”Mergers & acquisitions,” or M&A for short, denotes the buying, selling, and joining of entire corporations or at least business units. The size and complexity of such transactions generate much attention and fee income. More to the point, these transactions implicate many areas of corporate law, which make them a great training ground for us. Last but not least, acquisitions can be an important governance device if better-managed firms “take over” worse-managed firms.


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  1. 1 Show/Hide More Introduction to M&A
    Original Creator: Holger Spamann


    Importance for the firm

    Acquisitions are the single most important event in most corporations’ existences. On a formal level, the corporation may cease to exist after the acquisition (see transactional technique below).

    More importantly, however, most acquisitions profoundly affect the substantive organization of the business. This is especially so for the acquired firm (the “target”). The target’s management will usually leave (or be made to leave) following the acquisition. Often, business units are sold or shut down. But acquisitions tend to be major events for the acquirer as well, because the acquirer’s business may grow and change dramatically through the transaction.

    Acquisitions are routine events only if the acquirer is much bigger than the target. (For example, big pharmaceutical companies frequently buy small biotechs or other startups to add to their technology portfolio.)

    Importance for the social allocation of productive capacity

    In a broader social perspective, acquisitions reallocate large pools of assets to different management and possibly different economic tasks (e.g., Google’s acquisition of Motorola; Facebook’s acquisition of Instagram).

    Oftentimes, the capital structure of the corporation changes dramatically as well. This is particularly so in acquisitions or divestitures by so called “financial acquirers” — mainly private equity funds (acquirers who do not have a stand-alone line of business but specialize in acquiring and then improving existing companies).

    Importance for corporate governance

    From the perspective of corporate governance, the most important aspect of acquisitions may be their role as a governance device.

    Takeovers have a direct effect on governance when a better-governed firm takes over a worse-governed firm. After the takeover, both firms’ assets will be managed under the former’s better governance structure.

    But takeovers also have an indirect effect on governance. The threat of a takeover may incentivize boards to do a better job. If they don’t, the corporation’s stock price may fall below potential. This may create an opportunity for a potential acquirer to take over the firm at a profit. While this indirect effect is hard to measure, it may well be more important than the direct effect.

    Hostile takeovers and takeover defenses

    To be sure, the threat of a takeover would be empty if takeovers only occurred with the approval of the current management (so-called “friendly takeovers”). This is why “hostile takeovers”—  takeovers without the approval of current management — deserve special attention as a potentially potent governance device.

    By definition, target management opposes hostile takeovers. Over time, target managers and their advisers have devised various “takeover defenses” to fend off such “attacks.” The defenses may be justified because hostile takeovers and the threat thereof can be abused to disrupt the target’s business. The defenses can also be an important bargaining tool to get a better price for target shareholders. At the same time, target management may use defenses merely to perpetuate itself in office and to blunt the governance mechanism of hostile takeovers. We will study an important string of cases struggling with the double-edged nature of takeover defenses— “entrenchment” on the one hand and legitimate protection of corporate interests on the other.

    Transactional technique: mergers in a technical sense

    Most acquisitions are structured to involve a “merger” in a technical legal sense. In this sense, it would be more accurate to speak of “acquisitions by way of merger” instead of “mergers and acquisitions.”

    A merger in this legal sense is the fusion of two corporations into one (cf. DGCL subchapter 9, especially sections 251, 259-261). The target merges with the acquirer or, more frequently, a wholly-owned subsidiary of the acquirer. The acquirer thus obtains control over the target’s assets directly (if the target merges with the acquirer) or indirectly (if the target merges into the acquirer’s subsidiary). The target shareholders obtain the merger consideration for their shares, if they have not already sold them earlier.

    Because a merger tends to be such an important transaction, it generally requires approval by the board and a majority of the shareholders (DGCL 251(b)/©). Furthermore, shareholders can request to receive the “fair value” of their shares as appraised by the Chancery Court rather than the merger consideration (appraisal, cf. DGCL 262). There are, however, numerous exceptions and conditions – see Delaware Merger ABC below.

    The shareholder approval requirement has major implications for deal structure and timing even if a clear majority of shareholders approves of the deal when it is signed. Properly calling a shareholder meeting and soliciting proxies takes time – usually several months. (You wouldn’t know this from DGCL 213(a) and 222 alone, but you need to factor in the time it takes to clear the proxy statement with the SEC [again, not a statutory or regulatory requirement but everybody does it] and then to solicit the proxies – at least 50% of the shareholder need to approve, DGCL 251©.) Many things can happen between signing and shareholder vote. Most importantly, a new bidder may arrive on the scene—usually to the (then) delight of the seller and dismay of the buyer

    Question: Why do buyers tend to like the appearance of other bidders whereas sellers dread them?

    A partial alternative is to structure the deal as a tender offer, i.e., an offer to all shareholders to sell (“tender”) their shares to the bidder at the price announced by the offeror (and, in a friendly deal, agreed by the target corporation’s board). Under SEC rules, a tender offer must be open for at least 20 business days (rule 14e-1, see below), but it can still be quicker than calling a shareholder meeting. The tender offer is only a partial alternative because not all of the shares will be tendered, and so the offeror will have to conduct a follow-up merger to “squeeze out” (see below) the remaining shareholders. (But see now DGCL 251(h), which greatly facilitates the post-tender squeeze-out – more on this below.)

    Mergers vs. asset sales

    The use of the merger technique is a choice of convenience (and possibly tax and accounting considerations, but those are beyond this course). The alternative to a merger is an asset sale, as in Hariton v. Arco Electronics below.

    The hassles of asset sales

    In an asset sale, the target transfers its assets individually to the acquirer. The sales contract must carefully describe all assets and employ transfer mechanisms compliant with the applicable transfer rules, which differ by asset type (e.g., personal property, real property, contracts, negotiable instruments, etc.). If the sales contract fails to do so, the acquirer will not obtain ownership rights in all the assets. Moreover, some assets cannot be transferred in this way without the affirmative approval of some third party. In particular, by default, contracts cannot be transferred without the approval of the contract counterparty. All of this makes asset sales extremely cumbersome. (Unless, of course, the assets are shares in one or more subsidiaries. That sort of asset sale would be very simple.)

    An asset sale does have two potential advantages. First, dissenting shareholders do not get appraisal rights (cf. DGCL 262 and Hariton v. Arco Electronics below). Second, the acquirer does not automatically assume all the liabilities of the target. In practice, however, a variety of rules limit the importance of this second point. Some liabilities automatically transfer with ownership of the asset (such as environmental cleanup obligations). Further, a variety of rules covered later in the class protect creditors against opportunistic asset transfers. Last but not least, major debt contracts usually restrict a debtor’s ability to sell off a substantial part of its assets.

    To be sure, a contract might also require approval for a merger, and many important ones do. In general, as always, contractual arrangements, including charter arrangements, can add or efface distinctions between asset sales and mergers. What will usually remain, however, is the hassle of transferring assets individually in an asset sale.

    The ease of mergers

    The merger, on the other hand, is easy. It usually requires only an agreement between the two corporations, and approval by both boards and shareholder meetings, usually by simple majority vote. Unanimous approval is not required.

    In addition, the merger agreement can freely determine just about anything in the organization of the joint entity: its charter, its ownership, and its management. For example, there is no requirement that the shareholders of both merging corporations remain shareholders in the joint entity.

    A warning: Don’t be misled by expressions such as “surviving entity.” They are merely naming conventions. In particular, the shareholders, board, management, and charter of the “surviving entity” could all be eliminated in the merger (in the case of shareholders, for due compensation) and replaced by those of the other entity.

    A side note: Because the merger is so easy and flexible, it is a versatile device with many uses outside of M&A. For example, it can be used for internal rearrangements inside a corporate group (cf. DGCL 253, 267), reincorporation from one state to another (by merging the corporation into a shell company incorporated in the destination state; this can also be achieved directly by “conversion” under DGCL 265, 266), and so on.

    Other steps in the acquisition process

    To be sure, the merger is not the only step in many acquisitions. This is most obvious in a hostile takeover. A merger requires approval by the target board. By definition, the hostile takeover is a situation in which the target board is unwilling to approve a merger. So how can a merger happen in a hostile takeover?

    The answer is that the merger will come last in a chain of hostile acquisition steps. In a standard hostile takeover, the acquirer would first acquire a majority of the target stock through a “tender offer” (i.e., an offer addressed to all target shareholders to purchase their stock) and then replace the resisting target board. The new board would then cause the target to enter into a merger agreement with the acquirer.

    Friendly acquisitions can also involve more than just the merger step. In these cases, however, the merger agreement may act as a road map containing the earlier steps. The 3G / Burger King agreement below provides an example of such a structure.

    Sources of law

    M&A involves a complicated mix of statutes, rules, and precedents, from many areas of law, including corporate law, securities law, and antitrust.

    Securities laws

    The securities laws and rules not only regulate disclosure, but also set important timing requirements. In particular, the Williams Act of 1968 requires an acquirer of 5% or more of a corporation’s voting stock to disclose this fact within ten days of crossing the 5% threshold (SEA §13(d)). This means that an acquirer cannot gain control of the target secretly and slowly.

    The Williams Act also regulates tender offers (SEA §14(d)/(e)). Among other things, the SEC rules require that any tender offer remain open for at least 20 business days (rule 14e-1). This prevents quick acquisitions by way of a tender offer. Moreover, while the offer remains open, shareholders who already tendered may reverse their decision and withdraw their shares (rule 14d-7(1)).

    Other Williams Act rules of particular importance for deal structure are:

    • “All holders, best price:” the tender offer must be open to all shareholders, and all must be paid the same consideration (rule 14d-10);
    • Conversely, the tender offeror may not buy stock in side deals between public announcement and expiry of the offer (rule 14e-5: “Prohibiting purchases outside of a tender offer”);
    • Pro-rata allocation: if the tender offer is oversubscribed — the tender offer is for less than all of the corporation’s outstanding stock, and more shares are tendered — the offeror must take up tendered shares pro rata (SEA §14(d)(6), rule 14d-8).

    Stock exchange listing rules

    The listing rules of the stock exchanges can play an important role as well. For example, rule 312.03 of the New York Stock Exchange’s Listed Company Manual requires stockholder approval for certain stock issuances, including those of a certain size (≥20%) or leading to a change in control. Rule 402.04 requires active proxy solicitation for any stockholder meeting, triggering the SEC’s proxy rules and associated delay.

    Corporate law

    Within corporate law, the statutory provisions relating to mergers are of obvious importance for M&A (e.g., DGCL 251, 253, 262, 271). But as we have already seen (Blasius), many general and perhaps deceivingly innocuous provisions of the DGCL, such as those governing director removal and appointment (DGCL 141, 223), can also play an important role in M&A.

    Fiduciary duties play a major role in M&A as well. In fact, most of the cases that we will read will deal with the shaping of fiduciary duties in the M&A context. Nevertheless, this should not lead you to think that the statute is unimportant. Fiduciary duties only become important to the extent that the statute has not preempted a particular question. In other words, the statute demarcates the field on which the game is played, and fiduciary duties regulate the behavior of the players on the field. Both are important to understand the game.

    Other law

    Depending on the industry, various other areas of law may come into play. For example, banks require approval from the banking regulator for acquisitions.

    One area of law that is always important in M&A is antitrust. It is covered in a separate course. Here you just need to know that the Hart-Scott-Rodino Act requires that certain antitrust filings be made fifteen or thirty days before the closing of an acquisition. This may be an additional source of delay — and, in the case of “hostile” acquisitions, an early warning to the corporation's management.

    1. 1.2 Show/Hide More Hariton v. Arco Electronics, Inc. (Del. 1963)
      Original Creator: Holger Spamann
      This case addresses the question whether an asset sale that achieves the same purpose as a merger should be subjected to the rules applicable to mergers as a “de facto merger.”

      1. Why did the defendant structure the deal as an asset sale rather than a merger?
      2. What is the Delaware Supreme Court’s position on the de facto merger theory? (NB: This position is still good law in Delaware.)
      3. How does that answer relate to the court’s opinion in Schnell (which was decided eight years later but did not purport to break new ground)?
  2. 2 Show/Hide More 3G / Burger King merger agreement (2010)

    Most of the action in M&A is in the contracts. The following is an excerpt from the acquisition agreement whereby 3G Capital, a private equity fund, acquired Burger King. The full agreement is available on EDGAR.

    Please try to answer the following three questions in reading the excerpts:

    1. What is the sequence of events mapped out in this agreement?
    2. What are the main economic terms?
    3. What will happen to Burger King Holdings, Inc. (its shares, its board, etc.) in the merger?
  3. 3 Show/Hide More Controlling Shareholders in M&A
    Original Creator: Holger Spamann

    Controlling shareholders deserve particular attention in M&A because they may have acute conflicts of interest.

    To be sure, notwithstanding the presence of a controlling shareholder, every merger and most other steps in an M&A transaction still need to be reviewed by the full board, whose members may not have the same conflict of interest (in particular, the controlling shareholder may not be a member of the board). Technically, the board may recommend the transaction only if it is good for the corporation as a whole. But even if all directors are technically completely independent, the directors must also be aware that the controlling shareholder could replace them at any moment (under the default rules, DGCL 141(k), 228; but even a staggered board etc. would merely delay the replacement). There is thus always a suspicion that the board may be driven to be partial to the controlling shareholder’s interests.

    1. 3.1 Show/Hide More Squeeze-outs / Going-privates
      Original Creator: Holger Spamann

      In a squeeze-out a/k/a cash-out merger, a controlling shareholder acquires complete ownership of the corporation’s equity, squeezing/cashing out the minority. Technically, the transaction is structured as a merger between the controlled corporation and a corporation wholly-owned by the controlled corporation’s controlling shareholder. The controlling shareholder retains all the equity of the surviving corporation, while the merger consideration for the outside shareholders is cash (or something else that is not stock in the surviving corporation). If the controlled corporation was previously publicly traded on a stock exchange, the transaction is also known as a going private merger because the surviving corporation will no longer be public, i.e., it will be delisted from the stock exchange.

      There can be good economic reasons for a squeeze-out. It facilitates subsequent everyday business between the controller and the corporation, among other things because there are no more conflicts of interest to manage (cf. Sinclair). Private corporations do not need to make filings with the SEC and the stock exchange. Finally, the controlling shareholder may be more motivated to develop the corporation's business when owning 100% of it.

      At the same time, squeeze-outs pose an enormous conflict of interest. Any dollar less paid to the minority is a dollar more to the controlling shareholder. For this reason, the SEC requires additional disclosure under rule 13e-3, and Delaware courts police squeezeouts under the duty of loyalty. In fact, controlling shareholders' duty of loyalty was developed principally in squeeze-out mergers, in particular the adaptation in Kahn v. MFW below.

      Question: Can you think of another, procedural reason why squeeze-outs generate most duty of loyalty cases against controlling shareholders in Delaware courts? Hint: Consider Aronson and its scope of application.
      1. 3.1.1 Show/Hide More Weinberger v. UOP, Inc. (Del. 1983)
        Original Creator: Holger Spamann

        This decision introduced the modern standard of review for conflicted transactions involving a controlling shareholder. We could have read it in the general Duty of Loyalty section above, but I wanted you to read it together with the next two cases.

        Review questions (answer now or while reading the opinion):

        1. What is the standard of review for conflicted transactions, generally speaking?
        2. Can the controlling shareholder do anything to obtain a more favorable standard, or at least a more sympathetic application of the standard (cf. footnote 7)?
        3. How does the judicial treatment of self-dealing by a controlling shareholder compare to that of self-dealing by simple officers and directors (as described in the Duty of Loyalty section above)?

        Policy questions:

        1. Does it make sense to treat controlling shareholders more harshly than other fiduciaries?
        2. Why allow squeeze-outs at all?
        3. Is there a connection between the Delaware Supreme Court's abandonment of the business purpose test (part III) and its refinement of the standard of review, in particular a more flexible approach to valuation (part II.E)?

        Check your understanding:

        1. Why does Weinberger bother bringing a fiduciary duty action? Couldn't he have obtained the same relief through appraisal, without having to prove a violation of fiduciary duty?

      2. 3.1.2 Show/Hide More Glassman v. Unocal Exploration Corp. (Del. 2001)
        Original Creator: Holger Spamann
        The most basic facts of this case are similar to those in Weinberger: parent attempts a cash-out merger, or squeeze out; minority stockholders of the subsidiary complain. Why is the outcome in this case different from Weinberger? Does the difference make sense from a policy perspective? And what happened to Schnell?
      3. 3.1.3 Show/Hide More Kahn v. MFW (Del 2014)
        Original Creator: Holger Spamann
        This decision epitomizes the Delaware judiciary's approach to tricky conflict situations. Practitioners have figured out the court's approach and structure deals accordingly.

        1. What standard of review does the court apply? Is it different from the cases we had seen thus far?
        2. How does the court want to protect minority shareholders? Does it work? Does it work better than alternatives?
        3. Why did this case proceed to summary judgment, whereas the complaint in Aronson was dismissed even before discovery? Hint: under what rule was Aronson decided, and did that rule apply here?
    2. 3.2 Show/Hide More Sales of Control
      Original Creator: Holger Spamann

      When the controlling shareholder is not buying but selling, a different problem arises: The controlling shareholder may sell control to a buyer who makes the minority shareholders worse off.1 Concretely, upon assuming control, the buyer might divert more value from the corporation than the seller did, be it through self-dealing transactions or by failing to develop the corporation’s business (e.g., imagine the buyer is a competitor of the acquired corporation or of one of its major clients). Technically, such diversion would violate the buyer’s duty of loyalty, but enforcement is always imperfect.2 Such diversion might even be the business rationale for the sale: the buyer might be able to pay more than the controlling shareholder’s valuation of the control block precisely because the buyer plans to divert more value. To guard against this possibility, many jurisdictions around the world, such as the UK, require the buyer of a control block to offer to buy out all minority shareholders at the same price. The U.S., however, does not have such a mandatory bid rule – control blocks in U.S. corporations can be bought and sold freely without having to deal with the minority stockholders at all, short of selling to a “known looter.”3

      One reason not to have a mandatory bid rule is that it creates problems of its own when the buyer is benign, i.e., when the buyer does not divert value, or at least not more than the seller. If the buyer has to offer the same price to everyone, it has to pay everyone as much as it pays the selling controlling shareholder. But the controlling shareholder owns more than the minority shareholder: it has control, which it may value either because it allows diversion of pecuniary benefits, and/or simply because it (or now I should say: he or she) enjoys being in charge. And the controlling shareholder will refuse to sell unless it/he/she is fully compensated for giving up control. So paying the same to the controlling shareholder and to the minority on a per share basis probably means overpaying the minority – and possibly means overpaying for the firm as a whole. Since buyers cannot be expected to overpay, the deal may simply fall through. As a result, insisting on equal treatment may end up hurting everyone, including the minority shareholders.

      To illustrate, consider the following numerical example. Imagine a firm with 100 shares outstanding that is worth $125 in total under the current governance arrangements. It has a controlling shareholder who holds 10 shares (= 10% of the equity) but enough votes for control (e.g., through a dual class arrangement). The controlling shareholder diverts 20% of the firm's value ($25) to herself in private benefits.4 In addition, the controlling shareholder gets 10% of the remaining value by virtue of her equity stake. Her total stake is thus worth $25 + 10% × ($125-$25) = $35 to her. Minority shareholders get the rest: $125 – $35 = $90, or $1 per share (there are 100 shares total, and the controlling shareholder owns 10 of them). Now imagine a sale under a mandatory bid rule. The controlling shareholder will accept an offer only if the per share price P gives her more than what she gets without the deal: 10 × P > $35, or P > $3.50. At P > $3.50, the minority shareholders will obviously accept the offer, since the status quo value of their shares is only $1. Consequently, all shares will be tendered, and the acquirer will have to pay 100 × P > 100 × $3.50 = $350 for the firm. This will only be worthwhile for the acquirer if the firm is worth more than $350 to the acquirer, i.e., more than 2.8 times the status quo value. Such buyers will be rare. By contrast, without the mandatory bid rule, any buyer to whom the firm is worth more than $125 could make an offer that makes everyone better off: for example, a buyer valuing the firm at $125.03 could pay $35.01 to the controller (= $3.501 per controller share), $90.01/90 for each minority share (= $1.0001 per minority share), and still make a $0.01 profit. In short, even the minority shareholders might be better off if the controlling shareholder is allowed to get a control premium.

      1 By definition, the controlling shareholder owns and can thus sell enough shares to convey full control to a buyer. Absent special rules, the controlling shareholder can therefore transfer control without the minority’s consent.

      2 In particular, the controlling shareholder may find a majority of nominally independent but servile directors to approve self-dealing transactions other than mergers. Review question: Why will this be enough to isolate the transactions from judicial review?

      3 See Harris v. Carter, 582 A.2d 222, 235 (Del. Ch. 1990, per Allen Ch.): “while a person who transfers corporate control to another is surely not a surety for his buyer, when the circumstances would alert a reasonably prudent person to a risk that his buyer is dishonest or in some material respect not truthful, a duty devolves upon the seller to make such inquiry as a reasonably prudent person would make, and generally to exercise care so that others who will be affected by his actions should not be injured by wrongful conduct.”

      4 This could be $25 in cash through a transfer pricing scheme etc., or simply a psychic benefit of being in control that the controlling shareholder values at $25 – that, too, is value. In the latter case, you should think of the firm as generating $100 in financial value plus $25 in psychic value.

      1. 3.2.1 Show/Hide More In re Delphi Financial Group Shareholder Litigation (Del. Ch. 2012)
        Original Creator: Holger Spamann

        This decision involves a target with a controlling stockholder, Rosenkranz. The decision revolves around Rosenkranz’s attempt to obtain a higher price for his shares than for the minority shares.

        As you read the decision, consider the following questions:

        1. Ex ante, what did Rosenkranz promise to do in a future sale, according to the court? Why do you think he would have made this promise?
        2. Ex post, was this promise economically enforceable? In particular, could Rosenkranz be forced to agree to a sale in the first place? How did the court deal with this here?
        3. What rule would have governed in the absence of an explicit charter provision?
        4. Did Rosenkranz in fact promise what the court says he promised?
        5. Bonus question: Could Rosenkranz have amended the charter provision in question without the approval of the minority shareholders? Cf. DGCL 242(b)(2).
    1. 4.1 Show/Hide More Unocal v. Mesa Petroleum (Del. 1985)
      Original Creator: Holger Spamann

      In this famous decision, the Delaware Supreme Court ruled that the board has the power to defend against hostile takeovers, even with discriminatory measures, and laid down the judicial standard of review for scrutinizing such defenses.

      The most important things to look for are thus:

      1. What is the threat that the board is defending against?
      2. Who is being protected?
      3. What is the standard of review? How does it relate to our two old friends: the business judgment rule and entire fairness? If it is different, why?

    2. 4.2 Show/Hide More Moran v. Household International (Del. 1985)
      Original Creator: Holger Spamann

      This decision approved the “rights plan” a/k/a “poison pill” invented by Martin Lipton. “Rights plan” may sound innocuous. But it completely transformed US takeover law and practice.

      The pill has only one goal: to deter the acquisition of a substantial block of shares by anyone not approved by the board. It does so by diluting, or rather threatening to dilute, the acquired block. If anyone “triggers” the pill by acquiring more than the threshold percentage of shares (usually 15%), the corporation issues additional shares to all other shareholders. The number of additional shares is generally chosen so as to reduce the acquirer’s stake by about half. Needless to say, that would be painful – arguably prohibitively painful – to any would-be acquirer.

      Question: How does the pill compare to DGCL 203 – what are their respective trigger conditions, and what are their consequences for the acquirer if triggered? (I recommend that you consult the simplified version of section 203 on simplifiedcodes.com. Note that section 203 was completely overhauled in 1988; the Moran opinion quotes the old version.)

      The pill ingeniously obscures this discriminatory mechanism in complicated warrants. The corporation declares a dividend of warrants to purchase additional stock or preferred stock. Initially, these warrants are neither tradeable nor exercisable. If anybody becomes an “acquiring person” by acquiring more than the threshold percentage, however, the warrants grant the right to buy corporate stock for prices below value. Of course, all shareholders will then rationally choose to exercise the warrant. So what is the point? The point is that by their terms, the warrants held by the acquiring person are automatically void.

      (The description of the pill in Moran may read slightly differently. The reason is that the industry standard pill has evolved since Moran. You can find a contemporary example here.)

      The pill is extraordinarily powerful. In the 30 years since Moran, only one bidder has dared triggering the pill, and that was one with a particularly low trigger of 5% (chosen to preserve a tax advantage). The exercise of the rights did not only dilute the acquirer but caused massive administrative problems (a lot of new stock had to be issued!), leading to a suspension of issuer stock from trading. The issuer, Selectica, also violated the listing rules. See here. What this shows is that the pill really is designed purely as a deterrent – it is intended never to be triggered. It’s MAD (Mutually Assured Destruction) intended to keep out the unwanted acquirer, nothing else.

      The upshot is that nowadays no Delaware corporation can be acquired unless the board agrees to sell. The pill has stopped not only hostile two-tier bids, but all hostile bids. To be sure, a would-be acquirer could attempt to replace a reluctant board through a proxy fight. But one proxy fight may not be enough, if and because the corporation has a staggered board in its charter (cf. Airgas below). In any event, the point is that board acquiescence is ultimately indispensable. The acceptance of the pill was thus a fundamental power shift from shareholders to boards in dealing with “hostile” offers (read: offers that the board doesn’t like).

      Perhaps understandably, the Moran court did not fully understand these implications. Or perhaps it didn’t want to? The SEC’s amicus brief certainly predicted as much. As it were, the Court gives mainly technical, statutory reasons for approving the pill. But as in Schnell, the Court could have brushed those aside since “[t]he answer to that contention, of course, is that inequitable action does not become permissible simply because it is legally possible.” Why didn’t it? Should it have?

    3. 4.3 Show/Hide More Revlon v. MacAndrews & Forbes (Del. 1986)
      Original Creator: Holger Spamann
      As you have just read, in 1985, Unocal and Moran approved boards’ use of powerful, discriminatory defensive tactics. You will now read Revlon, the 1986 decision that drew the line at playing favorites: if the board decides to sell or break up the company, then it can no longer defend selectively against some bidders but not others. Does this distinction make sense? Where would you draw the line?
    4. 4.5 Show/Hide More 3G / Burger King merger agreement: Section 6.02 ("go shop")
      In reading Revlon, did you wonder how the Burger King board discharged its duty of “getting the best price for the stockholders” in its acquisition by 3G? Section 6.02 tells you how. Such a “go shop” provision is now a standard feature in merger agreements with Delaware corporations.

      1. Do you think buyers like these provisions?
      2. What about sellers? (Hint: it may matter at what point in time you ask them.)
    5. 4.6 Show/Hide More Current US Debate (2016)
      Original Creator: Holger Spamann

      So where are we now?

      The Airgas excerpt below summarizes the current state of Delaware fiduciary law for takeover defenses. A board can maintain a poison pill for as long as it likes and for the mere reason that it believes the offer price to be inadequate. This means that the only way to overcome determined resistance by an incumbent board is to replace it in a proxy fight.

      Until recently, most large corporations’ charters did not permit replacing a majority of the board in a single annual meeting. Their boards were staggered, i.e., only a third of the directors were up for reelection each year (re-read DGCL 141(d), (k)(1)!). Consequently, an acquirer had to win proxy fights at two successive annual meetings to replace the majority of an intransigent board. This takes at a minimum one year and a couple months, and the acquirer would have had to keep the tender offer open (and capital tied up etc.) during that entire time. Hardly any challenger was willing to attempt this. Airgas is about one of the very few exceptions.

      In recent years, however, the incidence of staggered boards has declined precipitously among the largest U.S. corporations. By 2012, only a fourth of the corporations in the S&P 500 index had staggered boards. Between 2012 and 2014, most of these hold-outs “destaggered” as well. The impetus came from a law school clinic, the Shareholder Rights Project (SRP) based at Harvard Law School. Acting on behalf of several institutional shareholders, the SRP submitted precatory destaggering proposals (why not binding proposals?) for the corporations' annual meetings. Under rule 14a-8, the targeted corporations had to include these proposals on their proxies. Other shareholders generally supported these proposals, and most recipient corporations soon agreed to destagger. At the same time, staggered boards remain the norm in IPO charters — the charters of corporations selling their stock to the public for the first time.

      1. Most observers believe that staggered boards have important consequences for corporate governance and thus ultimately the value of these very large firms. In other words, hundreds of billions are at stake. Other shareholders generally supported destaggering. Why did it take a law school clinic to bring about this change?

      2. Why do institutional investors vote against staggered boards in established corporations but continue buying staggered IPO firms? Put differently, why do IPO charters still include staggered boards?

      Opinions are sharply divided about the desirability of takeover defenses in general, and of staggered boards in particular. Managers and their advisors argue that defenses allow boards to focus on long-term value creation rather than on catering to short-term pressures from the stock market. Opponents claim that defenses shield slack and prevent efficient reallocations of productive assets.

      3. The accountability argument for takeovers is easy to understand. What about the short-termism counterargument? Why would stock markets exert short-termist pressures on boards?

      4. Many are concerned that the rules on poison pills, as policed by Delaware courts, allow management and boards to entrench themselves against shareholder interest, but also believe that the pill can be a valuable tool in the hands of a well-motivated management and board. Distinguishing good and bad uses of the pill in a charter or bylaw provision is probably impossible. What other governance device might align use of the poison pill with shareholder interest?

      1. 4.6.1 Show/Hide More Airgas (Del. Ch. 2011)
        Original Creator: Holger Spamann
        Airgas (Del. Ch. 2011)
    6. 4.7 Show/Hide More The UK Approach
      Original Creator: Holger Spamann

      In global perspective, Delaware’s heavy reliance on fiduciary duties and judicial case-by-case scrutiny is an outlier. Some countries are more takeover friendly, others less. Almost all, however, are more rule-centric than Delaware.

      As a counterpoint to Delaware, the UK is particularly interesting. Like the U.S., the UK is a common law country with very developed financial markets and dispersed ownership of most large corporations. You might, therefore, expect UK takeover law to resemble Delaware’s. You would be quite wrong.

      Please read the following excerpts of the Takeover Code, the Companies Act 2006, and the FCA Disclosure Rules and Transparency Rules. Do these rules have analogues in Delaware law or U.S. federal securities law? In particular, consider the following:

      1. Would the poison pill be legal in the UK?
      2. Would other takeover defenses that we have encountered (think of the board actions in Unocal and Revlon) be legal in the UK?
      3. If not, what other rules, if any, protect UK shareholders?
      4. Who makes the rules?
      5. What is the role of the courts?

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December 10, 2017

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Holger Spamann

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