MERGERS
& ACQUISITIONS
FINAL
EXAMINATION
PROF.
JEFFREY H. KARLIN, J.D., LL.M., C.P.A.
SPRING
SEMESTER 2006
ATTENTION:
DO NOT TURN TO PAGE 3 UNTIL INSTRUCTED
TO DO SO.
LOOK UP AFTER YOU HAVE COMPLETED READING THE INSTRUCTIONS AND DO NOT
TURN THE PAGE UNTIL INSTRUCTED.
1.
You will have a total of three (3) hours to
complete both parts of this examination.
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.
2.
This is an open book examination.
3.
This exam comprises two main parts for a possible 100-point
total.
a.
Part One consists of 25
multiple-choice questions scored at two points each for a total of 50
possible points. Answer each
multiple-choice question by indicating on the ParSCORE form provided, the
letter corresponding to the response you believe to be most correct. If
you change your answer, place an “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. If two answers are true, you should select
only the best answer. You will receive zero points for questions
answered incorrectly; but there is no penalty for guessing, so be sure
to answer all of the questions. 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.
b.
Part Two consists of six
short-answer questions based upon one fact pattern regarding a proposed merger
transaction. This section is also worth
a possible total of 50 points.
Write your answers to this section in one of the blue books provided.
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, 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.
c.
There is also a short extra credit section at the end of
the exam consisting of two short-answer questions worth five (5) points each.
4.
Write your student examination identification number in
the space provided in the upper right corner of every page of this examination;
the ParSCORE test form; on your exam envelope; and any used blue books. Do not use your name, student ID number or
Social Security Number on any exam materials.
5.
You may mark on
this examination and/or use it for scratch paper (no such marks will be
considered in determining your score), but failure to return this exam with
all its pages intact will result in a failing grade.
6.
At the conclusion of the exam, return all exam materials to the exam
envelope and submit it to the proctor. This
examination must be returned.
Please do not seal the envelope.
7.
LOOK UP AFTER YOU HAVE COMPLETED READING THE
INSTRUCTIONS AND DO NOT TURN TO THE NEXT PAGE UNTIL INSTRUCTED.
BEST
OF LUCK!
PART II
The
Target: Tally Ho Corporation (“T”)
The Hostile Acquirer: Andrews Corporation
(“A”)
On 5/1/06, 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 freeze-out merger;
*
A
subsequent “take no prisoners,” freeze-out 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 5/22/06, 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 or the attached Letter of Intent until 5/19/06. 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 5/23/06.
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 non-traded (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 shares[1]
(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: Assume 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:
“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)
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...” 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....” 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