Mergers and Acquisitions

Mergers and Acquisitions

1. Bob Smith is the founder of Bob’s Ice Tea, Inc., (BIT) a corporation that manufactures and bottles flavored iced teas. Bob is one of three directors and owner of a majority of shares of stock in this privately held company. The other two directors own the remaining shares. BIT is the owner of several patents on beverage formulas. BIT is aware of some potential liability based on complaints that consumers became ill when the tea spoiled after storage without refrigeration, where the label states that no refrigeration is needed. BIT owns its own factory and real estate, and currently employs 50 people. Bob is considering retirement, and asks you for advice regarding his options for getting the maximum value out of his investment in BIT. What do you advise him? Please discuss and evaluate a stock sale, asset sale, and merger.

2. City Newspapers Corp (CNC) publishes a daily newspaper and has negligently released toxic chemicals into the local water supply injuring a number of people. If Daily News Corp (DNC) purchases CNC’s assets, hires different management and personnel, and then publishes a similar newspaper under the same name, would DNC be liable for the harm caused by CNC’s activities under any of the traditional, modern, or minority exceptions to non-liability for corporate asset purchasers?

3. Gala Corp is publicly traded. Franklin Corp. (FC) sends notice to all holders of class A common stock of Gala Corp. (GC), offering to buy shares at $30 per share, which is a 3% premium over the current market price. The offer states that it will remain open for 60 days, or until FC acquires 80% of the outstanding shares, whichever occurs first. The reports filed with the SEC indicate that FC’s purpose is investment only. On the 58th day, FC has acquired only 79% of the outstanding shares. Sally Shareholder approaches FC and tenders her 100,000 shares, but demands $45 per share, which would give FC an 82% ownership interest. FC agrees to buy Sally’s shares at $45, but pays the offered $30 per share to all other shareholders who tendered before Sally. On the 59th day, Billy Shareholder tenders his 5,000 shares to FC, but FC refuses to buy because it already has more than the 80% goal. Has any provision of the Williams Act been violated by FC? Explain which provisions are applicable. (p. 207)

4. X Corp is a holding company with subsidiaries that manufacture bicycles. On June 1, 1997 Y Inc. (Buyer) entered into a stock purchase agreement with X Corp and its shareholders IB and Ken. IB, an investment banking firm, owned approximately 20 percent of the stock, of X Corp, and Ken owned 6.7 percent. Neither IB nor Ken is considered a management shareholder. A few months earlier, X Corp had filed a registration statement with the Securities Exchange Commission in order to make an initial public offering of 4,800,000 shares of common stock, including some stock owned by Ken. No securities were ever sold pursuant to the registration statement. X Corp abandoned the public offering once it entered into the private stock purchase agreement with Y Inc., although the agreement did warrant and represent the truthfulness of the information in the registration statement. Both the stock purchase agreement and the registration statement contain representations that X Corp is in compliance with all regulations and there are no pending or threatened government investigations. Y Inc.’s purchase of X Corp stock pursuant to the Stock purchase agreement resulted in Y Inc. owning approximately 92 percent of the outstanding common stock for a total cost of $ 570 million. After completion of the stock purchase, Y Inc learned X Corp was exposed to and now faces extensive liabilities regarding personal injuries from defective brakes. In part to avoid the liabilities and to expunge itself from the plethora of problems X Corp faces, Y Inc. seeks to rescind the deal. Ken and IB refuse to refund the purchase price. Y Inc.’s complaint asserts that X Corp omitted material facts that rendered its representations in the stock purchase agreement false and misleading, constituting fraud in violation of the Securities Act, section 12(2), and the state Securities laws. X Corp. moved to dismiss the complaint for failing to state a claim upon which relief could be granted. What provisions have been violated? What is Y Inc.’s best theory upon which to gain relief? (p.144)

5. Soft, Inc. is a publicly-traded Delaware corporation that sells software. Ida is Soft’s CEO and majority shareholder, and is on the board of directors. She controls the corporate activities along with the rest of the directors and officers of the board including her good friends Pete and Sue. All the other directors frequently miss meetings because of regularly scheduled golf games. (p. 283)
Recently, Soft’s assets have significantly decreased and Ida calls for a Board meeting. Pete and Sue discover that Ida has been hiding large amounts of money in an attempt to make the corporation appear to be in financial peril. Ida tells Pete and Sue that she is doing this because her friend, Willa, of Zill Corp. has told Ida that if Softa appears to be financially strapped, Zill Corp will begin negotiating with Soft about a proposed merger. If the merger goes through, Soft’s directors and shareholders will make a large amount of money. Ida tells Sue and Pete that she will then distribute the money that she has been hiding evenly among all the shareholders. Ida also informs Sue and Pete that Zill Corp has promised to continue their employment with large bonuses.
Soft’s board reveals to its shareholders that they have decided to solicit bids for a merger of the corporation. Two weeks later, when no other offers have been received, Ida, Sue and Pete announce the offer from Zill Corp. Zill Corp has tendered an offer for all outstanding shares of Soft’s stock at three times its value. All shareholders are told by Ida that they will receive a large cash bonus in two weeks. The shareholders immediately vote to agree to the merger. Two weeks later, the shareholders receive the money that Ida was hiding from the corporate records. Soft is subsequently merged into Zill Corp and Ida, Sue and Pete take large bonuses and positions on the board of Zill Corp.
Mary is a former employee of Soft and as a retirement incentive was given ten shares of Soft’s stock. She has come to you for advice on whether there are any potential claims here for breaches of fiduciary duties against Zill Corp, Ida, Sue or Pete. Advise her. (p. 283)

6. Defendant Geo Corp is a publicly traded Delaware corporation. The largest shareholder is Louise, who holds 15% of the shares, who is neither a director nor employee. Geo’s directors are concerned that the corporation may be attractive to a hostile takeover, because of the large cash reserves and the undervaluation of the stock by the market. The directors are particularly concerned about Louise, who is rumored to be quietly increasing her holdings, and who has adamantly disagreed with some recent management decisions of the board. Geo is in a growth phase, reinvesting its capital in the company, and the market has not yet seen the sales potential. The board approved a number of anti-takeover measures, including a poison pill. The poison pill plan provided each shareholder (with the exception of any shareholder holding 20% or more of the shares) had the right to purchase additional shares at 1/3 of the market price as soon as any shareholder gained a 20% holding. This poison pill plan was not adopted in response to an actual hostile bidder. Five out of the eight Geo directors hold management positions in Geo or another wholly owned subsidiary. Additionally, two of the directors hold 2% of the stock each. Plaintiff Louise filed suit alleging a breach of fiduciary duties because the poison pill was not created in response to any perceived threat. Louise had plans to increase her investment, and is concerned with potential dilution of her holdings if she surpasses 20%. Does this constitute a breach of the board’s fiduciary duty?

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