Mergers and Acquisitions

USD Law School

Fall 2009

Professor Tom Smith

Final Exam

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Directions

Open Book Exam : This is an open book exam. You can use your casebook, notes, outline, statutory supplement, and materials from class. You cannot use any commercial outline, treatise or similar material prepared by someone other than you.

Three hour exam: You have three hours to complete this exam. You can allocate your time among the problems as you see fit.

Six Questions: This test has six main questions. Most of the questions, however, have sub-questions within them that you should watch out for and address in your essays.

Do not use a blue book; type or write in the space provided instead: If you are not typing, please write you answer legibly in this exam booklet in the space provided under the questions. Word limits for those typing are noted at the end of the space provided and have been provided to the Registrar’s office. I have tried to provide more than ample space. You should not feel you have to fill up the space provided.

General Directions:

In this exam, you should strive to display that you have mastered the material thoroughly and can apply it to particular problems. To this end, it is useful to cite relevant case law or statutory law, but throwing in extraneous citations will not help your grade.

The main thing to try to do is apply the law to the facts. This is the legal analysis I am really looking for.

It is a good idea to discuss the issues raised directly by the problems, but if you have time to discuss somewhat collateral issues that give you a chance to display your knowledge, that is worth doing as well (but only obviously if you have time). The purpose here is thus somewhat different from a legal brief or memo, where the point is not to show how much you know, but just to answer questions as succinctly as possible. Here, you should feel free to expand on your answers, to the extent it is relevant and helps show your knowledge.

However, throwing in irrelevant material as padding is not a good idea.

You may notice several of the problems are taken right from our casebook. It is OK to use class discussions and notes to help you answer these problems but I expect the best answers will show that the student has thought through these problems on his or her own and carefully studied the materials in this course.

I enjoyed this class and hope you did too. Good luck on this test!

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Question 1.

After the decision in Trans Union, a small pharmaceutical company becomes aware that several large corporations have an interest in acquiring it. Finally, when contacted by representatives of a large foreign pharmaceutical company with no operations or sales in the U.S., the company's officers retain an investment banker, and meet with the investment banker on a Thursday. On the following day they meet with the prospective buyer, and are offered a price which represents 66 times current earnings, far beyond what the investment bankers or the corporate officers ever thought would be offered for their company. The proposal expires in three days. The company’s officers immediately accept the oral proposal, and their attorneys proceed with drafting an acquisition agreement on Saturday, while a board meeting is called for Sunday, with notice of the acquisition proposal. By Sunday the investment bankers have prepared a valuation study which they present to the board, and the company's chief financial officer has presented his projections about the company's future earnings prospects. The acquisition proposal would effectively preclude further shopping, because it calls for the company's principal shareholder, owning roughly one-third of the stock, to sell at the acquisition price immediately. As the meeting begins, the final pages of the acquisition agreement arrive by fax from New York.

Please address all issues you think are important, including answers to the following questions:

Can the board accept this offer that precludes further shopping?

What should the record reflect to protect the board's acceptance?

Should you insist on more time?

Do you need to have an investment banker’s opinion?

Given the comments in Van Gorkom about blind following of the officers’ advice, how much do you need to probe the investment bankers about the basis for their opinion?

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Question 2.

You represent Imagifind, Inc., (the “Company”) a San Diego start up that has developed powerful technology for searching images on the Web. Both Microsoft and Google regard you as dangerous competition and are interested in acquiring the Company. There is a big difference, however, between what either company is willing to pay in cash for the acquisition and what the Company is willing to sell for. The potential buyers are offering in the range of $10 million, while the Company thinks it is worth at least $100 million.

Outline a transactional structure that has in your view the best chance of bridging this gap. What terms should be included to protect your client post-closing? What are some traps to avoid?

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Question 3.

Your client is the largest franchisee of a fast food company that has been experiencing difficulties. Earnings are flat, and the stock has declined about 75% from its high price of several years ago. The franchiser’s 33% stockholder and company founder is the CEO and dominant force in the company. The franchiser’s outside directors are disturbed about the way things are going, and several of them have expressed this concern to your client’s CEO. Your client believes that it could do a better job of running the franchiser than the current management team, and would like to get a look at the franchiser’s records to determine how bad things really are, and what can be done to fix them. Your client is willing to purchase part or all of the franchiser, provided it ends up in control and able to implement a turn-around strategy. Because your client is not yet ready to make a bid, and does not have its financing lined up, it does not want to trigger the franchiser’s board’s Revlon duties. Your client recognizes that to obtain access to confidential records of the franchiser it will have to enter into an agreement to hold that information confidential. At the same time, it must give the franchiser’s board some reason to grant it access to these records. What would you say in a letter to the franchiser’s board proposing such access?

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Question 4.

Your client is a computer software company that has experienced some marketing setbacks, and as a result was in financial difficulty. Like most computer software companies, a majority of its stock is held by employees (although it is a ‘34 Act reporting company). A few months ago, it appeared that the company would not be able to renew its lines of credit with its banks. As a result, the board determined to seek an equity partner - someone who would purchase a significant minority stock interest in the company, and lend the company additional funds to replace its bank financing. For this purpose it hired a well-known investment banking firm. This search failed, and the board approved a search for a merger partner. Every prospect approached by the investment bankers was required to sign a confidentiality agreement and a stand-still agreement, by which it agreed it would not make any offers to buy the company or its shares except through negotiations with the board. The stand-still agreement had a five year life, and is still in effect. After a search, the board entered into negotiations with another software company. These negotiations resulted in a letter of intent for a proposed merger. As a result of the merger, the client’s shareholders would have received a significant interest in the merged company, but the merged company would have had a dominant (40%) shareholder, the present parent of the other software company. Because the other software company changed its position during the course of the negotiations, no definitive agreement was signed.

The letter of intent contained an exclusivity period, during which your client could only negotiate with the other software company. As soon as the exclusivity period expired, your client located a wealthy individual investor capable of fulfilling its original goal: of taking a minority equity interest in the company, while furnishing senior financing. Accordingly, an agreement was reached by which the investor would purchase preferred stock carrying one third of the voting rights in the company, as well as options to purchase one third of the company’s common stock at increasing prices over the next five years. As the options are exercised, the voting rights disappear from the preferred under this arrangement. The investor entered into a stand-still agreement, agreeing not to purchase more than 50% of the company’s stock for the next five years. At the same time, banks agreed to renew lines of credit, in view of this infusion of new capital.

The client has sent out proxy statements to its shareholders for a proposed special meeting to authorize the new preferred stock. As soon as the mailing is complete, the software company that originally negotiated with the client writes to the client’s CEO and its entire board of directors, offering to purchase all of the client’s stock for cash, at a price about 15% above the market.

Advise the board on their obligations.

(Go to next pages to write answer.)

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Question 5.

In part II.B. of its opinion Weinberger v. UOP (Carney, p. 832), the Delaware Supreme Court states that the Chancery Court was required to “examine what information defendants had and to measure it against what they gave to the minority stockholders, in a context in which complete candor’ is required.” Does this mean that majority shareholders must always disclose their “reservation price,” that is, the highest price they would be willing to pay, to the minority? Why or why not?

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Question 6.

Do you think the Omnicare v. NCS Healthcare (Carney, p. 685) case was correctly decided as a matter of law? Why or why not? Do you think it represents good policy? If you sat in the Delaware legislature, do you think it would be advisable to amend Delaware law in order to “legislatively overrule” the case? Why or why not?

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