockholder List Request 1. Proper purpose requirement 2. Target objections D. Standstill Agreements 1. Standstill provisions 2. Judicial opinions E. Buybacks and ‘Greenmail'VIII. Responding to a Tender Offer A. Board Evaluation of an Unsolicited Tender Offer 1. General principles and the board process 2. Timing of the bid 3. Pricing analysis and other considerations 4. Impact on the target and its constituencies B. Schedule 14D-9 1. Procedures and timing 2. Target disclosure requirements 3. Disclosure of negotiations C. Rule 14d-5 Bidder Mailing Rights D. Counter Tender OfferIX. Litigation Against Raiders and Activist Investors A. Strategic Considerations B. Suing an Accumulator 1. Section 13(d) filing and disclosure claims a. Five percent ‘beneficial ownership': swaps and derivatives b. Item 4: purpose and ‘plans or proposals' c. Items 3 and 6: source of funding and ‘arrangements' d. Item 2: identity, background, and integrity e. The effect of corrective disclosure by the raider or activist 2. Section 13(d) undisclosed group claims 3. Remedies in section 13(d) cases 4. Unconventional tender offer litigation a. Wellman v. Dickinson eight-factor test b. Hanson statutory-purpose test based on ‘totality of the circumstances' C. Challenging a Tender Offer 1. Inside information and breach of confidentiality claims 2. Federal tender offer disclosure claims a. Bidder's 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 D. Special Defenses Against Foreign Raiders170 1. Exon-Florio and CFIUS 2. Foreign acquisitions in protected industries X. Antitrust Considerations A. Introduction: Antitrust Issues and Target Strategy B. The Role of Federal Antitrust Enforcement C. DOJ and FTC Merger Guidelines 1. Market definition 2. Analysis of competitive effects 3. HHI index of market concentration D. The Hart-Scott-Rodino Act55 1. Reportable transactions: coverage and exemption rules 2. HSR requirements and agency processes a. Filing and waiting period rules b. Document submissions and the Item 4(c) requirement c. Early termination d. Second requests 3. Prohibition against ‘gun-jumping' 4. No cause of action for the target E. State Enforcement F. Antitrust Litigation Against Raiders106 1. General principles 2. Target standing 3. Strategy and venueXI. Recapitalizations and Restructurings A. Introduction B. Changing the Capital Structure 1. Form and use as a takeover defense a. Types of restructuring and recapitalization b. Anti-takeover impact 2. Potential problems and issues C. Spin-offs and Sales of Divisions 1. Spin-offs 2. ‘Crown jewel' sales 3. 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. Methods and defensive effects 2. Legal standards for defensive stock repurchasesXII. Selling or Merging the Company A. Introduction B. Board Fiduciary Duties in Sales and Mergers 1. No fiduciary duty to sell the company or negotiate 2. Consideration of merger alternative to hostile bid a. Communications with hostile bidder b. Exclusive negotiating agreement with a potential merger partner 3. The Revlon doctrine: duties in a sale or breakup of the company C. When Does ‘Revlon Mode' Generally Occur? 1. When is a company ‘for sale'? 2. Stock-for-stock mergers: no Revlon duties if no sale of control 3. Effect of shareholder approval of a merger on Revlon and Unocal claims D. Consequences of the ‘Revlon Mode' 1. Overview of the ‘Revlon duties' 2. No duty to shop 3. Sale of the company a. Requiring a standstill agreement from bidders: standstill enforceability b. Sale procedure guidelines 4. Early cases on the conduct of a sale process 5. Market check alternative to a sale process a. Pennaco: post-signing market check upheld where deal protections minimal b. MONY: post-signing market check sufficient where sale process risky c. Netsmart: micro-cap company in niche industry must actively solicit strategic buyers d. Lear: established public company forgoes sale process for 45-day go-shop e. Guttman: credit market dislocation paves way for strategic-buyer-only sale process f. Topps: post-signing sale process unfairly biased toward management-friendly bidder g. Lyondell: Revlon duties not triggered by aggressive Schedule 13D filing h. Optima: 24-hour period for stockholder approval upheld 6. Market-check ‘go-shop' provisions E. Deal Protection 1. No-shop/no-talk clauses a. No-shop provisions b. No-talk provisions 2. Fiduciary outs a. No-talk provisions b. Commitments to recommend: submission to stockholder votes; termination outs c. The shadow of Omnicare 3. Deal protection in a sale process: the implications of Revlon 4. Termination fees