MA 2-25 2/25/14 9:27 AMAtheros:

Disclosure questions are really important now o What is said by the board to the sh

Danger in letting mgmt. do this?o CEO working for Qualcom: he has already set up his position;

maybe he won’t negotiate or get the best price possible Postpone actual terms of position and compensation until after the

agreement is reached on principal terms o Ideally you wait until merger agreement is signed, but at least

price and mgmt. succession Board moves forward engages a financial advisor

o They make it largely contingent (the fee) If you’re the board of the tgt: it will save you money if

the deal doesn’t progress Incentivizes Qualtalyst to do the deal

Protracted negotiations board is over it o They look at 11 other potential matches, and then narrow it

down to 2-3 Deal protections

o No solicitation clause, matching rights provision, termination fee (3.3% of total value of trxn)

Sufficient to stop a competing bid? NO Issues:

o Fee for the IB is contingent, they said that; but they didn’t say that it was 50x what they get paid if the deal didn’t go through

Why is this material: We are worried about the negotiation process

about whether to accept the deal price

o When you have this level of premium it is difficult to persuade sh to not approve the deal

You don’t anticipate that disclosure claims will dramatically effect voting by sh

Pg 9 o Disclosure claims:

Read the summary of what constitutes material information

Disclose: all that within the board’s control Burden of establishing materiality rests with P

Substantial likelihood that disclosure would have been viewed as having altered total mix of info avail (Northways)

If you make a misleading statement, you have to supplement

Duty to speak, and duty to speak fully, fairly and accurately

El Paso Pipeline business Exploration and Production (E and P) Complicated facts

o GS is the IB for both Morgan and El Paso GS owns 19% of Morgan and controls 2 board members GS partner that works for El Paso has a small

investment in Morgan's stock (340k) o CEO gone wild

Foshee is trying to do a LBO of E and P Trxns: sale of entire company, and a spin off of E and P

o Question for board: what is the best way to proceed? Fn 31

Olson vs. EB3 P is challenging the use of a top up option in an arms length 3rd

party merger o Top up option: stock option issued by the tgt that gives the

holder of a greater than 50% block, the ability to acquire 90% for the merger possibility

o Why want this? They can easily get to 90% and can do short form which saves time and money

Doesn’t req sh vote Cannot bring a breach of duty SH gets money sooner; this is super attractive

2nd step of merger happens faster Reduces potential risk that some bad event might occur

between the first trxn and the 2nd step trxn What is the downside of the top up option?

o They limit sh remedies to rights Breach of duty claim would now be moot

o Appraisal dilution P says that since they’re giving up 170 million shares

that it will dilute the sh shares and they try to exercise rights

Since you have to issue a chunk of new stock, the value of a sh in the company is going to decline and if I seek appraisal I will get a lower price

What does the court say? It isn’t a terribly strong claim; the appraisals

happen before the merger goes through 262h statutory claim: anything prior to the

consummation of the merger, anything done to facilitate, is excluded from calculation in an appraisal case

o The shares wouldn’t be counted o You can include language that simply

excludes them in the merger agreement

Deal price exceeding the appraisal value of the stock?o Percentage of reduction in agency costs o Court: it is very likely that any addtl shares issued, if counted

as part of appraisal would actually lead to an increase in the appraised value of a sh stock

o But they don't address: If I know that I only need 51% of a tgt’s stock, and that I

can expect based on sh valuation of shares that some value it higher than others (supply curve is upward sloping), I might be able to get this %age at 15/sh, but if I want 80% Id have to raise my premium to like, 20/sh

Could lead to lower premiums in trxn Specific problem in the case:

o In the option there was a pay for “by promissory note” and the terms of this note were really vague

DE requires that you have to have concrete terms for payment/repayment

Pg 22 Here they didn't specify the terms here at all

Why? Short time frame The amt of shares issued: 22 million

Which is a shit ton So potentially the buyer might have to come

up with at least awhile, a large amt of money

So they need to have a meeting §152 of the board So they meet, and they pass a resolution

authorizing the issuance in the appropriate manner

P gets a substantial fee for their work in doing this

What is the justification?o These problems were a big deal and

they could have invalidated the short form merger, so they prevented a legal battle the company saved money in the long run, so they should pay out this million dollars

These are very common, used in almost all trxn now

Openlane Control block of stock

o Openlane thinks their mkt will deteriorate in the future, and the sh decide to initiate a sale

90 million bid: considered and rejected December: still considering sale, but not an actual

valuation performed Range of values is really large

Not useful information 2nd Company A bid: rejected as well May: KAR makes a higher bid

Written indication of interest between 200-210 million

Not what the board wants counter … Board contacts another buyer Company B: 200

million offer they won’t raise June: KAR and openlane enter into an exclusivity

agreement August: They reach an agreement about doing a deal

merger agreement executed maj of stock executes a consent approving trxn

Consent: a vote before the vote; it is basically a done deal at this point

Maj of sh would vote yes Independent action

Waivable condition: at least 75% of sh execute consents

Satisfied o How do you treat stock options that are unvested when a

company is acquired in a merger trxn They accelerate and conditions eliminate (all options

become exercisable at what the price would have been if they had been vested) when the change of control actually happens

From executive perspective this could be a windfall gain

This is universal, but does it create some kind of conflict because execs have an incentive at this point to do a deal?

7/8 board members didn’t even have their options accelerated

Not a domination and control issue (the 1 board dude)

It doesn’t contaminate all the other directors

Incentives: Court isn’t concerned It seems to view it as a positive things We want deals to happen

o Part of the deal price is stuck in an escrow account Escrow account: it puts money that you’d be paying into

a third party hands to control released based on conditions antecedent

Double edged sword: the acquirer will like this because it gives them a

way to take back some of the consideration if something fails

tgt: delays receipt of consideration

if acquirer has a lot of reservations about tgt value, they might pay more up front if they have an assurance that if a bad event happens they won’t be out additional money

Can serve a valuable function Why are they almost never used in public co deals?

Greater knowledge and more info in the mkt in a public co deal

o Strict no solicitation provision This is pretty weird

You want to get the best price, when selling (Revlon), so you would want to see what others are willing to pay

Look at Omni Care: it is a forced deal that sh have no way to get out of

o Why is this a Revlon case? They initiate a sale process

Although this isn’t a CoC process SH will not have a subsequent opp to get a control

premium Assume that block held by board is a control block

Do minority sh expect a CoC premium: no; because they have control right now

o Basic Revlon claims of sh Nonsolicitation sucks They didn't like the number of companies negotiated

with No financial buyers considered Whether the board satisfied its oblig to be informed abt

the value of the co No mkt test (no go shop) No auction

But the court says that they’re informed: they have an impeccable knowledge of value of co

But the sh are actively involved in mgmt. of company, this is super probative about value

The control block is owned by the ppl running the company --> they're well informed since they’re hands on in control as opposed to the common board

Private equity firm Helps them know what price a financial

buyer would be willing to give them This is an independent way/expertise

valuation ability o Not a classic candidate for an LBO; so

they really only focus on strategic bidders

This is the opposite of what we almost always see; mgmt. always wants PE bidders because it figures it will be hired by them post trxn

Omnicare: Why isn’t the no solicitation and lock up invalid

under Unocal? Voting consents not actually linked to

agreement itself They only need a one day no solicitation

period here; that is super briefo The likelihood of anything happening

in this window is pretty close to zero The fact that the co has the

right to walk during this window makes a difference in terms of its ability to do an alt trxn if something should happen before consent

Ancestry: Chancery court opinions are rad. 12 parties confidentiality agreements with Ancestry as a

condition to undertaking due diligence o These contain standstill restrictions

I wont be hostile and etc. o Don’t ask don’t waive provisions

Prohibits the prospective buyer for a period of usually a year, from directly or indirectly requesting the board to waive the standstill provisions unless they are expressly invited to do so by the board

Only 3 highest bidders advance to the 2nd round o Ultimately a PE firm was the winner 32/sh bid cash

Complicating fact: IB for board, based on mgmt. projections we cannot issue a fairness opinion

o But mgmt. projections usually have at least a little bit of credibility

o Mgmt promptly revises them, lowers them, they IB uses these to give a fairness opinion

P files suit challenging reasonableness o Don’t ask don’t waive precludes the board impermissibly from

being fully informed about possible superior offers since the effect is to knock out topping bids

o The use of the revised projections for fairness opinion Don’t ask don’t waive is invalid

o They impermissibly limit stat and fid obligations to properly evaluate competing offers; because they preclude losing bidders from making topping bids

Per se invalid Strine shows up:

o They shouldn’t be per se invalid, there could be circumstances that they could be used to max sh value

Could be used to force bidders to make best bid in initial round of bids

o However, you evaluate them on a case by case basis because it could be the case that boards like in Ancestry, weren’t informed by counsel of the effect of the provision and in some cases maybe counsel didn’t know the effect themselves so that if the board was uninformed it might be precluding addtl bids

Damages still unlikely because of 102b7 Disclosure holding

o Strine says that if you use these things you’ve got to make full disclosure about them to your shareholders, and the board didn’t do that, proxy statement deficient, deal enjoined until curative disclosures happen

o Strine doesn't like the revised projections, he enjoins them, this isn’t disclosed either

2/25/14 9:27 AM

2/25/14 9:27 AM