chapter 22 duties within corporate groups

Corporations:A Contemporary Approach

Chapter 22Duties within Corporate Groups

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• 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


Chapter 21Executive Compensation

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Review of fiduciary duties …(directors)


Chapter 21Executive Compensation

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Fiduciary duties(directors)

OversightDecision-making

Bestinterests

Business Judgment RuleShlensky v Wrigley

Inattention Conflictinterest Remillard

Grossnegl

Van Gorkom

WasteAronson / Vogelstein

Corpopp

Farber

IllegalityMiller v AT&T (Allis-Chalmers)

Malfeasance(bad faith)

Francis

IllegalityCaremark Bad faith

Disney

Disinterestedindependent

Benihana

102(b)(7)

102(b)(7)



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Corporate groups

SubsidiaryCompany

ParentCompany

SubsidiaryCompany

SubsidiaryCompany

ShareholdersAffiliate?

Wholly-owned vs.Partially-owned sub?

Public shareholders



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Corporate groups

SubsidiaryCompany

ParentCompany

SubsidiaryCompany

SubsidiaryCompany

Shareholders

Division Division

Difference betweendivision / sub?



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Corporate groups

SubsidiaryCompany

ParentCompany

SubsidiaryCompany

SubsidiaryCompany

Shareholders

Public shareholders

How much necessaryfor control?



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Law of corporate groups …



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Sinclair Oil v. Levien (Del 1971)

Issues

• Dividend policy• Intra-group dealings• Allocation of business

opportunities



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Sinclair Venezuelan

Sinclair Oil

SinclairInternational

SinclairAlaska

Shareholders

Minority public shareholders

Dividendpolicy



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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



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Sinclair Venezuelan

Sinclair Oil


SinclairAlaska

Shareholders


Intra-enterpriseContract



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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.




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Sinclair Venezuelan

Sinclair Oil


SinclairAlaska

Shareholders


Business opportunity



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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. ...




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Cash-out mergers

• “Cash out” merger? • Reasons for squeezing out minority? • Standard of review? • Remedies?



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Cash-out merger (Weinberger)

Get rid of minority?(legally)

UOP

Signal Companies

Shareholders

Minorityshareholders

50.5% 49.5%



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Cash-out merger (Weinberger)

UOP

Minorityshareholders

Merger

Cash

SignalCompanies

Signal Companies

Shareholders Shareholders

= +

UOP

What protection?100%

MergerSub



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Standard of review …

Business purposeFair price (intrinsic fairness)

Entire fairness



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"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?




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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?



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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.



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How much $$ …(which valuation method?)



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Delaware black method

Court Proportion Weight

Avg earnings $120 55% $66.00

Book value $100 35% $35.00

Market value $75 10% $7.50

TOTAL $108.50



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"... 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 ... "




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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 $39,176 ..... ..... ..... Year 19: $ 8,175 $19,787 Year 20: $ 7,432 $18,844

TOTAL $425,678 $623,111



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Discounts in appraisal …(remember minority lacked control)



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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

EnterpriseValue



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discount?

Pro rata(minority)

$50 million



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discount?

Lack ofcontrol

$35 million



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discount?

Lack ofcontrol

$20 million

Lack ofmarketability



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The end

chapter 22 duties within corporate groups

Documents

corporate groupsslide

corporate groupscorporations

contemporary approachchapter

corporate groups control

necessaryfor control

executive compensationslide

dividend policyif

owned sub