Business Organizations Notes

Theodora Holding Corp. v.

Henderson
DelawareCourtofChancery
257A.2d398(Del.Ch.1969)

Rule of Law
Corporations can make valid donations for charitable purposes.

Facts
Girard Henderson (defendant) had a controlling interest in Alexander
Dawson, Inc. (Alexander Dawson) (defendant) and dominated its corporate
affairs. The defendant's ex-wife owned a large amount of the corporations
stock through Theodora Holding Corp. (plaintiff). Over the years, Henderson
had caused Alexander Dawson to make charitable contributions to the
Alexander Dawson Foundation (the Foundation), a legitimate charitable
organization recognized by the Department of Internal Revenue. In 1967,
Alexander Dawson had a total income of $19,144,229.06. In April of the same
year, Henderson asked the board to approve a gift of company stocks valued at
$528,000 to the Foundation to finance a camp for under-privileged boys.
Although one director objected, Henderson got board approval of the gift by
getting rid of five directors. Theodora Holding Corp. brought suit against
Alexander Dawson, Inc. and Henderson in Delaware Court of Chancery,
challenging the gift.

Issue
Can corporations make valid donations for charitable purposes?
Holding and Reasoning (Marvel, J.)
Yes. Under Delaware law, Delaware corporations can make valid donations
for charitable purposes. Del. Code tit. 8, 122. In A.P. Smith Mfg. Co. v
Barlow, 98 A.2d 581 (1953), the Supreme Court of New Jersey upheld a $1500
corporate gift to a university. The court also held that a charitable gift made by
a corporation must be reasonable both as to amount and purpose to be valid.
This court concludes that test of the validity of a charitable gift by a
corporation is that of reasonableness. The provisions of the Internal Revenue
Code regarding charitable gifts by corporations provide a helpful guide. In this
case, the Foundation is a legitimate charitable organization recognized by the
Department of Internal Revenue, and thus the gift to the Foundation is a
charitable donation. Further, in 1967, Alexander Dawson, had a total income
of $19,144,229.06. The $528,000 corporate gift was well within the federal tax
deduction limitation of 5 percent of the total income. In addition, the gift
reduced the Alexander Dawson unrealized capital gains taxes by $130,000,
which increased the balance-sheet net worth of stockholders of the
corporation. The relatively small loss of income otherwise payable to
shareholders is "far out-weighed by the overall benefits" of the gift, which will
provide under-privileged young people with rehabilitation and education.
Therefore, the charitable gift is reasonable and thus valid.

Answer to questions Page 191

(1) If there is no provision as to the quorum, there must be a majority. In this case,

only four out of eight directors voted. Section 141 b Delaware Code
(2) No, directors cannot vote by proxy. It is usually only shareholders that can

vote by proxy.
(3) Yes. 141 i Delaware Code
(4) Yes, notice is not required by Delaware, as long as there is a majority quorum

(unless otherwise provided in by-laws). Section 141 b.

(5) No, same argument as before.
Kinney Shoe Corp. v. Polan
United States Court of Appeals for the Fourth Circuit
939 F.2d 209 (4th Cir. 1991)

Rule of Law

A shareholder in a corporation may be held personally liable for

corporate obligations once the corporate veil is pierced to prevent
injustice.

Facts

Lincoln M. Polan (defendant) incorporated Industrial Realty Company

(Industrial) and Polan Industries, Inc. (PI) under the laws of West Virginia.
Polan made no capital investment into either company. Further,
Polan did not hold initial meetings or elect directors, and no stock
was ever issued. Kinney Shoe Corporation (Kinney) (plaintiff) had a long-
term lease on a building, which Kinney subleased to Industrial. Industrial
then subleased a portion of the building to PI, with Polan signing the relevant
documents. Polan made a single rental payment to Kinney from his personal
account before Industrial defaulted on the lease. Kinney sued and obtained a
judgment of $166,400 against Industrial. Kinney then sued Polan personally.
The district court concluded that Kinney had assumed the risk of
Industrials undercapitalization and refused to pierce the
corporate veil. Kinney appealed to the United States Court of Appeals for
the Fourth Circuit.

Issue

May a shareholder in a corporation ever be held personally liable for corporate

obligations?
Holding and Reasoning (Chapman, J.)

Yes. Under West Virginia Law, the corporate veil may be pierced
and personal liability imposed on shareholders if equity so
requires. The burden of proof falls on the party seeking to pierce
the veil. Though the question is always a fact-specific inquiry, there is a
two-pronged test for piercing the corporate veil: (1) the
shareholder must have failed to maintain the separate character of
the corporation, and (2) refusing to impose liability on the
shareholder would cause an inequitable result. Laya v. Erin
Homes, Inc., 352 S.E.2d 93 (W.Va. 1986). There is an optional third prong in
cases involving sophisticated parties, such as financial institutions or banks,
who assume the risk of default. Those parties are thought capable of
reasonable credit investigation and will be imputed with the knowledge such
an investigation would have turned up. In this case, the two-part test is
satisfied. Polan made no capital contributions to the corporation and
performed none of the required formalities. These failures caused general
unfairness and justify piercing the corporate veil. Laya, supra. Polan
obviously created Industrial as a shell corporation to provide
another layer of insulation from personal liability, thus setting up
a paper curtain constructed of nothing more than Industrials
certificate of incorporation. The question of whether the third prong
applies to parties other than financial institution lenders will not be reached.
The third prong is not mandatory and need not be applied here to reach an
equitable conclusion. Polan made no contributions to Industrial. When
nothing is invested in the corporation, the corporation provides no protection
to its owner. Polan failed to comply with the formal requirements and cannot
avoid liability on a theory that Kinney assumed the risk. Polan is therefore
personally liable, and the ruling of the lower court is reversed and remanded.

Walkovszky v. Carlton
Court of Appeals of New York
223 N.E.2d 6 (1966)

Rule of Law

A creditor cannot pierce the corporate veil without a showing that

there is a substantial unity of interest between the corporation and
its shareholders.

Facts

Carlton (defendant) owned 10 corporations (defendants), including, notably,

Seon Cab Corporation. Each of the corporations owned one or two
cabs, and the minimum amount of automobile insurance required
by law. One of the cabs owned by Seon Cab was in an accident with
Walkovszky (plaintiff). Walkovszky sued the cabs driver, as well as Seon
Cab (under a respondeat superior theory), Carlton (under a piercing the
corporate veil theory), and all of Carltons other cab companies. In the lower
court proceeding, Walkovszky claimed that the cab companies did not
act as separate organizations, but were set up separately to avoid
liability. The lower courts found that Carltons companies were set up to
frustrate creditors, and that a creditor could sue Carlton. Carlton and his
companies appealed.

Issue

Can a personal injury plaintiff sue the owners of a cab company

because of injuries the plaintiff sustained from one of the
companys cabs?

Holding and Reasoning (Fuld, J.)

No. A plaintiff can pierce the corporate veil and hold a companys
owners liable for the debts of the company if the company is a
dummy corporation, whose interests are not distinguishable from
those of the owner or owners. It is very relevant to the discussion of veil-
piercing if a business is undercapitalized, because this suggests that the
business is a fraud intended to rob creditors of the ability to fulfill their debts.
It is also relevant that the formal barriers between companies are not
respected. That said, a business enterprise may divide its assets,
liabilities, and labor between multiple corporate entities, without
impinging the limited liability of the shareholders. In this case, Seon
Cab Company was undercapitalized, and carried only the bare minimum
amount of insurance required by law. However, while this is relevant, it is not
enough to allow a plaintiff to pierce the veil, otherwise, owners would be on
the hook every time their corporation accrued liabilities outstripping its
assets, and limited liability would be meaningless. Instead, there must be
some evidence that the owners themselves were merely using the
company as a shell. While Walkovszky alleged that each of Carltons
companies was actually part of a much larger corporate entity, he could offer
no proof to that effect. The mere fact that Walkovszky might not have
been fully able to recover his damages was not enough to justify
letting him pierce Seon Cabs veil. Accordingly, the judgment of the
lower courts is reversed.

Dissent (Keating, J.)

When the legislature passed the automobile insurance minimum, it assumed

that companies that could afford insurance above the minimum would in fact
purchase additional insurance. The goal of the act was to ensure that there
was a pot of money provided for victims of automobile accidents. Seon Cab
was profitable enough to afford more than the minimum insurance coverage,
but the company was kept intentionally undercapitalized. The insurance
minimum should not be used here to prevent Walkovszky from the type of
recovery that the law was meant to provide for, and Carlton should not be
allowed to benefit from a corporate form he adopted merely to abuse it.
Radaszewski v. Telecom
Corp.
Eighth Circuit Court of Appeals
981 F.2d 305 (1992)

Rule of Law

A plaintiff may ordinarily pierce the corporate veil and bring a

parent corporation into a case against a subsidiary where the
subsidiary was operating while undercapitalized.

Facts

Radaszewski (plaintiff) was injured in an automobile accident when the

motorcycle he was driving was struck by a truck driven by an employee of
Contrux, Inc. Contrux, Inc. is a wholly owned subsidiary of Telecom
Corporation (defendant). When Telecom formed Contrux, it
contributed loans, not equity, and did not pay for all of the stock
that was issued. Telecom did provide Contrux with $1 million in basic
liability coverage, and $10 million in excess coverage. Contruxs excess
liability insurance carrier became insolvent two years after Radaszewskis
accident. Telecom argued that the district court lacked personal jurisdiction
over it. The question of jurisdiction turned on whether Radaszewski could
pierce the corporate veil and hold Telecom liable for the conduct of its
subsidiary, Contrux. Telecom argued that the corporate veil could not be
pierced on the basis of undercapitalization, because of the insurance it had
provided to Contrux. The district court rejected Telecoms argument that
insurance could determine a subsidiarys financial responsibility. The district
court nonetheless held that it lacked jurisdiction over Telecom on other
grounds.
Issue

May a plaintiff pierce the corporate veil to bring a parent

corporation into a case against a subsidiary where the subsidiary
was undercapitalized in a traditional accounting sense, but was
provided with more than adequate liability insurance?

Holding and Reasoning (Arnold, C.J.)

No. A plaintiff may not pierce the corporate veil and bring a parent
corporation into a case against a subsidiary if the subsidiary was
undercapitalized in a traditional accounting sense, but was
provided with more than adequate liability insurance. A person
injured by a corporation or its employees may generally recover only from the
assets of the employee or the employer corporation, and not from the
shareholders of the corporation or its parent corporation. As found in Collet v.
American National Stores, Inc., 708 S.W.2d 273 (Mo.App. 1986), to pierce
the corporate veil and make corporate shareholders liable a
plaintiff must show: (1) complete domination and control over the
finances, policy, and business of the corporation, so that the
corporation at the time of the transaction had no separate mind,
will, or existence of its own; (2) the control was used by the
defendant to commit fraud, to violate a legal duty, or to act
dishonestly or unjustly in violation of the plaintiffs legal rights;
and (3) the control and breach of duty proximately cause the
plaintiffs injury. Undercapitalizing a subsidiary satisfies the second
element of the Collet test, since creating a business and operating it without
sufficient funds to be able to pay bills or satisfy judgments against it implies a
deliberate or reckless disregard of the rights of others. In this case, the district
court found that Contrux was undercapitalized according to generally
accepted accounting principles. Telecom contributed loans, not equity, and
did not pay for all of the stock that was issued. However, Telecom argues that
Contrux was financially responsible because it was provided with $11 million
in liability insurance to pay judgments such as the one now sought by
Radaszewski. The district court rejected the argument that insurance could
determine a subsidiarys financial responsibility. This court disagrees. The
policy behind the second element of the Collet test is to ensure
financial responsibility. Insurance meets this policy just as well as
other forms of capitalization. The purpose of the limited liability doctrine
is to protect a parent corporation when a subsidiary becomes insolvent. This
doctrine would be destroyed if a parent corporation could be held liable for
errors in business judgment. Something more than an error in business
judgment is required under Collet. The district courts dismissal of the
complaint for lack of jurisdiction is therefore affirmed, but modified to be with
prejudice.

Dissent (Heaney, C.J.)

While Contruxs liability insurance is one relevant factor, the factfinder at trial
could conclude that the insurance alone does not require a judgment for
Telecom.

Gardemal v. Westin Hotel

Co.
United States Court of Appeals for the Fifth Circuit
186 F.3d 588 (5th Cir.1990)

Rule of Law

A parent corporation is not liable for acts committed by its

subsidiary if the two corporations, although closely related, keep
their corporate entities separate.

Facts
Lisa Gardemal (plaintiff) and her husband, John, travelled to Cabo San Lucas,
Mexico to attend a seminar held at the Westin Regina Resort Los Cabos
(Westin Regina). Westin Regina is managed by Westin Mexico (defendant).
Westin Mexico is a Mexican corporation and a subsidiary of Westin Hotel
Company (Westin) (defendant), a Delaware corporation. While staying at the
hotel, the Gardemals decided to go snorkeling. Allegedly, the hotel's
doorman directed the Gardemals to a beach that had rough surf
and strong undercurrents without warning the Gardemals of the
danger. Without knowing the beach's conditions, John went swimming and
was swept into the ocean by a rogue wave and thrown against the rocks. John
drowned. Gardemal brought wrongful death and survival actions against
Westin and Westin Mexico under Texas law, alleging that her husband
drowned because Westin Regina's doorman negligently directed them to the
beach and failed to warn them of the dangerous conditions. Although
Westin and Westin Mexico were closely related through stock
ownership, common officers, financing arrangements, etc., the two
corporations strictly adhered to their corporate formalities.
Further, Westin Mexico was sufficiently capitalized. Westin moved
for summary judgment, claiming that it was a separate corporate entity and
thus should not be liable for acts committed by its subsidiary. The district
court granted Westin's motion for summary judgment based on the magistrate
judge's recommendation. The magistrate judge rejected Gardemal's theory
that the alter ego and single-business-enterprise doctrines allowed the court
to impute liability to Westin. Gardemal appealed.

Issue

Is a parent corporation liable for acts committed by its subsidiary if the two
corporations, although closely related, keep their corporate entities separate?

Holding and Reasoning (DeMoss, J.)

No. Under Texas law, a parent corporation is not liable for acts committed by
its subsidiary if the two corporations, although closely related, keep their
corporate entities separate. The alter ego doctrine allows the court to
hold a corporation liable for acts of another corporation when the
latter is operated as "a mere tool or business conduit." Alter ego can
be proven by "a blurring of lines" between the two corporations, both formally
and substantively. Undercapitalization is an important indication that
a subsidiary acts as alter ego of its parent. Similarly, the single-
business-enterprise doctrine allows the court to hold a corporation liable for
the acts of another corporation when the corporations are "so integrated as to
constitute a single business enterprise." In this case, the record, even viewed
in a light most favorable to Gardemal, shows only "a typical corporate
relationship between a parent and subsidiary." The mere fact that Westin
and Westin Mexico are closely related through stock ownership,
common officers, financing arrangements, etc. is insufficient to
apply the alter ego doctrine. Evidence shows that Westin and Westin
Mexico are incorporated in two different countries and strictly adhere to their
corporate formalities. Further, no evidence shows that Westin Mexico is
undercapitalized so that Gardemal could not recover directly from
Westin Mexico. Therefore, there is insufficient evidence that
Westin Mexico is Westin's alter ego. Similarly, there is insufficient
evidence that Westin and Westin Mexico are so integrated as to constitute a
single business enterprise. The district court's grant of Westin's motion for
summary judgment is affirmed.

OTR Associates v. IBC

Services, Inc.
Superior Court of New Jersey
801 A.2d 407 (App. Div. 2002)

Rule of Law

The corporate veil of a parent corporation may be pierced if the

parent: (1) dominates and controls the subsidiary and (2) abuses
the privilege of incorporation by using the subsidiary to commit a
fraud or injustice.

Facts

OTR Associates (OTR) (plaintiff) owns a shopping mall in New Jersey. It

leased space to Samyrna, Inc. (the franchisee), a franchisee of International
Blimpie Corporaiton (Blimpie) (defendant). Blimpie wholly owned a
subsidiary named IBC Services, Inc. (IBC) (defendant). IBC was
created for the sole purpose of holding the lease for the space
occupied by the franchisee. IBC had no assets except the lease and
no income except the rent payments by the franchisee. IBC did not
have its own business place and employees, and Blimpie retained
the right to approve and manage the lease. The transaction happened
in this way: IBC entered into the lease with OTR, and then with OTR's
consent, IBC subleased the space to the franchisee. OTRs partners
believed that they were dealing with Blimpie instead of IBC and did
not discover the separate corporate entities until after the eviction.
The persons who approached OTR and asked to rent space in the mall were
wearing Blimpie uniforms, the tenant identified in the lease was IBC
Services, Inc. having an address at c/o International Blimpie Corporation,
1414 Avenue of the Americas, New York, New York, and the letters sent to
OTR bore the Blimpie logo. Later, the lease was terminated due to continued
late payment of rent. OTR sued Blimpie for unpaid rent in the amount of
$150,000. The trial court found for OTR. Blimpie appealed.

Issue

May the corporate veil of a parent corporation be pierced if the

parent: (1) dominates and controls the subsidiary and (2) abuses
the privilege of incorporation by using the subsidiary to commit a
fraud or injustice?

Holding and Reasoning (Pressler, J.)

Yes. To pierce the corporate veil in New Jersey, a court must find that the
parent corporation dominates and controls the subsidiary and that
the parent abuses the privilege of incorporation by using the
subsidiary to commit a fraud or injustice. Indicators of such abuse
are that: (1) the subsidiary has no independent business but
provides services exclusively for the parent, and (2)
undercapitalization of the subsidiary makes it difficult to recover
from the subsidiary. In this case, Blimpies domination and control
over IBC is obvious: IBC was created for the sole purpose of
holding the lease for the space occupied by Blimpies franchisee,
IBC had no assets except the lease and no income except the rent
payments by the franchisee, IBC did not have its own business
place and employees, and Blimpie retained the right to approve
and manage the lease. Further, Blimpie abused the privileged of
incorporation by using IBC to commit a fraud or injustice. OTRs
partners believed that they were dealing with Blimpie instead of IBC and did
not discover the separate corporate entities until after the eviction. IBC failed
to explain its relationship with Blimpie and intentionally misled OTR to
believe that it was Blimpie: the persons who approached OTR and asked to
rent space in the mall were wearing Blimpie uniforms, the tenant identified in
the lease was IBC Services, Inc., and the letters sent to OTR were headered by
the Blimpie logo. These facts indicate that Blimpie created IBC for the
purpose of insulating Blimpie from liability on the lease if the
franchisee defaulted. Such purpose was fraudulent and improper.
Therefore, the corporate veil was properly pierced. The judgment is affirmed.

Precision Tools Problem

1 - Evidence of the case shows that PTC and New Higgins were separate corporate

entities. In this case, the shareholders have maintained the separate character of the

corporation, avoiding one of the requisites for the pierce of the corporate veil,

according to Kinney Shoe Corp. Among such evidence we find that New Higgins was
sufficiently capitalized with equity ($25k), debt ($125k) and proper insurance

coverage. Further, New Higgins held proper corporate formalities, such as board and

shareholders meetings. There does not seem to be operational confusion, as New

Higgins is using some facilities and services of PTC but it is paying for it. The issue is

that there is control of PTC by New Higgins. PTC offered loans, which may be

viewed as no respect for economic formalities.

2 The issue here is that the shareholders must prove that New Higgins was not a

shell corporation. The shareholders leveraged the company heavily, providing loans

that we place them above if the company is liquidated. Further, the distribution of all

the profits of the last two years could be seem as a way of emptying the company and

avoiding the payment of creditors. Possibly, plaintiffs would try to use the argument

of Walkovszky and try to prove that New Higgins was a dummy corporations, part of

the PTC conglomerate.

The shareholders will have to prove that the interests of New Higgins differ from

those of its shareholders and that New Higgins was not just a shell corporation. For

that matter, it is also to note how New Higgins and PTC have a close relationship

which could have been avoided. The fact that they shared the same personnel, offices

etc may be used in court as a argument for the piercing of the corporate veil.

Criteria for Piercing the Veil

Control + Undercapitalization (intentional) + Creditors misled + No Respect for

Corporate Formalities + No Respect for Economic Formalities (Confusion of Assets)

+ No Respect for Operational Formalities (same location, employees, assets etc)

IN RE: APPRAISAL OF DELL INC.

Delaware Court of Chancery Determines Fair Value Is 28% Higher Than Merger Price

Following an Auctioned Arms-Length MBO

SUMMARY

In In re: Appraisal of Dell Inc., the Delaware Court of Chancery (Laster, V.C.) held in

an appraisal proceeding that the fair value of Dell Inc. was 28% higher than the price

paid for it by Michael Dell and Silver Lake Partners and approved by a majority of the

unaffiliated shares after a lengthy, public and wellrun arms-length sale process. The

Court concluded that the deal price undervalued Dell because there was a significant

valuation gap between the long-term value of Dell and the markets short-term

focus, and the agreed-upon price was the product of a competition among like-

minded financial bidders who were price-constrained by targeted internal rates of

return in LBO pricing models. Even though the deal price represented a nearly

30% premium to market and was within the range of DCF values provided by

the Dell special committees financial advisors, the Court held that a DCF

valuation, using the Courts inputs, produced a better approximation of the fair

value of Dell than the results of the sales process.

BACKGROUND Between 2010 and 2012, Dell spent approximately $14 billion

acquiring 11 new businesses that Michael Dell, who owned approximately 15.4% of

Dell, believed would transform Dell into a company with less reliance on declining

PC sales and increased sales of enterprise software and services. In a sum of the parts

analysis in 2011, management valued Dell at $22.49 per share (by line of business).

However, the companys revenues and earnings continued to decline, as did its stock

price (to approximately $12 per share in June 2012). After having been approached by

a number of financial sponsors about a possible MBO and believing that the market

failed to appreciate his long term vision, Mr. Dell approached the Dell Board about a
possible buy-out. The Dell Board formed a special committee with full powers with

respect to any proposed transaction, as well as any other strategic alternatives or any

other matters it determined to be advisable. In July, 2012, management presented the

Dell Board with its projections which indicated that management thought the

company was worth $25 billion more than the then current market capitalization of

$15 billion. In September, 2012, management revised the projections downward

somewhat to reflect Dells poor performance during the period. The Dell special

committee thought that even the September projections were overly optimistic but

included them in the sale data room. The Dell special committees financial advisors

provided a preliminary stand-alone valuation of Dell at the time that included a DCF

range of $20 to $27 per share using the September projections, and a DCF range of

$15.25 to $19.25 per share using the Streets consensus case. It also included its view

that a financial buyer applying an LBO pricing model at 3.1x leverage and assuming a

20% five-year IRR would likely pay a price of approximately $14 per share. KKR and

Silver Lake submitted initial proposals, but KKR dropped out following Dells

disappointing third quarter 2013 results. Silver Lake submitted improved proposals in

December 2012 and January of 2013 of $12.70 and $12.90 cash per share,

respectively. Mr. Dell did not participate in the pricing. The Dell special committee

eventually determined that it would target a sale price of $13.75 per share. On

February 6, 2013, after rejecting Silver Lakes lower offers, the Dell special

committee agreed with Silver Lake to a transaction at $13.65 cash per share, with Mr.

Dell agreeing with Silver Lake to roll over his shares at a lower per share valuation

and to invest additional cash. Under the deal, Mr. Dell would own approximately 75%

of Dell following the transaction. At the time, one of the Committees financial

advisors had provided DCF ranges of $11.50 to $16 per share using the Street
consensus and $12 to $16.50 per share, using the projections produced by the

Committees own advisor, assuming 25% of managements projected cost-savings

could be realized. During the 45-day go-shop period that followed, the Dell special

committees financial advisors reached out to 60 parties, including strategics. Carl

Icahn submitted a leverage recapitalization alternative and Blackstone submitted a

$14 per share cash proposal but later withdrew the proposal following disappointing

Dell sales results. Silver Lake eventually raised its offer to $13.75 cash per share plus

a cash dividend immediately preceding the merger of $0.13 per share, an offer that

was financed by Mr. Dell agreeing to a lower value for his rolled shares. The Dell

special committee and Dells Board approved the transaction. On September 12, 2013,

Dells unaffiliated shareholders voted in favor of the transaction, with 57% of the

outstanding shares voting in favor and 70% of those voting approving.4 The merger

was completed on October 29, 2013. Certain Dell shareholders sought appraisal of

their shares.

THE COURTS DECISION

The Dell Court concluded that the sale price did not create a reliable indication of fair

value even though Dells sale process easily would sail through if reviewed under

enhanced scrutiny5 and Delaware Courts have recognized that a merger price

resulting from arms-length negotiations is a strong indication of fair value. The

Court indicated that three factors in the pre-signing phase contributed to

establishing that the deal price was below fair value: (1) the use of an LBO

pricing model to determine the original merger price, (2) the compelling

evidence of a significant valuation gap between the long-term value of Dell in

the view of Dells management and the market price of the Dell stock, and (3) the

lack of meaningful pre-signing competition. In the post-signing go-shop phase,

according to the Court, problems endemic to MBOs resulted in a disincentive to

competition and a final deal price that was also below fair value, namely: (1) the size

and complexity of Dell, (2) the winners curse informational asymmetry between

insiders and potential bidders and (3) Michael Dells value to Dell.

A. THE PRE-SIGNING PHASE: LBO PRICING MODEL, VALUATION GAP, AND

LACK OF COMPETITION DID NOT PRODUCE FAIR VALUE

The Dell Court began its analysis by noting that because the Dell special committee

only engaged in the pre-signing phase with financial sponsors, the price the bidders

were willing to pay did not reflect intrinsic value but, rather, the sponsors relative

willingness to sacrifice potential IRR.

The Court noted that one of the special committees financial advisors at the inception

of the process valued Dell as a going concern at between $20 and $27 but projected

that a financial buyer would only be willing to pay approximately $14 per share to

achieve a 20% five-year IRR hurdle. According to the Court, because the LBO pricing

model solves backwards from a desired internal rate of return and the limit on the

amount of leverage the target can support to finance the deal, the Dell special

committee as a practical matter negotiated without determining the value of its best

alternative to a negotiated acquisition. In arriving at this conclusion, the Court

appears to have discounted the Dell special committee financial advisors DCF

valuation ranges, including a DCF range of $12 to $16.50 per share applying the

committee advisors own projections of Dell, that were provided prior to entering into

the transaction.

The Court also found persuasive the compelling evidence of a valuation gap

between the markets perception and Dells operative reality. The Court stated that

the markets emphasis on short-termism did not take into account the $14 billion
in acquisitions that Dell had effected over the prior three years to transform the

company that had not yet generated results, noting that even the special

committees financial advisors had commented that the market was in a wait

and see mode. Despite its awareness of the valuation gap and the depressed Dell

stock price, the Court noted, the Dell special committee and its advisors used Dells

market price as a key input of its going concern value and an anchor for price

negotiations. Recognizing that the optimal time to take a company private is after it

has made significant investments but before those have been reflected in its stock

price, the Court stated that the anti-bubble both facilitated the MBO and

undermined the reliability of the deal price. The Court cited to the Delaware Supreme

Courts guidance in Glassman v. Unocal Exploration Corp. that opportunistic timing

should be addressed by the appraisal proceeding. Lastly, the Court emphasized that

the pre-signing process lacked real competition insofar as the Dell special

committee did not contact any strategic buyers, only engaged with two financial

sponsors initially and, after one dropped out of the process, essentially negotiated

only with a single bidder-the management buyout group. The Court opined that

even though it was empowered to say no, the Dell special committee lacked the threat

of an alternative deal, and therefore the original merger price was not a reliable

indicator of fair value. Moreover, the Court noted, that because the original

merger price served as the basis for the go-shop post-signing, the original merger

price also undermined the reliability of the final merger price.

B. THE GO-SHOP PERIOD: LACK OF PRE-SIGNING COMPETITION AND THE

BARRIERS TO OUTBIDDING MANAGEMENT DID NOT PRODUCE FAIR

VALUE
Although the go-shop period produced higher bids that forced the buy-out group to

increase their offer by 2%, the Dell Court concluded that it did not establish that the

Dell stockholders received fair value. The Court stated that the emergence of the

higher financial sponsor bids only indicated that the original merger price was not fair,

even using LBO-pricing. While conceding that the 45-day go-shop with a single

match right and a low break fee was unlikely to deter higher bids, the Court stated that

the size and complexity of Dell may have affected the utility of the go-shop in

determining fair value. More significant for the Court, however, was the fact that

incumbent management is perceived in the goshop context to have an

informational advantage, rendering questionable whether a bidder would

perceive a pathway to success through the go-shop. Noting that the Dell special

committee sought to address the asymmetry by providing extensive due diligence and

making Mr. Dell personally available, the Court concluded that the asymmetry

endemic to MBO go-shops created a powerful disincentive to competition.12

Moreover, the Court concluded that Mr. Dells value to Dell created an impediment to

competitive bidding, even though he had committed to the Dell special committee to

explore working with other bidders in good faith, the record indicated, he had done so

and the two post-signing bidders did not regard him as essential to their bids.

C. THE DCF ANALYSIS AS EVIDENCE OF FAIR VALUE

Having concluded that Dell failed to establish by a preponderance of the evidence that

the outcome of the sale process offered the most reliable evidence of fair value, the

Court turned to the DCF analysis of both sides experts, which generated values that

differed by 126%, based primarily on the different projected cash flows they used.

Concluding that there were two reliable forecasts from the Companys expert, the
Court, using its own determinations of the correct inputs for each of the DCF

valuation factors, concluded that the fair price of a share of Dells stock was $17.62.

LA France PROBLEM I

Voting Rights

Statutory Merger

a) Yes. The 400,000 new shares to be issued correspond to more than 20% of the

voting power.

b) Yes, for the same reason above.

c) Voting rights yes. As for appraisal rights, she is entitled to have the shares bought at

a price that is according to the market.

2 - Delaware Same.

Triangular Merger

a) Yes, if the triangular merger involves a dilutive share issuance of 20%, it must be

voted by LaFrance.

b) No, there are no appraisal rights for a triangular merger.

Delaware No need to vote. Only shareholder of the subsidiary will vote.

Reverse Triangular Merger Same as the forward triangular merger

Statutory Share Exchange

Sale of Assets
a) Yes, if the bought of assets for shares involves a dilutive share issuance of 20%, it

must be voted by LaFrance.

b) No, LaFrance shareholders are not entitled to appraisal rights under MCBA

c) Only for voting she might succede in blocking

Delaware LaFrance shareholders do not have voting or appraisal rights for buying

the assets.

3 Delaware usually does not apply a de facto merger doctrine, unless a corporation

misinterpret or misapplies sale of assets statutes.

Other jurisdictions generally recognized the de facto merger doctrine, as long as four

factors are existent : 1) continuity of ownership [or continuity of shareholders]; (2)

cessation of the ordinary business and dissolution of the predecessor as soon as

practically and legally possible; (3) assumption by the successor of liabilities

ordinarily necessary for uninterrupted continuation of the business of the predecessor;

and (4) a continuity of [enterprise, including] management, personnel, physical

location, aspects, and the general business operation.