ITT: Business Associations/Corporations

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ph14
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ITT: Business Associations/Corporations

Postby ph14 » Thu Dec 05, 2013 7:56 pm

Ask your Corporations questions and help others.

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Thu Dec 05, 2013 8:00 pm

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Andrews989
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Re: ITT: Business Associations/Corporations

Postby Andrews989 » Fri Dec 06, 2013 9:35 pm

Here's my understanding, hopefully it helps....

Unocal establishes the basic framework of board's powers under Delaware law to implement defensive measures. To test whether a board's defensive measure is acceptable (in that they are allowed to implement it, and that it is appropriate), there's a two-step test that must be satisfied:
1) There is a threat to the corporation and
2) The tactic meant to respond to the threat is proportional

These prongs are interpreted pretty broadly. Examples of threats are the situation in Unocal itself and the situation in Paramount v. Time Warner (if you covered that)


Revlon is a duty when a sale or breakup of the company becomes inevitable. Once Revlon is triggered, the directors role changes from defenders of the corporation to auctioneers charged with getting the best price for the stockholders at a sale of the company. It no longer matters who they think will run the company best, they just have the duty to sell it for the most possible

Revlon is triggered when the board/shareholders are going to lose control of the company. A merger can possibly not trigger Revlon. However, when the corporation is being sold for cash or non-voting stock, Revlon duties are triggered.

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Fri Dec 06, 2013 9:43 pm

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Andrews989
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Re: ITT: Business Associations/Corporations

Postby Andrews989 » Fri Dec 06, 2013 9:50 pm

ph14 wrote:
Andrews989 wrote:Here's my understanding, hopefully it helps....

Unocal establishes the basic framework of board's powers under Delaware law to implement defensive measures. To test whether a board's defensive measure is acceptable (in that they are allowed to implement it, and that it is appropriate), there's a two-step test that must be satisfied:
1) There is a threat to the corporation and
2) The tactic meant to respond to the threat is proportional

These prongs are interpreted pretty broadly. Examples of threats are the situation in Unocal itself and the situation in Paramount v. Time Warner (if you covered that)


Revlon is a duty when a sale or breakup of the company becomes inevitable. Once Revlon is triggered, the directors role changes from defenders of the corporation to auctioneers charged with getting the best price for the stockholders at a sale of the company. It no longer matters who they think will run the company best, they just have the duty to sell it for the most possible

Revlon is triggered when the board/shareholders are going to lose control of the company. A merger can possibly not trigger Revlon. However, when the corporation is being sold for cash or non-voting stock, Revlon duties are triggered.


Thanks for your response, I appreciate it. I think you're entirely right on all points, but I guess i'm not certain entirely on the triggers. What if someone merely makes a cash offer with a stated intent to break-up the company? It would seem that alone should not trigger Revlon yet. But why is that exactly? One of the triggers is an impending bust up.

Intuitively it seems that Unocal, and not Revlon should apply. Yet i'm having trouble articulating why, in the proper corporate law language so to speak, it should not trigger Revlon in light of the stated break-up


I agree that Revlon does not apply. Revlon only applies when it is clear/inevitable they are going to lose control of the corporation. They are under no obligation to accept the cash offer in this scenario. Thus, it is not clear the board is going to lose control, and Revlon does not apply.

It wouldn't make sense for any offer to trigger Revlon duties. If this was the case, then any time someone made an offer, the targeted corporation's board would be obligated to sell/lose control of the company. This is obviously not the case.

Lets say hypothetically, the board contracted a guarantee to the company/person/entity who made the offer and it was merely awaiting shareholder approval. Then, since the board has contractually obligated itself to the sale, Revlon duties are triggered and they now have a duty to accept the highest big they receive, even if it violates their original guarantee. This is the scenario that arose in Paramount v. QVC.


In your hypo, Unocal says that since a cash offer was made (aka a takeover threat), the board is allowed to implement a defensive measure to retain control, so long as it is proportional to the takeover threat.

If I remember correctly, almost anything can be characterized as a "threat" and the board can respond under Unocal.

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Fri Dec 06, 2013 10:15 pm

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TTRansfer
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Re: ITT: Business Associations/Corporations

Postby TTRansfer » Sat Dec 07, 2013 1:06 am

Tagged. Final is this week for me.

Andrews989
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Re: ITT: Business Associations/Corporations

Postby Andrews989 » Sat Dec 07, 2013 1:22 am

ph14 wrote:Ah, thanks, that is very helpful. So it's not until the deal is basically inevitable and the board is waiting for the deal to close that Revlon is triggered? So could the deal be inevitable under the break-up trigger without the board agreeing to the deal (as you mentioned above in the Paramount v. QVC case)? I.e., that it is almost certain the board will accept the deal but it has not yet been voted on?

Tell me what you think on this, just playing it out a little, 3 Revlon triggers:

1. Active bidding process/sale. Under this trigger, Revlon would always be triggered even before the board agrees to anything, right?
2. Break-up. Under this trigger, Revlon is only triggered when the break-up is inevitable, which probably means that there are no Revlon duties prior to the Board agreeing to the deal with someone, right? (Then it also seems weird that they could go through all the trouble to get a deal essentially done, then turn around and have to conduct a market check, etc. and potentially sell to someone else. To kind of play that out a little, assume T has a poison pill. A1 would have to pay enough (and pay the negotiating costs) to figure out a point where T would agree to redeem a pill (assume it would be fine under Unocal to keep it in at this point). They agree to that deal at a price point of $100. Thus, because the break up is now inevitable, Revlon is triggered and the board must redeem the pill, conduct a market check, and have a level playing field, etc. So at this point A2 can just swoop in and offer $101 and assuming A1 doesn't beat their offer they get to takeover T. I guess that's just something I find slightly odd about Revlon, although I understand the point of it is to maximize current shareholder value.
3. Change of control. Again, like trigger #2, above, for there to be an inevitable change of control, that means that Revlon is never triggered under this prong until the Board has agreed to a deal with an acquirer. What do you think?

Also, when Revlon duties are triggered, they have to accept the highest bid they receive? Say they prefer the friendly $120 deal instead of a hostile $121 deal. Would they be able to pick their partner and accept the $120 offer, or would they be stuck with taking the highest offer? It seems like they'd have to take the $121 deal even though they would prefer the $120 deal, right?

But now let's alter the hypo a little, after a long bidding process to get the $120 and $121 offers, above, the Board then turns around and offers some sort of deal protection, like a 3% termination fee, in exchange for a $122 offer. This seems okay under Revlon since it was for the purpose of inducing the highest bid, right?


I'm not sure on your first Revlon question re. the board hasn't approved. One of the cases (i'm blanking on the name) holds that Revlon duties are not triggered when a potential acquirer makes an unsolicited bid.

However, when the board is making offers to sell itself, or contracts guarantees to a potential acquirer, the board assumes Revlon duties.

As for the numbered ones....

1. I believe so. As I said above, if the company is actively trying to sell itself, Revlon is triggered.
2. Not sure what the question is here. In class we did discuss how one of the policy arguments against Revlon is that it discourages acquirers to be the first to bid.
3. Again, I'm not sure what you're asking.

Not sure on the termination fee either, we didn't do too much of that.

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Sat Dec 07, 2013 12:07 pm

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Re: ITT: Business Associations/Corporations

Postby ph14 » Sun Dec 08, 2013 4:12 pm

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acw1213
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Re: ITT: Business Associations/Corporations

Postby acw1213 » Sun Dec 08, 2013 6:06 pm

ph14 wrote:Does anyone have a good synthesis of Delaware corporate opportunity law?

Background: Corporation can waive corporate opportunity constraints in their charter under DGCL 122(16).
General rule: A director may not take a corporate opportunity. Duty of loyalty violation.
Corollary: A director may take an opportunity when it is not a corporate opportunity. No liability.
Safe Harbor: If a director presents the opportunity to the board, and they decline to take it for whatever reason (most likely because of (1) financial incapability; or (2) disinterest), then the director can take the corporate opportunity. No liability.
No need to present to Board: A director need not take advantage of the safe harbor. However, if he does not present the opportunity to the corporation, he then has the burden of proving either (1) that the opportunity is not a corporate opportunity (per the corollary to the general rule, above); or (2) that the company was incapable of taking the opportunity, generally because they were financially unable to take advantage of the opportunity. If the director meets his burden of proving either of those, then there is no liability. If the director fails to meet his burden, then liability.

Thoughts? Am I missing anything? Is that correct?


My understanding is that showing that the company was "financially incapable" of taking the opportunity will usually not be an acceptable defense. It might be persuasive in an extreme context; for example a close family corporation almost certainly couldn't afford a $500 million piece of property in Manhattan. It seems like the best arguments to make to avoid liability is that the opportunity is outside the scope of the corporation. I.e. Facebook directors don't have to notify Facebook if they want to buy a private island because Facebook isn't in the business of buying or using islands.

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Sun Dec 08, 2013 6:08 pm

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acw1213
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Re: ITT: Business Associations/Corporations

Postby acw1213 » Sun Dec 08, 2013 6:25 pm

ph14 wrote:I agree that it isn't really a strong argument. But I guess my question is whether I'm correct that as a matter of doctrine that it is available as a defense? That is, a director can usurp a conceded corporate opportunity, not even present it to the Board for their evaluation, but still not be liable because he proves that the company was financially incapable of taking it.


If it came up on an exam I would acknowledge that it would be one of the arguments that a director would make in trying to avoid liability. I would balance the price of the opportunity against the available assets of the corporation (including ability to take out loans). After that, I would conclude that the court would not find merit in the argument (unless it was an extreme example like the one above).

I think the reason is largely policy based, sort of like the business judgment rule. The courts are not business experts and they don't want to try and arbitrarily figure out how "valuable" the opportunity would be to the corporation. Even if the corporation didn't currently have the necessary assets to obtain the opportunity, who's to say the corporation wouldn't sell more stock or obtain bonds to acquire it? Outside of extreme circumstances, it's really just too hard to determine if a corporation could afford something.

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Sun Dec 08, 2013 6:28 pm

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Sun Dec 08, 2013 10:53 pm

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ph14
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Re: ITT: Business Associations/Corporations

Postby ph14 » Mon Dec 09, 2013 11:50 pm

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echooo23
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Re: ITT: Business Associations/Corporations

Postby echooo23 » Tue Dec 10, 2013 6:34 pm

Anyone know where I can get some DE-based short answer or exam questions? My prof does not teach Model Act at all.

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Re: ITT: Business Associations/Corporations

Postby olive16 » Mon Dec 16, 2013 7:02 pm

bump




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