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Mergers & acquisitions Section 1a: Shareholding Prof. Amitai Aviram [email protected] University of Illinois College of Law Copyright © Amitai Aviram. All Rights Reserved S16D

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Mergers & acquisitionsSection 1a:

ShareholdingProf. Amitai [email protected]

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

S16D

ShareholdingOverview of Section 1a

1. Share ownership– Ownership structures– Ownership mechanics (in public firms)– Owner motivations

2. FD of controllers

© Amitai Aviram. All rights reserved.2

Ownership structuresSole ownership

• Ownership in a firm means the control rights to direct its behavior and the economic rights to its residual assets (either periodically as dividends, or at the time the firm is liquidated)

1. Sole ownership: one person has all firm’s control & economic rights– The most common situation of sole ownership is a wholly-owned subsidiary– Managerial agency costs (cost/risk for owners to monitor corporate actors): low

relative to other firms – the sole owner has a strong incentive to monitor the actors, and the ability to punish actors she doesn’t approve of

– Majoritarian agency costs (cost/risk that some owners will exploit other owners): none, since there is just one owner

– Access to equity capital: none, because firm can’t raise capital by selling shares; it can still finance itself from its profits, from the owner’s funding, and by borrowing (but lenders don’t get to control the firm, so they’d be reluctant to lend much or will demand high interest and collateral)

© Amitai Aviram. All rights reserved.3

Ownership structuresConcentrated ownership

2. Concentrated ownership: Firm has C (SH with enough control rights to force a SH vote on an issue & then win the vote), as well as MSHs– C may be 1 person, or group that effectively exercises direct control:

• Low cost to act collectively (e.g., clear hierarchy, easy for group to meet)• Similar business interests• Equal access to info/expertise

– Typically, >50%, but in many firms less than 50% is still enough to control (and if SH voting requires a supermajority, 51% may not be enough)

– Sometimes concentrated ownership results from C owning a special class of “supervoting shares” (more votes per share), or MSHs owning nonvoting shares

– Managerial agency costs: low to medium; C monitors corporate actors, but:• C gets less than 100% of benefits of monitoring, so less effort monitoring;• C may collude with corporate actors to extract value from firm at expense of MSHs

– Majoritarian agency costs: high; C has incentive & ability to tunnel– Access to equity capital: limited; firm can issue shares, but:

• Limited in # of voting shares it issues, because C won’t allow losing control• Potential SHs deterred by risk of C’s tunneling

© Amitai Aviram. All rights reserved.4

Ownership structuresDispersed ownership

3. Dispersed ownership: Firm does not have a C; only MSHs– Example: firm in which largest SH has 4%; largest 10 SHs together have 15%– Another example: Italian mutually-owned banks (Popolari) has a rule of one

vote per SH (rather than one vote per share) – result is that no one can control the firm, since buying more shares does not increase one’s votes

– Managerial agency costs: high; MSHs unlikely to monitor corporate actors• Each MSH only gets tiny portion of value of monitoring, but bears full cost• Even if MSH did monitor & find a problem, MSH can’t do much to control the board• Exception: activist SHs are MSHs who are willing & able to monitor corporate actors,

typically in the hopes of creating a large short-term profit (activism is expensive and risky, so the ordinary returns of a good firm are likely not enough, and activist wants to be able to cut losses quick and move on)

– Majoritarian agency costs: low to medium; no controller, but activist SHs may force firm to act in their benefit, but not always in benefit of other MSHs

– Access to equity capital: broad; firm can issue shares• MSHs don’t object to dilution of control rights (since they can’t/won’t exercise

control rights), as long as price of shares is fair• No risk of C tunneling to deter potential SHs

© Amitai Aviram. All rights reserved.5

Ownership structuresAdvantages & disadvantages

• Which factor matters most? This changes over time, place & industry– Managerial agency costs matter more when corporate actor performance is

difficult for outsiders to assess– Majoritarian agency costs matter more when SHs widely differ in their vision of,

benefit from, or knowledge about the firm– Access to equity capital matters more when business has negative cashflow &

when equity markets are more efficient relative to debt markets• Because optimal ownership structure changes over time, Law allows

firms to shift firm between sole, concentrated & dispersed ownership

Ownership ManagerialAgency Costs

MajoritarianAgency Costs

Access toequity capital

Sole (no MSHs) Low None None

Concentrated (C + MSHs) Low-Medium High Limited

Dispersed (no C) High Low-Medium Broad

© Amitai Aviram. All rights reserved.6

Ownership structuresShifting from one ownership structure to another• Sole to concentrated: firm issues new shares to MSHs• Sole to dispersed: issue more shares to MSHs (or C sells some of her

shares to many different SHs), so no SH has enough shares to control• Concentrated to dispersed: same as sole to dispersed• Dispersed to concentrated: C buys shares from many MSHs, until she

has enough shares to control the firm• Concentrated/dispersed to sole

– This is a challenge, because some MSHs are likely to hold-out and not sell to C, in order to get more money

– Solution: freezeout (deal between C & firm that forces MSHs to sell their interest in the firm to C; similar to eminent domain in property law)

– E.g., short form merger (“SFM”): if C owns ≥90% of shares, law allows C to force MSHs to sell to her, but MSHs can petition court to determine fair price

– C can also freezeout without first owning 90% of shares – in that case (illustrated on the next slide) transaction is called a long-form merger (“LFM”)

• LFMs require approval by majority of SHs (SFMs don’t require SH approval)

© Amitai Aviram. All rights reserved.7

Ownership structuresFreezeout: from concentrated to sole ownership

– In a freezeout, individual MSHs don’t get a choice (must sell)• SH meeting approval required in LFM, but individual SHs can’t opt out

– Reason: if individual SHs can opt out, there’s a hold-out problem• But we want MSHs to get fair price (or no one would want to become a MSH)• Who negotiates with C on price? Why not the individual SHs?

Firm

C

60%

MSHs

40%

1. Before the merger

2. C merges with Firm, paying $100 to SHs

Firm

C MSHs C + Firm MSHs

3. After the merger

-$40 +$40

© Amitai Aviram. All rights reserved.8

+$40-$100+$60

Ownership structuresFreezeout: ensuring a fair price

• One solution to the fair price problem is to have an independent party (a judge) decide the fair price

• This is called an appraisal: SHs reject the price offered by C, and petition the court to determine the fair price– Delaware law gives SHs the option of appraisal

• This can result in some SHs (who accepted C’s offer) getting the price C offered, while other SHs (who dissented) getting a different price determined by the court

– Why not have universal appraisal (all SHs get price determined by the court)?– Indeed, Delaware’s appraisal rules intentionally impose procedural barriers &

don’t allow a class action, in order to limit the # of SHs demanding appraisal (more about these rules in Section 2a3)

• Optional appraisal still leaves consenting SHs vulnerable– Solution: Encourage C & firm to negotiate freezeout in a way that bypasses CoI– Typically, this is done by creating a special board committee composed of

independent members, which negotiates with C on firm’s behalf

© Amitai Aviram. All rights reserved.9

Ownership structuresFreezeout: ensuring a fair price

• Are there any independent directors? C voted them into position– Under Delaware law, this does not create CoI for the director– Yet there remains a taint of conflict

• Can we delegate negotiations to SHs? No– SHs unsuited to act collectively in detailed negotiations (better at up/down votes)– Solution: Combine negotiation by special committee (step 1) with approval

by a majority of MSHs (excluding C) (step 2)1. 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 options2. Transaction approved by majority of MSHs

– Approval is informed (all material info was disclosed to MSHs)– There is no coercion of the minority (specifically, MSH approval must be

an unwaivable condition to the transaction)– Majority of all MSHs, not just those present at the meeting

© Amitai Aviram. All rights reserved.10

Ownership mechanicsRecord SHs & beneficial SHs

• Many SHs acquire stock through brokers– Every corporation has a SH list; SHs listed in it

are called record SHs (or record owners)• Many record SHs are intermediaries called

“nominees” or “designees”: firms that hold shareson behalf of someone else)

• Such stocks are said to be “held in street name”• Depository Trust Company (DTC) is the most

commonly used nominee• Why do people hold stocks in street name?

– Investor who purchased the shares is the beneficial SH or beneficial owner

• Types of SH lists (relevant for SH inspection rights)– “CEDE list”: list of record SHs– NOBO (Non-Objecting Beneficial Owners) list: specifies beneficial SHs

DTC

Citibank

Jane Doe Beneficial SH

Broker

Record SH

© Amitai Aviram. All rights reserved.11

Ownership mechanicsDesignee’s ability to vote shares

• Designee’s ability to vote the shares is limited by contract & stock exchange rules

• Exchange Act §6(b) requires exchanges to prohibit designees from voting shares in director elections, with respect to executive compensation & any other significant matter as determined by SEC rules– NYSE rule 452 allows designees, who solicited but didn’t receive instructions

from beneficial SH, to vote the shares on “routine” matters– Matters addressed by Exchange Act §6(b) would be “non-routine”

• On non-routine matters, these shares (called “broker non-votes”, see Licht, FN 8) do not count as “voting power present”

• However, since these shares can still vote on routine matters, they count for establishing a quorum if any routine matter was voted on in the SH meeting

© Amitai Aviram. All rights reserved.12

Ownership mechanicsSupport players in SH governance

• Custody & clearance of securities– Acts as record SH, provides proxies to facilitate beneficial SH’s use of SH powers

(e.g., voting), settles securities deals– Dominant player: Depository Trust Corporation (DTC)

• Proxy & voting services– Distribute proxy materials to beneficial SHs, process proxies, tabulate votes– Dominant player: Broadridge (spun-off from Automatic Data Processing (ADP))

• Policy analysis– Investigate issues that SHs are asked to vote on, write reports recommending

to SHs how to vote on these issues– Dominant player: Institutional Shareholder Services (ISS)

© Amitai Aviram. All rights reserved.13

Owner motivationsTypes of owners

• Strategic owners: interested in owning the firm because of the impact ownership has on their other assets– E.g., Google buying YouTube to gain synergies (in selling ads, gaining user

information, improving search engine results) from owning both a search engine and a video streaming service

– E.g., Halliburton (#2 oilfield services firm) buying Baker Hughes (#3) because the larger firm can lower costs due to economies of scale, to better compete with the #1 firm (Schlumberger)

• Financial owners: interested in owning the firm because of the financial gains from that firm’s assets– Growth (capital gains): gains in the share price (bought it for $5/share, now

share trades for $100); realized only when you sell the shares• Growth more likely in risky, high-growth industries

– Income: dividends paid periodically by the firm• Income more likely in mature, low-growth industries (because they don’t need

to reinvest their profits in the business, and they have predictable profits)© Amitai Aviram. All rights reserved.14

Owner motivationsTypical controllers

• Strategic controller– Most strategic owners like to control firm to maximize synergies/avoid CoI

• Financial controller– Founders/active family: deep personal attachment to firm, usually work in firm

• Typically want growth, resist losing control of the firm– Passive family: usually descendants of firm’s founder, but not involved with the

firm; ownership in firm is often a large part of their total wealth• Typically want income, or want to sell and diversify

– Private equity: take controlling positions in firms (usually buying the whole firm, sometimes with other investors if the PE firm can’t afford to buy it alone

• Clients of PE firms are locked-in for several years (e.g., 7 years), so PE firms have a longer time horizon than hedge funds & other short-term players

• PE firms look for disfavored firms that require changes that take years to implement• After the PE firm acquires a strategic firm, it makes those changes, and when they

are done the firm is either sold to a strategic firm or to the public• PE firms use a lot of leverage in their acquisitions (borrow, issue junk bonds) & use

the target as collateral, so they like firms that generate stable, predictable income © Amitai Aviram. All rights reserved.15

Owner motivationsTypical MSHs

• Strategic MSH– Sometimes firm uses a minority investment to support an alliance with another

firm, gain influence on it/knowledge from it, or as “beachhead” to control stake• Retail investors (financial MSH)

– Ordinary people owning stock; typically very small positions & very passive (either buy & hold, or sell rather than fight if they’re unhappy)

• Institutional investors (financial MSH)– Organizations that pool money & invest it– Tend to take non-controlling positions (allows to invest in more firms & diversify)– Tend to be passive (i.e., can’t become experts on all their investments), so if

they don’t like the way firm is managed, they are more likely to sell their investment than fight the management (however, occasionally they team up with activist SHs to fight)

– Less likely to use leverage (sometimes prohibited from using leverage)– Vary from very long-term investing to short-term investing– Common types of institutional investors are: insurance companies,

endowments, sovereign wealth fund, pension funds, active mutual funds, passive mutual funds (index funds)

© Amitai Aviram. All rights reserved.16

Owner motivationsTypical MSHs

• Hedge funds (financial MSH)– Less-regulated mutual fund (only open to “sophisticated” investors), charge

higher fees than mutual funds– Tend to take non-controlling positions in a firm (to diversity & move quickly)– Tend to have short time horizons (their clients can often take out their money

once a quarter, so the funds need to show a good performance every three months or risk that investors abandon them)

– Hedge funds differ widely in their strategies• High frequency traders: use computers to capitalize on tiny market discrepancies• Merger arbitrageurs (“arbs”): buy shares in potential T, betting it will be acquired• Activists: pick underperforming firms, then fight a public campaign for firm to take

certain actions that are likely to cause a quick increase in share price (e.g., forcing a company to sell itself or split itself into multiple firms). If they fail to persuade the board, they may try to replace it in a proxy fight.

– Tend to use a lot of leverage– Look for firms they can easily & secretly buy/sell large amounts of shares

© Amitai Aviram. All rights reserved.17

Owner motivationsLeverage and the junk bond market

• SHs can increase risk & return by using mostly borrowed money to acquire shares; the borrowed money can come from a bank (loan) or from the market (bonds)– Lenders typically take a secured interest in the acquired assets (target firm)

• Lenders care mostly about three things:– Amount of leverage used (how much of the borrowers own money is used

together with the borrowed money)– Cash generation capacity of the acquired firm/element (it must generate

enough cash to pay the interest charges)– Volatility of cash generation (the more stable the business, the more appealing

it is to the lenders, since it is less likely that at any given point insufficient cash will be generated to pay the interest)

• So, significant amounts of money could be borrowed to acquire assets with low earning volatility, but it is difficult to borrow much for assets with high volatility – buyers would have to borrow less and use more of their own money

© Amitai Aviram. All rights reserved.18

ShareholdingOverview of Section 1a

1. Share ownership2. FD of controllers

– C’s act (that does not involve the firm)– Firm’s act

© Amitai Aviram. All rights reserved.19

FD of controllersPurpose of FD

• Why impose FD on controllers? (They don’t act on behalf of the firm)– Similar to logic of apparent authority in agency: C can hide behind the directors

– hire judgment proof directors, have them divert value from MSHs to C, and MSHs would not be able to collect that value from the directors

• So, C owes a FD if it can influence the board– The board still owes a FD as well, and they would breach it if they give C

preferential treatment to the MSHs• FD lets courts examine the fairness of deals between firm & C, as well

as other deals in which C may tunnel (deals in which C receive better terms than the MSH)– This is undesirable; courts are not good in allocating value among SHs– Instead, the law tries to prevent CoI, by giving C & firm an incentive to

negotiate deals in a process that approximates arm’s-length negoitations• Deal negotiated by a special committee of independent directors• Deal approved by a majority of MSHs

– Fairness review is used as a threat if this process is not followed© Amitai Aviram. All rights reserved.20

FD of controllersAnalysis: Duty & SoR

• When does a SH owe a FD to MSHs?– SH owes a FD “only if it owns a majority interest in or exercises control

over the business affairs of the corporation” (Ivanhoe Partners v. Newmont Mining Corp. [Del. 1987])

– Control groups: Multiple SHs considered as a single control group when connected in some legally meaningful way (e.g., contract to work together towards a shared goal) (Frank v. Elgamal)

• Which SoR applies?– When C acts without involving the firm, C’s FD is limited to a duty of care (no

negligence), a duty of disclosure, and a duty not to coerce MSHs (so, C is allowed to self-deal); SoR is always BJR (Harris)

– When the firm acts:• If C is on both sides of a transaction, SoR is entire fairness unless firm

implemented “robust procedural protections”, in which case SoR is BJR (MFW)• Same if C is only on the MSHs’ side of the transaction, but C receives different

terms than MSHs (Frank)© Amitai Aviram. All rights reserved.21

FD of controllersC’s unilateral act: Policy

• This category usually involves:– C votes her shares– C sells her shares– C buys shares from MSHs– C executes a SFM

• Rule: C may act self-interestedly (no prohibition on self-dealing) when the firm is not involved (since C’s influence on the firm is irrelevant)

• Selling shares– When C offers to sell her shares, the buyer (new C) can be a looter (buyer who

plans to tunnel value from firm) or a non-looter (who shares value with MSHs)– Looter would value firm higher than non-looter, so a looter is likely to offer C a

better price than a non-looter– C has incentive to accept the looter’s offer (since she won’t be a SH anymore)– To prevent this perverse incentive, a duty of care to MSHs is imposed on C

when she sells control of the firm to someone

© Amitai Aviram. All rights reserved.22

FD of controllersC’s unilateral act: Harris v. Carter [Del. Ch. 1990]

• Carter sells control of Atlas to Mascolo– The Carter group (owners of 52% of Atlas) sold their shares to Mascolo in

return for shares in ISA– Mascolo falsely claimed that ISA owned two insurance companies– Mascolo provided Carter with a draft financial statement of ISA that falsely

claimed ownership in another insurance co.– Atlas CFO analyzed statement & raised questions about its accuracy, but Carter

did not demand explanations• Mascolo loots Atlas

– Mascolo merges Atlas with ISA• Result: Mascolo owns 75%; Carter group 13%; others 12%• Why would Carter agree to drop from 52% to 13%?

– Mascolo makes Atlas buy shares of Hughes (which he owns)• Harris alleges that price was unfair (too high)• Does Carter lose something is Harris is correct?

– Presumably Carter wouldn’t do this deal if he suspected Mascolo was looting• Can Carter be liable to MSHs if he didn’t know Mascolo was looting?

© Amitai Aviram. All rights reserved.23

FD of controllersC’s unilateral act: Harris

• Is Carter liable to MSHs for the looting?– Insuranshares [E.D.Pa. 1940]: C breaches DoC to MSHs when selling to a

looter, if C knew of looting plans or if a reasonably prudent person would have suspected buyer is dishonest & C didn’t conduct a sufficient investigation

– Levy [NY 1942]: DoC breached only if C knew of looting plans (otherwise, no liability for negligence)

• Court follows Insuranshares (standard: gross negligence)– Concerned that Levy standard encourages seller to have “head in the

sand”. What does the court mean?– But dicta in Abraham [Del.Ch. 2006] suggests Levy more appropriate if

firm’s charter has a §102(b)(7) exculpatory provision• On exam assume Abraham correctly states the law

© Amitai Aviram. All rights reserved.24

FD of controllersOther unilateral acts

• C votes her shares– No duty to MSHs

• C buys shares from MSHs– Solomon v. Pathe Comm. Corp. [Del. 1996]: no duty to offer a fair price; duty

only to provide full disclosure & not coerce the sellers– In re Siliconix Inc. Shareholders Litigation [Del.Ch. 2001]: court confirms entire

fairness does not apply to freeze-out via tender offer• C executes a SFM (freezes out MSHs)

– Glassman [Del. 2001]: No duty to offer fair price in a SFM; only duty is to provide full disclosure of facts required for MSHs to decide if they should opt for appraisal

© Amitai Aviram. All rights reserved.25

FD of controllersC’s unilateral act: Some related issues…

• Selling shares: Contractual protection for MSHs– Common contractual techniques for MSHs to share control premium

• “Tag along” provision (C promises to sell only if MSHs also included in deal)• MSHs receive a “put option” (option to sell to C), triggered if C sells to

someone else– When is a C likely to agree to such terms?

• Selling shares: Mandatory “tag along” protection for MSHs– Some non-US jurisdictions’ corporate laws require an acquirer who buys

control (e.g., over 40%) to offer to buy MSHs’ shares at same price• Is “C’s unilateral act” a diminishing category?

– Board can, if it chooses, implement takeover defenses that block an acquirer from buying C’s shares

– Because C’s “unilateral” sale of control depends on firm not imposing takeover defenses, perhaps Frank should apply?

• Court may rule on this in future. On exam, assume Harris, not Frank, applies.

© Amitai Aviram. All rights reserved.26

FD of controllersFirm’s act: When is C self-dealing?

• When the firm is involved in an act, C is not allowed to self-deal– Transactions in which C is on both sides of the deal (Kahn v. MFW)

• E.g., Firm sells assets to/buys assets from C• Most common cases in this category involve freezeouts

– Transactions in which C receives different terms than MSHs (Frank v. Elgamal)• E.g., X’s board agrees to sell X to Y. Under the deal, Y pays $10/X share to MSHs,

and pays 1 Y share/X share to C• In either of these cases:

– SoR is BJR if firm implemented “robust procedural protections” (deal negotiated by independent special committee & approved by majority of MSHs);

– Otherwise, SoR is entire fairness• In some cases a firm’s act isn’t a transaction in which C can be on the

other side or receive different terms than MSHs– In such cases, when you can’t apply MFW or Frank, you can use an older precedent

as a backup: Under Sinclair Oil Corp. v. Levien (Del. 1971), SoR is entire fairness if C receives something to the exclusion of & detriment to MSHs; otherwise SoR is BJR

© Amitai Aviram. All rights reserved.27

FD of controllersFirm’s act: “Robust procedural protections”

1. 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 options2. Transaction approved by majority of MSHs

– Approval is informed (all material info was disclosed to MSHs)– There is no coercion of the minority (specifically, MSH approval must be an

unwaivable condition to the transaction)– Majority of all MSHs, not just those present at the meeting

• What if firm implemented each of these protections imperfectly?– SoR is entire fairness; positive aspects of process play role in “fair process”

• What if firm implemented only one of the two protections?– Kahn v. Lynch [Del. 1994]: Normally when plaintiff proves C is self-dealing,

burden of proof is on C to show the challenged transaction’s fairness. However, if transaction was approved by either the special committee or the majority of MSHs, burden of proof to show fairness shifts to the plaintiff

© Amitai Aviram. All rights reserved.28

FD of controllersFirm’s act: Frank v. Elgamal [Del. Ch. 2012]

• American Surgical’s control group– Elgamal – CEO, Chairman, director, owns 27.53% of shares– Olmo-Rivas – COO, director, owns 27.58% of shares– Chapa – surgical assistant, owns 8.04% of shares– Chamberlain – surgical assistant, owns 8.04% of shares

• Great Point acquires American Surgical for $2.87/share (in cash)• At the same time it signed the merger agreement, Great Point also

signed three agreements with the control group– Control group promises to vote their shares in favor of the merger– After the vote & before the merger, Great Point will buy 17.4% of American

Surgical’s shares owned by the group, in return for 14.9% Great Point shares (group gets cash for remaining shares, like the rest of American Surgical’s SHs)

– Specify post-merger terms of employment of each control group member• Effect: MSHs are cashed out at $2.87/share; control group gets same

price for about ¾ of their shares, but get shares in Great Point for the other ¼ of their shares– Frank (a MSH) claims this allows C to divert value away from MSHs– Is there a reason other than taking value from MSHs to give C (but not MSHs)

shares in Great Point?© Amitai Aviram. All rights reserved.29

Together, control group owns 71.19%; has 2 of 5 directors

FD of controllersFirm’s act: Frank

• Duty– Probably none of the SHs is a C individually (since largest SH has 27.58% & at

least one more SH has about as much)– Court: Multiple SHs considered as a single control group when connected in

some legally meaningful way (e.g., contract to work together towards a shared goal)• Here, the four SHs were together parties in the three agreements with Great

Point that facilitated the merger – this makes them a single control group• FN 57: Chapa & Chamberlain are part of the group, even though Elgamal &

Olmo-Rivas together had over 50% of the shares, because they too were part of the voting, exchange & employment agreements

© Amitai Aviram. All rights reserved.30

FD of controllersFirm’s act: Frank

• SoR– Court follows In re John Q. Hammons Hotels Inc. Shareholder Litigation [Del.Ch.

2009]: When an acquirer who is not affiliated with C gives different terms to C and to the MSHs, BJR will apply if the transaction was conditioned on “robust procedural protections” – i.e., on receiving both special committee & MSH approval. Otherwise, entire fairness applies.

• Application– The merger was conditioned on the vote of all SHs, not just MSHs. Even though

in fact a majority of MSHs did vote in favor, this was not a non-waivable condition in the merger agreement, and therefore this element of procedural protection fails

– Frank court: If either special committee or MSH approval was implemented, but not both, entire fairness applies but burden of proof on fairness shifts to plaintiff

• So, if in trial C can show that the special committee element was satisfied, the burden of proof to show fairness of deal will shift to Frank

© Amitai Aviram. All rights reserved.31

FD of controllersSummary

C’s unilateral act (act doesn’t involve firm)• Selling control in the firm• Buying shares• Executing a SFM

BJR (duty: only DoC)Duty: only disclosure & no coercionDuty: only disclosure

HarrisSiliconixGlassman

Firm’s act• C is on both sides of firm’s transaction• C receives different terms than MSHs• C does not receive anything to exclusion of & detriment to MSHs

Entire fairness (SC+MSH→BJR)Entire fairness (SC+MSH→BJR)

BJR

MFWFrank

Sinclair

© Amitai Aviram. All rights reserved.32