1.

Takeovers

i. Directors have the power – and sometimes the duty – to adopt

defensive measures in the face of a takeover. The problem is that
directors have __inherent conflicts of interests_________ in
considering a hostile bid, because they are likely to be fired if the
takeover is successful. Thus, we cannot use only standard
Business Judgment Rule analysis in examining the board’s reaction
to a hostile takeover (unless board action is approved by a fully
informed vote of shareholders, which cleanses the inherent
conflict). The __Unocal_________ test provides the modern
approach to analyzing the board’s actions. We analyze the
directors’ conduct as follows:

 FIRST, directors have the burden to show the

__reasonableness and adequacy ___________of the
decision-making process, including the adequacy of the
information the board used in reaching its decision and
showing ______good faith and reasonable investigation
__________________________, in determining there was
a threat to corporate policies and effectiveness

a. (Unocal says directors have the burden to show they

had reasonable grounds for their belief in the threat
to the corporation, showing good faith and
reasonable investigation)

 THEN, we apply a balancing test – the board must have

acted ___reasonably in light of the circumstance of time
(reasonable in relation to the threat posed), it being
understood that the board’s objective is to defend corporate
policy and effectiveness against the takeover threat by
using defensive measures. By “defensive measures” we
mean things like no-shops, termination fees, lock-ups on
crown jewels for a favored bidder, poison pills, and options
for a favored acquirer to buy shares of the target at a
discount.

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  After a defensive measure has met this standard, we “kick
back” to ______business judgment rule_____________,
meaning the court will defer to directors unless there has
been some other breach of fiduciary duty, like a breach of
the duty of care by being uninformed, or a breach of the
duty of loyalty by acting primarily to perpetuate themselves
in office, or doing something in bad faith, or committing
fraud

ii. Broadly stated, we have a so-called “_Revlon moment ______”

when a corporation undertakes a transaction or takes an action
which will cause:

 A ___________change in corporate
control________________________________; or

 A _______breakup of the corporate

entity______________________________________.

 Put another way, we have a Revlon moment when:

a. A corporation initiates an active bidding process

seeking to sell itself or to effect a business
reorganization involving a breakup of the company;
or

b. In response to a bidder’s offer, a target abandons its

long-term strategy and seeks an alternate transaction
or arrangement involving the breakup of the
company; or

c. A target is facing a change of control of some other

type. The type we saw is a situation where assets
which had been owned by the public will come
under the control of a dominant shareholder.

 All of these definitions of “Revlon Moment” include the

idea that the sale or break-up of the corporation is

Reed Bus. Assoc. Summary Document – Spring 2020 2

 “____inevitable ______________,” and the board
knows it

 Some specific examples where we do not have a Revlon

moment:

a. the board of a widely-held publicly traded company

agrees to a stock-for-stock merger with another
widely-held publicly traded company

b. a company pursues a strategic transaction according

to a well-developed plan

c. the company in question is the acquirer

d. a going private transaction in which the controlling

shareholder will control the company both before
and after the transaction

 Also, we do not automatically get a Revlon moment just

because a hostile bidder wants to buy the company
(although remember Unocal will apply to any defensive
measures in that case)

 In a Revlon moment, two key things happen:

a. the duties of directors change such that they no

longer defend the corporation (corporate policy and
effectiveness), but rather become _Auctioneer
charged with getting the best price for
shareholders_______________________________
_________________________________________
(the so-called “Revlon duties”)

b. since there is an inherent conflict of interest, the

directors have lost the protection of the business
judgment rule, and board action is subject to a
__Unocal________________ “strict scrutiny”

Reed Bus. Assoc. Summary Document – Spring 2020 3

 analysis, which can be stated in this context as
follows:

i. FIRST, directors have the burden to show the

reasonableness and adequacy of the decision-
making process, including the adequacy of the
information the board used in reaching its
decision and showing good faith and reasonable
investigation.

ii. THEN, we apply a balancing test – the board

must have acted reasonably in light of the
circumstances at the time, it being understood
that the board’s objective is to obtain the best
price for the target’s shareholders.

iii. After the board has met this standard, we “kick

back” to the business judgment rule, meaning
the court will defer to directors unless there has
been some other breach of fiduciary duty, like a
breach of the duty of care by being uninformed,
or a breach of the duty of loyalty by acting
primarily to perpetuate themselves in office, or
doing something in bad faith, or committing
fraud

 In considering competing bids, the board should consider

respective bidders ability to close the transaction, including
getting financing and securing government
consent_________________________________________
______
_______________________________________________.
Boards should also consider the quality of consideration.

 _Reasonableness_______, not perfection, is the standard

 Given that the board is supposed to be working to

maximize price when Revlon duties are triggered, they
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 must be particularly careful in agreeing to no-shops, lock-
ups, or high break-up fees. However, if these protective
measure, which likely favor one bidder over another, are
reasonably designed to increase shareholder price and the
board reasonably concludes it is the best way to further
shareholder interests, they can be acceptable, even in a
Revlon moment

 If a no-shop clause is drafted in such a way that it prohibits

the target board from considering competing offers when it
is obligated by its fiduciary duties to do so, then the no-
shop clause is invalid and unenforceable. To avoid this
outcome, no-shop clauses are drafted with a so-called
“___fiduciary out_________________________” - which
means the target board has the right to consider competing
offers if it is obligated by its fiduciary duties to do so.

 Notwithstanding Revlon, courts apply __Business

judgment rule____________ if an acquisition transaction is
approved by a fully-informed, uncoerced vote of the
disinterested stockholders (unless the merger is a squeeze-
out, in which case the doctrine described later in this
summary document applies). This means that Revlon
claims can only be brought __prior to__________
stockholder approval; ____After________ stockholder
approval, plaintiffs are limited to corporate waste claims
and proceedings to assert their appraisal rights (and, of
course, claims arguing the shareholder vote was coerced or
uninformed).

iii. A Few Thoughts on Poison Pills [no cute poison pill jargon will be
tested on the exam]

 Poison pills are __shareholder rights

plans_________________________________
__________________ in which shareholders are given the

Reed Bus. Assoc. Summary Document – Spring 2020 5

 right to buy shares or something else if there is a takeover
attempt.

 “__Flip-in________________” pills give the shareholder

the right to buy really cheap shares of their company if
someone buys a big block of company shares (say 15%) or
if someone makes a tender offer for a big block (say 30%).
The rights are not exercisable by the bidder.

 “___Flip-over_______________” pills give target

shareholders the right to buy cheap shares of the buyer’s
stock at a discount from market price post-acquisition, and
the triggers are the same (bidder gets big block of target
shares or makes tender offer for big block of target). Flip
over pills function by using “indestructible preferred stock”
(or similar) of the target, which has rights associated with it
that survive a merger.

 Generally poison pills can be

_redeemed_________________ by target board which
means the board causes the company to buy back the right
at a low price

 Poison pills can be “_chewable____,” meaning

shareholders can revoke them, or they may automatically
go away if it’s a great bid

 Delaware allows poison pills, and the IRS doesn’t tax

shareholders who get them

 Absent shareholder approval, board adoption of poison pills

is analyzed with __Unocal________________ (even if they
are adopted in the absence of a specified threat), and
assuming the board is informed and is at least slightly
worried about takeovers, then the plans are generally
proportionate and are fine.

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 However, __Unocal________________ applies AGAIN
when there is an actual takeover attempt and the board
decides whether or not to redeem the pill. A decision not to
redeem a poison pill is considered a defensive measure, and
is subject to Unocal analysis. A decision to redeem the
poison pill is not a defensive maneuver, and therefore is
protected by ____business judgment
rule_________________________________.

 Other poison pill notes (not on exam):  dead hand, no hand,

and slow hand pills are all invalid.  Unpacking that:

a. “Dead hand” pills, in which only the “incumbent”

directors can redeem the pill, fail in a few ways:

i. they are arguably invalid under the statute,

because they create different voting rights
among directors, and decisions like that are
supposed to be made in the charter and by
shareholders

ii. they are disproportionate under Unocal, in that

they indirectly affect shareholders’ voting
rights, AND they arguably fail under Blasius
(referenced in the Hilton case) because they
disenfranchise shareholders without compelling
justification

b. “Slow hand” pills are “no hand” or “dead hand”

pills of limited duration

i. These types of poison pills are invalid under

Delaware law because they prohibit the ability
of the board to govern

c. “No hand” pills say that no board can redeem the

pill

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 i. These types of poison pills are invalid under
Delaware law because they prohibit the ability
of the board to govern

iv. Two More Unocal Thoughts:

 Measures that include voting agreements from dominant

shareholders promising to support a particular deal are
likely outside the “__the range of reasonableness
____________________________” if they prohibit the
board from being able to exercise its fiduciary duties

 Protective measures that disenfranchise shareholders are

particularly suspect, and require a “___compelling
justification ________________” to be valid

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