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Corporate Mergers and Acquisitions
Professor Bradford
May 3, 2016
8:30 a.m.
3 Hours
GENERAL INSTRUCTIONS
1. This is a partially open book exam. You may use the Maynard casebook; the required statutory supplement; any handouts provided by the professor; and any materials, such as notes or outlines, written and prepared exclusively by you. During the exam, you may not use or possess any other materials, written, digital, or recorded. You may not use or possess a cell phone or any other electronic device other than the computer on which you are taking the exam. You may not consult with or communicate with any other person during the exam. If you have any other books, notes, briefcases, book bags, cell phones, electronic devices, or other items, you must bring them to the front of the room now. You may not take any of these items to another designated exam room.
2. This exam has fourteen (14) pages, including the instructions. The page numbers appear on the top right-hand corner of each page. Please check to be sure that this copy has all the pages.
3. You have three hours (3:00) to complete the exam. You must turn in your answers in this room, even if you are taking the exam somewhere else in the building. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.
4. The exam consists of eight (8) questions. The recommended time for each question is as follows:
Question 1……………………...…….. 30 Minutes
Question 2………………..…….…….. 20 Minutes
Question 3…………………..….…….. 35 Minutes
Question 4 ..…………….………….... 10 Minutes
Question 5 …………………………… 35 Minutes
Question 6 …………………..……….. 25 Minutes
Question 7 ...………………………..…. 5 Minutes
Question 8 ...... 20 Minutes
Each question will be weighted in accordance with its recommended time.
5. Do not spend all of your time writing. Think about the issues and organize your answers before writing. Be concise. Be organized. Long, disorganized, rambling answers will be penalized, as will merely “dumping” portions of your notes or outline into your answers rather than answering the question posed.
6. This exam will require you to interpret and apply many of the statutory provisions and regulations we have examined. You should not just state general principles, but should cite the relevant sections and subsections of the statutes and regulations and explain how the language of those rules applies to the facts of the question. An answer that doesn’t cite and analyze relevant statutes or regulations is incomplete and will not receive full credit.
7. If you believe that additional facts are needed to answer a question, state exactly what those facts are and how they would affect your answer. If you believe that a question is ambiguous or unclear, note the ambiguity or lack of clarity and indicate how it affects your answer.
8. The Honor Code is in effect.
EXAM 4 INSTRUCTIONS
9. You must take the exam on a computer that has the latest version of the Exam 4 software installed. Use the OPEN mode. If you have not previously installed the Exam 4 software, please notify the exam administrator immediately.
10. Be sure to enter your exam number in the Exam ID field. (Do not use your NU Card ID number or your social security number.) You will be required to enter your exam number twice. Select the course name from the drop-down box. Be sure you find the folder for this course, because that is where your exam will be stored. Verify that the information is correct just before you select “Begin Exam.”
11. Do not worry about headers, footers, page numbers, or double-spacing your exam; the software does all that for you when the exam is printed.
12. When you are finished, please submit your exam electronically. A pop-up box will show the status of your exam. It should show a black bar with 100% in it and a message that says, “Your file has been successfully stored.” If you do not get this message, please see the Dean’s office immediately. After successfully submitting your exam, exit Exam 4 before leaving the classroom.
13. If you have any technical problems during the exam, please report them immediately to the Dean’s Office; we will assume you had no technical problems until you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.)
Question One
(30 Minutes)
You are an associate in the law firm Fine and Dandy. The firm represents Seller Corporation, a small company with 30 shareholders. Seller is not an Exchange Act reporting company and its stock is not publicly traded.
Seller is negotiating a triangular merger with Bidder Corporation, a large publicly-traded company. If the merger is completed, Seller would merge into a wholly-owned subsidiary of Bidder, and the Seller shareholders would receive cash for their Seller shares.
You just received the following memo from Paula Partner, the partner who is coordinating your firm’s work on the merger. She wants a response in thirty minutes because she’s about to meet with the client.
TO: YouFROM: Paula Partner
RE: Warranty in Seller-Bidder Deal
We just received a draft merger agreement from Bidder’s counsel. I’m having a number of associates look at different sections of the agreement, and I want you to comment on the following warranty. I have included the opening of the warranty section so you can see it in context:
ART. VI. SELLER’S REPRESENTATIONS AND WARRANTIES
Seller and the Seller Stockholders warrant to Bidder and Bidder Sub that the following statements are true, correct and complete as of the date of this Agreement and as of the closing date of the merger:
* * *
17. Liabilities. The company has not incurred any liabilities other than those shown on the interim balance sheet dated April 30, 2016 and those set forth in the Liability Schedule attached to this Agreement. For purposes of this section, “liability” shall mean any indebtedness, debt, commitment, guaranty, claim, loss, cost, expense or obligation of any nature, whether contingent or matured, known or unknown, accrued or unaccrued, due or to become due.
Here’s some more relevant information about the agreement. Bidder’s obligation to close the deal is conditioned on all of the representations and warranties being true and correct as of the closing date. In addition, any breach of warranty is a basis for termination of the agreement or, if Bidder chooses to close the merger, subsequent indemnification.
Please write a memo discussing the risks associated with this warranty, any amendments you think are necessary, and how we should justify those amendments to Bidder’s counsel as reasonable. I realize you only have a limited amount of time to prepare a response, but do the best you can in the time available.
Respond to Paula’s memo.
Question Two
(20 Minutes)
Acme Corporation is incorporated in a state that has adopted the latest version of the Model Business Corporation Act. Acme has two outstanding classes of stock, called simply common stock and preferred stock. Both classes have voting rights; each common share and each preferred share is entitled to one vote. Acme has 200,000 shares of common stock and 220,000 shares of preferred stock outstanding.
Acme’s board of directors has approved a merger with Beta, Inc. Under the plan of merger, Acme will be the surviving company and Acme’s current common shareholders will hold the same shares after the merger. However, each Acme preferred share will be converted into one Acme common share.
Acme held a shareholders’ meeting on Dec. 1. At that meeting, the vote on the merger was as follows:
Vote / Common / Preferred / TotalYes / 99,000 / 105,000 / 204,000
No / 101,000 / 95,000 / 196,000
Not Present / 0 / 20,000 / 20,000
Discuss whether the Acme has obtained the required shareholder approval to proceed with the merger. (Do not discuss whether shareholder approval is required at all; assume that the MBCA requires shareholder approval, and just discuss whether the vote was sufficient to approve the merger.)
Question Three
(35 Minutes)
Target Corporation is a Delaware corporation. Its stock is traded on the New York Stock Exchange. Target has a nine-person board of directors. All nine directors are independent, outside directors.
Six months ago, Target’s board adopted a “poison pill” rights plan. No one had made an offer for Target at the time, but the directors were concerned about protecting Target’s shareholders from coercive, two-tier offers. The directors were also worried that the shareholders, many of whom are not sophisticated investors, might mistakenly tender to someone offering less than fair value for the shares. Before adopting the rights plan, the directors discussed these issues and the structure of the plan extensively with the company’s lawyers and financial advisors.
When the plan was adopted, every shareholder immediately received one Right for each share they owned. The Target board may redeem the Rights for 20 cents each until a “Non-Redemption Event” occurs; then, the Rights become non-redeemable. There are two Non-Redemption Events: (1) when anyone acquires 12% or more of Target’s stock; or (2) when anyone other than Target itself acquires proxies representing more than 20% of Target’s shares.
The Rights have no value until some person or affiliated group of persons acquires 30% or more of Target’s stock. Once that occurs, the holder of each Right, other than the 30% shareholder, is entitled to buy $50 worth of Target stock for $25.
Bidder Corporation recently announced a tender offer for all of Target’s stock, at a price of $100 a share. Completion of the tender offer is conditioned on the Target board’s redemption of the poison pill. If Bidder gets 51% control, it promises to cash out the rest of the shareholders for the same $100 price in a section 251(h) merger. Bidder indicated it was willing to meet with the Target directors to negotiate for a higher price.
After the offer was announced, the Target board met to consider its response. Target’s investment banker indicated that it had valued Target using four different methods, all of which are accepted by financial experts. Two methods produced a value of slightly less than $100/share. The other two methods produced a value of $105/share. (The Target stock price prior to Bidder’s offer was $70/share.)
The Target directors decided that they had no interest in selling the company and that, in any event, the price offered by Bidder was inadequate. They voted unanimously to reject the offer, not to negotiate with Bidder, and not to redeem the poison pill.
Discuss whether the Target directors have breached their fiduciary duties.
Question Four
(10 Minutes)
Some M & A lawyers believe letters of intent are useful. Others refuse to use them. Discuss the risks and benefits of using a letter of intent.
Question Five
(35 Minutes)
LeShawn Fame is a famous professional athlete. Until two years ago, he had an endorsement contract with Nasty Athletic Supply, Inc. LeShawn was not happy with Nasty; he didn’t like the people and he thought Nasty’s products were inferior to other brands.
When LeShawn’s contract with Nasty expired, he signed a long-term endorsement contract with Mikey Corporation, a smaller athletic shoe and equipment company. The contract obligates LeShawn to appear in Mikey’s commercials and to endorse the shoes and other athletic gear manufactured by Mikey.
The Mikey contract includes the following paragraph:
17. LeShawn Fame’s obligations under this contract are owed only to Mikey Corporation. Mikey may not assign or transfer this contract, or any of Fame’s obligations under this contract, to any other person. If Mikey assigns or transfers this contract or any of the obligations under this contract, the contract shall be null and void and Fame shall have no further obligations to Mikey. For purposes of this paragraph, “transfer” includes any merger or consolidation of Mikey with any other company.
On April 1, 2016, Nasty sold all of its assets to Mikey in return for Mikey stock. Mikey did not agree to assume any of Nasty’s liabilities; those were paid by Nasty prior to the sale. Immediately after the sale, Nasty dissolved and distributed the Mikey shares to its shareholders. The old Nasty shareholders now own 90% of Mikey’s voting stock.
Mikey has the same officers and directors it had before the sale. All of Nasty’s former employees, other than its officers, are now employees of Mikey.
Mikey will continue to manufacture all of the products made by both Mikey and Nasty prior to the sale. The old Nasty products will still bear the Nasty name and logo. Each product will continue to be manufactured at the same plant as it was before the sale.
Mikey has informed LeShawn that it expects him to endorse both the Mikey and Nasty lines of products, since they are both now made by Mikey. LeShawn’s response was brief: “No damn way!” LeShawn’s attorneys contend that Mikey violated Paragraph 17 of the contract, so Mikey’s contract with LeShawn is no longer in effect.
Discuss whether the transaction between Mikey and Nasty violated Paragraph 17.
Question Six
(25 Minutes)
Transport Trucking, Inc. is incorporated in a state that has adopted the latest version of the Model Business Corporation Act. Transport is not an Exchange Act reporting company. It has 500 shareholders; its shares are not traded on any stock exchange.
Transport has three wholly-owned subsidiaries:
1. Trucking Enterprises, Inc., a trucking company;