Hypothetical
Amalgamated Products, Inc., is a Delaware corporation whose predominant business is as a major national Internet retailer. One of Amalgamated’s most profitable divisions, however, is its “e-Clearinghouse” division, which has developed a sophisticated, web-based networking product that allows Fortune 1000 companies to organize informal markets for buying and selling intermediate goods, services, licensing rights, and the like, in business-to-business transactions. Over the last few years, not only has e-clearinghouse produced a sophisticated and successful product, but its innovations in the field have also spilled over to spawn related innovations (to web design, encryption, marketing, etc.) that have become central to much of Amalgamated’s other retail business. As a result, Amalgamated frequently channels some of its numerous new business projects into the e-clearinghouse division, including some that are not directly related to e-Clearinghouse’s B2B operations.
Unfortunately, many of Amalgamated’s retail divisions have been somewhat less successful of late, and their mounting losses have caused severe cash-flow problems at the company. In order to address these liquidity concerns, and to prop up some of its other flagging divisions, Amalgamated is considering spinning off the e-clearinghouse division as a separate subsidiary. It hopes to effect the spin-off in roughly two stages. In the first stage, Amalgamated will sell a modest (20%) ownership stake in the newly-created subsidiary in an initial public offering, in anticipation of placing a larger ownership stake in a subsequent offer. Because of the production and research synergies between the sub and the parent’s other business enterprises, however, Amalgamated would like to retain a control stake in the spin-off, even after the public offering. As a result, it is anticipated that the two companies are likely to share a number of common directors.
Question Set 1: Because of this directorial overlap, and the overlap in the respective lines of business of the two firms, Amalgamated is concerned about conflicts that might erupt over whether the parent or sub should receive the right to pursue new business prospects. What sort of governance arrangements (if any) can be implemented in the sub’s charter to ameliorate these problems (involving, for example, opting out of Del. Gen. Corp. Law § 203, or expressly limiting fiduciary duties)? What about post-incorporation arrangements? Could (or should) Amalgamated itself make any changes to its own internal governance policies to augment (or substitute for) those made at the level of the sub?
Suppose that, after following your advice in the previous set of questions, the subsidiary is formed (under the name “e-Clearinghouse, Inc.”). A few months after the initial first stage sale of 20% of the sub’s equity, the already-unfriendly IPO climate cools off significantly more, dampening Amalgamated’s hopes for a significant revenue infusion from a public offering. Moreover, many of the once-flagging divisions ub Amalgamated have recovered significantly, reducing Amalgamated’s urgent need for liquidity. Because of these changes, the Amalgamated board has decided that it would prefer to re-acquire all of the outstanding shares of the sub in order to restore the status quo ante, in which e-Clearinghouse was a consolidated division of Amalgamated. Because Amalgamated is an interested, dominant shareholder, however, it would prefer to execute the negotiations in a manner that is least susceptible to a subsequent challenge by e-Clearinghouse’s minority shareholders. One avenue that is being considered is the creation of a sub-committee of independent e-Clearinghouse directors to negotiate the terms of the merger. Complicating matters further, however, is the fact that Coagulated Products, Inc., a competitor of Amalgamated, has recently approached e-Clearinghouse’s board about a potential acquisition of e-Clearinghouse.
Question Set 2: Would the formation of a special negotiation committee help immunize the final transaction from judicial scrutiny? What sort of factors should both the parent and sub keep in mind when this committee is formed? What about during negotiations? After them? Does the negotiating committee need to take seriously the interest of third parties (such as Coagulated Products) when dickering with Amalgamated over proposed terms?
1