FINAL EXAMINATION
MERGERS AND ACQUISITIONS
PROFESSOR JEFFREY H. KARLIN, J.D., LL.M., C.P.A.
SPRING 2004
1. You have three (3) hours to complete this exam.
2. This is a closed book exam.
3. The examination consists of two parts:
Part I is comprised of 25 Multiple Choice Questions worth 2
Points apiece, totaling 50 points. There is no penalty for “guessing,”
so be sure to answer all of the questions.
Part II is allotted 50 points. In Part II, one overall fact
pattern is presented regarding a proposed merger transaction. Part II contains
6 numbered “essay/short-answer” style questions with point values
assigned as listed at the end of each of the 6 questions. The maximum total
number of points that may be awarded in the exam is 100 points.
In addition to Parts I and II, there are two optional extra credit questions
worth 5 points apiece at the end of the exam. Time permitting, do your best
to answer all of the questions.
4. You may take the exam in whatever order you prefer. There
is no time limit on a particular part. However, it is suggested that you avoid
spending an inordinate amount of time completing questions with a small point
value assigned. It is important to pay heed to the point scoring since that
is the maximum score that you may receive on a particular question! In light
of the numerous questions, you will likely have to move rapidly and decisively.
5. The Multiple Choice Questions. Each Multiple Choice question
has one correct answer out of five possible answers--choose only one proposed
answer. Certain questions provide for answers such as “All are correct,”
“A & B only are correct” or “None are correct,”
so make sure to scan the proposed answers to ensure that you haven’t missed
situations where more than one answer is correct or no answer is correct. There
is no additional penalty for incorrect guesses. Correct multiple choice answers
are to be marked on the separate “ParSCORE TEST FORM” using pen
or pencil and following the instructions on that form. If you change your answer,
place a clear X through the wrong answer and mark the correct answer. A machine
will score the exam and any ambiguities will be counted as a wrong answer.
6. The Short Answer/Essay Style Questions. Please answer these
questions in the blue books provided to you. Write only on the right hand side
of the page (skipping a page each time) and double-space your work. Please write
legibly. In completing Part II, if you should find it absolutely necessary to
assume facts, state them. However, it is the intent of the instructor to provide
you with enough necessary facts to permit a reasoned initial analysis of the
issues raised by the questions in Part II, so don’t spend too much time
assuming additional facts that are unstated. A simple "Yes" or "No"
response or a mere reference to an apparently applicable case or statute will
likely receive no point credit, since it indicates no specific understanding
of the issues involved. Your response to each question should be legible and
brief, but contain enough detail as if presented to an intelligent, reasonably
knowledgeable exam reader.
7. Write your exam number on your exam envelope. Please put your student exam
number at the top of this page, each page of essay questions, each Blue Book,
and on the Par SCORE test form. Do not use your name, student ID number,
or Social Security Number on any exam materials.
8. At the conclusion of the exam, return all test materials, including blue
books, scratch paper, the ParSCORE answer sheet and this exam packet to the
envelope and submit it to the proctor. Do not seal the envelope.
Students who do not return all exam materials at the end of the exam may not
be graded.Finally, take a deep breath, relax and give the exam your "best
shot."
BEST OF LUCK!
PART II: The Target: Tally Ho Corporation (“T”)
The “Hostile” Acquirer: Andrews Corporation (“A”)
(50 POINTS)
On 5/1/04, Susan Andrews, Chief Executive Officer (CEO) and majority shareholder
of Andrews Corporation, a Texas publicly held corporation (“A”),
sent a “bear hug” letter to Joseph Tallman, Board Chairman, CEO and
President of Tally Ho Corporation, a Delaware publicly traded corporation (“T”).
A and T are active competitors and both manufacture
advanced missile technology parts for the United States Air Force. The letter
from Andrews informed Tallman that A would be willing to take
either of the following actions with regards to T:
(1) Form a “strategic alliance” in a friendly
merger, on terms acceptable to A, providing for:
* an agreed upon price per T share valued at “up to $65
per share of T common stock,” to be received in the form of A stock and
other securities;
* the retention of key T management personnel, including Mr.
Tallman (to serve as co-chairman of the combined companies);
* The management retention offer would also allow T’s
core management group to continue as core division managers in A,
with substantial annual cash awards based on reaching defined productivity and
growth targets;
* In addition, Andrews would be willing, as a “special accommodation,”
to cause A to make a one-time “hello and welcome to the
team” cash payment of $250,000 to each inside director and/or member of
senior management joining A’s new team and a special
$1 Million “goodbye payment” to each terminated inside board member;
and
* A would guaranty payment, on a private purchase basis, of
$85 per share for each share of director’s and management’s “insider”
private, preferred shares held as of the date of Andrews’s letter.
OR, in the Alternative, Should the A Board not be willing to proceed as
described above,
(2) Andrews Corporation will engage in a
hostile tender offer for control of T shares, with terms providing for:
* a likely per common share of T offer price substantially lower
than the friendly offer (perhaps in the $30-$40 per share range);
* no tender offer for T preferred shares, just a downstream forced
exchange of A common and other securities in the second step
freezeout merger;
* a subsequent “take no prisoners” “freezeout merger”
of T into A, and
* upon takeover, the termination from employment of all T senior
officers.
Finally, Andrews’s letter states that T must respond
to her letter by signing an enclosed binding Letter of Intent no later
than 5/22/04, or else, the hostile tender offer will be commenced.
The current common stock price of T is $25 per share.
Mr. Tallman was on vacation at the time the Andrews letter was received by T.
Consequently, he did not read the letter and the attached Letter of Intent
until 5/19/04. After reading the correspondence, he immediately called for a special
meeting of the board of directors of T to discuss the Andrews
letter and the Letter of Intent. The meeting is scheduled for 5/23/04.
The T board is comprised of 7 directors, 4 of whom are also officers
of T. The other 3 directors are outside directors. T
is a New York Stock Exchange listed corporation with one class of publicly traded
common stock and two classes of nontraded (private) preferred stock. Currently
the inside directors own approximately 30%, or 18 million common shares of the
60 Million issued and outstanding shares of common stock of T.
The outside directors own an insignificant number of common shares (less than
.0001%).
The first class of T preferred stock is voting, redeemable preferred. As
such, this class of stock is entitled to vote on an equal basis (one share, one
vote) with the common stockholders on all matters that the common shares vote
on, and pursuant to the terms pursuant to which this class of preferred was issued,
the redeemable preferred may be reacquired by T at any time,
in a cash distribution at a per share purchase price of 125% times the previous
month’s New York Stock Exchange average daily closing price of the T
common stock. The redeemable preferred stock is currently owned privately by nonaffiliated
investors who are not controlled by or subject to the influence of either T
or A.
The second class of preferred stock is nonvoting except that each share of
preferred stock is entitled to vote along with the common shares and redeemable
preferred shares on an equal basis (one share, one vote) in a merger or significant
asset sale transaction. The preferred stock is entirely owned by the T
“inside” directors and officers, having been issued prior to T
corporation becoming a public company. In summary, the classes and number
of shares of T stock outstanding are as follows:
Outstanding Shares Authorized Shares
Common Stock: 60 Million shares 100 Million shares
Voting Redeemable Preferred: 20 Million Shares 20 Million Shares
“Nonvoting” Preferred Stock: 20 Million shares 120 Million Shares
Total Shares Outstanding: 100 Million shares
Total Shares Owned by T insiders: 38 Million shares1 (see footnote below)
Total Insider Voting Control of T: 38%
Note that T is obligated to numerous classes of bondholders
holding unsecured corporate debts of T of various mid-term maturities.
Further, there are various significant trade accounts payable. In fact, the overall
ratio of debt to equity is 3 to 1, the debt securities comprising the most significant
aspect of the equity/liability side of T’s balance sheet.
As counsel to the target T, you have been asked by Mr. Tallman to advise
the board of your initial views of the following matters:
Question 1: First, assuming the T board believes
that a merger of T into A is feasible and appropriate, if the T board approves
the merger, in addition to the 3 classes of shareholders, will the board likely
need to ask bondholders and unsecured trade creditors to ratify the merger transaction?
Briefly discuss. (5 points)
Question 2: Assuming arguendo that bondholders and unsecured
trade creditors have no voting rights, may the T board consider
their interests and the interests of other constituencies, such as suppliers,
current employees and the local community where T conducts business,
as relevant factors in deciding to endorse or contest A’s
takeover plans? Briefly discuss. (5 points)
Question 3: Assume that, in response to the A
“bear hug” letter, T’s board meets and engages
in a heated discussion regarding A’s proposals. In the
course of the board discussion, one of T’s consultants,
(an outside independent certified accountant who was expressly invited to the
meeting), announces that:
“Given the recent run up in value of T’s stock, I would strongly
recommend that T go forward with a “quick merger” closing with A since
it’s unlikely that T stock will ever reach a value equivalent to A’s
per share merger offer price in at least 5 years. As the board is no doubt aware,
there has never been a better time for T shareholders to cash out.”
Based solely upon this advice, T’s board proceeds
to quickly sign the binding letter of intent with A. As counsel
to T, what concerns might you have with respect to this “decisive”
board approach? Discuss. (10 Points)
Question 4: If T chooses to accept A’s
“friendly merger” alternative offer, are there any actual or likely
conflicts of interest that the board or senior management have vis a vis T
or its shareholders that are problematic? If so, list two conflicts and list one
possible solution that you might use to deal with a conflict. (5 points)
Question 5: Assuming T accepts A’s
merger proposal, list one demand that T may reasonably
make of A prior to entering into any meaningful discussions regarding
a strategic alliance by merger (the first choice offered by A)
and sharing information regarding T with A.
Further, in no more than two or three sentences, clearly describe your rationale
for making the particular demand. (5 points)
Question 6: Assuming that the T board decides
to reject the A merger proposal, given the current capital structure
of T, briefly provide your views as to the appropriateness
of the following “shark repellants” for consideration to be used by
T in avoiding the A takeover:
A) Issue More “Nonvoting” Preferred to Assure Control Retention:
Immediate resolution of the T board of directors to issue to
T management 30 Million nonvoting Preferred Shares authorized
but previously unissued, such that T insiders would control
68 Million of a total of 130 million issued and outstanding shares of preferred
and common stock. Discuss your views. (4 points)
B) Adopt Class Voting to Assure Control Retention: Immediate adoption
by the T board of directors of a bylaw amendment requiring
that: “in matters involving extraordinary corporate transactions,
including mergers and significant asset acquisitions, each class of stock shall
be entitled to vote as a class...”
Please briefly discuss your views. (4 points)
C) Adopt Shareholder Rights Plan to Thwart Takeover: Immediate adoption
by the T board of directors of a Shareholder Rights Plan which:
“triggers, upon the unapproved acquisition of 20% or more of T common
stock or upon the announcement of an unapproved tender offer, the distribution
of share rights in a 4 to 1 ratio to all common shareholders not involved in
the unapproved acquisition or tender offer...”
Please briefly discuss. (4 points)
D) Board Resolution to Redeem Redeemable Preferred to Assure Control Retention:
Immediate resolution of the T board to redeem the redeemable
preferred shares, thereby increasing the T management share
ownership percentage from 36% (36 Million shares/100 Million shares) to 45%
(36 Million shares/80 Million Shares). Please briefly discuss. (4 points)
E) Adopt all Plans at Once? Assuming the board of T
wants to pursue all of the options listed in #6A-D above, do you see any additional
legal problem faced by T solely because its board of directors
chooses to “play it safe” and adopt all of the shark repellant options?
Please discuss in a sentence or two. (4 points)
10 POINTS OF EXTRA CREDIT QUESTIONS:
EC 1: Briefly, what is the difference between a “no shop” clause and
a “no-talk” clause in a merger agreement? (5 points).
EC 2: Briefly, what is a Revlon duty? (5 points)
END OF EXAMINATION
THANKS FOR A GREAT SEMESTER!