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 guarantee 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 5/22/02, 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 didn't read the letter and the attached

Letter of Intent

until 5/19/02. 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 5/23/02.

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 %).

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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 alone 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 shares' (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 midterm 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 mercer 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. (10 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

(18 MM common shares + 20 MM "nonvoting" preferred).

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Mergers and Acquisitions Final Exam-5/08/02

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. (10 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, l 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 won 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. (15 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 and list one possible solution that you might use to deal with a conflict. (10 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. (10 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. (10 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

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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. (10 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 -I to I ratio to all common shareholders not involved in the unapproved acquisition or tender offer... " Please briefly discuss. (10 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. (10 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 repellent options? Please discuss in a sentence or two. (5 points)

15 POINTS OF EXTRA CREDIT QUESTIONS:

EC 1: As regards the intended acquisition discussed in Part II above, if A was a foreign corporation (e.g. a French corporation) and not otherwise engaged in U.S. defense industry work, what other regulatory concerns) would, in your view arise that, absent this new assumption, had not arisen heretofore as regards A's intended takeover of T? (7.5 points)

EC 2: Completely unrelated to any other question in this exam, how would you define the doctrine known as the "equal dignities rule," also called the doctrine of "separate legal independence?" (7.5 points)

END OF EXAMINATION

THANKS FOR A GREAT SEMESTER!

Jefrrey

A Karlin

JD, LLM, CPA

Senior Adjunct Professor Golden Gate University