Acquisition

corporation

Different ways to acquire another corporation

There are a variety of ways one can acquire another corporation. All methods involve the exchange of consideration in the form of securities, cash, or a combination of consideration. The three primary methods of acquisition are:

• 1) merger
• 2) sale of assets
• 3) tender offer

The acqusition will more easily occur if the Board of Directors of the "target" corporation is in favor of the transfer. If it is not, the acquisition of control is called "hostile," and the mechanisms availabe for obtaining control are substantially reduced. The hostile tender offer raises significant legal and policy issues.

If the "bidder" corporation wants to attempt to attempt a hostile takeover, there are only two means available:

• 1) proxy fight - in which the bidder soliciits the target's shareholders to vote for its slate of directors. If successful, the new board of directors can faciliate a friendly acquisition of B Corporation by approving the acquisition or removing any defensive tactics that block the bidder.
• 2) tender offer - where the bidder can make an offer directly to the sharehodlers to buy their shares, thereby giving control of the target to the bidder. Technically, the tender offer does not involve the board of director of the target. Because of target defensive tacts (some of which operate after a bidder ahs acquired a fixed percentage of sahres). bidders usually must convince the target directors to remove the tactics or usy a proxy fight to remvoe directors prior to the tender offer.

Remedies for shareholders who object to the merger

The statutory scheme may allow for those who object to the merger to dissent and seek an appraisal as a remedy.

Early American law required a unanimous vote when mergers were approved, but overtime that changed and legislatures lowered the unanimity requirement, providing sharehodlers who dissent from the merger an appraisal remedy.

Actions of target's management and directors

asdAccoring the the court, the board is empowered to give a bidder reasonable strucutrla and economic defenses and incentives and fair compensation if the acquirer loses out to another bidder. But they must be economic and reasonable and they cannot limit the directors' fiduciary duty. There is not authoirty for an absolute lockup without a fiduciary out clause. Thus, the fiduciary out clause is now the norm for merger agreements even though they create uncertainty for an acquirer succeeding.

See Omnicare, Inc. v. NCS Healthcare, Inc.,

Actions of target's management and directors

When a target's management and directors institute actions to defend the corporation from the hostile takeover they are often faced with a charge of breach of fiduciary duty to the corporation and its shareholders under state law. Fiduciary duty is usually divided between duty of care, and when there is a conflicit of interest or lack of good faith, the duty of loyalty.

Those who favor hostile tender offers

• tend to argue that the target's defensive tactics place directors in a conflict of interest because they are concered with keeping their positions, and thus, duty of loyalty should apply and not the business judgment rule. In a duty of loyalty analysis involving a conflict of interest and not good faith, the directors usually have the burden of proof as to the fairness of their decision and, thus, the courts scrutinize the process and the substance of the decisions with a greater possibility of liability.

Those who oppose hostile takeovers

• view the implentation of defensive tacts as similar to other business decisions protected by the business judgment rule.

Different tests

Unocal

In fact, in most cases, the use of defensive tactics have resulted in the application of an enhanced standard of review involving a modified business judgment rule or proportionality test under the Delaware case of Unocal Corp. v. Mesa Petroleum Co .

When shareholders challenge the defensive actions of target directors the enhanced standard of review of Unocal generally applies which looks at the threat to the corporation and the response to it.

• The strengths of the Unocal test are that it applies when the directors' conduct is defensive and allows the courts significant discretion in dealing with the variety of takeover scenarios.

• Its weaknesses are its lack of clarity and its inclination to defer too much to the directors.

When the test applies, the court looks at the threat and the response.

• The initial burden is on the directors, and the courts look first at the reasonableness test that focuses on the good faith determination of the threat to the target.

• • The use of a majority of independent directors enhances the proof.

• • The threat is often based on the belief that the bidder has offered insufficient value, but other threats are possible. It could involve the hostile bid depriving target shareholders of a superior alternative (an opportunity loss), treating non-tendering sharehodlers differently and distorting shareholder chocie (structural coercion like Unocal) or the shareholders may tender to an undervalued tender offer because shareholder disbelieve management's view (substantive coercion like Unitrin).

• The court then looks at the proportionality of the target's resposne to the threat.

• • Under Unitrin, if the defensive tactic is viewed as draconioan (that is either preclusive of tender offers or coercive to shareholders), it will be closely scrutinized and will likely fail.

• • If the response is less than draconian, then the judicial scrutiny looks at the range of reasonableness (that is, whether the tactic was proper and proportionate to the threat). In that case, there will be judicial restraint and the court will not usually substitute its judgment for that of the directors.

Revlon

Revlon duty of getting the best available price for the shareholders will apply if:

• the corporation seeks to sell itself by initiating active bidding, or

• abandons a long-term strategy and seeks alternatives that include the breakup of the business (Revlon), or

• attempts to effect a change of control (QVC).

Without any of the above scenarios, there appears to be no general obligation to sell the corporation, even if a premium that reflects a fair price is offered by a bidder. This is especially true when the tender offer upsets a business plan.

Actions by directors that are unilateral and whose primary purpsoe is to interfere or impede the effective exercise of the shareholders' franchise in a contested election are also carefully scrutinized by the courts. Under MM companies when the defensvie actino's primary purpose is to interfere or impede shareholder voting, the Blausius compelling justiifcation test applies and must be a condition precedent before scrutinizing the driectors' response. If shareholders are involved in the approval of the defensive tactics, that will also influence the level of scrutiny.

The overall effect of Delaware's judicial deference to most defensive tacts makes a direct hostile tender offer by a bidder unlikeliy. Instead a bidder will either negotiate to remove the defensive tracts or announce a hostile offer but also initiate a proxy fight to elect new directors who will remove the defensive tactics. When the tactics are removed then there can be a friendly acquisition. Mnay of the defensive tacts can be removed by the directors but only prior to the bidder purchasing a specific amount of shares (found in the poison pill or possible in a state statute). Thus, the bidder will usually purchase as many shares as it can iwthout reaching the limit prescribed that precludes the new board from removing the defensive tact. Institutional sharehodlers often play an important role in supporting the bid or trying to change the defensive tactics.