Organizations
Today
Takeovers
Revlon CORPORATIONS
Business v. MacAndrews & Forbes
Paramount v. Time
Paramount v. QVC
Unocal Holding
Independent directors who adopt
defensive tactics in a takeover must
show:
There are reasonable grounds for believing
that the takeover posed a danger to
corporate policy and effectiveness
they
after
have acted in good faith; and
reasonable investigation;
that their actions constituted a reasonable
response to the threat posed
Problem with two-tier
takeover offers
CSX bid for Conrail (1996): CSX offers $92.50 cash
for 40% of Conrail shares and CSX stock worth
$92.50 per share for the remaining 60%.
BUT: On deal announcement CSX share price
drops so that back-end is now worth $86.78.
AND: As CSX raises its cash front-end to compete
with hostile bid from Norfolk Southern, market
takes the value out of the CSX stock.
Morris Kramer, Skadden Arps: Every time you raise
the front end, your stock goes down on the back
end. Thats the problem: you can keep raising the
front end, but your back end keeps going down,
and it just becomes more coercive.
Tactical defenses
Greenmail (+ standstill agreement)
Leveraged Recapitalization
Issuing new debt to buy back shares or
issue a cash dividend.
Pac Man Defense
Agreeing to purchase a bidders shares at
an attractive price.
Making a bid for the bidder
Bulking Up
Structural defenses
Golden Parachutes:
Anti-Greenmail provision
Large payments to management team and
sometimes to employees (silver
parachutes) in the event of a takeover.
Prohibits the board from buying back a
stake from a large-blockholder at a
premium price.
Supermajority Voting Provisions
Requires super-majority vote (e.g., 80%) to
Poison Pills
Flip In Pill
Flip Over Pill
Gives target shareholders other than the
bidder the right to buy shares of the target
at a substantially discounted price.
Allows stockholders to buy the acquirer's
shares at a discounted price after the
merger.
Chewable Pill
Pill disappears if fair price criteria are met
Implementing a Flip-in
poison pill
Step 1: Rights plan adopted by board
vote.
Shareholder vote not necessary as long as
the board has the requisite provision in the
charter allowing it to issue blank check
preferred stock.
Step 2: Rights are distributed by
dividend and remain embedded in
the shares.
Step 3: Triggering event occurs (it
never does) when prospective
Revlon v. MacAndrews
June 1985: Ron Perelman (CEO of Pantry
Pride) approached Michel Bergerac (CEO
of Revlon) about a possible acquisition at
$40-45 per share
Revlon did not want to be taken over by
Pantry Pride. So what did it do? Two
options
Buy back some stock
Issue a poison pill called the Notes
Purchase Rights Plan
Pantry Prides tender offer
Pantry Pride made a tender offer of
$47.50 per share (when stock trading at
$25 per share)
Revlons response
Offer contingent on Revlon redeeming the
poison pill
Issued notes in exchange for one-third of
companys stock. Strict covenants.
Pantry Prides response
Cut its offer to $42
Holding
The initial defense measures (poison pill
and stock buyback) were reasonable
Directors thought PPs offer too low
Acted in good faith with reasonable
investigation; response was reasonable
given the threat (Unocal test)
The lock-up and cancellation were not
reasonable
Once the company is up for sale, the board
has a duty to maximize the sale price.
Revlon duties clarified
Barkan v. Amsted Industries, Inc., 567 A.2d
1279 (Del. 1989)
Level Playing Field Among Bidders:
[W]hen several suitors are actively
bidding for control of a corporation,
the may directors not use defensive
tactics that destroy the auction
process. . . . When multiple bidders
are competing for control . . .
fairness forbids directors from using
defensive mechanisms to thwart an
Paramount v. Time
March 1989: Time and Warner agreed to
a stock-for-stock merger
1 Warner share for .465 Time share
Warner shareholders would own 62% of
combined co.
June 1989: Paramount announces an allcash offer for Time at $175 per share
Time rejects Paramounts offer;
announces tender offer for Warner at
$70 per share
Paramount and Time suits
(consolidated)
Paramount brings suit to enjoin Times
defensive tactics under Unocal
o
All cash offer for all shares no coercion or
threat to Time shareholders
o
Board did not conduct reasonable
investigation of the offer
o
Times response (cash tender for Warner)
not reasonable
o
Time board and management motivated by
self-perpetuation
Some Time shareholders join suit, and
Holding Revlon duties
Chancery Court states that Revlon
(auction) duties did not apply
because the deal with Warner did not
wrest control from the shareholders
of Time
The same disaggregated shareholders who
owned Time & Warner, would own the
combined company after the merger
Delaware Supreme Court agreed but
on different grounds. Revlon duties
Holding: Application of
Unocal test
Court applies Unocal test to lock up and
other bid preclusive measures:
Not an improper purpose
Time merger with Warner was based on
long-term business plan, and pre-existing,
legitimate business considerations
(Chancellor)
Coercion and inadequate value not only
threats possibility of shareholder
confusion real
Paramount v. QVC
Hostile tender offer
Friendly deal
Terms of the ParamountViacom Agreement
Viacom would pay $70 per Paramount
share
Viacom would be controlling shareholder
Martin Davis (CEO of Paramount) would run
the combined company
Defensive measures
No shop agreement
Termination fee
Stock option
Holding
Court enjoined the option and
termination fee
Transaction with Viacom constituted a
change in control triggering Revlon duties
Enhanced judicial scrutiny
Judicial
determination regarding adequacy of
decision-making process (including information
used by directors)
Judicial
examination of reasonableness of
directors actions
Burden
on directors
Summarizing the caselaw
Unocal
Can use defense if:
a)
Reasonable grounds for
danger to corporate policy
and effectiveness
i.
Good faith
ii.
Reasonable
investigation
b)
Reasonably balanced
i.
How bad is the
danger?
ii.
How bad is the
defense?
Revlon
If sale or breakup
a)
Directors become
auctioneers (no corporate
policy to protect).
Paramount v. Time
Revlon (auction) duties where:
a)
Active bidding process,
business reorganization
involving a break-up, or
b)
In response to hostile bid,
company abandons longterm strategy and seeks
alternative transaction
involving the break-up of
the company
Paramount v. QVC
Change of control triggers
Revlon duties.
Change of control implicated
where control block created.
Doctrinal Update on
proportionality
Unitrin, Inc v. American General Corp., 651 A.
2d 1361 (Del. 1995)
Proportionality is satisfied so long as the
defensive measures were within a range of
reasonableness
Not
draconian, neither coercive nor
preclusive
Preclusion
ultimately defined in terms of
shareholders right to replace a board that
opposes a bid with one that will accept it
Carmody v. Toll Brothers, 723 A. 2d 1180
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