Case Briefs on Corporate Law

Yin Huang September 25, 2010

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Contents
1 The 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 Duty of Care Joy v. North . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dodge v. Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . A.P. Smith Manufacturing Co. v. Barlow . . . . . . . . . . . . Katz v. Oak Industries, Inc. . . . . . . . . . . . . . . . . . . . Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Francis v. United Jersey Bank . . . . . . . . . . . . . . . . . . In re Emerging Communications, Inc. Shareholders Litigation Kamin v. American Express Co. . . . . . . . . . . . . . . . . . Smith v. Van Gorkom . . . . . . . . . . . . . . . . . . . . . . In re Caremark International Inc. Derivative Litigation . . . . Malpiede v. Townson . . . . . . . . . . . . . . . . . . . . . . . Gantler v. Stephens . . . . . . . . . . . . . . . . . . . . . . . . Lyondell Chemical Co. v. Ryan . . . . . . . . . . . . . . . . . Opportu. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16 17 19 20 20 21 23 23 24 24 25 27 27 5 5 5 5 6 6 7 8 8 9 12 13 14 16

2 The Duty of Loyalty: Self-Dealing and Corporate nities 2.1 Lewis v. S.L. & E., Inc. . . . . . . . . . . . . . . . . 2.2 Cookies Food Products v. Lakes Warehouse . . . . 2.3 Hawaiian International Finances, Inc. v. Pablo . . . 2.4 Forkin v. Cole . . . . . . . . . . . . . . . . . . . . . 2.5 Northeast Harbor Golf Club, Inc. v. Harris . . . . . 2.6 Broz v. Cellular Information Systems, Inc. . . . . . 2.7 In re eBay, Inc. Shareholders Litigation . . . . . . . 2.8 Tyson Foods, Inc. (Tyson II) . . . . . . . . . . . . . 3 Duty of Loyalty: Controlling Shareholders 3.1 Zahn v. Transamerica Corp. . . . . . . . . . . . 3.2 Sinclair Oil Corp. v. Levien . . . . . . . . . . . 3.3 David J. Greene & Co. v. Dunhill International, 3.4 Kahn v. Lynch Communications Systems, Inc. . 3.5 Levco Alternative Fund v. The Reader’s Digest Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 In re Trados Inc. Shareholder Litigation . . . .

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4 The Voting System: Allocation of Legal Powers Rules 4.1 Charlestown Boot & Shoe Co. v. Dunsmore . . . 4.2 People ex rel. Manice v. Powell . . . . . . . . . . 4.3 Schnell v. Chris-Craft Industries, Inc. . . . . . . . 4.4 Blasius Industries Inc. v. Atlas Corp. . . . . . . . 4.5 Condec Corp. v. Lunkenheimer Co. . . . . . . . . 4.6 J.I. Case Co. v. Borak . . . . . . . . . . . . . . . 4.7 Wyandotte v. United States . . . . . . . . . . . . 4.8 Cort v. Ash . . . . . . . . . . . . . . . . . . . . . 4.9 Mills v. Electric Auto-Lite Co. . . . . . . . . . . . 4.10 TSC Industries v. Northway, Inc. . . . . . . . . . 4.11 Virginia Bankshares, Inc. v. Sandberg . . . . . . . 4.12 Rosenfeld v. Fairchild Engine & Airplane Corp. . 5 Transactions in Control 5.1 Zetlin v. Hanson Holdings, Inc. 5.2 Gerdes v. Reynolds . . . . . . . 5.3 Perlman v. Feldmann . . . . . . 5.4 Brecher v. Gregg . . . . . . . . 5.5 Essex Universal Corp. v. Yates .

and Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 31 32 32 33 34 34 35 35 35 36 37 38 39 39 40 41 42 43

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6 Mergers and Acquisitions: The Legal and Business ture 6.1 Hollinger, Inc. v. Hollinger International, Inc. . . . . . 6.2 Hariton v. Arco Electronics, Inc. . . . . . . . . . . . . . 6.3 Heilbrunn v. Sun Chemical Corp. . . . . . . . . . . . . 6.4 Farris v. Glen Alden Corp. . . . . . . . . . . . . . . . . 6.5 Rath v. Rath Packing Co. . . . . . . . . . . . . . . . . 6.6 Terry v. Penn Central Corp. . . . . . . . . . . . . . . .

Struc. . . . . . . . . . . . . . . . . . . . . . . . 45 45 46 47 47 48 48

7 Mergers and Acquisitions: Freeze-outs and the Appraisal Right 7.1 Leader v. Hycor, Inc. . . . . . . . . . . . . . . . . . . . . . . . 7.2 MT Properties, Inc. v. CMC Real Estate Corp. . . . . . . . . 7.3 Weinberger v. UOP, Inc. . . . . . . . . . . . . . . . . . . . . . 7.4 Glassman v. Unocal Exploration Corp. . . . . . . . . . . . . . 7.5 Solomon v. Pathe . . . . . . . . . . . . . . . . . . . . . . . . . 3

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7.6 7.7

Coggins v. New England Patriots Football Club, Inc. . . . . . 52 Alpert v. 28 Williams Street Corp. . . . . . . . . . . . . . . . 52 52 52 54 55 55 56

8 Public Contests for Corporate Control: Part 1 8.1 Unocal Corp. v. Mesa Petroleum Co. . . . . . . 8.2 Moran v. Household International, Inc. . . . . . 8.3 Carmody v. Toll Brothers . . . . . . . . . . . . 8.4 Revlon, Inc. v. MacAndrews & Forbes Holdings, 8.5 Barkan v. Amsted . . . . . . . . . . . . . . . . .

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9 Public Contests for Corporate Control: Part 2 56 9.1 Paramount Communications, Inc. v. QVC Network . . . . . . 56 10 Miscellaneous Cases 57 10.1 Emerald Partners v. Berlin . . . . . . . . . . . . . . . . . . . . 57 10.2 Pure Resources, Inc. Shareholders Litigation . . . . . . . . . . 57

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1.1

The Duty of Care
Joy v. North

692 F.2d 880 (2d Cir. 1982) Squib The Second Circuit held that directors’ decisions as to the risk of corporate investments should be reviewed under the business judgment rule. The court found that the business judgment rule would prevent directors from being unduly punished for taking risks.

1.2

Dodge v. Ford Motor Co.

204 Mich. 459 (1919) Squib Ford Motor Company was making enormous profits on cars. After distributing considerable dividends for several years, Henry Ford decided that the company should reduce dividends and use the money to expand its business and lower the price of its cars. The Michigan Supreme Court held that the company’s directors had no power to place humanitarian concerns over the maximization of immediate profits.

1.3

A.P. Smith Manufacturing Co. v. Barlow

13 N.J. 145 (1953) 1.3.1 Overview

The New Jersey Supreme Court held that a corporation may make donations to the public good. 1.3.2 Facts

A.P. Smith Manufacturing Company made a donation to Princeton University. According to the president of the company, the donation was “good” business” because it helped to produce an educated citizenry from which the company could hire. The president further stated that such donations were a “reasonable and justified public expectation.” The company’s shareholders sued on the ground that the company’s charter allowed no such donations. 5

1.3.3

Issue

May a corporation make donations for the public good? 1.3.4 Holding

A corporation may make donations for the public good. 1.3.5 Reasoning

Jacobs, J. The realities of the twentieth century have driven courts to construe corporate powers more and more broadly. The original restrictions on corporate powers developed in the nineteenth century, when wealth was concentrated in private hands rather than corporations. As corporations became more powerful, new legislation allowed them to donate within broad limits. Since nothing suggests that the donation was made to a pet charity, the donation is valid.

1.4

Katz v. Oak Industries, Inc.

508 A.2d 873 (Del.Ch. 1986) Squib The Chancery Court of Delaware held that corporate directors must prioritize the interests of shareholders even if that prioritization comes at the expense of bondholders.

1.5

Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp.

1991 WL 277613 (Del.Ch. 1991) Squib The Delaware Court of Chancery observed that some special circumstances may cause a corporate board to owe a fiduciary duty not just to shareholders but to the corporate enterprise as a whole. The court provided an example illustrating how directors should act when their corporation is “operating in the vicinity of insolvency.”

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1.6

Francis v. United Jersey Bank

87 N.J. 15 (1981) 1.6.1 Overview

The New Jersey Supreme Court held that corporate directors owe a duty of care to their corporation and its shareholders. The court outlined the responsibilities that arise from the duty of care. 1.6.2 Facts

Pritchard & Baird Intermediaries Corporation was a reinsurance broker. The company acted as a “middle man” between insurance companies seeking to indemnify each other for insurance claims. The company had begun as a partnership co-founded by Charles Prichard, Sr. (“Charles Sr.”) but eventually became a corporation whose whose board included Lillian Pritchard (“Lillian”), William Pritchard (“William”), and Charles Pritchard, Jr. (“Charles Jr.”). Following the death of Charles Sr., Charles Jr. and William began to abuse the company’s finances by withdrawing increasing sums of money from its accounts under the guise of “shareholder loans.” Although the withdrawals created enormous capital deficits that eventually forced the company into bankruptcy, Lillian did nothing to rein in the abuse. 1.6.3 Issue

(1) Did Lillian Pritchard breach a duty of care to the corporation and its shareholders? (2) If so, was the breach a proximate cause of the bankruptcy? 1.6.4 Holding

(1) Lillian Pritchard breached a duty of care to the corporation and its shareholders. (2) The breach was a proximate cause of the bankruptcy. 1.6.5 Reasoning

Pollock, J. Corporate directors owe a duty of care to the corporation and its shareholders. While the specific responsibilities vary according to the nature of the corporation, the duty of care requires directors to have at least

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a rudimentary understanding of the corporation’s business as well as up-todate knowledge of the corporation’s activities. Although a director need not personally audit the corporation’s accounts, directors should review financial statements to keep abreast of its financial situation. Therefore, a director may not excuse his failure to discharge this duty by claiming ignorance of the corporation’s state. Despite being a director of Pritchard & Baird, Lillian was entirely detached from the company’s affairs. Had she reviewed its financial statements, she would immediately have realized that Charles Jr. and William were making improper withdrawals from the company’s accounts. The obviousness of the withdrawals means that Lillian also had an obligation to attempt reining in the abuse. Her failure to intervene was therefore a proximate cause of the bankruptcy.

1.7

In re Emerging Communications, Inc. Shareholders Litigation

2004 WL 1305745 (2004) Squib The court found that a director violated his duty of care by agreeing to a merger in which his corporation would be purchased for an excessively low price. According to the court, the director’s financial expertise should have alerted him to the fact that the proposed price was unfairly low. The court held that this knowledge obligated him to object to the merger.

1.8

Kamin v. American Express Co.

383 N.Y.S.2d 807 (1976) 1.8.1 Overview

The New York State Supreme Court held that the business-judgment rule insulates corporate directors from liability for a decision as long as they made the decision on an informed basis and with good faith.

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1.8.2

Facts

American Express Company had purchased a significant amount of stock in another corporation. Although the purchase price of the stock was $29.9 million, the stock eventually depreciated to a value of only $4 million. American Express then faced a choice as to the disposition of the stock. The first choice was to sell the stock on the open market, in which case the company would be entitled to a tax break of $8 million. The second choice was to forgo the tax break and distribute the stock as dividends to American Express’s own shareholders. The directors considered both choices and ultimately decided on the second course of action. Shareholders then sued on the ground that the directors had wasted the company’s assets by failing to take advantage of the tax break. 1.8.3 Issue

Should the directors be liable for committing waste? 1.8.4 Holding

The directors should not be liable for committing waste. 1.8.5 Reasoning

Edward J. Greenfield, Justice. Because the complaint does not claim that the directors engaged in self-dealing or any other form of bad faith, the decision must be reviewed under the business-judgment rule. The businessjudgment rule states that directors are not liable for the results of a decision as long as they made that decision on an informed basis and in good faith. Since the directors considered both courses of action at some length, they cannot be held liable simply because the decision turned out badly.

1.9

Smith v. Van Gorkom

488 A.2d 588 (Del. 1985) 1.9.1 Overview

The Delaware Supreme Court declined to apply the business-judgment rule in reviewing a merger approved by insufficiently informed directors. The 9

court found that the directors had breached their duty of care by approving the merger. 1.9.2 Facts

Trans Union Corporation (“Trans Union”) was a diversified holding company. Although the company generated considerable revenue, it consistently faced difficulties in making enough money to fulfill its tax obligations. Jerome Van Gorkom, a director of the corporation, proposed solving the problem by allowing another corporation to acquire Trans Union in a leveraged buyout (LBO). The board considered the possibility only briefly. Donald Romans, the Chief Financial Officer, and Bruce Chelberg, the Chief Operating Officer, performed a cursory analysis of the feasibility of an LBO and concluded that $50 per share would be an “easy” price for such a transaction while $60 per share would be “very difficult.” Based on this analysis, Van Gorkom expressed his willingness to sell his 75,000 shares of the company for $55 per share. Rather than further discussing Trans Union’s options with the board, Van Gorkom approached Jay Pritzker, a takeover specialist and social acquaintance, with the possibility of acquiring Trans Union through a merger. Van Gorkom did not disclose to the board his contact with Pritzker, asking only Carl Peterson, the Controller, to analyze the feasibility of an LBO at $55 per share. Pritzker eventually agreed to a cash-out merger in which Pritzker’s New T Company would acquire Trans Union at $55 per share. To address Van Gorkom’s concerns as to the fairness of the price, the Merger Agreement allowed Trans Union to perform a ninety-day “market test” to determine whether a higher price could be obtained. Since Pritzker was taking the risk of losing Trans Union to a higher bidder, the Agreement also gave Pritzker an option to buy 1 million shares of Trans Union at $38—75 cents above the most recent closing price. In the rush to finalize the transaction, the Agreement was drafted “sometimes with discussion and sometimes not.” Van Gorkom conspicuously retained James Brennan, an independent attorney, to represent Trans Union and never consulted Trans Union’s legal department. Van Gorkom announced the merger to the other directors at a subsequent board meeting, but the subject of the meeting was not disclosed beforehand. Only Romans and Chelberg had any prior knowledge of the merger. During the meeting, Van Gorkom described the terms of the merger orally, sup10

ported only by statements from Romans, Chelberg, and Brennan. Copies of the Agreement were not available until after the meeting. Despite initial opposition to the merger, the board ultimately approved the transaction. The public announcement of the merger, however, set off a wave of protest from Trans Union’s managers. Faced with the possibility of en masse resignation in the management ranks, Van Gorkom convinced Pritzker to modify the Agreement. Although news of the modifications temporarily appeased the managers, the revised Agreement actually worked against Trans Union’s interests by placing additional constraints on Trans Union’s ability to withdraw from the merger upon receiving a better offer than Pritzker’s. Even so, the board again approved the merger without reviewing a copy of the Agreement. 1.9.3 Issue

Did Trans Union’s directors make an informed business judgment in approving the merger? 1.9.4 Holding

Trans Union’s directors did not make an informed business judgment in approving the merger. 1.9.5 Reasoning

Horsey, Justice (for the majority): The directors should not have relied solely on Van Gorkom’s oral presentation of the merger in approving the transaction. Van Gorkom did not supply copies of the Merger Agreement for review during either meeting, nor did he explain how he concluded that $55 per share would be a fair price. Although directors are entitled to rely upon “reports made by officers” in making business decisions, the oral statements of Van Gorkom, Romans, and Chelberg were too uninformed to qualify as “reports.” Although the price of $55 per share represented a substantial premium over Trans Union’s market price of $38 per share, the existence of such a premium alone does not establish the fairness of the transaction. Because the market price may undervalue the company, the directors should have undertaken a detailed valuation.

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Likewise, the market test failed to establish fairness because the Agreement severely limited Trans Union’s ability to accept offers better than Pritzker’s. The original Agreement prohibited Trans Union from soliciting offers, and the revised version hampered Trans Union’s ability to withdraw from the merger even if a better offer were forthcoming. Given these restrictions, the directors should have realized that no realistic market test was attainable. McNeilly, Justice, dissenting . . . The majority ignores that Trans Union’s directors had been discussing the tax problem long before the merger arose. Since the directors discussed the problem at length, their decision with regard to the merger should be considered an informed business judgment.

1.10

In re Caremark International Inc. Derivative Litigation

698 A.2d 959 (Del.Ch. 1996) 1.10.1 Overview

The Chancery Court of Delaware declined to impose liability on the directors of a corporation whose employees had engaged in conduct that resulted in a criminal investigation of the company. 1.10.2 Facts

Caremark International provided healthcare services. Because Caremark routinely contracted the services of independent physicians, the company faced the possibility of violating the Anti-Referral Payments Law (“ARPL”). The ARPL prohibited healthcare providers from paying “kickbacks” to physicians who referred Medicare of Medicaid patients to their services. Although Caremark published a “Guide to Contractual Relationships” instructing employees on compliance with the ARPL, the company was indicted for allegedly paying kickbacks to a Minneapolis physician. During the investigation, Caremark updated its Guide and implemented procedures for the approval of contracts with independent physicians.

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After Caremark settled the criminal case, shareholders sued on the ground that the company’s directors had breached their duty of care by failing to detect and thwart the conduct that led to the criminal investigation. 1.10.3 Issue

Did Caremark’s directors breach their duty of care by failing to detect and thwart the conduct that led to the criminal investigation? 1.10.4 Holding

Caremark’s directors did not breach their duty of care by failing to detect and thwart the conduct that led to the criminal investigation. 1.10.5 Reasoning

Allen, Chancellor. Corporate directors must make a good-faith effort to implement effective methods of monitoring the company’s employees and detecting wrongdoing, but the precise nature of the monitoring system should be left to the directors’ judgment. As long as directors ensure that such good-faith monitoring exists, they should not face liability simply for assuming the integrity of the company’s employees. Since Caremark implemented procedures to prevent the violation of the ARPL, the directors should not be liable for the cost of the settlement.

1.11

Malpiede v. Townson

780 A.2d 1075 (Del. 2001) 1.11.1 Overview

The Delaware Supreme Court held that § 102(b)(7) of the Delaware General Corporation Law insulated directors from personal liability for breaching the duty of care. 1.11.2 Facts

Frederick’s of Hollywood was negotiating a merger with Knightsbridge Capital Corporation. The terms of the merger restricted Frederick’s from negotiating with competing bidders. Despite that Frederick’s subsequently received 13

higher bids from two other prospective buyers, the directors of Frederick’s completed the merger with Knightsbridge. Shareholders of Frederick’s then sued on the ground that the directors had breached the duty of care by failing to consider the higher bids.. 1.11.3 Issue

Can the directors be personally liable for breaching the duty of care? 1.11.4 Holding

The directors cannot be personally liable for breaching the duty of care. 1.11.5 Reasoning

Veasey, Chief Justice: Section 102(b)(7) of the Delaware General Corporation Law insulates directors from personal liability for breaching the duty of care. Since the shareholders have not alleged that the directors engaged in conduct falling within any of the exceptions to § 102(b)(7), the directors cannot be held personally liable.

1.12

Gantler v. Stephens

965 A.2d 695 (Del. 2009) 1.12.1 Overview

The Supreme Court of Delaware held that the directors of a corporation may breach their fiduciary duty by frustrating its sale. 1.12.2 Facts

First Niles Financial, Inc. (“First Niles”) was a holding company whose sole business was to own and operate Home Federal Savings and Loan Association of Niles (“Home Federal”). Several directors of First Nile, including Gantler, did business with the company through their own businesses. When a depressed local economy dimmed the company’s prospects, the board considered selling the company. Although three prospective buyers approached First Niles with bids the directors deemed acceptable, negotiations with all 14

three parties ultimately failed. Gantler dragged his feet in providing duediligence materials to the first two buyers. The directors rejected the offer of the third buyer. The directors ultimately decided to concentrate voting power in their own hands by reclassifying First Niles’s stock. Although the reclassification was approved by a shareholder vote, the directors did not disclose the extent to which their own businesses did business with First Niles. Shareholders then sued the directors for breaching their fiduciary duty. 1.12.3 Issue

Does the conduct of First Niles’s directors support a claim that the directors breached their fiduciary duty? 1.12.4 Holding

The conduct of First Niles’s directors supports a claim that the directors breached their fiduciary duty. 1.12.5 Reasoning

Jacobs, Justice. The decisions of a corporate board are reviewed under the business-judgment rule unless the plaintiff demonstrates that the directors failed to make an informed and impartial decision. The plaintiff cannot overcome the business-judgment rule simply by pointing to the directors’ desire to entrench themselves. Because all directors face the possibility of being dismissed upon the sale of their corporation, the plaintiff must identify some element of self-interest beyond the mere continuation of service as a board member. Since the directors had business ties to First Niles through their own businesses, the circumstances support the claim that the directors breached their fiduciary duty in refusing to sell First Niles. Although shareholder approval of a self-interested decision may reinstate the business-judgment rule, reinstatement does not apply here because the directors failed to disclose their personal ties to First Niles in the proxy statement accompanying the vote.

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1.13

Lyondell Chemical Co. v. Ryan

979 A.2d 235 (Del. 2009) 1.13.1 1.13.2 1.13.3 1.13.4 1.13.5 Overview Facts Issue Holding Reasoning

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2.1

The Duty of Loyalty: Self-Dealing and Corporate Opportunities
Lewis v. S.L. & E., Inc.

629 F.2d 764 (2d Cir. 1980) 2.1.1 Overview

The Second Circuit declined to apply the business-judgment rule in reviewing a transaction in which the directors of a corporation had engaged in self-dealing. The court held instead that the defendants had the burden of establishing that the transaction was fair and reasonable. 2.1.2 Facts

The Lewis family operated a business consisting of two corporations: S.L. & E., Inc. (“SLE”) and Lewis General Tires, Inc. (“LGT”). The organization of the business was such that SLE owned the land on which LGT carried out its operations. SLE leased the land to LGT at an annual rent of $14,400 between 1966 and 1971, though the formal terms of the lease were never given much attention despite significant fluctuations in the real-estate market. The family members seemed to believe that the precise terms of the lease were immaterial since SLE existed purely to serve the needs of LGT. They also apparently ignored that there existed some shareholders of SLE who were not simultaneously shareholders of LGT. 16

Eventually, the affairs of the business became such that Donald Lewis (“Donald”) owned only shares of SLE. At that time, several of his siblings— Richard Lewis, Alan Lewis, and Leon Lewis, Jr.—owned enough shares of SLE and LGT to serve as directors for both corporations. In short, there existed a situation in which the directors of SLE constituted a subset of the directors of LGT. When the siblings attempted to exercise an option to buy Donald’s shares of SLE, Donald charged that they had wasted SLE’s assets by “grossly undercharging” LGT for the use of SLE’s land. 2.1.3 Issue

(1) Which party bears the burden of proof as to whether SLE’s directors had committed waste? (2) Did that party discharge the burden? 2.1.4 Holding

(1) The defendants bear the burden of proving that they committed no waste. (2) The defendants failed to discharge the burden. 2.1.5 Reasoning

Although an informed decision by the directors of a corporation is normally reviewed using the business-judgment rule, the rule does not apply when the directors face a conflict of interest. In such cases, the directors have the burden of proving that their decision was fair and reasonable to the corporation. The defendants have plainly failed to discharge the burden. Expert testimony established that the market rent during the relevant period was more than $39,000 per year and that such a rent was well within the means of LGT. The defendants’ claims of LGT’s financial infirmity belie their incentive to give themselves higher salaries.

2.2

Cookies Food Products v. Lakes Warehouse

430 N.W.2d 447 (Iowa 1988)

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2.2.1

Overview

The Supreme Court of Iowa declined to hold the director of a corporation liable for breaching the fiduciary duty even though he had engaged in transactions with the potential to create a conflict of interest. The court found that the director discharged the burden of proving that the transactions were fair. 2.2.2 Facts

L. D. Cook founded Cookies Food Products, Inc. to produce and distribute a barbecue sauce that he had created. The shares of the corporation belonged to Cook, Duane Herrig (the defendant), and thirty-some other shareholders. In addition to being a minority shareholder of Cookies, Herrig owned and operated two other corporations: Lakes Warehouse Distributing, Inc., and Speed’s Automotive Co., Inc. When Cookies found itself in dire financial straits after its first year in business, its directors approached Herrig with the proposition that he use the resources of his two other corporations to distribute Cookies’s barbecue sauce. Herrig entered into an exclusive distribution with Cookies, and his assistance led to a phenomenal growth in sales. Herrig became a majority shareholder of Cookies upon Cook’s retirement. Upon assuming control of the corporation, he replaced several directors with his own appointees. Herrig also took on additional responsibilities within the business, most notably by developing a taco sauce for which he received royalties from Cookies. The directors also authorized the corporation to pay Herrig $1,000 per month for the time he spent managing the business. Because Cookies distributed no dividends during this period of growth, the minority shareholders became dissatisfied with their inability to profit from the corporation. They sued on the ground that Herrig had improperly profited from self-dealing arrangements with Cookies. 2.2.3 Issue

Did Herrig prove that he acted in good faith, honesty, and fairness despite the self-dealing nature of his arrangements with Cookies?

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2.2.4

Holding

Herrig proved that he acted in good faith, honesty, and fairness. 2.2.5 Reasoning

Neuman, Justice. Nothing suggests that Herrig failed to disclose the profits he made from his relationship with Cookies. The evidence shows that Herrig was instrumental in the success of Cookies. Trial testimony suggests that he may actually have been underpaid for the amount of work he did. Schultz, Justice, dissenting. The majority has absolved Herrig of liability without properly analyzing whether his arrangements with Cookies were actually fair. The evidence suggests that the corporation could have saved money by hiring other individuals to perform Herrig’s work. That Herrig contributed to the success of the business has no bearing on whether his dealings with the business were fair.

2.3

Hawaiian International Finances, Inc. v. Pablo

53 Haw. 149 (1971) 2.3.1 Overview

The Supreme Court of Hawaii found that the director of a corporation breached his fiduciary duty when he accepted undisclosed commissions from the sale of real estate to the corporation. 2.3.2 Facts

Pastor Pablo (“Pablo”) and Rufina Pablo were the directors of Pastor Pablo Realty, Inc. At the same time, Pablo served as the president of Hawaiian International. Pablo advised Hawaiian International as to the availability for purchase of two parcels of land in California. Acting on Hawaiian International’s behalf, Pablo agreed to purchase the land. Unbeknownst to Hawaiian International, however, Pastor also arranged to take a portion of the commissions to be received by the seller’s brokers. Pablo did not disclose the commissions to the directors of Hawaiian International until several months after the transaction had closed. 19

2.3.3

Issue

Did Pablo breach his fiduciary duty to Hawaiian International? 2.3.4 Holding

Pablo breached his fiduciary duty. 2.3.5 Reasoning

Kobayashi, Justice. The acceptance of undisclosed benefits arising from a transaction involving a corporation may amount to a breach of the fiduciary duty owed to that corporation even if the benefits do not result in any harm to the corporation. Pablo cannot circumvent the settled law by claiming that Hawaiian International would have been prohibited from receiving any commissions from the sale by virtue of not being a licensed real-estate broker. A corporate officer cannot invoke ultra vires in order to obtain a share of the profits from a transaction. Pablo should have disclosed the commission to Hawaiian International so as to allow the corporation to make an informed decision as to the purchase price.

2.4

Forkin v. Cole

548 N.E.2d 795 (Ill.App. 1989) Squib Cole, who controlled HPDI Corporation, mortgaged the corporation’s property as security for a personal loan. Although Cole argued that the corporation suffered no material loss, the court found that he had encumbered the HPDI asset.

2.5

Northeast Harbor Golf Club, Inc. v. Harris

661 A.2d 1146 (Maine 1995) 2.5.1 Overview

The Supreme Court of Maine articulated the steps that a corporate director must take in order to avoid liability for the improper taking of a corporate opportunity. 20

2.5.2

Facts

While serving as a director of Northeast Harbor Golf Club, Harris purchased several parcels of land adjacent to the Golf Club’s property. Harris disclosed each transaction to the Golf Club’s board of directors, and she stated in each instance that she had no particular plans to develop the land. The directors declined to take any formal action in response to the purchases. When Harris expressed the desire to develop the land as residential subdivisions, the directors argued that she had breached her fiduciary duty to the Golf Club by failing to notify the directors of the opportunity to purchase the land. 2.5.3 Issue

What must a director do to avoid liability for the improper taking of a corporate opportunity? 2.5.4 Holding

A director must at least notify the corporation of an opportunity from which the director might profit personally at the corporation’s expense. 2.5.5 Reasoning

Roberts, Justice. Although different courts have adopted different tests for what constitutes a “corporate opportunity,” the basic purpose of each test is to ensure that a director does not pursue personal gain at the corporation’s expense. As set forth in the American Law Institute’s Principles of Corporate Governance, a director should disclose to the corporation any opportunity that might set the director’s personal interests at odds with the interests of the corporation. In order to avoid liability for breaching her fiduciary duty, Harris must convince the court that she afforded the Golf Club a meaningful opportunity to consider and reject purchasing the parcels of land at issue.

2.6

Broz v. Cellular Information Systems, Inc.

673 A.2d 148 (Del. 1996)

21

2.6.1

Overview

The Delaware Supreme Court held that the director of a corporation generally has no obligation to disclose potential conflicts of interest to potential buyers of the corporation. 2.6.2 Facts

Broz simultaneously served as a director for two corporations. First, he was the sole stockholder of RFB Cellular, Inc. (“RFBC”), which provided cell-phone service in the Midwest. Second, he was a director of Cellular Information Systems, Inc. (“CIS”), which was a competitor of RFBC. CIS knew of Broz’s relationship to RFBC at all times. In April 1994, Mackinac Cellular Corporation approached Broz to discuss the possibility of selling to RFBC a license that would allow RFBC to expand its coverage. Broz promptly disclosed the offer to several directors of CIS, each of whom expressed that CIS had neither the resources nor the plans to purchase such a license. After CIS made clear its lack of interest, Broz acquired the license for RFBC in November 1994. Between April 1994 and November 1994, PriCellular, Inc. acquired CIS. PriCellular subsequently sued Broz on the ground that he had breached his fiduciary duty to CIS by failing to consider that a potential purchaser of CIS might be interested in the license. 2.6.3 Issue

Is the director of a corporation required to disclose a potential conflict of interest not only to the corporation but also to parties that might have a future interest in the corporation? 2.6.4 Holding

The director of a corporation need only disclose potential conflicts of interest to the corporation itself. 2.6.5 Reasoning

The acquisition of CIS by PriCellular was still purely speculative when Broz disclosed the availability of the license to CIS. Broz obtained confirmation 22

that CIS had no interest in purchasing the license. Trial testimony established that the entire board of CIS believed that the corporation was financially incapable of making such a purchase. Having ascertained CIS’s intentions, Broz had no obligation to anticipate eventualities such as PriCellular’s acquisition of CIS.

2.7

In re eBay, Inc. Shareholders Litigation

2004 WL 253521 (Del. Ch. 2004) Squib The Delaware Court of Chancery held that accepting shares that would otherwise be issued in an initial public offering (IPO) may amount to a breach of the fiduciary duty. During a secondary offering of eBay, Goldman Sachs issued shares of the company to the defendants. Because the price of eBay stock skyrocketed, the defendants made immense profits on the shares within days or hours of receiving them. Although the court doubted that accepting such shares interfered with any corporate opportunity, it nonetheless found that the defendants’ conduct amounted to a breach of their fiduciary duty. The court held that the defendants had an obligation to provide an accounting of personal profits derived from transactions involving the corporation.

2.8

Tyson Foods, Inc. (Tyson II)

2007 WL 2351071 (Del. Ch. 2007) 2.8.1 Overview

The Delaware Court of Chancery found that the granting of “spring-loaded” stock options may amount to a breach of the fiduciary duty. The court held that failure to disclose the nature of such options with sufficient particularity precludes the application of the business-judgment rule in reviewing the issuance of the options. 2.8.2 Facts

The directors of Tyson Foods received from the corporation “spring-loaded” stock options—options whose strike prices were so contrived as to have a 23

high probability of being “in the money” immediately after issuance. Despite significant doubt as to whether the options complied with the terms of the Tyson Stock Incentive Plan, the directors assured shareholders in vague terms that the options were indeed permitted under the Plan. 2.8.3 Issue

Did the directors breach their fiduciary duty by failing to disclose the nature of the options with sufficient particularity? 2.8.4 Holding

The directors breached their fiduciary duty by failing to disclose the nature of their options with sufficient particularity. 2.8.5 Reasoning

Chandler, J. Directors owe to their corporation a duty of unremitting loyalty. The directors of Tyson Foods cannot fulfill this obligation by employing “bare formalism concealed by a poverty of communication.” Since the directors breached their fiduciary duty, their conduct cannot be reviewed under the business-judgment rule.

3
3.1

Duty of Loyalty: Controlling Shareholders
Zahn v. Transamerica Corp.

162 F.2d 36 (3d Cir. 1947) 3.1.1 Overview

The Third Circuit held that a controlling shareholder owes to minority shareholders the same fiduciary duty as that which a director would owe. 3.1.2 Facts

The Axton-Fisher Tobacco Company had issued three classes of stock: preferred stock, Class A common stock, and Class B common stock. Importantly, the Class A shares were callable by Axton-Fisher at $60 per share. 24

Zahn owned Class A stock. Transamerica held enough Class B stock to control Axton-Fisher by appointing a majority of its directors and managing Axton-Fisher’s business affairs. Transamerica knew that Axton-Fisher owned a significant quantity of tobacco whose value had recently risen from approximately $6 million to more than $20 million. To appropriate the value of the tobacco for itself, Transamerica caused Axton-Fisher’s board to call the Class A stock and liquidate the company. Zahn sued on the ground that the call option improperly deprived holders of Class A stock from receiving their fair share of the proceeds from the liquidation. 3.1.3 Issue

(1) Did Transamerica owe a fiduciary duty to Axton-Fisher’s minority shareholders? (2) If so, did Transamerica breach that duty by depriving shareholders of the ability to participate fully in the liquidation? 3.1.4 Holding

(1) Transamerica owed a fiduciary duty to the minority shareholders. (2) Transamerica breached that duty by calling Class A stock. 3.1.5 Reasoning

Biggs, Circuit Judge. While minority shareholders may vote solely for their own interests, directors owe a fiduciary duty to all shareholders. Because Transamerica appointed a majority of Axton-Fisher’s directors, AxtonFisher’s board was not acting disinterestedly when it chose to liquidate the company. Rather, a “puppet-puppeteer” relationship existed between Transamerica and Axton-Fisher. This relationship obligated Transamerica to act not only in its own interests but also in the interests of Axton-Fisher’s shareholders.

3.2

Sinclair Oil Corp. v. Levien

280 A.2d 717 (Del. 1971)

25

3.2.1

Overview

The Supreme Court of Delaware held that the intrinsic-fairness rule should be used to review a parent corporation’s self-dealing transactions with a subsidiary. By contrast, the court held that the business-judgment rule applies to all other parent-subsidiary dealings. 3.2.2 Facts

Sinclair Oil Corporation (“Sinclair”) wholly owned and operated Sinclair Venezuelan Oil Company (“Sinven”). Between 1960 and 1966, Sinclair caused Sinven to distribute dividends. During that period, Sinclair also breached a contract with Sinven. Levien sued on the ground that Sinclair had breached its fiduciary duty to Sinven’s shareholders by distributing the dividends and breaching the contracts. 3.2.3 Issue

(1) What standard should be applied in reviewing potentially self-interested dealings between a parent corporation and a subsidiary? (2) Did Sinclair breach its fiduciary duty to Sinven’s shareholders? 3.2.4 Holding

(1) A parent corporation’s potentially self-interested dealings with a subsidiary should be reviewed under the intrinsic-fairness standard. All other parent-subsidiary dealings should be reviewed under the business-judgment rule. (2) Sinclair did not breach any fiduciary duty in distributing the dividends, but it did breach a fiduciary duty by failing to make payments pursuant to its contract with Sinven. 3.2.5 Reasoning

Wolcott, Chief Justice. The intrinsic-fairness rule applies to dealings in which a parent corporation may benefit itself at the expense of the subsidiary’s shareholders. By contrast, the business-judgment rule applies to any parent-subsidiary dealing where such a conflict of interest cannot arise. Levien has failed to demonstrate that the distribution of dividends by Sinven benefited Sinclair at the expense of Sinven’s shareholders. While dis26

tributing the dividends may have been imprudent in light of Sinven’s financial situation, the only relevant consideration is that the dividends proportionally benefited Sinven’s shareholders. Because the dividends did not benefit Sinclair at the expense of Sinven’s shareholders, no conflict of interest existed. Levien has also failed to demonstrate that the distribution of dividends deprived Sinven of a corporate opportunity. Although he has alleged that distributing the dividends slowed Sinven’s growth, he could not point to any particular opportunity that Sinven lost through this course of action. Because Levien has not shown that any conflict of interest existed between Sinclair and Sinven, Sinclair’s conduct must be evaluated under the businessjudgment rule. Since the distribution of the dividends cannot be considered irrational, Levien cannot recover for their distribution. By contrast, the breach-of-contract claim must be evaluated under the intrinsic-fairness standard because Sinclair’s failure to make contractual payments to Sinven had the potential to benefit Sinclair at the expense of Sinven’s shareholders. Because Sinclair has failed to show that the delayed payments were intrinsically fair to Sinven’s shareholders, Sinclair may be liable to Levien.

3.3

David J. Greene & Co. v. Dunhill International, Inc.

Squib Dunhill International owned Spalding, a manufacturer of sporting goods and toys. After Dunhill acquired Child Guidance Toys, Greene sued on the ground that the acquisition was a corporate opportunity belonging to Spalding. The Chancery Court of Delaware ruled for Greene upon finding that Spalding had a realistic prospect of acquiring Child Guidance Toys.

3.4
3.4.1

Kahn v. Lynch Communications Systems, Inc.
Overview

The Supreme Court of Delaware applied the entire-fairness rule in reviewing a transaction involving self-dealing. The court declined to shift the burden of proving fairness to the plaintiff after finding that the approval of ostensibly disinterested directors was defective.

27

3.4.2

Facts

Alcatel U.S.A. Corporation (“Alcatel”) owned 43.3 percent of Lynch Communication Systems, Inc. (“Lynch”). Alcatel itself was owned by the Compagnie G´n´rale d’Electricit´ (“CGE”). Although Alcatel was a minority shareholder e e e of Lynch, Alcatel nonetheless exercised considerable control over Lynch by designating five of its eleven directors and several other important officers. After determining that Lynch should acquire Telco Systems, Inc. (“Telco”) to safeguard its competitiveness, the directors of Lynch recommended the acquisition to Alcatel. Alcatel, however, rejected the recommendation and suggested instead that Lynch should acquire Celwave Systems, Inc. (“Celwave”), an indirect subsidiary of CGE. Despite that several of Lynch’s directors favored the originally proposed acquisition of Telco, Alcatel insisted that Lynch pursue Celwave. Lynch formed an Independent Committee to consider the acquisition of Celwave. The Committee ultimately found the acquisition to be unfavorable and unanimously rejected the transaction. Alcatel responded by abandoning the Celwave proposal and making an offer to purchase enough Lynch stock to become the majority shareholder of Lynch. Despite that negotiations suggested that Lynch desired at least $17 per share, Alcatel made a final offer of $15.50 per share. Lynch’s board approved the transaction. Kahn sued on the ground that the price was unfairly low because Lynch’s directors could neither act independently of Alcatel nor negotiate at arm’s length with Alcatel. 3.4.3 Issue

Did Alcatel’s control of Lynch restrain the directors of Lynch from acting independently and negotiating at arm’s length? 3.4.4 Holding

Alcatel’s control of Lynch restrained the directors of Lynch from acting independently and negotiating at arm’s length. 3.4.5 Reasoning

Holland, Justice. Although Alcatel was a minority shareholder of Lynch, it was nonetheless a controlling shareholder because it exercised substantial 28

control over Lynch. Alcatel therefore faced a conflict of interest in purchasing Lynch stock, so the transaction must be reviewed under the entire-fairness standard. Although the approval of a self-interested transaction by independent directors may shift the burden of proof to the plaintiff, the burden of proving fairness in the current case must rest with Alcatel. While it is true that Lynch’s Independent Committee formally approved the transaction, that approval was defective because the Committee members were not acting independently in making the decision. In addition to generally dominating Lynch’s operations, Alcatel threatened to initiate a hostile takeover in the event that Lynch turned down its offered price. Because Alcatel interfered with Lynch’s ability to decline the transaction, it has the burden of proving that the transaction was fair.

3.5

Levco Alternative Fund v. The Reader’s Digest Association, Inc.

803 A.2d 428 (Del. 2002) Squib The Delaware Supreme Court disapproved a recapitalization of the Reader’s Digest Association that would have benefited the controlling shareholder at the expense of the minority shareholders.

3.6

In re Trados Inc. Shareholder Litigation

2009 WL 2225958 (Del.Ch. 2009) 3.6.1 Overview

The Chancery Court of Delaware held that corporate directors must prioritize the interests of common stockholders whenever their interests conflict with those of preferred stockholders. 3.6.2 Facts

Trados developed language-translation software. Four of its seven directors— David Scanlan, Lisa Stone, Sameer Gandhi, and Joseph Prang—were board

29

designees of investment firms whose combined holdings included 51% of Trados’s outstanding preferred stock. The company’s poor performance caused the directors to contemplate merging Trados with another company. To this end, the directors hired a new CEO, Joseph Campbell, whose task was to “grow the company profitably or sell it.” Under Campbell’s leadership, Trados’s performance improved to the point where a merger was no longer urgently needed. Despite the company’s improved prospects, the directors nonetheless approved a merger in which the common stockholders received nothing for their shares. 3.6.3 Issue

Does the directors’ decision to sell Trados support a claim for breach of the fiduciary duty? 3.6.4 Holding

The directors’ decision to sell Trados supports a claim for breach of the fiduciary duty. 3.6.5 Reasoning

Chandler, Chancellor Where the interests of common stockholders conflict with those of preferred stockholders, corporate directors must prioritize the interests of common stockholders. The business-judgment rule does not apply when the directors of a corporation have sufficiently material interests that may conflict with those of shareholders. Scanlan, Stone, Gandhi, and Prang all faced conflicts of interest because each worked for an investment firm that sought to maximize the value of the preferred shares. Because these directors were employed by their respective firms, it is reasonable to infer that they could not weigh impartially the interests of the preferred stockholders against those of the common stockholders.

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4
4.1

The Voting System: Allocation of Legal Powers and Proxy Rules
Charlestown Boot & Shoe Co. v. Dunsmore

60 N.H. 85 (1880) 4.1.1 Overview

The New Hampshire Supreme Court held that shareholders may not interfere with the directors’ management of a corporation except to the extent permitted by corporate bylaws. 4.1.2 Facts

The shareholders of the Charlestown Boot & Shoe Company voted to close down the corporation and appointed Osgood, who was not affiliated with the corporation, to oversee the conclusion of its operations. The directors of Charlestown, however, refused to follow the shareholders’ recommended course of action and declined to sell the corporation’s assets. After an uninsured warehouse burned down, the shareholders for damages allegedly incurred by the directors’ unwillingness to follow their recommendations. 4.1.3 Issue

Did the directors have an obligation to act in accordance with the shareholders’ recommendations? 4.1.4 Holding

The directors had no obligation to act in accordance with the shareholders’ recommendations. 4.1.5 Reasoning

Smith, J. The affairs of a corporation are to be managed solely by its directors. Shareholders may not interfere with the directors’ decisions except to the extent permitted by the corporate bylaws. Shareholders may not appoint an external individual, such as Osgood, to act with the directors. 31

4.2

People ex rel. Manice v. Powell

94 N.E. 634 (N.Y. 1911) Squib The New York Court of Appeals held that corporate directors are entitled act according to their best judgment in managing the affairs of the corporation. The court emphasized that “stockholders cannot act in relation to the ordinary business of the corporation.”

4.3

Schnell v. Chris-Craft Industries, Inc.

285 A.2d 437 (Del. 1971) 4.3.1 Overview

The Supreme Court of Delaware held that the directors of a corporation may not change the date of a shareholder vote for the purposes of entrenching themselves on the board. 4.3.2 Facts

After the shareholders of Chris-Craft Industries express their intent to replace the directors because of the corporation’s poor performance, the directors voted to advance the date of the annual shareholder meeting by a month. The shareholders sued on the ground that the directors changed the date of the meeting for the purpose of frustrating a shareholder vote on the issue of replacing the directors. 4.3.3 Issue

Did the directors improperly change the date of the shareholder meeting? 4.3.4 Holding

The directors improperly changed the date of the shareholder meeting.

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4.3.5

Reasoning

Herrmann, Justice (for the majority of the court): The directors changed the date of the shareholder meeting in order to frustrate the shareholders’ efforts to organize a proxy battle. Directors may not use the corporate machinery in such a way as to frustrate dissident shareholders’ legitimate attempts to exercise their voting rights. Even though the directors’ actions technically fall within the boundaries of the Delaware Corporation Law, mere compliance with the letter of the law does not validate an otherwise inequitable action.

4.4

Blasius Industries Inc. v. Atlas Corp.

564 A.2d 651 (Del.Ch. 1988) 4.4.1 Overview

The Delaware Court of Chancery held that the directors of a corporation may not interfere with the power of shareholders to appoint a majority of the board. The court found that this limitation applies even if the directors are acting in good faith and not merely to entrench themselves. 4.4.2 Facts

After acquiring 9.1% of the outstanding shares of Blasius Industries, Atlas announced its intention to explore the possibility of acquiring control of the company and implementing a restructuring. Acting through a subsidiary, Atlas submitted to Blasius a “precatory resolution” indicating its intention to expand the board from seven to fifteen members and to appoint enough directors to control a majority of the new board. The directors of Blasius responded by adding two members to the board, thereby preventing Atlas from installing a majority in the proposed fifteen-member board. Atlas challenged the decision on the ground that it was an improper exercise of the directors’ power. 4.4.3 Issue

Are the directors of a corporation prohibited from interfering with the shareholders’ ability to install a majority of the board even if they are sincerely 33

acting in the corporation’s interest? 4.4.4 Holding

The directors of a corporation are prohibited from interfering with the shareholders’ ability to install a majority of the board even if they are sincerely acting in the corporation’s interest. 4.4.5 Reasoning

Allen, Chancellor. Because the appointment of directors lies at the foundation of the agency relationship between shareholders and the board, the directors of a corporation should not have the power to take any action whose intended effect is to entrench the incumbent directors’ control of the board. Even if the directors believe in good faith that entrenchment will serve the corporation’s interests, they must nonetheless refrain from tampering with the allocation of power between the board and shareholders. This restriction protects shareholders, who can respond to unsatisfactory management only by exercising their votes or selling their shares.

4.5

Condec Corp. v. Lunkenheimer Co.

43 Del.Ch. 353 (1967) Squib The Delaware Court of Chancery held that a corporation may not resist a takeover attempt by diluting the acquiring party’s holdings by issuing new shares.

4.6

J.I. Case Co. v. Borak

377 U.S. 426 (1964) Squib The Supreme Court held that private parties may bring claims to enforce the SEC’s Proxy Rules. The Court found that private enforcement supplemented the SEC’s efforts to ensure compliance with the Rules.

34

4.7

Wyandotte v. United States

389 U.S. 191 (1967) Squib The Supreme Court reaffirmed its holding in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), that private parties could bring claims to enforce the Proxy Rules.

4.8

Cort v. Ash

422 U.S. 66 (1975) Squib The Supreme Court established a four-factor test for determining the appropriateness of bringing a private action to enforce the Proxy Rules. The Court stated that courts deciding whether to allow a private action should consider (1) whether the plaintiff belongs to the class for whose especial benefit the statute was enacted; (2) whether the statute creates a federal right in favor of the plaintiff; (3) whether a private action would be consistent with the legislative scheme; and (4) whether the plaintiff’s cause of action would traditionally fall under state law or federal law.

4.9

Mills v. Electric Auto-Lite Co.

396 U.S. 375 (1970) 4.9.1 Overview

The Supreme Court held that a materially misleading proxy statement necessarily constitutes a cause of the subsequent shareholder action. The Court found that such a statement allows private enforcement of § 14(a) of the Securities Exchange Act of 1934. 4.9.2 Facts

Mergenthaler Linotype Company was a majority shareholder of Electric AutoLite Company. Mergenthaler appointed eleven of Electric Auto-Lite’s directors. When Mergenthaler sought to merge with Electric Auto-Lite, it issued a proxy statement that failed to mention that Mergenthaler had appointed

35

the eleven directors. Mills sued on the ground that the omission of this information constituted a violation of § 14(a) of the Securities Exchange Act of 1934. 4.9.3 Issue

(1) Is Mills required to show that the misleading proxy statement was a butfor cause of the merger? (2) May the fairness of a merger allow that merger to be upheld despite inadequate disclosure? 4.9.4 Holding

(1) Mills need not show that the misleading proxy statement was a but-for cause of the merger. The misleading nature of the statement itself gives rise to a inference that the statement influenced the shareholders’ votes. (2) The fairness of a merger does not form a defense against claims of inadequate disclosure. 4.9.5 Reasoning

Mr. Justice Harlan delivered the opinion of the Court. The very fact that the proxy statement was misleading gives rise to the inference that the statement affected shareholders’ votes. When a shareholder has shown that the disclosures contained in a proxy statement are materially defective, the shareholder need not show additionally that any of the defects had a decisive effect on the vote. This rule avoids the intractable difficulty of determining just how many votes were affected by the defective proxy statement. The fairness of a merger does not form a defense against claims of inadequate disclosure. Congress intended to promote the exercise of shareholders’ votes in passing the Act of 1934; allowing a merger to be sustained solely by a fair outcome would defeat this purpose.

4.10

TSC Industries v. Northway, Inc.

426 U.S. 438 (1976) Squib The Supreme Court defined what it meant for information to be “material” for the purposes of a proxy statement. The Court stated that “an

36

omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” The Court further stated that a material fact is one which would alter the “total mix” of information available to a reasonable investor.

4.11

Virginia Bankshares, Inc. v. Sandberg

501 U.S. 1083 (1991) 4.11.1 4.11.2 Overview Facts

First American Bankshares, Inc. (“FABI”) wholly owned Virginia Bankshares, Inc. (“VBI”). FABI pursued a transaction in which First American Bank of Virginia (“Bank”) would merge with VBI. FABI issued a proxy solicitation indicating that $42 per share was a “fair” price for the Bank even though circumstances suggested that the Bank was worth at least $60 per share. Sandberg sued on the ground that FABI’s conclusory regarding the Bank’s value violated § 14(a) of the Securities Exchange Act of 1934. 4.11.3 Issue

(1) Can conclusory or qualitative statements be materially misleading for the purposes of § 14(a)? (2) Can undisclosed beliefs of directors support liability under § 14(a)? 4.11.4 Holding

(1) Conclusory or qualitative statements can be materially misleading for the purposes of § 14(a). (2) Undisclosed beliefs of directors cannot support liabiliy under § 14(a). 4.11.5 Reasoning

Justice Souter delivered the opinion of the Court. Because directors typically know much more about a corporation than shareholders, directors’ statements evaluations of potential transactions can be material to the extent that shareholders rely on their expertise. Furthermore,

37

4.12

Rosenfeld v. Fairchild Engine & Airplane Corp.

309 N.Y. 168 (1955) 4.12.1 Overview

The New York Court of Appeals held that a corporation may reimburse current and former directors for the expense of a proxy contest as long as the contest was not waged for the purpose of securing a personal interest in controlling the corporation. 4.12.2 Facts

After control of Fairchild Engine and Airplane changed hands following a proxy contest, the new directors voted to provide $28,000 to the former directors for expenses incurred in defending against the contest. Shareholders voted to provide $127,000 to the new directors for their expenses in bringing the contest. As a shareholder, Rosenfeld sued the corporation on the theory that such compensation was improper. 4.12.3 Issue

May a corporation compensate the parties to a proxy contest for the expenses they incurred during the contest? 4.12.4 Holding

A corporation may compensate the parties to a proxy contest for the expenses they incurred during the contest. 4.12.5 Reasoning

Frossel, Judge. Directors must have the means to resist those who attempt to seize control of their corporation. Otherwise, the directors would be at the mercy of any party with sufficient funds to initiate a takeover of the company. As long as the parties wage the contest over genuine issues of policy as opposed to the desire for personal power, the corporation should be allowed to compensate both parties for the expenses they incur.

38

Desmond, Judge (concurring). The court should consider the specific nature of the expenses incurred by each party to the proxy contest. The court should exclude from reimbursement those expenses relating to “proceedings by one faction in its contest with another for the control of the corporation.” Van Voorhis, Judge (dissenting). The former directors expended funds for purposes

5
5.1

Transactions in Control
Zetlin v. Hanson Holdings, Inc.

48 N.Y.2d 684 (1979) 5.1.1 Overview

The New York Court of Appeals held that a controlling shareholder may generally sell its shares at a premium. 5.1.2 Facts

The controlling shareholders of Gable Industries, Inc. sold their 44.4% stake in the company at $15 per share when the market price of Gable Industries stock was only $7.38 per share. Zetlin sued on the ground that the sellers should not have charged a premium for their controlling stake. 5.1.3 Issue

May the controlling shareholders of a corporation sell their shares at a premium? 5.1.4 Holding

The controlling shareholders of a corporation may sell their shares at a premium.

39

5.1.5

Reasoning

Since the controlling shareholders have invested the resources necessary to obtain control of the corporation, they should have the ability to charge a premium for the controlling stake. Absent corporate looting or other acts of bad faith, minority shareholders are not entitled to protection against the interests of the majority.

5.2

Gerdes v. Reynolds

28 N.Y.2d 622 (1941) 5.2.1 Overview

The New York Court of Appeals held that controlling shareholders may not sell their controlling stake to a corporate looter for the purpose of realizing personal gains. 5.2.2 Facts

The controlling shareholders of Reynolds Investment Company, Inc. sold their shares of the corporation at an immense premium. Although valuations of the company ranged from 5 cents per share to 50 cents per share, the controlling shareholders received $2 per share. As part of the sale, the controlling shareholders appointed to the board individuals designated by the buyer. The company’s assets consisted substantially of holdings in other companies, and the buyer began “converting [the] securities to its own use” immediately upon completion of the sale. The minority shareholders sued on the ground that the controlling shareholders had breached their fiduciary duty by selling their stake to a corporate looter. 5.2.3 Issue

(1) Did the controlling shareholders have an obligation to investigate the buyer? (2) Did the sale price reflect payment for the appointment of the buyer’s designees to the board?

40

5.2.4

Holding

(1) The controlling shareholders had an obligation to investigate the buyer. (2) The sale price reflected payment for the appointment of the buyer’s designees to the board. 5.2.5 Reasoning

Walter, Justice . . . . Corporate directors may not relinquish control of their corporation under conditions that would leave the corporation’s assets without proper care or protection. Although the controlling shareholders of Reynolds Investment Company had no knowledge that the buyer planned to loot the corporation, the circumstances of the sale should have alerted them to this possibility. The price paid for the company grossly exceeded its market value. The company’s particular combination of holdings was unremarkable and easily duplicable. A reasonable investor could do just as well, if not better, by buying similar securities directly from the market. Furthermore, the transaction left the buyer in a position to pay for the company by selling the company’s assets. These circumstances raise a strong inference that the buyer was in fact a corporate looter. The facts compel the conclusion that the sale price included not only the value of the shares but also payment for appointment of the buyer’s designees to the board.

5.3

Perlman v. Feldmann

219 F.2d 173 (2d Cir. 1955) 5.3.1 Overview

The Second Circuit held that the controlling shareholders of a corporation misappropriated a corporate opportunity by selling their stake to the corporation’s customers. 5.3.2 Facts

C. Russell Feldmann and members of his family were the controlling shareholders of Newport Steel Corporation. Owing to steel shortages caused by the Korean War, the company had sufficient bargaining power to implement the “Feldmann Plan.” Under the Plan, purchasers of steel gave interest-free 41

advances to Newport in return for claims to Newport’s steel output. Rather than continuing to do business under the Plan, the controlling shareholders decided to sell their stake to steel consumers. The sellers were paid $20 per share, which represented a significant premium over a market price that had not exceeded $12. The minority shareholders then sued on the ground that Feldmann and his family had improperly deprived Newport of the opportunity to continue operating under the Feldmann Plan. 5.3.3 Issue

Did the controlling shareholders of Newport improperly appropriate for themselves benefits that might have accrued to the corporation? 5.3.4 Holding

The controlling shareholders of Newport improperly appropriated for themselves benefits that might have accrued to the corporation. 5.3.5 Reasoning

Clark, Chief Judge. Controlling shareholders breach the fiduciary duty when they “siphon[ ] off for personal gain corporate advantages to be derived from a favorable market situation.” By selling control of the company to steel consumers, Feldmann and his family members deprived Newport of the opportunity to continue reaping benefits under the Feldmann Plan. Any premium that steel consumers would have paid to Newport for the scarce steel were instead directed to the controlling shareholders in the form of a control premium.

5.4

Brecher v. Gregg

392 N.Y.S.2d 776 (1975) 5.4.1 Overview

The New York Supreme Court found that some blocks of shares are too small to be considered controlling blocks.

42

5.4.2

Facts

Gregg owned 82,000 shares of Lin Broadcasting Corporation (“LIN”). His holdings amounted to 4% of LIN’s outstanding stock. When Gregg sold the shares to the Saturday Evening Post Company (“SEPCO”), he received a price of $3.5 million, which represented a premium of $1.26 million over the market price. As part of the sale, Gregg resigned from his post as president of LIN and agreed to ensure that SEPCO’s designees would occupy a majority of the board. LIN’s shareholders sued on the ground that Gregg improperly sold his control of the company. 5.4.3 Issue

Did Gregg improperly sell control of the company? 5.4.4 Holding

Gregg improperly sold control of the company. 5.4.5 Reasoning

Norman L. Harvey, J. As a matter of law, a 4% stake in a corporation cannot be considered holdings sufficient to warrant a control premium.

5.5

Essex Universal Corp. v. Yates

305 F.2d 572 (2d Cir. 1972) 5.5.1 Overview

The Second Circuit held that the seller of a 28.3% stake in a corporation may agree to replace existing directors with the buyer’s designees. 5.5.2 Facts

Yates, the president and chairman of Republic Pictures Corporation, agreed to sell 28.3% of the company’s outstanding shares to Essex Universal Corporation. The terms of the sale specified that Yates would grant Essex the option to replace a majority of Republic’s board with its own designees. This provision overrode bylaws providing that only a third of the directors could 43

be replaced at each annual meeting. When Yates terminated the transaction after finding Essex’s method of payment to be inadequate, Essex sued for damages. In response, Yates argued that the transaction was void because the option amounted to an unlawful sale of control. 5.5.3 Issue

Did Essex’s option to appoint immediately a majority of the board create an unlawful sale of control? 5.5.4 Holding

Essex’s option to appoint immediately a majority of the board did not create an unlawful sale of control. 5.5.5 Reasoning

Lumbard, Chief Judge. For all practical purposes, the 28.3% stake that Yates sold to Essex is sufficiently large to represent a controlling stake in the corporation. Since Yates sold a controlling stake in Republic, Essex was entitled to ask for the power to appoint a majority of the board immediately upon completion of the sale. The contrary rule would tend to frustrate the transfer of corporate control from seller to buyer. If Yates continues to pursue this argument, he must carry the burden of showing that the option would have frustrated the efforts of some contingent of shareholders to appoint their own directors. Friendly, Circuit Judge (concurring). Provisions that allow a buyer to circumvent the normal constraints on appointments of directors tend to interfere with shareholders’ ability to appoint directors through their own votes. For this reason, provisions such as Essex’s option should be enforced only if the buyer has purchased more than half of the corporation’s outstanding stock, so that the election of directors would be a mere formality.

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6
6.1

Mergers and Acquisitions: The Legal and Business Structure
Hollinger, Inc. v. Hollinger International, Inc.

858 A.2d 342 (Del.Ch. 2004) 6.1.1 Overview

The Delaware Court of Chancery applied the Gimble test to determine whether a corporation was selling “substantially all” of its assets. 6.1.2 Facts

Hollinger International (“International”) owned Telegraph Group Ltd. (“Telegraph”) through a series of subsidiaries that included Hollinger (“Inc.”). When International directed Inc. to sell Telegraph to Press Holdings International, Inc. sued to enjoin the sale on the ground that International had failed to obtain shareholder approval for a transaction disposing of “substantially all” of International’s assets. 6.1.3 Issue

Does the sale amount to a disposition of “substantially all” of International’s assets? 6.1.4 Holding

The does not amount to a disposition of “substantially all” of International’s assets. 6.1.5 Reasoning

Strine, Vice Chancellor . . . . Delaware law requires a corporation to obtain shareholder approval for any sale disposing of “substantially all” of the corporation’s assets. Under the Gimble test, a corporation disposes of “substantially all” of its assets when it engages in a sale “of assets quantitatively vital to the operation of the corporation and [which] is out of the ordinary and substantially affects the existence and purpose of the corporation.” 45

International is not disposing of “substantially all” of its assets by selling Telegraph. Although Telegraph accounts for 56–57% of International’s asset value, International also owns the Chicago Group, which accounts for 43-44% of its value. The sale of Telegraph would leave International with an appreciable fraction of its current assets. The sale also would not “substantially affect[ ] the existence and purpose of the corporation” since International would continue to own and operate newspapers. While International’s chain of subsidiaries would ordinarily insulate it from liability, International’s willingness to contract directly with Press Holdings suggests that courts should have the power to hold International responsible for a transaction in which its subsidiaries are simply acting at its behest.

6.2

Hariton v. Arco Electronics, Inc.

41 Del.Ch. 74 (1963) 6.2.1 Overview

The Delaware Court of Chancery approved a de facto merger accomplished through a sale of assets. 6.2.2 Facts

Arco Electronics and Loral combined with each other in a de facto merger. In the transaction, Arco sold its assets to Loral in exchange for Loral stock. Although a majority of Arco’s shareholders approved the transaction, dissenting shareholders sued on the ground that Arco had improperly circumvented the merger statute and thereby deprived shareholders of the right to appraisal of the assets. 6.2.3 Issue

Did Arco improperly circumvent the merger statute and thereby deprive its shareholders of the right to an appraisal of its assets? 6.2.4 Holding

Arco did not improperly circumvent the merger statute and thereby deprive its shareholders of the right to an appraisal of its assets. 46

6.2.5

Reasoning

Southerland, Chief Justice: Sections 271 and 275 of the Delaware General Corporation Law may be applied simultaneously to bring about a de facto merger.

6.3

Heilbrunn v. Sun Chemical Corp.

150 A.2d 755 (Del.Ch. 1959) Squib The Delaware Court of Chancery approved the use of a stock-forassets merger in which the minority shareholders of the acquired corporation could not vote against the merger.

6.4

Farris v. Glen Alden Corp.

393 Pa. 427 (1958) 6.4.1 Overview

The Supreme Court of Pennsylvania disapproved a de facto merger. 6.4.2 Facts

After operating at a loss for several years, Glen Alden Corporation sold itself to List Industries Corporations. In order to take advantage of Glen Alden’s loss carryovers for taxes and carry out the sale under Pennsylvania law, the transaction was structured as an “upside-down” acquisition in which Glen Alden acted as the nominal buyer. Although a majority of Glen Alden’s shareholders approved the sale, dissenting shareholders sued on the ground that Glen Alden had improperly deprived them of the right to an appraisal of their shares. 6.4.3 Issue

Did Glen Alden improperly deprive its minority shareholders of the right to an appraisal of their shares?

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6.4.4

Holding

Glen Alden improperly deprived its minority shareholders of the right to an appraisal of their shares. 6.4.5 Reasoning

Cohen, Justice. As efforts to circumvent legal constraints have generated increasingly complex corporate transactions, the substance—rather than the form—of a transaction should dictate which rules apply. The “reorganization” has fundamentally altered Glen Alden. The de facto merger has converted Glen Alden from a mining company into a diversified holding company. The merger has also significantly changed Glen Alden’s capital structure, so that former shareholders of Glen Alden now own shares of a corporation that is leveraged to a much greater extent than Glen Alden. The merger has forced Glen Alden’s shareholders to exchange their shares for unwanted shares in a new corporation.

6.5

Rath v. Rath Packing Co.

136 N.W.2d 410 (Iowa 1965) Squib The Iowa Supreme Court disapproved an attempt to circumvent shareholders’ voting rights by implementing a de facto merger instead of a statutory merger. Rath Packing Company arranged to acquire Needham Packing by issuing stock in exchange for Needham’s assets. Although 60% of Rath’s shareholders approved the transaction, the approval fell below the two-thirds supermajority required under Iowa law. Emphasizing the substance of the transaction, the court found that allowing the transaction would “amount[ ] to judicial repeal of the merger [statute].”

6.6

Terry v. Penn Central Corp.

668 F.2d 188 (3d Cir. 1981) 6.6.1 Overview

The Third Circuit approved a triangular merger.

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6.6.2

Facts

Penn Central sought to acquire Colt Industries, Inc. (“Colt”) through a triangular merger in which Colt would be purchased by a subsidiary of Penn Central. Former shareholders of Colt sued on the ground that the merger improperly deprived them of their ability to vote on the transaction and their appraisal rights. Penn Central subsequently abandoned the purchase of Colt, but it continued to pursue similar mergers with other companies. 6.6.3 Issue

Would the triangular merger with Colt have improperly deprived Colt’s shareholders of their voting rights and appraisal rights? 6.6.4 Holding

The triangular merger with Colt would not have improperly deprived Colt’s shareholders of their voting rights and appraisal rights. 6.6.5 Reasoning

Adams, Circuit Judge. Under section 311 of the Pennsylvania Business Corporation Law (“PBCL”), Colt’s shareholders would have voting and appraisal rights only if they would have acquired enough shares of Penn Central to elect a majority of Penn Central’s board. Section 908 of the PBCL states that voting and appraisal rights exist only if the transaction would create a single corporation. Since Penn Central’s acquisition of Colt would not have fallen within the scope of either section, Colt’s shareholders could not have invoked voting or appraisal rights.

7
7.1

Mergers and Acquisitions: Freeze-outs and the Appraisal Right
Leader v. Hycor, Inc.

395 Mass. 215 (1985)

49

Squib The Massachusetts Supreme Court approved the “block method” of stock valuation.

7.2

MT Properties, Inc. v. CMC Real Estate Corp.

481 N.W.2d 383 (Minn.App. 1992) Squib The Minnesota Court of Appeals disapproved the use of “minority discounts” in appraising shares held by minority shareholders.

7.3

Weinberger v. UOP, Inc.

457 A.2d 701 (Del. 1983) 7.3.1 7.3.2 7.3.3 7.3.4 7.3.5 Overview Facts Issue Holding Reasoning

7.4

Glassman v. Unocal Exploration Corp.

777 A.2d 242 (Del. 2001) 7.4.1 Overview

The Delaware Supreme Court held that appraisal is the only remedy for minority shareholders who object to a short-form merger. 7.4.2 Facts

Unocal Corporation owned a 96% stake in Unocal Exploration Corporation (“UXC”). After several years of low revenues and earnings, Unocal decided that acquiring the remaining 4% of UXC stock would allow Unocal to save money. When Unocal initiated a short-form merger with UXC, minority shareholders of UXC sued on the ground that Unocal and its directors had

50

breached their fiduciary duty by failing to show that the transaction was entirely fair. 7.4.3 Issue

May Unocal proceed in a short-form merger with UXC without showing that the transaction is entirely fair? 7.4.4 Holding

Unocal may proceed in a short-form merger with UXC without showing that the transaction is entirely fair. 7.4.5 Reasoning

Berger, Justice. Since the entire point of a short-form merger is to spare corporations from the process of establishing entire fairness, minority shareholders who object to a short-form merger can request only request appraisal of their shares.

7.5

Solomon v. Pathe

672 A.2d 35 (Del. 1996) 7.5.1 Overview

The Delaware Supreme Court held that a purchasing corporation in a shortform merger owes no fiduciary duty to the minority shareholders of the corporation being acquired. 7.5.2 Facts

Credit Lyonnais Banque Nederland N.V. (“CBLN”) owned 98% of Pathe Communications Corporation. When CBLN made a public tender offer to purchase the remaining 2% of Pathe at $1.50 per share, minority shareholders of Pathe sued on the ground that CBLN had breached its fiduciary duty to Pathe’s shareholders by making a “coercive” offer for Pathe.

51

7.5.3

Issue

Did CBLN breach a fiduciary duty to Pathe’s shareholders? 7.5.4 Holding

CBLN did not breach a fiduciary duty to Pathe’s shareholders. 7.5.5 Reasoning

Harnett, Justice. Absent coercion or incomplete disclosure of the terms of the transaction, the purchasing corporation owes no fiduciary duty to the minority shareholders of the acquired corporation.

7.6

Coggins v. New England Patriots Football Club, Inc.

397 Mass. 525 (1986) Squib The Massachusetts Supreme Court held that a purchasing corporation in a short-form merger must justify the transaction using a business purpose. According to the court, the lack of a business purpose may signify that the controlling shareholder is ousting the minority for selfish purposes.

7.7

Alpert v. 28 Williams Street Corp.

63 N.Y.2d 557 (1984) Squib The New York Court of Appeals held that a corporation may not effect a short-form merger unless the merger would result in the “advancement of a general corporate interest.”

8
8.1

Public Contests for Corporate Control: Part 1
Unocal Corp. v. Mesa Petroleum Co.

493 A.2d 946 (Del. 1985) 52

8.1.1

Overview

The Delaware Supreme Court approved selective self-tendering as a defensive measure against hostile takeovers. 8.1.2 Facts

Mesa Petroleum Company, which owned 13% stake in Unocal Corporation, decided to acquire an additional 37% of Unocal’s stock and thereby gain control of Unocal. To this end, Mesa initiated a two-tiered tender offer. The “front-loaded” first tier gave Unocal’s shareholders the choice to tender their stock at $54 per share even though the market value of the stock was more than $60 per share. At the second tier, any shareholders who declined to tender at the first tier would be forced to exchange their holdings for junk bonds worth no more than $45 per share. To counteract Mesa’s pressure to tender, Unocal’s directors announced that Unocal would immediately commit to purchasing 29% of its non-Mesaowned shares at $72 per share. By artificially raising the price of the 29% stake, Unocal effectively lowered the value of the shares that Mesa intended to purchase. Mesa sued on the ground that Unocal’s directors had misused their power in making the self-tender. 8.1.3 Issue

May a corporation use selective self-tendering as a defense against hostile takeovers? 8.1.4 Holding

A corporation may use selective self-tendering as a defense against hostile takeovers. 8.1.5 Reasoning

Moore, Justice. Corporate directors have broad discretion in protecting the interests of their corporation. Their discretion extends to defending the corporation against hostile takeovers. Although self-tendering raises the possibility of unfair self-dealing, directors may avail themselves of the business-

53

judgment rule as long as they are making a reasonable response to a genuine threat. Since a majority of Unocal’s independent directors approved the selftender, the self-tender was a product of “good faith and reasonable investigation.” The self-tender was also reasonable in light of the threat since Mesa was attempting to force Unocal’s shareholders to sell their shares for significantly less than their value.

8.2

Moran v. Household International, Inc.

500 A.2d 1346 (Del. 1985) 8.2.1 Overview

The Delaware Supreme Court applied the business-judgment rule in reviewing the use of a “poison pill.” 8.2.2 Facts

The directors of Household International adopted the Rights Plan, a “flipover poison pill” designed to discourage hostile takeovers. Under the Plan, Household’s shareholders automatically acquired the option to buy at a 50% discount shares of any corporation that successfully gained control of Household in a hostile takeover. Moran challenged the directors’ authority to adopt the Plan. 8.2.3 Issue

Should the adoption of the Plan be reviewed under the business-judgment rule? 8.2.4 Holding

The adoption of the Plan should be reviewed under the business-judgment rule.

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8.2.5

Reasoning

McNeilly, Justice. Since the Plan is designed to facilitate the exercise of business judgment by forestalling situations in which a hostile takeover may force the directors to make a hasty decision, the adoption of the Plan should be reviewed under the business-judgment rule. The Delaware General Corporation Law contains no restrictions on the creation of poison pills. Furthermore, poison pills tend to incur fewer costs than other means of warding off hostile takeovers. The Plan does not preclude Household’s shareholders from accepting a hostile tender offer, as certain maneuvers can allow a determined purchaser can overcome the Plan. Finally, fiduciary duties constrain the use of the Plan, as Household’s directors may not use the Plan to frustrate a transaction that would benefit shareholders.

8.3 8.4

Carmody v. Toll Brothers Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.

506 A.2d 173 (Del. 1985) 8.4.1 Overview

The Delaware Supreme Court held that corporate directors breached their duty of loyalty by placing the interests of noteholders before those of shareholders and frustrating an auction when the sale of the company was inevitable. 8.4.2 Facts

Revlon was facing the possibility of a hostile takeover by Pantry Pride. After Revlon rejected Pantry Pride’s initial offer of $40–50 per share, Pantry Pride prepared to make a hostile tender offer at $45 per share. Revlon defended itself by adopting a Note Purchase Rights Plan, which allowed Revlon’s shareholders to exchange their shares for notes with a face value of $65. In effect, the Plan was a poison pill that diluted Revlon’s stock. When Pantry Pride subsequently raised its bid to $47.50 per share, Revlon again allowed shareholders to exchange their shares for notes. The notes issued in the second exchange, however, contained “poison debt” provisions that would prevent 55

Revlon from taking on additional debt. The purpose of the poison debt was to make it difficult for Pantry Pride to finance the takeover by borrowing money in Revlon’s name. In response, Pantry Pride raised its bid to $53 per share. While Pantry Pride’s bidding unfolded, Revlon explored the possibility of selling itself to Forstmann. Revlon eventually agreed to a merger with Forstmann at $56 per share, with Revlon waiving the “poison debt” provisions of its notes. The waiver, however, caused the value of the notes to drop, prompting Revlon’s directors to worry about the possibility of being sued for the drop. To protect the value of the notes, Revlon convinced Forstmann to support the value of the notes through a note exchange. In return, Forstmann obtained a lock-up option to purchase two of Revlon’s divisions and Revlon’s agreement to a no-shop provision. Although Pantry Pride raised its bid to $56.25 8.4.3 8.4.4 8.4.5 Issue Holding Reasoning

8.5

Barkan v. Amsted

9
9.1

Public Contests for Corporate Control: Part 2
Paramount Communications, Inc. v. QVC Network

637 A.2d 34 (Del. 1994) 9.1.1 Overview

The Delaware Supreme Court held that the Revlon duties are triggered when a merger causes the dispersed holdings of the acquired corporation to be transferred to a controlling shareholder.

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9.1.2 9.1.3 9.1.4 9.1.5

Facts Issue Holding Reasoning

10
10.1

Miscellaneous Cases
Emerald Partners v. Berlin

726 A.2d 1215 (Del. 1999) Squib The Delaware Supreme Court held that the party invoking the protection of § 102(b)(7) of the Delaware General Corporation Law bears the burden of proving that it acted in good faith.

10.2

Pure Resources, Inc. Shareholders Litigation

808 A.2d 421 (Del.Ch. 2002) Squib The Delaware Court of Chancery disapproved an attempt to acquire a corporation through a coercive tender offer. Unocal already owned 65% of Pure Resources and made a tender offer for the remaining 35%. The tender offer was contingent upon the tendering of a majority of the nonUnocal-owned shares of Pure Resources. The court found the condition to be coercive because the minority shareholders of Pure Resources included directors and officers of Unocal as well as managers of Pure Resources, who stood to benefit from severance packages upon the completion of a merger with Unocal.

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