Law, Business 7e (Cheeseman)
Chapter 38 Corporate Mergers, Tender Offers, and Shareholder Resolutions
1) Corporate shareholders do not have the right to vote on mergers and charter amendments.
Answer: FALSE
Diff: 2
Topic: Proxy Solicitation
2) The Securities and Exchange Commission has no authority to regulate the solicitations of
proxies.
Answer: FALSE
Diff: 1
Topic: Proxy Solicitation
3) A proxy holder may be a director or officer of the corporation.
Answer: TRUE
Diff: 2
Topic: Proxy Solicitation
4) A copy of the proxy, the proxy statement and all other solicitation materials must be filed with
the SEC at least 30 days before materials are sent to shareholders.
Answer: FALSE
Diff: 1
Topic: Proxy Solicitation
5) A shareholder may present an issue on a proxy for a vote by the shareholders only if the
management agrees with the proposal.
Answer: FALSE
Diff: 1
Topic: Proxy Solicitation
6) If a proxy contest involves an issue of policy, the corporation must reimburse the incumbent
management for its expenses only if it wins the proxy contest.
Answer: FALSE
Diff: 1
Topic: Proxy Solicitation
7) If a group desires to solicit proxies to oppose a management action, management has the
choice of mailing the proxy materials for the dissenting group or providing the dissenting group
with a list of shareholders.
Answer: TRUE
Diff: 1
Topic: Proxy Solicitation
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8) Management is entitled to recover its proxy contest costs for all policy issue contests.
Answer: TRUE
Diff: 1
Topic: Proxy Solicitation
9) Shareholders desiring to communicate with other shareholders through mass mailing must file
the communication with the SEC only if the shareholder is seeking a proxy as part of the
communication.
Answer: TRUE
Diff: 2
Topic: Proxy Solicitation
10) When proxies are solicited, each issue must be able to be voted on separately.
Answer: TRUE
Diff: 2
Topic: Proxy Solicitation
11) Corporations are required to make detailed disclosures of the compensation of the chief
executive officer and its four other most highly compensated executives for the most recent 3
years.
Answer: TRUE
Diff: 1
Topic: Proxy Solicitation
12) Most shareholder resolutions have a good chance of being enacted because large-scale
investors usually support management.
Answer: FALSE
Diff: 2
Topic: Shareholder Resolution
13) The difference between a merger and a consolidation is that, in a merger, one of the original
corporations survives; in a consolidation, neither of the original corporations survives.
Answer: TRUE
Diff: 1
Topic: Mergers and Acquisitions
14) In a merger, the shareholders of the merged corporation always receive stock of the surviving
corporation.
Answer: FALSE
Diff: 2
Topic: Mergers and Acquisitions
15) The Revised Model Business Corporation Act has deleted all references to consolidations.
Answer: TRUE
Diff: 1
Topic: Mergers and Acquisitions
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16) Corporate consolidations are used more often today than in the past.
Answer: FALSE
Diff: 1
Topic: Mergers and Acquisitions
17) In a share exchange, the separate legal existence of one of the corporations ceases.
Answer: FALSE
Diff: 2
Topic: Mergers and Acquisitions
18) Ordinarily, a merger requires approval of both boards of directors and the shareholders of
both corporations.
Answer: TRUE
Diff: 2
Topic: Mergers and Acquisitions
19) A short-form merger is a simplified form of merger that can be used so long as more than 90
percent of the shareholders of both corporations approve of the transaction in advance.
Answer: FALSE
Diff: 2
Topic: Mergers and Acquisitions
20) If the management of a company desires to sell most of the assets of the business outside the
regular course of business, the board of directors must recommend this action and the
shareholders must vote to approve it.
Answer: TRUE
Diff: 1
Topic: Mergers and Acquisitions
21) The articles of incorporation or corporate bylaws can require the approval of a
surpramajority to approve a merger.
Answer: TRUE
Diff: 1
Topic: Mergers and Acquisitions
22) The board of directors may sell most of the corporation's assets without shareholder
approval.
Answer: FALSE
Diff: 1
Topic: Mergers and Acquisitions
23) The dissenting shareholder appraisal right allows a shareholder to request appraisal of the
shares to be acquired in a merger, and the tender offer price will be adjusted based on the
appraisal.
Answer: FALSE
Diff: 2
Topic: Dissenting Shareholder Appraisal Rights
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24) A shareholder loses the ability to exercise the appraisal right by voting in favor of the
proposed action.
Answer: TRUE
Diff: 2
Topic: Dissenting Shareholder Appraisal Rights
25) A shareholder exercising her appraisal right can petition the court to determine the value of
shares if she believes that the corporation has set the value too low.
Answer: TRUE
Diff: 2
Topic: Dissenting Shareholder Appraisal Rights
26) A shareholder must be notified of the existence of his or her appraisal rights before a
transaction such as a merger can be voted on.
Answer: TRUE
Diff: 2
Topic: Dissenting Shareholder Appraisal Rights
27) Federal law requires that the target company be notified of a tender offer before the offer is
made.
Answer: FALSE
Diff: 2
Topic: Tender Offers
28) The Williams Act requires that tender offers be open at least 20 days.
Answer: TRUE
Diff: 1
Topic: Tender Offers
29) Shareholders are not allowed to make individual decisions whether to sell their shares to the
tender offeror.
Answer: FALSE
Diff: 2
Topic: Tender Offers
30) The fair price rule in the Williams Act requires that tender offers be made for a fair price.
Answer: FALSE
Diff: 2
Topic: Tender Offers
31) The Williams Act provides that if fraud is committed, both civil and criminal charges may be
brought.
Answer: TRUE
Diff: 2
Topic: Tender Offers
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32) The pro-rata rule holds that the shares must be purchased on a pro-rata basis if too many
shares are tendered.
Answer: TRUE
Diff: 1
Topic: Tender Offer Rules
33) Once a shareholder has tendered his or her shares, he or she may not withdraw them before
the closing of the tender offer.
Answer: FALSE
Diff: 2
Topic: Tender Offer Rules
34) A poison pill refers to a target company in a hostile takeover selling off valuable pieces of
itself to make itself less attractive to the potential buyer.
Answer: FALSE
Diff: 1
Topic: Fighting a Tender Offer
35) A golden parachute exists when an officer is provided special, generous severance pay if the
officer is terminated due to the purchase of the corporation by another corporation.
Answer: TRUE
Diff: 1
Topic: Fighting a Tender Offer
36) When a company is the target of a hostile takeover, it cannot issue additional stock simply to
make the takeover more expensive for the acquiring company.
Answer: FALSE
Diff: 1
Topic: Fighting a Tender Offer
37) The board of directors has a fiduciary duty to shareholders in taking action relative to a
hostile takeover.
Answer: TRUE
Diff: 1
Topic: Fighting a Tender Offer
38) The term greenmail refers to the agreement of the tender offeror to abandon its tender offer
and not purchase any additional stock.
Answer: FALSE
Diff: 2
Topic: Fighting a Tender Offer
39) The business judgment rule protects the decisions of the board of directors in situations
where it acts in good faith that the action taken was in the best interests of the corporation and its
shareholders.
Answer: TRUE
Diff: 1
Topic: Business Judgment Rule
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40) State antitakeover statutes became unconstitutional once the Williams Act regulated using
federal law in this area.
Answer: FALSE
Diff: 1
Topic: State Antitakeover Statutes
41) The purpose of a proxy is to:
A) allow a shareholder to transfer shares to another
B) allow a shareholder to place shares in trust
C) allow a shareholder to assign her right to vote
D) allow a shareholder to assign her dividends to another
E) initiate a tender offer
Answer: C
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
42) If management desires to solicit proxies from shareholders, it must:
A) file the proposed proxy, proxy statement, and other solicitation material with the SEC and
obtain SEC approval prior to distributing the solicitation
B) file the proposed proxy, proxy statement, and other solicitation material with the SEC at least
30 days in advance of the distribution
C) file the proposed proxy, proxy statement, and other solicitation material with the SEC at least
10 days in advance of the distribution
D) file the proposed proxy, proxy statement, and other solicitation material with the SEC at least
10 days in advance, but only if financial statements will be distributed
E) not file anything with the SEC unless the SEC receives complaints about the materials that are
distributed
Answer: C
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
43) In order for a proxy to become valid, the shareholder must:
A) complete a written proxy document and file it with the SEC
B) complete a written proxy document, file it with the SEC, and receive the appropriate approval
from the SEC
C) complete a written proxy document and deliver it to the proxy holder
D) complete a written proxy document and deliver it to the corporation
E) reach agreement with the proxy holder, but no written documentation is required
Answer: D
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
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44) A shareholder's proxy can be granted to:
A) other shareholders only
B) officers only
C) officers or directors only
D) shareholders who are also officers or directors
E) anyone
Answer: E
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
45) Solicitation of proxies is regulated under:
A) the Securities Act of 1933
B) the Securities Exchange Act of 1934
C) the Williams Act
D) the Proxy Solicitation Act of 1968
E) the Uniform Commercial Code
Answer: B
Diff: 1
Topic: Proxy Solicitation
Skill: Legal Concepts
46) A proxy statement must include information about which of the following?
A) who is soliciting the proxy and the matter for which the proxy is being solicited
B) who is soliciting the proxy and the estimated likelihood that the matter will be approved
C) who is soliciting the proxy and the number of proxies already executed on the matter
D) who is soliciting the proxy and pro forma financial statements assuming that the matter for
which the proxy is sought is approved
Answer: A
Diff: 3
Topic: Proxy Solicitation
Skill: Legal Concepts
47) Which of the following is not a possible consequence of including fraudulent information in
a proxy solicitation?
A) criminal action initiated by the justice department
B) fines imposed on shareholders who granted proxies
C) civil action by the Securities and Exchange Commission
D) an order requiring a new election on the matter for which proxies were sought
E) a suit by an injured shareholder for damages from the wrongdoer
Answer: B
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
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48) Which of the following best describes a proxy contest?
A) Opposing factions of shareholders seek different prices for their shares.
B) Opposing factions of shareholders seek proxies so they can vote other shareholders' shares on
a matter.
C) Members of the board of directors seek the support of other board members on a matter to be
voted on by the board.
D) Opposing factions of shareholders seek to influence board members to vote in a certain way
on a matter before the board of directors.
Answer: B
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
49) In a proxy contest, what obligation does management have to the dissenting group of
shareholders?
A) Management must mail the proxy solicitation materials of the dissenting group.
B) Management must provide the dissenting group with a list of all shareholders.
C) Management must identify the leading representative(s) of the dissenting group in
management's own proxy materials.
D) Management must either mail the proxy solicitation materials of the dissenting group or
provide the dissenting group with a list of all shareholders.
E) Management must not provide false or misleading information about the dissenting group or
the issue in controversy in its own proxy solicitation materials, but otherwise has no obligations
to the dissenting group.
Answer: D
Diff: 3
Topic: Proxy Solicitation
Skill: Legal Concepts
50) Under what circumstances can management recover from the corporation the costs it incurs
in a proxy contest?
A) under all circumstances
B) in all proxy contests management wins
C) in all proxy contests involving issues of policy, whether or not management wins
D) in all proxy contests involving issues of policy, and in the case of contests concerning
personal matters, if management wins
E) in all proxy contests involving issues of policy that management wins, but never for contests
involving personal issues
Answer: C
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
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51) Under what circumstances can a dissenting group of shareholders recover from the
corporation the costs it incurs in a proxy contest?
A) under all circumstances
B) in all proxy contests which the dissenting group wins
C) in all proxy contests involving issues of policy, whether or not the dissenting group wins
D) in all proxy contests involving issues of policy, and in the case of contests concerning
personal matters, if the dissenting group wins
E) in all proxy contests involving issues of policy that the dissenting group wins, but never for
contests involving personal issues
Answer: E
Diff: 2
Topic: Proxy Solicitation
Skill: Legal Concepts
52) In a proxy contest involving management on one side and dissenting shareholders on the
other side, what is true about the right to recover the costs incurred in conducting the proxy
fight?
A) Neither side can recover its costs in the proxy contest.
B) If the contest involves a policy issue, the winning side can recover its costs from the losing
side.
C) The victorious side can always recover its costs from the corporation in a contest involving a
policy issue.
D) Management is the only side that can ever recover its costs from the corporation in a proxy
contest involving a personal issue.
E) Each side can recover its costs from the corporation in a proxy contest involving matters of
policy regardless of the outcome.
Answer: C
Diff: 3
Topic: Proxy Solicitation
Skill: Legal Concepts
53) A transaction in which two corporations combine such that afterwards only one of them still
exists and owns all the assets previously owned by either corporation is called a:
A) merger
B) consolidation
C) purchase of assets
D) share exchange
Answer: A
Diff: 1
Topic: Mergers and Acquisitions
Skill: Legal Concepts
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54) Which of the following best describes a merger?
A) Two corporations jointly purchase a third corporation and operate it as a joint venture.
B) Two corporations are combined to form a new third corporation, and the original two
corporations cease to exist.
C) Two corporations are combined, with one of the original corporations surviving and the other
ceasing to exist.
D) One corporation acquires all of the shares of a second corporation, with both corporations
retaining their separate legal existence, the second a subsidiary of the first.
E) One corporation sells substantially all of its assets to a second corporation, with both
corporations retaining their separate legal existence.
Answer: C
Diff: 2
Topic: Mergers and Acquisitions
Skill: Legal Concepts
55) Which of the following best describes a share exchange?
A) Two corporations jointly purchase a third corporation and operate it as a joint venture.
B) Two corporations are combined to form a new third corporation, and the original two
corporations cease to exist.
C) Two corporations are combined, with one of the original corporations surviving and the other
ceasing to exist.
D) One corporation acquires all of the shares of a second corporation, with both corporations
retaining their separate legal existence, the second a subsidiary of the first.
E) One corporation sells substantially all of its assets to a second corporation, with both
corporations retaining their separate legal existence.
Answer: D
Diff: 2
Topic: Mergers and Acquisitions
Skill: Legal Concepts
56) A transaction in which two corporations combine such that afterwards neither of the
combining corporations continues to exist, but that a new corporation is formed is called a:
A) merger
B) consolidation
C) purchase of assets
D) share exchange
E) hostile takeover
Answer: B
Diff: 1
Topic: Mergers and Acquisitions
Skill: Legal Concepts
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57) Which of the following forms of business combinations is seldom used today because of the
advantages of other forms?
A) merger
B) consolidation
C) purchase of assets
D) share exchange
E) hostile takeover
Answer: B
Diff: 1
Topic: Mergers and Acquisitions
Skill: Legal Concepts
58) Which of the following corporate transactions requires the approval of a majority of the
shareholders of the corporation planning to undertake the transaction?
A) merger
B) consolidation
C) sale of assets in the normal course of business
D) A, B, and C
E) A and B only
Answer: E
Diff: 1
Topic: Mergers and Acquisitions
Skill: Legal Concepts
59) In an ordinary merger, what approvals are needed?
A) Recommendation by both boards of directors and votes of the shareholders of each
corporation.
B) Votes by both boards of directors, but shareholders need not approve.
C) Vote by the board of directors of the surviving corporation, and for the corporation that does
not survive, recommendation by the board of directors and vote by the shareholders.
D) For both corporations, a vote by the shareholders, but no action by the board of directors.
E) No approvals needed by the surviving corporation, and for the corporation that does not
survive, recommendation by the board of directors and vote by the shareholders.
Answer: A
Diff: 3
Topic: Mergers and Acquisitions
Skill: Legal Concepts
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60) In an ordinary merger, if the number of voting shares increases by 20 percent or less, this
eliminates which needed approvals when compared to ordinary mergers where the number of
shares increases by more than 20 percent?
A) shareholders of the surviving corporation
B) shareholders of both corporations
C) shareholders and the board of directors of the surviving corporations
D) shareholders and the board of the corporation that does not survive
E) The approval requirements are the same whether the increase in voting shares of the surviving
corporation is more or less than 20 percent.
Answer: A
Diff: 3
Topic: Mergers and Acquisitions
Skill: Legal Concepts
61) In a short-form merger, which approvals are needed?
A) Votes by both boards of directors, but shareholders need not approve.
B) Vote by the board of directors of the surviving corporation, and for the corporation that does
not survive, recommendation by the board of directors and vote by the shareholders.
C) Vote by the board of directors of the surviving corporation.
D) For both corporations, a vote by the shareholders, but no action by the board of directors.
E) No approvals are needed by the surviving corporation, and for the corporation that does not
survive, recommendation by the board of directors and vote by the shareholders.
Answer: C
Diff: 3
Topic: Mergers and Acquisitions
Skill: Legal Concepts
62) What is required in order for a merger to be conducted under the short-form merger
procedure?
A) An increase of less than 20 percent in the number of outstanding shares of the surviving
corporation is required.
B) Agreement by both boards of directors to use the short-form procedure is required.
C) Approval by the Securities and Exchange Commission to use the short-form procedure is
required.
D) Ownership by the surviving parent corporation of at least 90 percent of the shares of the
nonsurviving (subsidiary) corporation prior to the merger is required.
E) The sale, prior to the merger, by the nonsurviving corporation of all its noncash assets is
required.
Answer: D
Diff: 1
Topic: Mergers and Acquisitions
Skill: Legal Concepts
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63) In a merger, or consolidation of corporations, a dissenting shareholder may elect to receive
the fair value of her share instead of being part of the restructuring. This is called the
shareholders':
A) dividend right
B) appraisal right
C) merger right
D) voting right
E) ultra vires right
Answer: B
Diff: 2
Topic: Dissenting Shareholder Appraisal Rights
Skill: Legal Concepts
64) In order to exercise the appraisal right where a shareholder is opposed to a merger, the
shareholder must:
A) give the corporation notice of demanding cash payment for the shares, with the notice given
prior to the vote on the matter
B) notify the corporation of the amount that the shareholder is demanding as cash payment for
the shares
C) not vote in favor of the proposed merger
D) A and C only
Answer: D
Diff: 2
Topic: Dissenting Shareholder Appraisal Rights
Skill: Legal Concepts
65) If a dissenting shareholder who has exercised his appraisal right is dissatisfied with the
corporation's determination of the fair market value of the shares, then:
A) shareholder The has no further recourse.
B) The shareholder must choose to receive the appraisal amount or cancel the exercise of the
appraisal right and accept the terms of the merger or other transaction.
C) The shareholder must pay for a new appraisal of the shares and seek that amount in court.
D) The corporation must petition the court to determine the fair value of the shares.
Answer: D
Diff: 2
Topic: Dissenting Shareholder Appraisal Rights
Skill: Legal Concepts
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66) What is a tender offer?
A) It is an offer made directly to the shareholders of a corporation for those shareholders' shares.
B) It is an offer made directly to the board of directors of the corporation to be acquired.
C) It is an offer made by the use of proxies granted by the shareholders of the corporation to be
acquired.
D) It is an offer to acquire another corporation that has been approved by the Securities and
Exchange Commission prior to the making of the offer.
Answer: A
Diff: 2
Topic: Tender Offers
Skill: Legal Concepts
67) When the management of the target corporation of a tender offer opposes the tender offer, it
can:
A) purchase the shares of its shareholders as treasury stock, but little more
B) petition the Securities and Exchange Commission to have the offer voided
C) exercise its appraisal rights
D) petition the board of directors to adopt a resolution prohibiting sale by the shareholders to the
entity who made the tender offer
E) none of the above
Answer: E
Diff: 3
Topic: Tender Offers
Skill: Legal Concepts
68) Which of the following is not true about tender offers?
A) The offer must remain open at least 20 business days from the commencement of the offer.
B) The SEC must be notified of the terms of a tender offer at least 10 days before it is made.
C) If the offeror increases the tender price, that higher price must be paid even to those who
already accepted the offer at the earlier, lower price.
D) Any increase in the price offered or the maximum number of shares that the offeror will take
requires that the effective time of the offer be extended at least 10 days.
E) There is no appraisal right for persons who do not want to accept the offer.
Answer: B
Diff: 3
Topic: Tender Offers
Skill: Legal Concepts
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69) In a leveraged buyout, which of the following is true?
A) Stock of one corporation is traded for the stock of another.
B) Following the borrowing of large amounts of capital, the acquiring corporation merges with
the corporation being bought out.
C) The corporation being acquired typically issues a large amount of additional common stock.
D) The debt financing used in a leveraged buyout usually carries an attractive interest rate for the
issuer.
Answer: B
Diff: 3
Topic: Tender Offers
Skill: Legal Concepts
70) Which of the following is not a correct description of a defensive strategy to a tender offer?
A) Selling a crown jewel refers to a sale by the target corporation of an asset that was
particularly attractive to the tender offeror.
B) A white knight merger refers to a merger with a different purchaser that is friendlier toward
management than the company that made the tender offer.
C) A poison pill is a strategy built into contracts, bylaws, and so forth, that can make any
purchase of the corporation more expensive, such as leases that automatically expire upon the
purchase and would require renegotiation, likely at a higher price.
D) Under a standstill agreement, shareholders holding a large number of shares of the target
corporation agree that none of them will sell to the tender offeror, even if the tender offeror
raises the offer price.
E) A greenmail payment is a payment, usually at greater than fair market value, made by the
target corporation to the tender offeror for shares already owned by the tender offeror in
exchange for the tender offeror dropping the tender offer.
Answer: D
Diff: 3
Topic: Fighting a Tender Offer
Skill: Legal Concepts
71) If a company that is the target of a hostile tender offer locates another corporation that will
be friendlier to management and agrees to be taken over by this second company, this action is
often referred to as:
A) a reverse tender offer
B) a greenmail payment
C) the selling of a crown jewel
D) adopting a poison pill
E) a white knight merger
Answer: E
Diff: 2
Topic: Fighting a Tender Offer
Skill: Legal Concepts
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72) In determining whether antitakeover tactics are legal, the management must show that the
actions taken were reasonable in relation to the threat posed, and that there was a danger to:
A) corporate policy and effectiveness
B) the best interests of the corporation and its shareholders
C) the national economy
D) Both A and B must be shown.
E) Both A and C must be shown.
Answer: B
Diff: 2
Topic: Fighting a Tender Offer
Skill: Legal Concepts
73) In evaluating whether management's actions are appropriate in response to a hostile tender
offer, the primary concern is usually that management might have improperly:
A) demanded too high a price for the corporation's stock
B) put its interests ahead of those of the shareholders
C) put persons that favor management on the board of directors
D) tried to implement changes to the corporate structure too quickly
Answer: B
Diff: 2
Topic: Fighting a Tender Offer
Skill: Legal Concepts
74) Many states have enacted antitakeover statutes to regulate takeover activity within their
states. However, there is a federal statute governing tender offers. Therefore, these state statutes
are:
A) constitutional
B) constitutional as long as it is possible to comply with both the state and federal laws
C) unconstitutional, because they violate the Commerce Clause
D) unconstitutional, because they violate the Supremacy Clause
E) unconstitutional, because they violate the First Amendment
Answer: B
Diff: 2
Topic: State Antitakeover Statutes
Skill: Legal Concepts
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75) Bob has decided to solicit proxies from shareholders of Sunset Corporation. Bob owns two
shares of Sunset, which have a share price of $48. Bob is soliciting the proxies in order to elect a
friend of his to the board of directors. Bob's friend is reasonably intelligent but has no business
experience. In his proxy solicitation, Bob accurately describes his friend and his background and
indicates that the proxy is being sought in order to elect this friend to the board of directors. Bob
does not disclose why he thinks his friend should be on the board of directors. Nor does Bob
disclose what effect he thinks his friend being on the board will have on the earnings of the
company. Two weeks before starting to solicit proxies, Bob filed copies of his proxy materials
with the Securities and Exchange Commission. Bob:
A) has not properly prepared the proxy statement because he did not disclose the effect on the
earnings of the company of electing his friend to the board
B) cannot solicit proxies because he has not owned at least $1,000 of stock for 2 years
C) can solicit the proxies only if he has obtained approval from the board of directors
D) will be able to recover the costs of this proxy contest, even if his friend is not elected
E) has complied with applicable proxy requirements
Answer: E
Diff: 3
Topic: Proxy Solicitation
Skill: Legal Concepts
76) Over the years, Maple Corporation has gradually been acquiring the stock of Spruce
Corporation. Maple Corporation has increased its purchases of Spruce Corporation in the current
year. At the beginning of the year, Maple owned 64 percent of Spruce, but by early August
owned 91 percent. What is the easiest and quickest method for Maple to merge with Spruce?
A) complete a reverse merger where Spruce is the surviving corporation
B) complete the merger in such a way that the number of common shares of Maple outstanding
does not increase by more than 20 percent
C) complete a short-form merger requiring the approval only of the board of directors of Maple
Corporation
D) complete a leveraged buyout of Spruce
Answer: B
Diff: 2
Topic: Mergers and Acquisitions
Skill: Legal Concepts
77) Company X wants to acquire Company Y. Company X gives some of its own stock (X
stock) to all of the shareholders of Y Company in exchange for their Y stock. Afterwards,
Company X owns all of the Company Y stock. This transaction is called a(n):
A) merger
B) consolidation
C) purchase of assets
D) share exchange
E) hostile takeover
Answer: D
Diff: 1
Topic: Mergers and Acquisitions
Skill: Legal Concepts
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78) Marvin owns several thousand shares of Elm Street Corporation. Hickory Street Corporation
has proposed a merger with Elm Street where Hickory Street will be the surviving corporation.
Hickory Street is proposing to give each current Elm Street shareholder some Hickory Street
stock and some cash for each share of Elm Street. Marvin is opposed to some of the corporate
policies of Hickory Street and does not want to own any of its stock. What is Marvin's best
course of action in this situation?
A) Marvin can hope to obtain the support of other shareholders in opposing the merger, but must
go along with the merger if it is approved.
B) Marvin can hope to convince the board of directors of Elm Street to oppose the merger, but if
he is unsuccessful, he must go along with the merger.
C) Marvin can invoke his appraisal right, and would be entitled to receive cash for his shares
even though the merger plan includes the receipt of Hickory Street shares.
D) Marvin can invoke his appraisal right, but because part of the price paid for the Elm Street
shares is in the form of stock rather than cash, his appraisal right is limited.
Answer: C
Diff: 3
Topic: Dissenting Shareholder Appraisal Rights
Skill: Legal Concepts
79) Robin Corporation has made a tender offer to acquire 80 percent of the shares of Cardinal
Corporation at $58 per share. Because only 68 percent of Cardinal's shares have been tendered,
the board of Robin wants to raise its offer price to $65 per share. Robin must:
A) cancel the first tender offer and start over
B) keep the higher offer open for at least 20 days
C) pay the $65 to all shareholders who accepted at $58 per share
D) not complete the merger unless at least 90 percent of Cardinal's shares are tendered
Answer: C
Diff: 2
Topic: Tender Offers
Skill: Legal Concepts
80) JKL corporation has acquired 7 percent of Target Corporation in a hostile takeover attempt.
Target is opposed to this takeover, so Target offers to purchase the 7 percent of its shares owned
by JKL for $40 per share. The actual fair market value of that stock is $25 per share. JKL accepts
the offer. This is an example of:
A) a golden parachute and is illegal
B) greenmail and is illegal
C) a golden parachute and is legal
D) greenmail and is legal
E) a poison pill and is legal
Answer: D
Diff: 3
Topic: Fighting a Tender Offer
Skill: Legal Concepts
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81) At the time Corporation A was created, the management was concerned about potential
hostile takeovers, so in the articles of incorporation it included a provision that all of Corporation
A's contracts would expire if the ownership of Corporation A changed hands. This antitakeover
technique is best described as:
A) selling a crown jewel
B) a poison pill
C) a white knight merger
D) a reverse merger
E) a golden parachute
Answer: B
Diff: 2
Topic: Fighting a Tender Offer
Skill: Legal Concepts
82) Tandem Corporation is the target of a hostile takeover by Alpha Corporation. Management
of Tandem fears for its jobs because of statements made by Alpha's management about the need
to streamline the management of Tandem. Tandem works out a deal with Beta Corporation for
the two corporations to merge with Beta surviving. Beta has indicated that it will leave present
management intact. Two years after the merger with Beta, an independent consultant reports that
there are too many levels of management in the combined corporation and that 30 percent of
management positions should be eliminated. In this circumstance, which of the following
occurred?
A) Tandem prevented the merger with Alpha with a poison pill.
B) Tandem prevented the merger with Alpha by a white knight merger with Beta, which was an
illegal tactic.
C) Tandem prevented the merger with Alpha by a white knight merger with Beta, which was
legal; Tandem's management is liable to shareholders for the loss of profits due to the excessive
levels of management.
D) Tandem prevented the merger with Alpha by a white knight merger with Beta, which was
legal; Tandem's management is not liable to shareholders for the loss of profits due to the
excessive levels of management assuming it is protected by the business judgment rule.
Answer: D
Diff: 3
Topic: Fighting a Tender Offer
Skill: Legal Concepts
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83) Corporation L is the target of a hostile takeover by Corporation O. Corporation L's most
valuable asset is its oil fields. To stop the takeover, Corporation L decides to sell its oil fields.
This antitakeover technique is best described as:
A) selling a crown jewel
B) a poison pill
C) a white knight merger
D) a reverse merger
E) a golden parachute
Answer: A
Diff: 1
Topic: Fighting a Tender Offer
Skill: Legal Concepts
84) Norm, Cliff and Sam form a limited liability company. Norm contributes $20,000, Cliff
$30,000 and Sam $50,000. The operating agreement does not state how profits and losses are to
be apportioned. The company makes a $60,000 profit during the year. Under the ULLCA, how
will profits be divided?
A) Norm will receive $12,000, Cliff $18,000, and Sam $30,000.
B) Norm will receive $20,000, Cliff $20,000, and Sam $20,000.
C) Norm will receive $18,000, Cliff $12,000, and Sam $30,000.
D) Norm will receive $15,000, Cliff $15,000, and Sam $30,000.
Answer: B
Diff: 1
Topic: Fighting a Tender Offer
Skill: Legal Concepts
85) In recent years shareholders have increasingly attempted to use shareholders' meetings as a
forum to encourage corporations to operate in accordance with the views of one or some
shareholders with respect to various policy issues. Common examples include environmental
issues and human rights issues, especially for corporations with operations in other nations. Is
this a proper forum for this particular type of activity? What are the arguments on each side of
the issue? What other methods could these shareholders use to promote the viewpoints on these
issues?
Answer: In some cases these activities are successful in bringing about changes, as happened
with some corporations in connection with overseas plants operating in "sweatshop" conditions.
This is proper activity if one believes that corporations have obligations beyond simply earning
the maximum profits for shareholders.
Diff: 2
Skill: Ethics and Policy
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86) Should shareholders encourage responsibility of corporations in which they invest, or should
investors make those judgments by the choices of companies in which to invest? Which
approach is more effective?
Answer: There is no clear answer to whether corporate policies are more influenced by actions
and views of current shareholders or by large numbers refusing to invest in the corporation.
Diff: 1
Skill: Ethics and Policy
87) If a corporation's shareholders are supposed to have ultimate control over the corporation, is
it appropriate for management to get involved in proxy contests among shareholders? Under
what circumstances is it most appropriate for management to get involved?
Answer: In many cases, members of management are also shareholders, thus it would be
difficult to preclude their involvement. Management is most appropriately involved when the
issue is value to the shareholders, rather than management protection of its jobs.
Diff: 2
Skill: Ethics and Policy
88) Many persons believe that it is too easy for corporations to take over other corporations, and
point to the large reductions in workforces which frequently result following mergers. Should
there be limits placed on the ability to lay off employees following a business combination?
What are the advantages and disadvantages of limited regulation of merger activity?
Answer: Many argue that mergers act as incentives for the management of a company to not
become bloated, and that regulation will interfere with free market efficiency.
Diff: 1
Skill: Ethics and Policy
89) Jim "Thorny" Johnson is a shareholder of Staid Corporation who is informally head of a
dissident group. Thorny engaged in three proxy contests with the board members of Staid. In the
first, Thorny sought to recall one of the board members. This effort was successful. In the
second, Thorny sought to have the company stop doing business with nations that have not
signed the Montreal Protocol of 1987 dealing with the phasing out of substances thought to
deplete the atmospheric ozone. This effort was unsuccessful. Thorny's third proxy contest sought
having his pet poodle, Alicia, named the official mascot of Staid Corporation. This effort was
successful, mainly because the board thought if they did this Thorny would not bother them in
future proxy contests. The board members and Thorny incurred substantial expenses in
conducting these proxy contests. Can either side recover any of these costs, and from whom?
Answer: The first and third are personal and neither side could recover. Assuming that the
second is a policy issue, the directors could recover from Staid. Thorny could recover only if
successful.
Diff: 3
Topic: Proxy Solicitation
Skill: Factual Application
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90) Maple Corporation wants to acquire Foodcity Corporation, a chain of supermarkets. Both
corporations are publicly traded. Maple Corporation has some cash, but not a large amount, and
it needs to have ample cash for its operations. How might Maple be able to acquire Foodcity?
Answer: Maple could offer additional shares to the existing shareholders of Foodcity for their
shares in a stock swap, merger, tender offer, or consolidation. Alternatively, Maple could borrow
the money, possibly by issuing junk bonds in a leveraged buyout.
Diff: 2
Topic: Mergers and Acquisitions
Skill: Factual Application
91) The board of directors of Patty Corporation acquired Sandy Corporation by issuing junk
bonds in a leveraged buyout. Patty Corporation was barely able to make the interest payment on
the junk bonds and Patty Corporation suffered significant losses as a result. Will the business
judgment rule protect Patty's board of directors from a suit by shareholders?
Answer: It will protect the board if the board acted in good faith on an informed basis.
Diff: 2
Topic: Tender Offers
Skill: Factual Application
92) Expansive Corporation made a tender offer of $65 per share to the shareholders of
Hometown Corporation to acquire 75 percent, but no more than that, of the shares of Hometown.
Because only 68 percent of the shares had been tendered in 30 days, Expansive offered $75 per
share, and another 20 percent of the shares were tendered in 4 days. Expansive terminated the
higher offer on the fifth day, paid $65 for all the shares tendered at that price, and paid $75 for
some of the shares tendered at the higher price. Discuss Expansive's actions.
Answer: Under the Williams Act, Expansive must keep the increased offer open at least 10
business days, pay the $75 price for all shares acquired, and acquire shares tendered on a pro rata
basis from all who tendered.
Diff: 2
Topic: Mergers and Acquisitions
Skill: Factual Application
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93) Ramone is president of Rock Permanence, Inc. Flash in the Pan Corporation has just made a
tender offer to the shareholders of Rock Permanence. Flash in the Pan is known for severe job
cuts after takeovers, so Ramone and the other officers do the following:
1. They adopt contracts with the officers and other key managers that provide very generous
severance pay if Flash in the Pan should acquire Rock Permanence.
2. They tell many shareholders that they will be hired if they do not accept the offer. Each of
these shareholders is told to keep the arrangement secret and that they are one of only a select
few who will be hired.
3. They distribute an article from a newspaper 2 years earlier that discussed the inept
management of Flash in the Pan. They do not tell the shareholders that the publisher of the article
had been successfully sued by Flash in the Pan because of false statements.
4. They send mailings to their shareholders calling the management of Flash in the Pan a
"committee of the devil" and "shareholders' nightmare."
Discuss the appropriateness of the four listed actions by management.
Answer: There are many ways to fight a tender offer. No. 1 is probably acceptable so long as
management reasonably believes these actions to be in the best interest of the corporation and its
shareholders. No. 2 is not acceptable because it is fraudulent and because it is probably not in the
best interest of the corporation to hire so many people. No. 3 is at least misleading if not
fraudulent. No. 4 is probably acceptable assuming that the terms used are considered to be
opinions.
Diff: 3
Topic: Fighting a Tender Offer
Skill: Factual Application
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2010 Pearson Education, Inc. publishing as Prentice Hall