biz org class 27

three cases in which plaintiffs charge that the merger statute was used unfairly: 

weinberger. 
minority shareholders may be frozen out but the process/ dealings has to be fair and the price (which is more subjective) has to be fair.

in weinberger, signal owns UOP and decides it wants to freeze out the UOP shareholders. to do so, it mergers UOP into signal and cashes out the minority. when this happens, the dealings has to be fair. and in this case, signal had people on the UOP board that were signal executives and reporters about the fair prices. the shareholders and independent board voted in favor of the merger because they were not aware of the information held by UOP. the dealings were therefore unfair.

in farris v. glen alden, the defendants did not use merger form and the plaintiffs claimed that the lack of merger form should be deemed irrelevant and a merger should be found de facto even though it was an "asset acquisition". the minority position that asset acquistions in reality are de facto mergers.

NYS and DE reject asset acquistion: in harriton, the majority of the courts said that the asset acquistion deserves "equal dignity" as the merger acquistion, and the court will observe the business' stated objective.

coggins.
coggins facts are very similar to weinberger, but the defendants used the merger provisions. the plaintiff's arguments were that the merger provisions were incorrectly used.

with respect to weinberger, the court introduced the concept of fair dealing and fair price. but the DE court rejected the legitamate business purpose requirement in this case: in all jurisdictions, previously, the defendant had to have a legit business purpose to freeze out shareholders. NYS courts follow this equal dignity rule as well.

there may be perfectly legit reasons to freeze out/ cash out minority shareholders. in the weinberger case, if signal freeze out the minority and becomes a 100% shareholder of UOP, signal no longer has to worry about fiduciary duties owed to minority shareholders.

in sinclair v. levine, the court announced that the duty of loyalty analysis applies to the relationship with minority shareholders. we ask if the majority receives something to the detriment of the minority. and if it does, the majority holds the burden of proving fairness in their dealings.

in weinberger, the context is narrower because it is a merger, but the duties owed are still relevant. the majority share holder may still want to get rid of the minority just to dislodge that duty.

coggins: the merger was held to be impermissible because the controlling shareholder had no business purpose for freezing out the minority shareholders. the defendant used the old company and surviving company for insurance on personal loans. a company may not be used as security for a loan if there are minority shareholders.

but it's easy to come up with a legitimate business interest.

rabkin v. philip. 
the controlling shareholder maneuvered things to make the timing such that minority shareholders got less than a fair price for their shares. the court obviously held this wasn't fair, because the minority expected a certain pay point as granted to other parties. the court said that if the minority is complaining only about unfair price, the remedy is appraisal. but if the minority is claiming unfair dealings such as nondisclosure, misrepresentation, or fraud, then plaintiff's are claiming a weinberger remedy in which plaintiff will allege unfair dealings/price and requires a different analysis. there's no possibility of class action for an appraisal but there is for unfair dealings.


rauch v. RCA
plaintiffs claim that it's a de facto non-merger (liquidation), and that if the court accepted the plaintiff's argument, the plaintiffs should have gotten much more for their shares. the case illustrates the idea of "form over substance" as we saw in harriton. the court applies an equal dignity approach, and dismisses the plaintiff's claim and applies the equal dignity approach. the court acknowledges the merger/ asset sale, and expresses that there is more than one way to combine companies.


all courts reject de facto non-merger, at this time.


VGS v. castiel
LLC. investors are called "members" or "managers". there is centralized organization sometimes. this company was manager managed by three people. two had a disagreement with the other manager, and joined forces against the one and adhered to the limited liability company act in dissolving the current LLC and beginning a new one (freeze the third manager out of the original business). the 3d manager had a controlling interest in the company. once the LLC was merged into the created corp, the one who held the original LLC lost control and the two minority had control. the court basically says that they understand that LLC act allows for managers to act pursuant to written consent without meeting or notice, but equitable principles will not allow for the actions taken in this circumstance, because clearly the 3d manager would have stopped and had the full authority to stop the merger if he had known about it.


takeovers.
acquiring companies and target companies.

dealing with both the entities and the personalities that control the entities.
acquiring companies that make a hostile bid for a target, the

the acquirer (or bidders) can be an individual or company.


think about how these cases compare to the previous ones: the previous cases demonstrate how business combination happen through the acquirers negotiating deals with the target companies. in the  current cases, the method of merger is a hostile one and the acquirer will go to other shareholders of the organization instaed of to the company's management.


tender offer: an offer to buy the company's shares but only if the acquisition happens by at least 51% of the minority shareholders tender. the acquirer generally offers a significant premium to get control.


what will the target companies do with respect to the deals? when an acquirer announces a tender offer and attempts to take control of the target company, what will the managers do?
like in pretty woman, they will try to get the acquiring company to deal with them and back off etc. they will spend corporate funds to thwart hostile bidders. but what's the problem? there might be a conflict of interests. the defense of the company will be that the acquirer is a threat to corporate existence and is a liquidator and will not manage the company in a way that is good for the company long-term, or that the acquirer will hurt the community by hurting employees, the environment and local economy.

what of the fact that this may be shareholders just entrenching themselves trying to keep their jobs? what if the directors
these cases are about the business judgment rule.

what specifically are incumbent managers of the target company doing to defend against hostile bidders and where are they getting the money? they are spending the target company's money: if the company wasn't earning anything, the acquirer wouldn't be attracted to it.

cases where the hostile bidder is trying to take the target company's executives jobs. courts therefore engage in a heightened level of scrutiny: courts first scrutinize the takeover defense mechanisms. the business judgment rule does not initially apply to the target company's business decisions. the target company's managers decisions to defend against the hostile bidders' bid do not get protected by biz judgment rule initially.

defense measures are
- greenmail (not something that acquirers try to get because have to pay 50% to IRS)
- stock repurchases or self-tenders
- poison pills
- lockups
- termination fees
- no-shop agreements


cheff v. mathes
holland was a company that was making money, but through fraudulent practices. mirmount, who wants to merge with the company holland, of which cheff is the CEO, proposes a merger. cheff rejects mirmount, who then goes to hollands shareholders and starts buying holland stock. inside directors have to show that they have a business reason for defending against the hostile bidder.

unocal corp v. mesa
the court's holding is that directors have to show that self-tender is a reasonable (proportionate) response to the hostile bidder's threat to the existence of the target company. unocal said that the threat of acquirers was coersive. this builds on the cheff analysis and adds the holding above.

revlon. poison pill.
there is another company that the target company would like to merge with. there are two personalities,
for each revlon share self-tendered to the board, the shareholder would get a payoff in a year of 12%. it was a shifting of the nature of the shareholder's investment to equity. it gave them a note, which made them creditors to be paid in the future with a stated return. much more attractive offer.