IBS's IPO & Shareholder Battle: A Case on Control & Duties, Exams of Law

Download IBS's IPO & Shareholder Battle: A Case on Control & Duties and more Exams Law in PDF only on Docsity! 1 University of Illinois College of Law Examination Cover Sheet Business Associations II Professor Amitai Aviram Spring Semester 2008 Number of Pages: 5 (including this page) Time Allotted: Until 10am on the day following the day you received the exam Exam Instructions 1. Permissible material: This is an open book exam. You may use any materials you want, whether in hardcopy or electronic format. 2. Anonymity: The exams are graded anonymously. Do not put your name or anything else that may identify you (except for your student number) on the file that contains your answer to the exam. 3. Receiving and submitting the exam: You must personally pick up a copy of the exam from Angela Martin (Room 338) between 9-10am on the day of your choice among the following: April 30, May 1, 2, 5, or 6. You must submit the exam, by e- mail to Angela Martin (aymartin@law.uiuc.edu), no later than 10am on the day following the day you received the exam. 4. Confidentiality a. Once you receive this exam form, you are not allowed to discuss the exam with anyone until after the final day of the exam period for this semester (which may be later than the day of the exam). b. Students who are enrolled in this course are not allowed to solicit or receive information on the exam if the source of this information (directly or indirectly) is a person who has seen the exam. c. After the last day of the exam period for this semester, you are allowed to freely discuss the exam. 5. Writing the exam a. The exam contains two questions. Answer one of them. I will grade only the question you answered first. b. Cite relevant case and statutory authority. c. When writing anything the source of which is neither your original thought nor part of the course material, you must give a complete citation of the source in a footnote. d. Within the constraints of the length limit, answer all relevant issues that arise from the fact pattern, even if your conclusion on one of the issues is dispositive to other issues. 6. Applicable law a. If a fact pattern or question specifies the applicable law, then assume that the relevant jurisdiction applies that law. b. If neither the fact pattern nor the question specified the applicable law, then apply the law of each jurisdiction we addressed in the course. 2 7. Length limit: If you answer question 1 – a. The total length of your answer should not exceed 1,000 words. Footnotes are not included in this count. b. For every 10 words in excess of the length limit (rounded up), one point will be taken off the exam’s raw score. c. Footnotes may only contain citations and descriptions of the content of cases and statutes that are not in the course material. d. This section does not apply to students answering question 2. 8. “Fact” patterns are fiction: The “facts” presented in the exam were constructed for an educational purpose, and were not intended to refer to or inform about any real person or event. Good Luck! 5 Question 2 From: Ben I. Graham [mailto:Mr.BIG@work.com] Sent: Tuesday, April 29, 2008 11:25 PM To: Project Sandwich Mailing List Subject: CONFIDENTIAL – Project Sandwich You’ve been assigned to work with me on Project Sandwich. Our client is Charles Montgomery Burns (“Burns”), the wealthy owner of the Springfield Nuclear Power Plant and a frequent participant in the popular television show The Simpsons. Burns is interested in acquiring control of the Panera Bread Company (“Panera”), a corporation that is publicly traded on the NASDAQ (NASDAQ:PNRA). [Exam note: this is a real company, with branches in Champaign, IL] At this point Burns is interested in buying just enough shares to control the company, without cashing out the remaining shareholders. Burns intends to offer cash and stock in the Springfield Nuclear Power Plant (a close corporation incorporated in Illinois) in return for Panera’s shares [Exam note: the power plant company is fictitious; don’t try looking for it in EDGAR]. He has enough spare cash to buy all of Panera’s stock, but for tax reasons would prefer to use mostly borrowed money for the acquisition if possible. Burns has already communicated with Panera’s management regarding a friendly acquisition, but they have rebuffed him. He is now prepared to release the hounds on them. Investigate Panera (using only free public sources), find out what takeover defenses (if any) it has, how many shares are needed to control the company, who are the major shareholders, and any other information that relates to the ability to acquire the company. Next, we need to write a memo to Burns, recommending how to acquire control in Panera, what are the legal and business risks, how Panera’s management is likely to react and what we could do to counter that. Normally, I would write this memo, but I have a golfing emergency, so you are responsible for preparing the memo. Make sure to explain to Burns his various options in detail, and tie your analysis closely to Panera’s particular circumstances – simply going through the options from your law school class notes won’t do. Thanks and good luck! 6 Business Associations II – Spring 2008 “Bare bones” Answer to Question 1 (not including research component) I .IBS vs. SCUP (a) SCUP violated the Williams Act by failing to file a Schedule 13D within 10 days of acquiring 5% of IBS. (b) IBS has standing to sue SCUP for equitable remedies (such as recession of the purchases or divestiture of the shares acquired), but it does not have standing to sue for damages. Therefore, IBS’s suit for damages will fail. II. Angela vs. Blue 1. Derivative Action (a) IBS is not a party to this lawsuit (Angela sued Blue) and therefore this isn’t a derivative action. (b) Does Angela have a direct cause of action against Blue? Under Tooley, suit is derivative if IBS suffers the alleged harm and would receive the benefit of recovery or other remedy. Under Agostino, question is whether given alleged harm and requested remedy, can plaintiff prevail without showing injury to the corporation? While not clear cut, under these tests the suit seems derivative because it alleges director entrenchment, and the harm is to the corporation; Angela did not have an individual right to receive $12,000 for her shares; rather, IBS has a right that Blue will maximize its value, which Blue violates if he passes on an opportunity to maximize value in order to entrench himself. (c) Demand futility: Under Aronson, demand requirement is excused if plaintiff shows reasonable doubt that either: (i) majority of the board is independent for the purpose of responding to the demand – here, the only board member, Blue, clearly has CoI in deciding to sue himself for breach of fiduciary duties; (ii) challenged transaction is protected by the BJR – Blue’s CoI in adopting a disproportionate takeover defense that protects his current control of IBS raises reasonable doubts regarding applicability of BJR. So, if Angela’s suit is derivative, demand would be excused. 2. Did SHs approve Trojan Horse plan? (a) Quorum: DGCL s216(1): by default, quorum consists of a majority of shares entitled to vote. Under Berlin (cited in Licht), shares withheld on a particular matter are still counted towards the quorum if they are present through proxy or in person. So, all 1,000 shares entitled to vote were present, even though 600 of them withheld their vote on Trojan Horse. 7 (b) Vote: Under DGCL s216(2), “the affirmative votes of the majority of shares present… shall be the act of the stockholders.” Under Berlin (cited in Licht), votes withheld are not part of voting power present. Therefore, the plan was approved by the affirmative vote of all voting power present. (c) However, SHs are not authorized to run IBS or approve Trojan Horse; BoD is authorized to do this. SHs may ratify a faulty BoD decision, but while the plan was approved by shareholders, it was not ratified by them (see II.3.c below). (d) SHs were not asked to approve an increase to the number of authorized A shares. Since all authorized A shares have already been issued, B shares that are issued cannot be converted into A shares, and the plan will fail. 3. Did the directors breach Fid Duties in implementing the Trojan Horse? (a) Blue employs a “just say no” strategy. This does not violate his Revlon duties because IBS purports to have a long-term strategy and has not sought to sell itself or to break itself up (which would trigger Revlon “auctioneering” duties). (b) Is Trojan Horse a takeover defense? Yes – SH owning 1 A share and 1 B share has 11 votes, but if he sells the shares to SCUP, B share turns into A share and combination has only 2 votes. Those who do not sell to SCUP will have 11 votes for the same combination of shares. This is a form of a voting plan known as a “tenure voting plan”. (c) Unocal: Board must: (i) act in good faith: no evidence of lack of good faith or of CoI; (ii) act after reasonable investigation/deliberation: here, seems the deliberation and investigation were reasonable; (iii) defenses are proportionate to the threat posed: Unlike Unocal, here no threat of coercion through front-loading; though the BoD sees a threat to IBS’s “corporate culture” (considered a relevant interest in Paramount). The voting plan cannot be redeemed once launched, since the board is not authorized to add rules regarding redemption when B shares are outstanding. This seems to make the voting plan excessive to counter a non-coercive bid. The voting plan hinders any takeover, even ones from bidders with a compatible “culture”. (d) Ratification: SHs approved Trojan Horse in what appears to be an informed vote (see II.2 above). However, under the Fliegler interpretation of DGCL s144(a)(2), votes of conflicted SHs are not considered and ratification requires “majority of the minority” votes. Excluding Blue’s and SCUP’s shares, this requires a majority of the 600 disinterested votes; Trojan horse only received 150, so no ratification. (i) If ratification is nonetheless deemed valid, then by analogy to Weinberger (which was in a different context, of a friendly acquisition) BoP as to fairness shifts to the plaintiff, but court may still consider fairness. Here, it seems that the voting plan is unfair (because it is disproportional to the threat posed by SCUP, see II.3(b)(iii)) and therefore court will likely find that Blue breached his fiduciary duties.