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Takeover cases

Takeover cases. 1. Unocal Corporation v. Mesa Petroleum Co. 493 A.2d 946(Del.1985). FACTS:. April 8,1985 Mesa 13% The two-tier coercive tender offer: ①$54-----------------64 million ②securities--------------remaining

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Takeover cases

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  1. Takeover cases • 1

  2. Unocal Corporation v. Mesa Petroleum Co.493 A.2d 946(Del.1985).

  3. FACTS: • April 8,1985 Mesa 13% The two-tier coercive tender offer: ①$54-----------------64 million ②securities--------------remaining Unocal-----aptly termed such securities “junk bonds” ( presentation of Goldman Sachs& Dillon.)

  4. The Court of Chancery: • the Sachs presentation was designed to apprise the directors of the scope of the analyses performed rather than the facts and numbers used in reaching the conclusion that Mesa’s tender offer price was inadequate. • BOD not informed

  5. Defensive measure April 15 $72 ----remaining 49% • Mesa Purchase Condition 64M purchased by Mesa----50M • Mesa Exclusion Mesa can not tender to Unocal Injunction

  6. FUNDAMENTAL ISSUES 1. Did the Unocal board have the power and duty to take a defensive measure to oppose a takeover threat? 2. Is its action here entitled to the protection of the business judgment rule?

  7. The legal power of board 8 Del. C. §141(a) 8 Del. C. §160(a) • A board of directors is not a passive instrumentality. Five cases BJR—apply to the takeover situation Good faith& reasonable investigation informed + disinterested + independent

  8. The board’s exercise of corporate power to forestall a takeover------fiduciary duty. • The element of balance (nature & effect) ①inadequacy of the price offered ②nature and timing of the offer ③questions of illegality ④impact on “constituencies” • national reputation as a “greenmailer” • stampede shareholders into tendering at the first tier • the director’s duty to ensure that • the minority stockholders receive equal value

  9. Nonsupport of Mesa’s argument • Unlawful--discriminate against one SH. • The exclusion permits the directors to abdicate the fiduciary duties they owe it. Mesa can also tender after this Mesa can turn the board out • The basis of this action is punitive, and solely in response to the exercise of its rights of corporate democracy. Not the Fisher Case’s facts

  10. The Result • There was a directorial power to oppose the Mesa tender offer. • The selective stock repurchase plan chosen by Unocal is rational & reasonable. • The board’s action is entitled to the protection of the BJR. The decision of the Court of Chancery:REVERSED The preliminary injunction:VACATED

  11. ATTENTION: The reasoning of common law. The compare of the facts in the proceed of reasoning.

  12. Takeover cases • 2

  13. Revlon Case

  14. Appeal from the court of chancery • Plaintiff: Pantry pride • Defendants: *Revlon • *BOD of Revlon • *Forstmann • Injunction: • * lock-up option • * no-shop provision • * $25M cancellation fee

  15. The court of Chancery: Revlon directors breached duty of care. Supreme Court of Delaware: Affirm • Active bidding contest for corporate control----defensive measures (permitted) Here------no • a corporation may consider the impact of a takeover threat on constituencies other than SH Here------no rationally related benefits accruing to the SH, so no

  16. Facts: • June 1985 $40-50 • Mr. Perelman Mr. Bergerac • Pantry Pride Revlon (NO) • August 14 • Negotiation: $42-$43 per S. • Hostile tender offer: $45

  17. Defensive measures • Lazard Freres--Revlon investment banker • * $45 per S-----inadequate • * Pantry Pride use junk bond to finance • *break-up of Revlon and deposition of its assets • $60-70 Per S return • sale as a whole----$mid 50 range

  18. 1. repurchase up to 5 M of its nearly 30 M outstanding shares; • 2. adopt a “Note Purchase Rights Plan” • unless $65 cash for all S • dividend--one common S = one rights 20% acquired trigger A $65 principal Revlon note 12%interests per year BOD 10cents each redeem

  19. Pantry pride • August 23 • $47.5-common S;26.67-preferred S • Revlon • August 29 • $47.5 Subordinated Note—10Million • 1995, 11.75% interests/y • no additional debt, • no assets sale • no dividends • unless approval by independent directors

  20. Pantry pride • Sept. 16 second cash bid----$42 • increase price if no “rights” • Sept.27 $50 • Oct.1 $53 • Oct.7 $56.25 • Revlon BOD reject all its offers. • Leverage buyout by Forstmann.

  21. Revlon SH--$56 cash • waive the Notes covenants • Finance by: • Revlon “golden parachutes” • sell cosmetics and fragrance division for $905M • Forstmann assume $475M debts—sell Revlon’s two divisions for $335M • Notes from par value$100--$87.5 • noteholders----threat to suit

  22. Forstmann’s privileges: • Access to certain Revlon financial data; • lock-up option: purchase one divisions for $525M which is $100-175M below its value if other acquiror get 40% of Revlon’s shares; • Rights and Notes covenants ---removed • No-shop provision • Cancellation fee $25M to be placed in escrow if this agreement terminated or if another acquiror get 19.9% of Revlon’s shares. $57.5 No Revlon management involved support the par value of the Notes

  23. Revlon BOD’s reasons: • Higher price than the Pantry Pride bid; • Protect the noteholders; • Forstmann’s financing was firmly in place. should consider time value of money No

  24. Court of Chancery • Injunctive relief • Temporary restraining order • breach the duty of loyalty • prohibit: the transfer of assets • lock-up • no-shop • cancellation fee • concern the liability to the noteholders (No) • Maximizing the sale price of the company for the shareholders (Yes)

  25. Regarding the preliminary injunction • 1. Plaintiff must demonstrate a reasonable probability of success on the merits; • 2.some irreparable harm would occur if absent the injuntion.

  26. Revlon board negotiate a merger or buyout with Forstmann Revlon for sale recognition Change to BOD role • Defenders auctioneers • no Unocal test here Preservation of Revlon as a corporate entity Maximize the company value at a sale for SH benefits

  27. Lock-up • Legal under Delaware Law • Citing Thompson V. Enstar Corp. 1. Some lock-up options may be beneficial to the SH Such as those that induce a bidder to compete for the control of a corporation 2. Some may be harmful Such as those that effectively preclude the bidders from competing with the optionee bidder

  28. Not to foster bidding----but destroy it(here, illegal) • Preferring the noteholders • Ignoring the duty of loyalty to the SH intent rights of noteholders were fixed by contract, need no further protection • At the expense • of the SH protect the directors against a perceived litigation threat from the creditors

  29. No-shop provision • Like the lock-up, not per se illegal. • Impermissible under the Unocal standards when a board’s primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder.

  30. consider a no-shop agreement Ironic here 1. Cooperation from management 2. Access to financial data 3. The exclusive opportunity to present merger proposals directly to the BOD deal preferentially Forsemann no Justifiable ok BOD remain free to negotiate When bidders make relatively similar offers Dissolution of the company is inevitable Offer adversely affect SH’s interests Best price for SH’s equity

  31. Takeover cases • 3

  32. Paramount v. Time

  33. Brief preliminary injunction Paramount Time SH of Time tender $70 cash Fail on Merits Chancery: Deny the motion Supreme: Affirm Walner 51%

  34. Two important facts (1) • Since 1983-1989 • considerable time study the merger Inside Directors Best fit 4 Time Warner 8 outside directors Time control the BOD Preserve a management culture (journalistic integrity) dominated by Henry R. Luce III Care Profits (no) Not report to top officer Report to a committee of BOD

  35. Time’s resolution with Warner • No-shop agreement • Dry-up fee • Lock-up exchange agreement (each hold 9-11 percent of other’s shares )

  36. Structure of Time-Warner Time SH vote (June 1989) Time 39 % Time-Warner Stock-for-stock merger 61% Warner Premium for (1) 50% of BOD (2) Time culture

  37. Time’s defense--Paramount $175 inadequate price Paramount offer “smoke and mirrors” Timestock $182.75 $170 $44 Time BOD meet 3times in 8days protect the Time-Warner combination Still (no) $200 51% $70 cash (56% premium of Warner stock) Remaining combined cash and security = $70 Cash bid Avoid SH vote accelerate the combination?

  38. Shareholder Plaintiff assert: (1) Paramount’s bid for Time place Time “for sale” (2) Time’s transaction with Warner result in Transfer of control (3) Combined Time-Warner is not large BOD should enhance short-term shareholder value and to treat all other interested acquirors on an equal basis. trigger Revlon duties preclude the possibility of SH receiving a future control premium.

  39. Chancery and Supreme court: BOD has conferred authority to manage corporation business to enhance profitability • Del 141(a): (2) If not under Revlon No fixed investment horizon Not put the corporation’s future in the hands of its SH BOD should act in an informed manner no duty to maximize SH value in the short term Pivotal Issue: Time—”up for sale”?

  40. No Revlon here: • Corporation initiate an active bidding process seeking to sell or reorganization involving a clear break-up of the company. (here no) • In response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction also involving the break-up of the company. (here no) Here: control of the corporation existed in a fluid aggregation of unaffiliated SH (Control in the Market)

  41. Apply Unocal here: Not prevent SH from a control premium Lock-up No-shop Dry-up fee Safety devices Properly subject to a Unocal analysis Merger agreement before Mar.3----BJR ok Revised transaction on June 16----Under Unocal

  42. Plaintiff: two-tier offer ---------- threat all cash, all share offer------- no threat Court: Wrong Unocal *inadequacy of the price *nature and timing of the offer *questions of illegality *the impact on contingencies other than SH *The risk of nonconsummation *quality of securities how to evaluating threat:

  43. Unocal 1: where is the threat Threat: (1) Paramount’s 11 hour offer upset the SH to consider the Time-Warner merger vote (2) Paramount offer a degree of uncertainty BOD informed (1) long time investigation for Warner (2) 12/ 16 are outside directors

  44. Unocal 2: Is this a reasonable defensive action? Paramount: Assuming threat there, Time’s response was unreasonable in precluding SH accepting the a control premium. Court: Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term SH Profit unless there is clearly no basis to sustain the corporate strategy. Heavy debts incur to finance the acquisition of Warner----Fine Paramount can still make an offer for the combined Time-Warner

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