mergers & acquisitions section 0: introduction to the m&a course prof. amitai aviram...

Mergers & acquisitionsSection 0:

Introduction to theM&A course

Prof. Amitai [email protected]

University of Illinois College of LawCopyright © Amitai Aviram. All Rights Reserved

S16D

Introduction to the M&A courseOverview of Section 0

• Administrative details• BA boot camp

© Amitai Aviram. All rights reserved.2

• Mergers & acquisitions (“M&A”) are transactions with two goals:– Transfer/consolidate control in a firm and/or acquire new assets & liabilities

• Types of M&A transactions– Freezeout• Shareholder who controlled firm now owns 100% of the firm• Control change: former controller (Acquirer) now wholly owns the firm (Target)• Asset change: none, unless firm combined with controller’s other assets

– Takeover• Someone who didn’t control the firm now controls it or wholly owns it• Control change: Acquirer now either controls or wholly-owns Target• Asset change: assets of the two firms are combined

– Merger of equals• Two firms combine, neither firm’s SHs controls the combined firm• Control change: combined firm now owned by both parties’ shareholders• Asset change: assets of the two firms are combined• True mergers of equals are rare; usually, one firm wants the deal more than the

other (it’s the Acquirer, the other is the Target)© Amitai Aviram. All rights reserved.3

Administrative detailsWhat is M&A?

• The obvious players are the parties to the M&A transaction– Target (X): firm that is being acquired– Acquirer (Y): firm that is trying to buy X

• Many deals involve X merging not with Y but with Y’s subsidiary– Acquirer’s subsidiary (S): usually wholly-owned & with no business activity

• Some deals draw rival acquirers to also bid for X– Rival acquirers (Y2, Y3 , etc.): other firms that are trying to buy X

• But what makes M&A more complicated (and exciting) is that each firm has a board of directors (“board”) & shareholders (“SHs”), who may have different views about the deal– Target’s board (XB); Target’s SHs (XS)– Acquirer’s board (YB); Acquirer’s SHs (YS)


Administrative detailsWhat is M&A: key players in M&A deals

• M&A is typically a 3-way fight between YB, XB, XS

– The two parties that ally are likely to defeat the third– If YB & XB ally vs. XS, it’s a friendly deal (lower price, terms appealing to XB)– If YB & XS ally vs. XB, it is a hostile deal (higher price, terms unappealing to XB)– If XB & XS ally vs. YB, there will be no deal (X will refuse it)


Administrative detailsWhat is M&A: key players in M&A deals

• We already know the powers & duties of boards (from the Business Associations course); to understand the balance of powers between the three sides, we need to study the powers of SHs

• So, in the first half of the M&A course, we will study SH activism– 1a: Governance framework (FD analysis, types of SHs, FD of controlling SHs)– 1b: SH litigation– 1c: SH voting

• The second half of the course will cover dealmaking & dealbreaking– 2a: M&A mechanics: procedures for conducting M&A deals– 2b: The M&A dance: what YB & XB do to enhance bargaining position?– 2c: M&A litigation: how does FD analysis apply in the context of M&A– 2d: Documenting the deal: what’s in an acquisition agreement & why?


Administrative detailsWhat is M&A: course structure

• Take-home exam– Exam will be e-mailed to you at 9am at your choice of these three days:

– You must e-mail my administrative assistant (Athena Newcomb) by Thursday, April 30, 5pm, with your choice among these three dates

– If you didn’t e-mail your choice by the deadline, you will receive the exam on the first day it takes place

• Time limit– Exam responses must be e-mailed to my administrative assistant by 10am on

the day following the day it was e-mailed to you (even if it’s a weekend)• Exam structure: issue spotter

– Traditional essay-type law school exam question– Word limit: 1,000 words– More info on the exam in the exam prep session (last class of semester)– Past exams (with model answer) available at: http://www.law.illinois.edu/aviram/Exams.htm

• Deadline for answering student questions (both face-to-face & by e-mail): Thursday, April 30, 5pm

Thursday, May 7 Friday, May 8 Monday, May 11


Administrative detailsThe exam

http://www.law.illinois.edu/aviram/Exams.htm



• Instead of taking the exam, you may submit a project– Teaching module picks a topic studied in the course (typically, one sub-section; e.g., 1c3

– principal’s liability in torts) & creates alternative or supplemental materials to teach the same topic• Module can include new cases, practical application of the material, etc.• Product you submit should include:

– PowerPoint slides used to teach the material– Teaching notes that provide information professor needs to know to use slides in class, plus a

statement explaining why you structured the module the way you did & what you believe are the strengths of the module compared to the material as it was taught in the course

• Product you submit may include other aids, such as relevant video clips, scanned images, excel spreadsheets etc.

• Module should provide enough content to teach a 75-minute class (~20 slides)– Case study (plus teaching notes) for one of the sections of the course

• Case (typically 7-12 pages, plus exhibits): this is the part students read• Teaching notes: explains to the prof teaching goals, suggested solution, extensions

(other issues that can be addressed by extending the case), how the case developed in reality

• Information on creating a case study is available on my website at: http://www.law.illinois.edu/aviram/Aviram-Writing_case_studies.pdf© Amitai Aviram. All rights reserved.8

Introduction to M&AProject in lieu of exam

http://www.law.illinois.edu/aviram/Aviram-Writing_case_studies.pdf

http://www.law.illinois.edu/aviram/Aviram-Writing_case_studies.pdf

• Deadline– Project is due same time as deadline for questions (April 30, 5pm)– E-mail project to my administrative assistant (Athena Newcomb) as 1 or more

attached files• Anonymity

– Projects are graded anonymously (like exams) so the only identifying marks on them should be the 4-digit exam ID number

– To maintain anonymity, you can’t tell me your specific project, consult with me about your project or have me look at drafts of your work• But you may ask me general questions that don’t identify your project

– Due to anonymity, projects don’t qualify for ULWR• Finality of choice between exam & project

– A student who submitted a project can’t withdraw it & can’t take the exam– A student who didn’t submit a project by the deadline must take the exam on

one of the days it is administered• Attendance & participation

– Must comply with class attendance/participation standard throughout the entire semester, whether you take the exam or submit a project


Introduction to M&AProject in lieu of exam

• Talking to me outside of class– Please e-mail prior to meeting with me

• Suggest when you would like to meet (not limited to office hours)• Describe what issues you want to talk about

– E-mail: [email protected]; Room 326• Accessing materials– Slides, past exams, reading assignments (outline) & syllabus are all

posted and regularly updated on my website– http://www.law.illinois.edu/aviram/


Administrative detailsResources

Administrative detailsReading assignments

• Pre-class assignments– Lecture video (on YouTube – I will send you the link for each class)

• The lecture slides are available at: http://www.law.illinois.edu/aviram/)– Course materials packet (notes, cases, legislation) on law school’s intranet course page• Legislation is part of exam material; cases/notes optional unless I say otherwise

– Optional reading• For sections 1a-1c: Bainbridge, Corporate Law (2nd ed., 2009)• For sections 2a-2c: Bainbridge, Mergers & Acquisitions (3rd ed., 2012)• For business & business law immersion

• The Wall Street Journal, Sections C (Money & Investing) & B (Marketplace)• The Business Lawyer, American Bar Association Business Law Section• Harvard Law School Forum on Corporate Governance & Financial Regulation (

http://blogs.law.harvard.edu/corpgov/)• Business Law Today, American Bar Association Business Law Section• The Deal Professor Blog (http://dealbook.nytimes.com/category/deal-professor/)


http://blogs.law.harvard.edu/corpgov/

http://dealbook.nytimes.com/category/deal-professor/

http://dealbook.nytimes.com/category/deal-professor/

Administrative detailsClass types

• A course schedule is posted a few slides ahead• Schedule specifies topic, material covered in each class & class type

– Lecture (L): 8 classes (including 2 classes to watch a movie)– Application (A): 11 classes– Review (R): 5 classes (including exam preparation class)– Lawgaming (G): 4 classes


Administrative detailsClass type: Lecture

• In most cases, this covers background (rather than applied) material• Pre-class student responsibilities

– Review the slides of the relevant sub-section before class• Class content

– I lecture & occasionally call on volunteers; students may ask questions– Volunteer participation (no cold calling)


Administrative detailsClass type: Application

• Covers applied material (directly used in exam/problem/case)• Pre-class student responsibilities

– Watch before class the video of the lecture (I will provide the YouTube link ahead of time)

– Make sure you understand the material in the slides – i.e., what legal issues does it cover and how to analyze those issues if they appeared in a case/problem/exam

• Class content– See it: I present examples that apply material taught in the video lecture– Do it: group exercises that apply material taught in the video lecture– Review it: class discussion of the group exercise


Administrative detailsClass type: Review

• Opportunity to ask questions at the end of a section• Pre-class student responsibilities

– Note anything that isn’t clear about the material (from assignments, lecture & application classes) so you can ask me in class

– See if the new material is relevant to your firm• Class content

– “Reverse Socratic”: I cold-call students to ask me questions about the material (that they didn’t understand or understood but thought complicated)

– Open Q&A: opportunity for all students to ask questions about the material– “Adopted firm” corner: I cold call on people to tell me how the new material would

be relevant to their “adopted firm” or their “lawgame firm”


Administrative detailsClass type: Lawgaming

• Apply the material in a simulation (teams of students representing firms)• Pre-class student responsibilities

– Before first lawgame, receive a team assignment (typically, you continue with your team in later lawgames, unless your firm was acquired)

– No assignments before most lawgames (but your team may decide to prepare)• Class content

– Game stage: teams pursue their goals, creating legal documents and releasing information in the process

– Review stage: we discuss the experience of some/all of the groups – what did they do & why


Administrative detailsLawgaming: team assignments

• Team types include– Strategic firms: make products/services (by owning several “business elements”)– Financial firms: invest money in strategic firms and/or their business elements

• Hedge funds• Private equity• Institutional investors

– Supporting institutions• Judges: decide on arguments (SH litigation lawgame)• Proxy advisory services: recommending to SHs how to vote (SH voting lawgame)• Media: journalists, collecting & publicizing information (M&A dance lawgame)

• When I assign students to a firm, I will call it by its color (designating its type) and number: e.g., Blue 1, Red 3; the team will then decide on a name for the firm– Once teams are formed, each blue/red team will receive a sheet describing

firm’s strategy/preferences, business elements (blue)/shares (red) owned, shareholders (blue) & other information about the firm


Administrative detailsLawgaming: team assignments

• Selecting into teams– Fill your names in this spreadsheet,

in appropriate spot– You can authorize a friend to fill your

name on the spreadsheet– If your “team” is less than 3 people,

complete an existing team ratherthan start a new one

– If you’re indifferent about teamassignment, write your name in the“don’t care” column

• Filling the gaps…– I aim for roughly equal numbers of Blue & Red teams– I aim for as many members in Green team as there are either Blue/Red teams– If I can’t do this using the “don’t care” column & excess Green team members, I will

need to break up Blue/Red teams, starting with later members, then later teams© Amitai Aviram. All rights reserved.18

Administrative detailsCourse schedule


Date # Section Type Topic1/20 1 --- L Introduction to the M&A course1/26 2 1a1 L “Imports” from BA11/27 3 1a2 L Share ownership2/2 4 --- G Lawgaming: Forming the firms2/3 5 1a3 A Controllers2/9 6 1b1 A SH voting mechanics

2/10 7 1b2 A Board FD in influencing SH voting2/16 8 1b3+1b4 A Proxy solicitation in public firms/Controlling the agenda2/17 9 --- G Lawgaming: Understanding your firm & rivals2/23 10 --- G Lawgaming: Battle over SH meeting2/24 11 --- R Review of section 1b3/2 12 1c1 L Litigation concepts3/3 13 1c2 A Derivative actions3/9 14 1c3 A SH inspection

3/10 15 --- G Lawgaming: Suing the firm3/16 16 --- R Review of section 1c3/17 17 --- L Movie: “Barbarians at the gate”

“ 18 --- L [Movie continued]3/30 19 2a1 L Basic M&A concepts3/31 20 2a2 A Share acquisitions4/6 21 2a3 A Mergers & asset sales4/7 22 --- R Review of section 2a

4/13 23 2b1 L The M&A dance4/14 24 2b2 A Takeover defenses4/20 25 2b3 A M&A litigation4/21 26 --- G Lawgaming: M&A dance4/27 27 --- R Review of section 2b4/28 28 --- R Exam preparation

• Class on Monday, May 4 is cancelled• In lieu of this class, I will extend the

March 17 class to 3-hours (3:00-5:45), and we will watch “Barbarians at the Gate”, a movie that will give you the sense of what an M&A battle between multiple acquirers looks like

Administrative detailsAdopt a firm / adopt a director

• To help you with lawgaming (and the rest of the course), please pick a public firm and a director in a public company that you “adopt”

• The adopted director will become your persona in lawgames– But don’t get too attached – if more than one student picks the same director,

I will have to randomly pick who gets to be that person, and other students would need to pick another director

– Don’t adopt a director if you are on a green team• As part of pre-class preparation, research your

adopted firm to see how the material we studiedis relevant to that firm• E.g., when we study constitutional documents, find & read

your adopted firm’s bylaws & articles of incorporation; whenwe study controllers, find out who are the major SHs in yourfirm, and whether the firm has any procedures to address(or has recently addressed) transactions with the controllers


Administrative detailsAdopt a firm / adopt a director

• Finding information on public firms– Google News, Yahoo! Finance, etc.– EDGAR (Electronic Data Gathering, Analysis, and Retrieval system): All

companies registered under the Securities Act or Securities Exchange Act must make certain public disclosures; SEC places those online on EDGAR (www.sec.gov/edgar/searchedgar/companysearch.html)

• Disclosure types include:– Registration of securities (various forms)– Form 10-K (annual report);– Form 10-Q (quarterly report);– Form 8-K (episodic, within four business days)• New material developments• Disclosures made to parts of the public (analysts, public speaking events)

– Form 14 A [PRE14A; DEF14A] (proxy materials)– Forms 3/4/5 (beneficial ownership of securities)

• Exercise (Answers: 4 million; Robert L. Ryan)– Steve Jobs, CEO of Apple (AAPL) spoke at a trade show on Jan. 15, 2008 and

stated the number of iPhones that Apple has sold to date. Find that number.– Who is the chair of the audit committee at Hewlett-Packard Company (HPQ),

as of January 2008?© Amitai Aviram. All rights reserved.21

http://www.sec.gov/edgar/searchedgar/companysearch.html

Introduction to the M&A courseOverview of Section 0

• Administrative details• BA boot camp


• Corporate law (in the broad sense of the law of business organization, including agency law, partnership law, LLCs, etc.) is the law that governs acting through others (the act of one on another’s behalf)– The one who acts is the corporate actor (A); the one on whose behalf the actor

is acting is the beneficiary (B); a person interacting with A in connection with the matter on which A is acting on behalf of B is the third party (T)

• Acting through others raises two sets of legal issues– External relationships (corporate compliance): addressing when A’s behavior

changes the legal relationship between B and T (e.g., contract/tort liability)– Internal relationships (corporate governance): mitigating the agency problem

(A’s incentive to “shirk or steal”, that is – to fail to put B’s interests before A’s own interests)


BA boot campWhat is corporate law

• How does A “steal” from B? This is often called “tunneling”– A conducts a transaction between B & A, skewed in favor of A

• Excessive compensation for A (excessive money, perks, stock options, etc.)• A buys/rents/borrows an asset from B at below market price• A sells/lets an asset to B at above market price

– A makes personal use of the position of acting on B’s behalf, or of information that belongs to B (e.g., obtained by A in acting on B’s behalf)• Usurping business opportunities (diverting the opportunity from B to A)• Insider trading (buying or selling shares in market with advantage of non-public

information A has by virtue of his position)– Controller (“C”; SH who controls firm’s board) influences the board to enter a

transaction that diverts value from the minority shareholders (“MSHs”) to C• Freezeout: C acquires sole ownership of firm, paying MSHs less than fair value• Sale of control: Firm enters agreement to sell itself to T, with C receiving

undeserved preferential terms compared to the MSHs


BA boot campTunneling

BA boot campGovernance solutions


Bonding: Align a party’s welfare with the group’s collective welfare

Morality/identityPerformance-based compensation

Joint ownershipIntervention: Have government enforce appropriate behavior by whomever acts for the group

Private ordering (contract)Public paternalism (regulation)

Private paternalism (FD)Voice: Allow a party unilaterally to express dissent in a manner that may affect the group’s behavior

ApprovalProtest

Exit: Allow a party unilaterally to end her association with the group without losing her share of the value produced by the group

TerminationDissociationAlienation

• You will need for this course knowledge (from the BA course) of the following issues:– Constitutional documents (“ConDocs”): the charter & bylaws– Corporate actors: authority of firm’s agents & organs, and framework for when

their behavior binds the firm– Fiduciary duty (“FD”) analysis: evaluating whether a corporate actor violated FD– Approval: evaluating whether a flawed act of a corporate actor was cured

through the beneficiary’s ratification or prior consent


BA boot campTopics imported

BA boot campConstitutional docs

• A firm’s constitutional documents regulate the firm’s legal internal relationships (between the firm, SHs & the board)• Charter (“Articles of Incorporation” in MBCA; “Certificate of Incorporation” in DGCL)• Bylaws

• Creation of constitutional documents– Charter [DGCL §101(a)]: incorporator– Bylaws [DGCL §109]: Until stock is issued – board; after – SHs (charter may also allow board)

• Amendment of constitutional documents– Charter [DGCL §242(b)]• First, board must adopt the proposed amendment• Then, SHs approve the proposed amendment (in some circumstances, SHs vote

in separate groups [DGCL §242(b)(2)])– Bylaws [DGCL §109]• SHs always allowed to amend• By default board can’t amend bylaws, but charter may allow board to amend


BA boot campConstitutional docs: charter contents

• Charter: mandatory terms [DGCL §102(a)]– Firm’s name– Address of firm’s registered office and name of its registered agent– Nature of the business to be conducted (“any lawful act or activity”)– Name/address of incorporators and initial directors– Specify if firm is not a stock corporation (in which case, conditions of

membership must either be specified, or refer to bylaws)– “A statement of the designations and the powers, preferences and rights, and

the qualifications, limitations or restrictions [on firm’s stock]”– Number of authorized shares & share par value

• Charter: optional terms [DGCL §102(b)]– “Any provision for the management of the business and for the conduct of the

affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders […]”

– “Any provision which is required or permitted […] to be stated in the bylaws may instead be stated in the certificate of incorporation […]”

– SH preemptive rights– Supermajority requirements for SH or board votes– Opting out of limited liability or perpetual existence– Limits on directors’ fiduciary duty


BA boot campConstitutional docs: bylaw contents

• DGCL 109(a): bylaws may address any subject “not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.”

• Valid bylaw content (Boilermakers Local 154 Retirement Fund v. Chevron Corp. [Del.Ch. 2013])1. Bylaws are subordinate to the law & charter

• So, anything that the law says should be in the charter (e.g., authorized shares, rights of shares) is not valid bylaw subject matter

• Bylaw can’t order directors to violate FDs (only charter can)2. Valid subject matters include

• Business/affairs of firm• Rights/powers of firm, SHs, directors, officers & employees

3. Bylaws dictate process, not substantive decisions• Court: “[B]ylaws typically do not contain substantive mandates, but direct how the

corporation, the board, and its stockholders may take certain actions.”4. Bylaw isn’t invalidated because it can be abused; if a particular act abuses the

bylaw, that act can be challenged5. Board-amended bylaw may diminish an existing SH right


BA boot campConstitutional docs: assumptions for exam

• On the exam, assume that the corporations mentioned in the fact pattern have the following terms in their constitutional documents, unless the fact pattern states otherwise

• Charter– Firm is a stock corporation, has limited liability & perpetual existence– Firm may conduct any lawful act or activity– Director FD is limited to the maximum degree allowed under §102(b)(7)– Board may amend bylaws

• Bylaws– Chairperson of the board is authorized to call a board meeting– Board is authorized to call both annual & special SH meetings


BA boot campConstitutional docs: finding on EDGAR

• Find your firm’s most recent 10-K (annual report)– Go to the exhibit listing/schedule (Item 15)– Charter will be Exhibit 3.1; Bylaws will be Exhibit 3.2

– Most of the time, the documents will be incorporated by reference (i.e., instead of including them, the Exhibit will say in which past filing they were included), so go to that filing

• Confirm charter/bylaws were not amended since the last 10K. Check:– Proxy statements since last 10K (DEF14A or PRE14A) – check if solicitation

involved a vote on an charter or bylaw change– Exhibit list (Item 6) of all 10-Qs since the last 10K– 8Ks that have an Item 5.03


BA boot campCorporate actors

• Agents (A)– Restatement (Third) of Agency (“R3A”) §1.01: An agency relationship is

created when A & P manifest assent that A shall act -• On P’s behalf• Subject to P’s control

– For this course, officers are agents (law is ambiguous about this)• Organs – act for the firm, but not subject to the firm’s control

– Board of directors (“board”)– Board committee– SH meeting– Incorporator

• Controllers (C)– C is a SH/group with enough control rights to control the agenda (force a SH

vote on an issue) & then win the vote– C doesn’t have authority to act on firm’s behalf, but firm’s board has an

incentive to act according to C’s wishes


BA boot campCorporate actors: how organs act

• Organs act by approving resolutions, either by:– Written consent

• Board: requires unanimity [DGCL §141(f)]• SH meeting: requires SHs having no less than the minimum # of votes

needed to take the action at meeting in which all shares entitled to vote were present [DGCL §228(a)]

– Meeting (rules for SH meetings discussed in Section 1c)• Call (authority to call meeting + appropriate notice)

– Board: No statutory notice requirement, but abuse breaches FD• Quorum

– Board: by default, majority of total # of directors (may be modified in charter, but no less than 1/3); presence via teleconferencing [DGCL §141(b),(i)]

• Vote– Board: by default, majority of directors present at the meeting [DGCL §141(b)]


BA boot campCorporate actors: authority

• Authority can be granted by law, agreement or approval– Agents: is A an agent (R3A 1.01) & does A have actual authority (R3A 2.01)?– Organs: is A an organ & does a law, agreement or approval grant A authority?

• Organ authority created by law– Board: All firm’s powers not reserved to others by law/charter (DGCL §141(a))– Board committees

• As stated in charter/bylaws• As authorized by board (limits on authorizing committees @ DGCL §141(c))

– SH meeting• Exclusive to SH meeting

– Electing directors– Appointing firm’s independent auditor– Precatory (non-binding) SH resolutions

• Jointly with board– Charter amendments– Mergers / sale of all or substantially all of firm’s assets– Dissolution of the firm– Ratification of certain unauthorized corporate actions (DGCL §204)

• Either SH meeting or board– Bylaw amendments– Ratifying breach of FD


BA boot campCorporate actors: firm’s duties to its actors

• Contract & tort law• E.g., express & implied terms of contract between actor & firm

• B owes a duty of good faith & fair dealing to A (R3A §8.15)• Duty not to frustrate A’s justified expectations, when contract lacks specific

language governing the issue, and B’s conduct frustrates purposes reflected in contract’s express language• E.g., Professor agrees with research assistant that he will get an extra $100 if he

shows up at prof’s office at 8am. Prof later changes mind, locks office doors so RA can’t enter office at 8am.

• Duty to warn A about unreasonable risks involved in the agency, if risk is foreseeable to P & A is unlikely to become aware of risk on his own

• B has a duty to indemnify A for expenses & losses that are incurred in the exercise of A’s authority

• For agents, governed by R3A §8.14(2)• For organs, governed by DGCL §145


BA boot campCorporate actors: bypassing a conflict of interest• When A has a conflict of interest, best procedure is to isolate the

conflicted A from both negotiating the transaction & approving it• That’s easy when A has a non-conflicted superior or board – just

have A recuse herself, declare her conflict & let the superior agent or the board negotiate the transaction without A’s involvement

• When a majority of directors are tainted, a good way to cut them out of the loop is to create a board committee of independent directors and authorize the committee to handle the transaction

• Best practices of such delegation to an independent committee are:• Transaction negotiated & approved by a special committee or an

independent board majority– Committee is independent– Committee satisfied its duty of care– Committee authorized to freely select its advisors (& they’re independent)– Committee authorized to use firm’s full bargaining power (e.g., implement

takeover defenses) & to consider all of the firm’s options© Amitai Aviram. All rights reserved.36

BA boot campCorporate actors: external relationships

• T as plaintiff– Enforcing a contract agreed to with a firm’s agent:

• Agency relationship + actual authority / ratification (retroactive actual authority)• Apparent authority• Estoppel• If P is undisclosed: agency relationship + “virtual apparent authority”

– Enforcing a contract agreed to with a firm’s organ• If act is not authorized by law, firm is not bound by it• If act is authorized by law, firm is bound by it

– If act is ultra vires (authorized by law but prohibited by charter): firm is bound unless SH or the AG sue to enjoin it, in which case T is compensated but doesn’t get anticipated profits of contract [DGCL 124(1)]

– Holding firm liable for the tort of the firm’s actor (agent or organ)• A acted with actual authority or firm ratified the tortious act• Firm was negligent in selecting/controlling A• Respondeat superior: A was an employee acting within scope of employment• A’s acted with apparent authority & act constituted/concealed the tort


BA boot campCorporate actors: external relationships

• T as defendant– Firm can sue T based on contract law, torts, agency, etc.– T doesn’t owe a FD to the firm or its SHs unless another

relationship creates a FD (e.g., T is firm’s agent)– T may be liable to firm for aiding & abetting a breach of FD by an

actor for the firm; elements required [Malpiede v. Townson [Del. 2001]]1. Existence of a fiduciary relationship;2. Breach of the fiduciary's duty;3. Knowing participation in that breach by T; and4. Damages proximately caused by the breach


BA boot campCorporate actors: internal relationships

• A beneficiary can challenge an actor’s behavior for lacking authority and/or for breaching fiduciary duties (“FD”)– If authority is granted by approval, use the approval framework– Authority may have a procedural aspect (require particular process for A to act)– Authority is irrelevant when an inaction is challenged

• Authority is always irrelevant for controllers, since they don’t act on firm’s behalf

• Analyzing a FD breach allegation1. Flaws2. Duty (does A owe B a fiduciary duty?)3. Determine SoR for each flaw• For agents: always agency SoR• For organs: business judgment rule (“BJR”), entire fairness or enhanced scrutiny

4. Application of SoR to each potential flaw– [Approval (if behavior of/attributable to B waives FD breach)]


BA boot campFD analysis: flaws

• Negligence: acting with insufficient effort/care– Negligent action– Negligent inaction

• Self-dealing– Having a conflict of interest (“CoI”) with respect to the challenged behavior– Receiving an unauthorized benefit from the fiduciary position

• Bad faith: acting not in B’s interests, without evidence of self-dealing– Illegality (knowingly violating criminal law)– Corporate waste– Conscious disregard of a known duty– Failure to disclose


BA boot campFD analysis: duty

• Directors– Each director owes a FD to the firm (and to its SHs)– Exculpation: Under DGCL §102(b)(7), a firm can have a clause in its charter that

eliminates or limits directors’ personal liability for monetary damages for breach of FD, except:• Self-dealing & bad faith (acts/omissions not in good faith, involving intentional

misconduct or knowing violation of the law, and acts/omissions where director derived improper personal benefit)

• Unlawful dividend payment/stock repurchase– So, if a firm has this clause, a challenge based on unintentional negligence that

requests a remedy of damages (as opposed to an injunction) will fail• Agents

– Agents owe a FD to the principal (firm’s agents owe a FD to the firm)• Officers

– The law is not clear as to whether officers are agents or organs– For this course, treat officers as agents

• SHs– SHs do not owe a FD to the firm or to other SHs, except that SH may owe FD in

exercising control of the firm– This exception is discussed in Section 1a3


• Agency (emphasizes beneficiary discretion)– Applies to all agent acts/inactions

• BJR (emphasizes actor discretion)– Default SoR for organ acts/inactions (applies when neither entire fairness nor

enhanced scrutiny is the applicable SoR)• Entire fairness (emphasizes judicial discretion)

– A (agent/organ/controller) is self-dealing (has CoI or receives unauthorized benefit from the fiduciary position)

• Enhanced Scrutiny– Applies when A deploys corporate power against B, (allegedly) to achieve

greater good for the firm• A adopts takeover defenses (Unocal)• A limits ability to sell shares, to preserve tax benefits (Selectica)• A runs SH meeting in way that interferes with SHs’ vote (Blasius)

– The test: quasi-BJR (did actor make a business judgment, was actor independent & did actor act in good faith?) + reasonableness (is act a reasonable way to address threat?)

BA boot campFD analysis: SoR (determining appropriate SoR)


BA boot campFD analysis: SoR (entire fairness)

• Entire fairness SoR applies if A has CoI with respect to the challenged behavior, or received an unauthorized benefit from fiduciary position

• When does a collective body (e.g., the board) have CoI?– Actor has CoI if 50% or more of its members have CoI– Example: Board composed of 4 directors votes 4-0 to hire Ann

• If 0 or 1 director has CoI, BJR applies• If 2 directors or more have CoI, entire fairness applies

• Which members have CoI? (Cinerama v. Technicolor [Del. 1995])– Member who was aware (at time of act) of a personal interest (with respect to

the challenged act) that contrasts with the firm’s interest– Member who was controlled or dominated by someone who has CoI

• Standard for domination (Beam v. Stewart): “[… F]acts that would support the inference that… the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.”

– Member who was unaware (at time of act) of another person’s CoI, if the other person violated a duty to disclose their interest to the member• Other person is an actor for the firm (e.g., director, officer, agent)• Info relates to other actor’s decision-making or oversight functions• Info is material to the discharge of those functions• Disclosure doesn’t violate a superior duty


BA boot campFD analysis: application (agency)

• Negligence: Test is ordinary negligence (R3A §8.08)• Self-dealing: automatic breach (no fairness test)• No bad faith categories

– But “bad faith” acts may violate other categories of FD; e.g.:• Failure to disclose/disregard of duty caused by CoI is self-dealing• Negligent failure to disclose/conscious disregard of duty is negligence• Illegal or wasteful acts may be seen as exceeding authority


BA boot campFD analysis: application (entire fairness)

• Under entire fairness, self-dealing breaches FD only if act was unfair to the corporation & its SHs

• Fairness analysis for acts– Was taking the act (e.g. hiring CEO’s spouse) fair to the firm?– Were terms of act (e.g., employment contract) similar to what firm

would have received in an arm’s length transaction?• Fair process (for determining price/other terms) – indirect assessment• Fair price (valuation/comparison) – direct assessment

• Fairness analysis for omissions– FD breached if an unauthorized benefit was derived from the fiduciary position– Test for determining whether opportunity was derived from the fiduciary

position (Guth v. Loft) (no single factor is dispositive; court balances all factors)• Was the corporation financially able to take the opportunity?• Was the opportunity is in the corporation’s line of business?• Did the corporation have an interest or expectancy in the opportunity?• By embracing the opportunity, would the officer/director create a conflict between

his/her self-interest and that of the corporation?


BA boot campFD analysis: application (BJR)

• When BJR is the applicable SoR, application of the SoR takes 2 steps:1. BJR rebutted? (Does court defer to A’s discretion?)2. FD breached? (Applying judicial discretion, did A’s behavior breach FD?)

• Step 1 (BJR rebutted?): court defers to A (no FD breach), unless –– A didn’t make a business judgment (inaction or negligent act)– A didn’t act in good faith pursuit of a legitimate corporate interest

• Step 2 (FD breached?): Once BJR is rebutted, FD is breached –– If legal flaw was negligence, FD is breached if act was grossly negligent– If legal flaw was a bad faith action, FD is automatically breached– If legal flaw was a bad faith inaction, certain tests for whether FD was breached


• Negligent inaction– BJR is rebutted (no business judgment to defer to)– FD is breached if inaction was grossly negligent (see later slide)

• Negligent act: to see if BJR is rebutted -– Identify necessary expertise & information – depends on:• Nature of the challenged act• Importance of the challenged act to corporation/SHs

– Did actor acquire necessary expertise & information?• Reliance on actor’s own knowledge/expertise• Reliance on advisors (DGCL §141(e))– Expertise– Independence– No abdication of decision

Note: whether an act amounts to a business judgment is a matter of the procedure of reaching the decision, not the substance of the decision

BA boot campFD analysis: application (BJR - negligence)


Example (Van Gorkom)• SH sues board for approving the sale of corp for $55/share• SoR: BJR, rebutted– CoI/bad faith: No CoI, illegality or waste– Inaction? No (challenge addresses board’s action)– Carelessness? Yes• Necessary expertise & information (this is a very important decision)– Legal analysis of merger agreement– Valuation of the company– Knowledge on how to best auction the company

• Did actor acquire necessary expertise & information?– Reliance on actor’s own knowledge/expertise– Reliance on advisors (Romans/Van Gorkom)» Expertise (Romans did not do a valuation; VG has law degree)» Independence (Van Gorkom was nearing retirement)» No abdication of decision (Hardly any deliberation; board not proactive)




• If negligence is alleged & BJR rebutted, FD is breached only if actor was grossly negligent– McPadden v. Sidhu (Del.Ch. 2008):“gross negligence is conduct that

constitutes reckless indifference or actions that are without the bounds of reason”

• When an action (but not an inaction) is allegedly grossly negligent, if BJR is rebutted due to carelessness, then the action was grossly negligent (so FD was breached)– When an inaction is allegedly negligent, BJR automatically rebutted, so you

now need to analyze whether inaction was grossly negligent


• BJR rebutted & actor breached FD if:– Illegality: actor intentionally violates the law (including fraud)– Corporate waste: transaction is so one-sided that no business

person of ordinary, sound judgment could conclude that the corporation has received adequate consideration

• Alternative test: actor is motivated by purpose other than SH welfare or actor’s self-interest

BA boot campFD analysis: application (BJR - bad faith actions)


• BJR always rebutted (inaction); FD is breached when:– Failure to disclose

• Actor must disclose to other actors (e.g., board, board committee, SHs) all material info reasonably required for them to act on behalf of corp– Info relates to other actor’s decision-making or oversight functions– Info is material to the discharge of those functions– Disclosure doesn’t violate a superior duty (imposed by law, confidentiality

agreement, ethics rule, etc.)• E.g.: since SHs elect the directors, board would act in bad faith if it failed to

provide SHs all material info is has relevant to deciding whether to elect the proposed candidates

• When info isn’t related to facilitating another actors’ acts, failure to disclose may still breach FD if it qualifies as a bad faith disregard of duty (i.e., if it passes the Stone test)

– Conscious disregard of a known duty: either actor “utterly failed to implement any reporting or information system or controls”; or having implemented such a system or controls, “consciously failed to monitor or oversee its operations, thus disabling [itself] from being informed of risks or problems requiring [actor’s] attention” (Stone v. Ritter)

BA boot campFD analysis: application (BJR - bad faith inactions)


BA boot campFD analysis: summary


FD analysis: SoR & Application stagesNeg. act Neg. inaction Bad faith act Bad faith inaction Self-dealing

SoR BJR BJR BJR BJR Test for self-dealing (apply entire fairness)

App.(BJR

rebutted?)

Van Gorkom test Automatic(for inaction)

Tests for illegality& corp. waste

Automatic(for inaction)

Fairness test

App.(FD

breached?)

Gross negligence (almost automatic)

Gross negligence

Automatic breach if BJR rebutted

Tests for disregard of duty (Stone) &failure to disclose

FD analysis: types of legal flaws

Negligence Self-dealing Bad faith

Negligent actNegligent inaction

CoIUnauthorized benefit

IllegalityCorporate wasteDisregard of dutyFailure to disclose

BA boot campApproval: general principles

• Approval is behavior by (or attributed to) B, that cures a legal flaw in A’s behavior– If approval takes place before A’s behavior, it is called prior consent– If approval takes place after A’s behavior, it is called ratification

• Revoking approval– Valid ratification can’t be revoked (i.e., once ratified, act can’t be un-ratified)– Prior consent can’t be revoked after the act takes place; whether it can be

revoked before the act takes place depends on the agency agreement (by default, yes)

• Rights of “fourth parties” (parties other than P, A & T)– Prior consent doesn’t diminish rights of persons not parties to the transaction,

as a general matter of contract law– Ratification doesn’t diminish pre-ratification rights of persons not parties to the

transaction, under R3A § 4.02(2)(c)• E.g., A is P’s financial manager. Without actual/apparent authority, A gives T an

option to purchase P’s Google shares for $50K. P then agrees to sell the shares to S for $40K. When T tells P he wants to exercise the option, P ratifies A’s agreement with T. S can enforce his contract to buy the shares for $40K (but P is also liable to T for damages for breach of contract, because he ratified)


BA boot campApproval: elements


1. Appropriate approver• Identity (B or person w/authority to approve & no CoI)• Attributability (A’s behavior is attributable to B)• Capacity

2. Appropriate approval• Unambiguous• Informed• Timely• Appropriate scope

Elements in blue must always be discussed; other elements should be discussed if fact pattern suggests they are an issue

BA boot campApproval: identity

• Appropriate approvers are:– The beneficiary (person on whose behalf A acted or purported to act)– Person who has authority to approve on behalf of B & doesn’t have CoI with B

regarding the behavior that is approved• Authority to approve: may be assumed if person has authority to conduct on

behalf of the beneficiary the same behavior that is subject to approval (unless specifically prohibited from approving or delegating that behavior)– Example 1: Suppose Amy’s unauthorized purchase of Blackacre was ratified not

by Paul but by Alex (another agent of Paul). Alex is an appropriate approver if Paul authorized him to buy property at $210K (or to ratify such deals)

– Example 2: if Paul authorized Alex to buy property at $210K, but specifically prohibited him from delegating the purchase to others, the authority to approve is not assumed (since if he approved Amy’s act it would amount to a delegation of his authority to Amy)

• No CoI with beneficiary– E.g., In example 1 above, if Alex gets a commission if the sale goes through but

not if it doesn’t, he can’t approve the transaction– Rule means that approver (other than beneficiary) can’t approve his own acts


• In the context of an organ’s behavior, appropriate approvers are:– A person who has authority to approve on behalf of the beneficiary

• Board– Board can approve behavior of corporate actors (based on its plenary

authority under DGCL §141(a) & on DGCL §144, 204)– As with agency law, board can’t approve its own acts & can’t approve acts

regarding to which board has CoI (e.g., no approval of controlling SH’s behavior)• SH meeting

– SH meeting can cure directors’/officers’ self-dealing by approval (DGCL §144)» Not clear if SH meeting can approve other behavior of corporate actors; even

if it lacks authority to approve, approval may be construed as waiving a SH’s right to sue for the legal flaw that was purportedly approved

– When approving, vote must be specifically designated as a ratification, and SH meeting can only approve acts that don’t require a SH vote to become legally effective [Gantler v. Stephens (Del. 2009)]

BA boot campApproval: identity


BA boot campApproval: attributability & capacity

• Actor’s behavior is attributable to beneficiary– A must have acted or purported to act on B’s behalf [R3A 4.03]• E.g., if Amy bought Blackacre for someone other than Paul (such as for herself), Paul can’t ratify– B must exist at the time of the act [R3A 4.04]

• E.g., if Amy bought Blackacre for PaulCo, a corporation that she is about to form (but hasn’t yet formed), PaulCo isn’t bound by the deal (P couldn’t create manifestations of authority) & can’t ratify it (PaulCo didn’t exist when Amy signed deal to buy Blackacre)

– No public policy reasons to prevent B from approving• Void acts (can’t be ratified)

– Lack of corporation authority (ultra vires) (but unanimous SH ratification insulates board from future SH challenge)

– Bad faith actions (illegal acts & corporate waste)– Probably also conscious disregard of duty

• Voidable acts (can be ratified): lack of actor authority, negligence, self-dealing & failure to disclose

• Approver must have legal capacity at time of approval [R3A 4.04]© Amitai Aviram. All rights reserved.57

BA boot campApproval: unambiguous

• R3A 4.01(2) – B approves an act by:– Manifesting assent that the act shall affect B’s legal relations; or– Conduct that justifies a reasonable assumption that B consents

• E.g., B knowingly accepts the benefits of A’s act, even if B manifests disagreement to accepting the act’s legal consequences

• Approval requires objective or externally observable indication that B consents to A’s act

• Related to ambiguity, R3A 4.02(2)(b) makes ratification ineffective in favor of A if B ratifies to avoid a loss– So, if B ratifies to avoid a loss, B is liable to T, but A may be liable to B– E.g., A is B’s financial manager. A lends B’s money to T without actual/apparent

authority. T becomes insolvent & B files a claim in T’s bankruptcy proceeding. Filing the claim doesn’t release A from liability for exceeding actual authority.

– Not relevant for prior consent (if B gave prior consent, she wasn’t “trapped” into approving by the threat of a loss)


• Implied approval is interpreted from the approver’s behavior, rather than expressly framed as an approval– E.g.: ratification implied by unambiguous acquiescence– Implied approval by the board is possible if it is unambiguous, but implied

approval by SHs is probably impossible (inherently ambiguous)• Express approval is framed as an approval

– To be unambiguous, express approval must comply with formal procedures for call, quorum & vote

– There are specific statutory rules for the process of approval of a transaction flawed by self-dealing or lack of authority (see next slide)




• Approval procedure– Lack of authority: DGCL §204 (approval by board & in some situations also by

the SH meeting) (effective April 1, 2014)– Transactions in which a director/officer has CoI: DGCL §144(a), either:

• Approval by a majority of disinterested directors (even if disinterested directors do not compose a quorum)

• Approval “in good faith by vote of the shareholders” (in Fliegler the court said this requires a vote of the majority of disinterested SH)

– Any other act: no statutory authorization for approval, but approval is possible under the board’s plenary powers (DGCL §141(a))• Follows the normal process for board acts (written consent or call/quorum/vote)

• Hypo– Hypo: Acme’s board consists of A, B, C, D & E. They vote to ratify a contract

between Acme & A’s husband (B, C & D do not have CoI). Only A, B and C show up for the vote. Do they have a quorum? [Note DGCL §141(b), §144 (b)]

– A, B & C all vote in favor of the contract. Was it approved? [Note §141(b), §144(a)(1)]


BA boot campApproval: informed

• Approval is valid only with “knowledge of [all] material facts involved in the original act” [R3A §§4.06, 8.06(1)(a)(ii)]– Unless B was aware of such lack of knowledge– Probably “all material facts” refers only to those facts A is aware of (since there

are always some uncertainties that neither A nor B know of)– Material facts: Facts that a reasonable person would consider relevant to the

decision whether to approve• Related to this, R3A §4.02(2)(a) says ratification is ineffective in favor

of a person who causes it by misrepresentation or other conduct that would make a contract voidable (duress, undue influence)– E.g., A buys car for B from T without actual or apparent authority. T persuades

B to ratify by falsely telling him car has a new engine. B not bound to T.


BA boot campApproval: timely

• Ratification ineffective if “circumstances that would cause the ratification to have adverse and inequitable effects on the rights of [T]” occurred [R3A § 4.05]– T withdraws from the transaction

• B hires A to identify houses B might want to purchase. A sees that T is asking for a very low price for his house, so she buys the house from T on B’s behalf with no actual or apparent authority. T learns there was no authority & notifies B he withdraws from the transaction. B then ratifies. Ratification is ineffective.

– Material change of circumstances that makes it inequitable to bind T• E.g., A sells B’s house without actual or apparent authority. B’s house then

burns down. B cannot ratify the sale.– Ratification after rights have crystallized (ratification timed so that T is deprived

of a right or subjected to liability)• E.g., T gives B an option to buy stock, which expires on May 3rd. Without actual

or apparent authority, A purports to exercise the option on B’s behalf on May 2nd. B ratifies on May 4th. T is not bound by the ratification.

• Prior consent is always timely


BA boot campApproval: appropriate scope

• Ratification (but not prior consent) must encompass “the entirety of an act, contract or other single transaction” [R3A §4.07]

• Approval of self-dealing (ratification/prior consent) must address a specific act/transaction or acts/transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency [R3A §8.06(1)(b)]

• Approval of authority cannot exceed the authority the approver has


BA boot campFD analysis: Review

• Fact pattern– Two corporations, A & B– A’s board has 5 directors: Zoe, Yogi, Xena, Wendy & Victor. Directors Zoe and

Yogi each own 15% of A’s shares, and 5% of B’s shares. The other directors do not own shares in A or in B.

– After thorough deliberation & reliance on expert advice, A’s board unanimously votes in favor of a contract to buy widgets from B corp. Price is 20% above market rates; B has reputation for reliability.

– When board votes on contract, Zoe & Yogi do not disclose that they own shares in B. However, Xena & Wendy know that they own shares in B.

– After approving the contract, board calls a SH meeting to ratify the contract, providing adequate notice & disclosing all relevant information. Owners of 70 of A’s 100 outstanding shares are present at the meeting. 40 shares (including Zoe & Yogi’s shares) vote in favor of ratification; 30 shares vote against.

– SH of A corp. sues A’s directors, challenging the contract with B



• First, make sure you are using the right analysis framework– SH (beneficiary) is suing its firm’s directors (actors): insider analysis

• Authority: no flaws– Firm’s authority: no evidence that charter restricted firm’s authority to buy

widgets, so no ultra vires– Actor’s authority: board has authority to manage business & affairs of firm

(DGCL 141(a)), which includes entering contract to buy widgets• Fiduciary duty

a) Flaws

b) Duty: defendants owe the firm FD as directors

Negligence Self-dealing Bad faith

Negligent actNeg. inaction

CoIUnauthorized benefit

IllegalityCorporate wasteDisregard of dutyFailure to disclose



• Fiduciary dutyc) SoR• Corporate waste claim: BJR applies• CoI: entire fairness applies if 50% or more of directors have CoI

– Zoe & Yogi’s ownership in B makes them benefit if A overpays– Zoe & Yogi had duty to disclose CoI to other directors (info is material to deciding on contract,

disclosure doesn’t violate a superior duty). Victor unaware of the conflict, so he is also considered conflicted.

– 3 of 5 directors have CoI: entire fairness applies to CoI claimd) Application• BJR (corporate waste claim): is contract so one sided that no reasonable person

could conclude that firm received adequate consideration? No, it could make sense to pay more for better widgets (or reliable supply), so corporate waste claim doesn’t rebut BJR

• Entire fairness (CoI claim): would firm enter this contract under these terms if directors had no affiliation to B corp.?

– Did A buy widgets from anyone in the past, or was deal designed for B’s sake?– Did process to buy widgets mimic arm’s length transaction?– Price is higher than market price, but B’s reputation is better than average. What price does B

charge others? What price do other firms with similar reputation to B charge?



• Approval: if deal was unfair, did SHs ratify?– Identity: Yes, SH can ratify as ultimate beneficiaries– Fact pattern does not raise issues regarding attributability & capacity (act

tainted by CoI is voiable & ratifiable; would be void & unratifiable if corporate waste claim was successful)

– Unambiguous: No• Vote designated as ratification & act doesn’t require SH approval (Gantler)• Call: board can call SH meeting & gave adequate notice• Quorum – Majority of shares entitled to vote: Yes (70 out of 100)• Vote – usually, majority of voting power present, but under Fliegler, for

ratification need majority of disinterested voting power present. Here, only 10 of 40 disinterested votes favor ratification

– Informed: Yes (according to fact pattern)– Fact pattern does not raise issues regarding timeliness or appropriate scope


mergers & acquisitions section 0: introduction to the m&a course prof. amitai aviram...

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