Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 1 of 29 Chapter 22 Duties within Corporate Groups Control within corporate groups –Definition of control –Possible abuses of control: intra-group activities, squeeze-outs of minority shareholders Dealings with subsidiaries –Sinclair Oil case –Comparison to director duties Cash outs of minority shareholders –Weinberger – entire fairness standard Nature of fair dealing Nature of fair price (exclusivity of appraisal) –Lynch II - effect of disinterested approval –Short-form merger Appraisal exclusive Pure Resources: review of tender offer + SO merger Module VII – Fiduciary Duties Citizen of world Law profession Corporate practice Bar exam Bar exam

Corporations: A Contemporary Approach Chapter 21 Executive Compensation Slide 2 of 27 Review of fiduciary duties … (directors)

Corporations: A Contemporary Approach Chapter 21 Executive Compensation Slide 3 of 27 Fiduciary duties (directors) Oversight Decision-making Best interests Business Judgment Rule Shlensky v Wrigley Inattention Conflict interest Remillard Gross negl Van Gorkom Waste Aronson / Vogelstein Corp opp Farber Illegality Miller v AT&T (Allis-Chalmers) Malfeasance (bad faith) Francis Illegality Caremark Bad faith Disney Disinterested independent Benihana 102(b)(7)

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 4 of 29 Corporate groups Subsidiary Company Parent Company Subsidiary Company Subsidiary Company Shareholders Affiliate? Wholly-owned vs. Partially-owned sub? Public shareholders

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 5 of 29 Corporate groups Subsidiary Company Parent Company Subsidiary Company Subsidiary Company Shareholders Division Difference between division / sub?

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 6 of 29 Corporate groups Subsidiary Company Parent Company Subsidiary Company Subsidiary Company Shareholders Public shareholders How much necessary for control?

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 7 of 29 Law of corporate groups …

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 8 of 29 Sinclair Oil v. Levien (Del 1971) Issues Dividend policy Intra-group dealings Allocation of business opportunities

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 9 of 29 Sinclair Venezuelan Sinclair Oil Sinclair International Sinclair Alaska Shareholders Minority public shareholders Dividend policy

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 10 of 29 Dividend Policy If a plaintiff can meet his burden of proving that a dividend cannot be grounded on any reasonable business objective, then the courts can and will interfere with the board's decision to pay the dividend. The dividends resulted in great sums of money being transferred from SinVen to Sinclair. However, a proportionate share of this money was received by the minority shareholders of SinVen... Delaware Supreme Court

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 11 of 29 Sinclair Venezuelan Sinclair Oil Sinclair International Sinclair Alaska Shareholders Minority public shareholders Intra-enterprise Contract

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 12 of 29 Dealings between subs Sinclair caused SinVen to contract with International whereby SinVen agreed to sell all of is crude oil and refined products to International at specified prices. The contract provided for minimum and maximum quantities and prices..... International's payment lagged as much as 30 days after receipt. International did not comply with the [fixed minimum] requirement. Under the intrinsic fairness standard, Sinclair must prove that its causing SinVen not to enforce the contract was intrinsically fair to the minority shareholders. Delaware Supreme Court

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 13 of 29 Sinclair Venezuelan Sinclair Oil Sinclair International Sinclair Alaska Shareholders Minority public shareholders Business opportunity

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 14 of 29 Allocation of opportunities Sinclair made no real effort to expand SinVen. [While] Sinclair actively pursued a company-wide policy of developing new sources of revenue through its subsidiaries, SinVen was not permitted to participate and was confined in its activities to Venezuela..... with which subsidiaries should these opportunities have been shared? No evidence indicates a unique need or ability of SinVen to develop these opportunities. The decision.... was one of business judgment.... Delaware Supreme Court

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 15 of 29 Cash-out mergers “ Cash out” merger? Reasons for squeezing out minority? Standard of review? Remedies?

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 16 of 29 Cash-out merger (Weinberger) Get rid of minority? (legally) UOP Signal Companies Shareholders Minority shareholders 50.5%49.5%

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 17 of 29 Cash-out merger (Weinberger) UOP Minority shareholders Merger Cash Signal Companies Signal Companies Shareholders =+ UOP What protection? 100% Merger Sub

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 18 of 29 Standard of review … Business purpose Fair price (intrinsic fairness) Entire fairness

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 19 of 29 "When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous, inherent fairness of the bargain..... There is no dilution of this obligation where one holds dual... directorships, as in a parent-subsidiary context. What is Inherent fairness? Entire fairness? Delaware Supreme Court

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 20 of 29 Weinberger blueprint "The concept of fairness has two basic aspects: fair dealing and fair price "... The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained." "... The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including... assets, market value, earnings, future prospects... Structure a squeeze-out (1) Who and when initiate? (2) How structure? (3) Who negotiates? (4) What sub directors told? (5) How sub Ds approve deal? (6) How sub SHs approve deal? Business purpose? What about appraisal?

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 21 of 29 Independent directors Footnote 7: "Although perfection is not possible, or expected, the result here could have been entirely different if UOP had appointed an independent negotiating committee of its outside directors to deal with Signal at arms' length.

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 22 of 29 How much $$ … (which valuation method?)

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 23 of 29 Delaware black method CourtProportionWeight Avg earnings$12055%$66.00 Book value$10035%$35.00 Market value$7510%$7.50 TOTAL$108.50

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 24 of 29 "... the discounted cash flow method [ie - earnings potential of UOP] was essentially the focus... of Messrs. Arledge and Chitiea in the evaluation of the merger. "We believe that a more liberal approach must include proof of value by any techniques or methods which are generally considered acceptable in the financial community... " Delaware Supreme Court

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 25 of 29 WONDERFUL NEWS (or slightly less wonderful than you thought) You have just won $1,000,000 in the state lottery. You will be able to repay some of your student loans! You will receive your prize in installments -- $50,000 each year for 20 years Discount rate: 10% 5% Year 1: $45,455 $47,619 Year 2: $41,322 $45,351 Year 3: $37,566 $43,192 Year 4: $34,151 $39, Year 19:$ 8,175 $19,787 Year 20:$ 7,432 $18,844 TOTAL $425,678 $623,111

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 26 of 29 Discounts in appraisal … (remember minority lacked control)

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 27 of 29 Discounts in appraisal At what price? What is Corporation’s “going concern” enterprise value? What is Minority’s pro rata interest in the company? –“lack of control” discount? –“lack of marketability” discount? $120 million Enterprise Value

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 28 of 29 Discounts in appraisal At what price? What is Corporation’s “going concern” enterprise value? What is Minority’s pro rata interest in the company? –“lack of control” discount? –“lack of marketability” discount? Pro rata (minority) $50 million

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 29 of 29 Discounts in appraisal At what price? What is Corporation’s “going concern” enterprise value? What is Minority’s pro rata interest in the company? –“lack of control” discount? –“lack of marketability” discount? Lack of control $35 million

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 30 of 29 Discounts in appraisal At what price? What is Corporation’s “going concern” enterprise value? What is Minority’s pro rata interest in the company? –“lack of control” discount? –“lack of marketability” discount? Lack of control $20 million Lack of marketability

Corporations: A Contemporary Approach Chapter 22 Duties within Corporate Groups Slide 31 of 29 The end