1. PARTNERSHIPS, CORPORATIONS AND THE VARIANTS PROF. BRUCE MCCANN SPRING SEMESTER LECTURE 6 2011 TAKEOVERS PP. 785-835 Business Organizations 2010-2011 Lectures

2. Stalking Horse Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann The initial bidder with whom the debtor negotiates a purchase agreement is called the "stalking horse" bidder. The term is an old hunting term referring to either a real horse or an image of a horse (typically some type of screen) behind which a hunter would hide to conceal himself from, and get closer to, his prey.

3. DGCL Section 251 - Mergers Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Board of each corporation must first adopt resolution approving merger agreement. Agreement shall set forth terms of the merger, mode of bringing into effect, manner of converting shares. The agreement shall then be submitted to the shareholders of each corporation for vote on no less than 20 days notice. Merger is not effective until requisite number of shares approve it.

4. Unocal Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Is offer in the best interests of the corporation? If contend it is not, the board must show:  Offer is threat to corporate policy or effectiveness  Via evidence of investigation  The defensive response is “proportional” to the threat.

5. Omnicare Refinements to Unocal Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Where defensive measures are invoked to protect a merger agreement, Unocal proportionality test is applied as follows: 1.Court must first determine if the measures are preclusive or coercive. If either, measures are illegal. 2. If measures pass that threshold test, then the Board must establish their measures were within a “range of reasonable responses.”

6. “Force The Vote” Provisions Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Refers to board commitment to suitor that the board will submit the proposed transaction to the shareholders for a vote even if the board does not recommend that the shareholders approve the transaction. Such provisions now expressly permitted under Delaware law and the Model Act Why bother? Because often the merger agreement is signed simultaneously with voting agreements binding the majority of shares to vote for the transaction if it is put to a vote. The suitor knows the transaction will be approved even if, under a “fiduciary out,” the board must withdraw its approval.

7. Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

11. Lyondell Sched. 13D Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 Lyondell Chemical Company (Name of Issuer) Common Stock (Title of Class of Securities) 552078 (Cusip Number) Alejandro Moreno AI Chemical Investments LLC c/o Access Industries, Inc. 730 Fifth Avenue, 20th Floor New York, New York 10019 Tel. No.: (212) 247-6400

12. Sched. 13D Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware 7 SOLE VOTING POWER -0- 8 SHARED VOTING POWER NUMBER OF SHARES BENEFICIALLY 20,990,070* OWNED BY EACH REPORTING PERSON WITH 9 SOLE DISPOSITIVE POWER -0- 10 SHARED DISPOSITIVE POWER 20,990,070* 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 20,990,070* 12 CHECK IF THE AGGREATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] (SEE INSTRUCTIONS) 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 8.3%

13. Sched 13D Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann This statement is filed by: (i) AI Chemical Investments LLC, a limited liability company organized under the laws of Delaware ("Newco"). The address of the principal office of Newco is 730 Fifth Avenue, 20th Floor, New York, New York 10019. The principal business of Newco is holding the Forward Contract (as defined below) to acquire Shares, as more fully described in Item 6 hereof; and (ii) Leonard Blavatnik, an individual whose principal occupation is Chairman of Access Industries, Inc. ("Access") with a business address at 730 Fifth Avenue, 20th Floor, New York, New York 10019 ("Mr. Blavatnik" and, together with Newco, the "Reporting Persons"). The principal business of Access is holding strategic investments in a variety of industries worldwide. Mr Blavatnik is the sole member of Newco. Mr. Blavatnik is a United States citizen.

14. Sched. 13D Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Item 4. Purpose of Transaction Newco has entered into the Forward Contract as a strategic investment. …The Reporting Persons may, depending on market conditions, the trading prices of Shares, alternative investment opportunities, the availability of funds and the outlook for the petrochemicals industry and the Issuer, acquire additional …Upon acquiring the Shares pursuant to the Forward Contract, Newco intends to assess its ownership and voting position in the Issuer. The Reporting Persons may seek to engage in discussions with the Issuer concerning, among other possible scenarios, the merits of an offer to acquire all of the Shares of the Issuer and the merits of a merger, combination or similar transaction between the Issuer and affiliates of Newco, including Access or Basell Holdings B.V. The Reporting Persons have not yet determined which, if any, of the above courses of action they may ultimately take.

15. LYONDELL Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Revlon duties do not arise simply because a company is “in play.” The duty to obtain best price arises only when the company itself embarks on a transaction that will result in a change of control.  Either on its own initiative or  In response to an unsolicited offer

16. Lyondell Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Bad Faith Breach of Duty of Loyalty Bad faith breach of duty of loyalty requires: a. subjective bad faith, actual intent to harm or b. a conscious disregard for one's responsibilities, lack of due care beyond mere gross negligence. Any ambiguity requires showing directors knew they were not discharging their fiduciary obligations

17. Shareholder Derivative Litigation Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann An action by shareholders to remedy an alleged wrong to the corporation.  A wrong by the directors or controlling shareholders or  A wrong by a third party, such as a supplier  The action is “founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff.” Daily Income Fund, Inc. v. Fox 464 US 523, 528 (1984)

18. Shareholder Derivative Litigation Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Two actions in one: A. A suit to compel the corporation to sue and B. A suit by the corporation (asserted by the shareholder –plaintiffs) against those liable to it

19. Shareholder Derivative Litigation Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann The stockholder’s right to litigate is secondary to the corporate right until such time as the corporation has refused to bring suit. So… Shareholder must first demand the corporation take action

20. Shareholder Derivative Litigation Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann In addition to demand requirement, shareholders filing derivative action must first post a bond to pay the defendants’ costs if the plaintiffs lose or abandon the litigation (in certain states); establish they are “adequate representatives” of the shareholder s in general and counsel is able to prosecute the action

21. Whose Ox Was Gored? Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Is the action “direct” or “derivative”? A direct action is available where  There is a special duty (such as a contract) between the shareholder and the wrongdoer.  The shareholder suffers injury “separate and distinct” from that suffered by other shareholders.

22. Direct vs. Derivative Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann ClaimDirectDerivative Δs conpired to deplete corporate assets√ Δs diverted corporate assets√ Δs paid dividends to only certain shareholders in class√√ Δs conduct caused share value to decline√ Δs diluted minority shares for benefit of majority s/h√ Δs refused to allow inspection of corporate records√ Δs prevented shareholder from voting√ Δs proposed action is ultra vires√ Δs wrongfully failing to dissolve the corporation√ Δs are acting fraudulently√

23. Demand Futility Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Demand requirement waived if “futile” Test is whether there is a reasonable doubt that  The directors are disinterested and independent (as to the action proposed by the plaintiff) and  The transaction being challenged was the product of the valid exercise of business judgment

24. The Corporate Response Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann BJR shields directors as to  1. Their response to the demand  2. Decision to dismiss the derivative suit  3. If suit is directed against them, the directors have the BJR shield as a defense.  PROVIDED:  1. Directors are disinterested as to any decision in question  2. The directors have not been grossly negligent with respect to their duty to inform themselves regarding the decisions(s)

25. Approaches to Demand Futility Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann Model Act: Absent a showing of irreparable harm if demand is required, a demand must always be made before a derivative action can be pursued. “Universal Demand.” New York: Demand required unless plaintiff shows:  1. Majority of board are not disinterested as to the transaction  2. Board did not inform themselves as to the transaction; or  3. Transaction is so egregious could not have resulted from sound business judgment.

26. Shareholder Derivative Litigation Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann Two actions in one: A. A suit to compel the corporation to sue and B. A suit by the corporation (asserted by the shareholder –plaintiffs) against those liable to it

27. The Corporate Response Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann Auerbach: BJR shields directors as to  1. Their response to the demand  2. Decision to dismiss the derivative suit  3. If suit is directed against them, the directors have the BJR shield as a defense.  PROVIDED:  1. Directors are disinterested as to any decision in question  2. The directors have not been grossly negligent with respect to their duty to inform themselves regarding the decisions(s)

28. The Rise of the ILC Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann Corp Gets Named in Shareholder Derivative Action (SDA) Board Votes to Create Independent Litigation Committee (ILC) Board Expands Itself to Add Members and appoints only new board members to be the ILC Corporation seeks Stay of SDA proceedings in court to “investigate” the merits of the SDA ILC “investigates” and reports back to the board that the SDA is not in “best interests of the corporation” Corp files motion to dismiss the SDA and/or for summary judgment along with report.

29. The “Structural Problem” of the ILC Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann The “Independent Litigation Committee”  Who appointed them?  What will the appointees be doing once the ILC disbands?  Whose Country Club do they belong to? Plaintiffs or defendants?  How do they feel about rabble-rousing shareholders?  “There but for the grace of God go I.”

30. Zapata Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann In balancing corporation’s right to avoid being hi- jacked by fringe shareholders with shareholders right to protect themselves from directors’ failure to act, In deciding corporation’s motion to dismiss derivative suit, court test the motion as follows: 1. First, was board (committee) independent and acting in good faith? 1. If no, motion shall be denied. 2. If passes that test, court may still test the decision applying the court’s own “business judgment” if court suspects corporation’s interests so require

31. The Limited Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann Aronson test re demand futility is operative  Complaint must allege with particularity facts raising reasonable doubt that  Directors had financial interest or  Directors were motivated by desire to remain in power (entrenchment) or  Directors were dominated or controlled by person interested in the transaction Test as to director’s independence is subjective:  Did that particular director lack independence under the circumstances?