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Takeovers

Original Creator: Brian JM Quinn Current Version: Brian JM Quinn Show/Hide
The merger transaction is probably one of the most significant events possible in the life of a corporation. Because mergers are so important to the corporation, they can be regulated quite closely. Although the corporate law typically grants great deference to the decisions of boards of directors, when boards take actions in the context of pursuing a sale or defending against an unwanted offer, courts are more apt to enquire into process relied on by the board. In the following sections we explore both the mechanics of the merger transaction as well as the fiduciary duties of directors in the merger scenario. EDIT PLAYLIST INFORMATION DELETE PLAYLIST

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  1. 1 Show/Hide More Statutory Mergers
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    The statutory merger is the building block of all M&A activity. The provisions that follow provide an outline for the mechanics of the statutory merger transaction.  Although the statutory mergers described in Section 251 involve two Delaware corporations, statutory mergers under other provisions of the code permit mergers between corporations and other business forms, including business forms from other states. The mechanics of those transactions are not substantially dissimilar from the process outlined in Section 251 below.


  2. 2 Show/Hide More Board Obligations in the Takeover Context
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    Decisions whether or not to sell the corporation are like other business decisions taken by the board. Absent special circumstances such decisions are going to be subject to the business judgment presumption.

    The cases that follow some of these special circumstances are present. The courts have developed the intermediate standard – a preliminary inquiry – to assist the courts in determining whether in a given fact scenario the court should deploy the business judgment presumption or whether the actions of the a board should be subject to the more intenstive entire fairness scrutiny. 

    These fact scenarios include situations when the board adopts defenses to fend off an unwanted buyer, or when the board of its own accord decides to engage in a sale of control of the corporation, or when the board takes an action that might interfere with stocholders' voting rights. Each of these situations will engender additional judicial scrutiny before they are let to stand. 

    1. 2.1 Show/Hide More Unocal Corp. v. Mesa Petroleum Co.
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Board decisions typically receive the deferential presumption of business judgment. However, in some sets of facts it may be difficult to ascertain immediately whether actions taken by the board are in fact acts taken by a fully informed, disinterested board acting in the best interests of the corporation or if they are acting to entrench themselves and not in the best interests of the corporation. 

      For example, when a board unilaterally adopts defensive measures in response to a perceived threat to its corporate policy or effectiveness, that decision might be motivated by a desire to protect the corporation from some outside threat (best case scenario) or it could also be motivated by a desire to entrench disloyal managers (worst case scenario).

      In such situations, those board decisions will be subject to a preliminary review (the intermediate standard) before the court determines whether to subject those decisions to deferential business judgment or the more exacting entire fairness standard. The nature of this review is an inquiry into the motivations behind board actions and then a determination about the reasonableness of the means adopted by the board. In testing the motive and means of the board, the burden is on the board to show that it was properly motivated and that the means it adopted were reasonable.

      To the extent the board is able to establish it was properly motivated and acted reasonably, the board's actions will receive the presumption of business judgment. On the other hand, if the board was not properly motivated or if the defensive measures adopted by the board are not reasonable, the board's decision will be subject to entire fairness review. Because entire fairness review places such a heavy burden on defendants, resolution of the preliminary inquiry laid out in Unocal will often times be outcome determinative.

    2. 2.2 Show/Hide More Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      When a board, under Unocal, is asked to justify its decision to adopt defensive measures by identifying some threat to the corporation or corporate policy, the board generally has broad discretion in identifying the threat. The court in Unocal noted that boards may be permitted to consider "the impact on “constituencies” other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally)". That is to say, the board is permitted to take a long term view and consider the potential impact of a threat on the many constituencies that the corporation requires over the long term.

      Revlon provides us with an alternative application of Unocal's intermediate standard. In situations like Revlon where the board has decided of its own accord to look to the short term by engaging in a sale of control of the corporation, then the board may no longer consider long term constituencies. When the board has focused on the short term, then the only cogniziable threat to corporate policy are those that affect value in the short term. If a board in a Revlon-like situation adopts defenses, it will have to justify them as reasonable in relation to the threat posed to the corporation in the short run. 

      In the Revlon opinion that follows notice how the court applies Unocal's intermediate standard before and after a break up of the corporation becomes imminent.

    3. 2.3 Show/Hide More Paramount Communications, Inc. v. Time, Inc.
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      In Time, the court is asked to clarify exactly when a board's actions will be reviewed under the standard announced in Unocal and Revlon.
    4. 2.4 Show/Hide More Paramount Communications, Inc. v. QVC Network, Inc.
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      The court in QVC returns to the question of application of the intermediate standard under Revlon. Ultimately, QVC will become a very important case in the development and application of the Revlon standard. In QVC, the court makes it clear that Revlon is not about a new standard of review but rather, akin to Unocal, it is an inquiry into the motive and means of the board.

      If the board's motive is impaired by conflicts of interest, or if the board's means in defending its decision merge with a preferred party are draconian, the court will apply the entire fairness standard to a review of that decision. If not, then the a board's decision to engage in a sale of control transaction will get the presumption of business judgment, even if that decision is not perfect or, in hindsight, appears unwise.

    5. 2.5 Show/Hide More Pell v. Kill
      Original Creator: Brian JM Quinn

      In Blasius Industries v Atlas Corp, the Chancery Court announced a new application of the intermediate standard, this time in the context of board actions to thwart the stockholder voting franchise. The court justified the increased scrutiny of board action because “the shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.” In Blasius, the court held a board must have a “compelling justification”  where the board acted “for the primary purpose of interfering with the effectiveness of a stockholder vote.”

      Blasius was a somewhat controversial when it first came down. Many believed that the Chancery Court was attempting to create a new standard of review beyond the business judgment presumption, entire fairness and the intermediate standard. However, subsequent application of Blasius has placed Blasius, like Revlon, squarely within the general rubrik of Unocal's intermediate standard. In the case that follows, the court applies Blasius in the context of board action to change board composition.

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August 18, 2017

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Brian JM Quinn

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