Corporate Finance - DigitalCommons@NYLS

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Faculty Scholarship
2014
Corporate Finance
Jeffrey J. Haas
New York Law School
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WEST ACADEMIC PUBLISHING'S
LAW SCHOOL ADVISORY BOARD
JESSE H. CHOPER
Professor of Law and Dean Emeritus,
University of California, Berkeley
JOSHUA DRESSLER
Professor of Law, Michael E. Moritz College of Law,
The Ohio State University
YALE KAMISAR
Professor of Law Emeritus, University of San Diego
Professor of Law Emeritus, University of Michigan
MARY KAY KANE
Professor of Law, Chancellor and Dean Emeritus,
University of California,
Hastings College of the Law
LARRY D. KRAMER
President, William and Flora Hewlett Foundation
JONATHAN R. MACEY
Professor of Law, Yale Law School
ARTHUR R. MILLER
University Professor, New York University
Formerly Bruce Bromley Professor of Law, Harvard University
GRANT S. NELSON
Professor of Law, Pepperdine University
Professor of Law Emeritus, University of California, Los Angeles
A. BENJAMIN
SPENCER
Professor of Law, University of Virginia School of Law
JAMES J. WHITE
Professor of Law, University of Michigan
CORPORATE
FINANCE
by
Jeffrey J. Haas
Professor of Law
New York Law School
HORNBOOK SERIES®
t•WEST
ACADEMIC
PUBLISHING
Mat #41508833
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The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the
advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney 0r
other professional.
Hornbook Series is a trademark registered in the U.S. Patent and Trademark Office.
0 2014 LEG, Inc. d/b/a West Academic
444 Cedar Street, Suite 700
St. Paul, MN 55101
1-877-888-1330
We•t, West AcademicPublishing, and West Academic are trademarks of West Publishing Corporation, used under license.
Printed m the United States of America
ISBN: 978-0-314-28964-3
Preface
I was delighted when West asked me to expand my popular Nutshell on
Corporate Finance into a full-fledged hornbook. The opportunity allowed me to
address many additional important and incredibly interesting topics arising at the
intersection of finance and law. It also provided me with the chance to more fully
list and describe supporting materials through a fully footnoted format. I look
forward to producing future editions and expanding the topics covered. I truly hope
you find the final product insightful and helpful in your endeavors, whatever they
maybe.
JEFFREY J. HAAS
New York, New York
June 30, 2014
v
Abbreviations
ALI-PCG
American Law Institute's Principles of Corporate Governance:
Analysis and Recommendations (1994)
Bankruptcy
Code
Bankruptcy Reform Act of 1978, as amended (11 U.S.C. § 101 et
seq.)
CEA
Commodity Exchange Act of 1922, as amended (7 U.S.C. § 1 et seq.)
CERCLA
Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. § 9601 et seq.)
CFTC
Commodity Futures Trading Commission
DCF
Discounted Cash Flow (Valuation) Method
DDM
Dividend Discount (Valuation) Method
DGCL
Delaware General Corporation Law (Del. C. tit. 8, § 101 et seq.)
DIP
Debtor-in-possession under the Bankruptcy Code
Dodd-Frank
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (12 U.S.C. § 5301 et seq.)
ECMH
Efficient Capital Market Hypothesis
ERISA
Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1001
et seq.)
Exchange
Act
Securities Exchange Act of 1934, as amended (15 U.S.C. § 78a et
seq.)
Exchange
Act Rules
Rules promulgated by the SEC under the Exchange Act (1 7 CFR
Part 240)
Fannie Mae
Federal National Mortgage Association
FI NRA
Financial Industry Regulatory Authority
Freddie Mac
Federal Home Loan Mortgage Corporation
FV
Future value
GAAP
U.S. generally accepted accounting principles
vii
ABBREVIATIONS
viii
Ginnie Mae
Government National Mortgage Association
IPO
Initial public offering
IRC
Internal Revenue Code of 1986, as amended (26 U.S.C. § 1 et seq.)
LBO
Leveraged buy-out
M&A
Mergers and acquisitions
MBCA
Model Business Corporation Act
MBO
Management
MDIP
Model Debenture Indenture Provisions of the American Bar
Foundation (1971)
MNCRD
Model Negotiated Covenants and Related Definitions (61 Bus. Law.
1439 (2006))
NYBCL
New York Business Corporation Law (N.Y. Bus. Corp. Law§ 101 et
seq.)
NYSE
New York Stock Exchange
OTC
Over-the-counter
P&L
Profit and loss (statement)
PV
Present value
HMSI
Revised Model Simplified Indenture (55 Bus. Law. 1115 (2000))
SEC
Securities and Exchange Commission
Securities
Act
Securities Act of 1933, as amended (15 U.S.C. § 77a et seq.)
Securities
Act Rules
Rules promulgated by the SEC under the Securities Act (17 CFR
Part 230)
SOX
Sarbanes-Oxley Act of 2002
TIA
Trust Indenture Act of 1939, as amended (15 U.S.C. § 77aaa et seq.)
ucc
Uniform Commercial Code
buy-out
(market)
Summary
of Contents
Page
PREFACE
V
ABBREVIATIONS
VII
PART 1. VALUING THE GOING-CONCERN
CHAPTER 1. DISTINCTIONS BETWEEN PUBLICLY-TRADED AND
PRIVATELY-HELD COMPANIES
§ 1. Publicly-Traded Companies
§ 2. Privately-Held Companies
3
3
11
CHAPTER 2. WORKING WITH FINANCIAL STATEMENTS
§ 3. Introduction
§ 4. Accountants and the Audit Function
§ 5. Fundamental Financial Statements
21
21
22
25
CHAPTER 3. TIME VALUE OF MONEY
§ 6. Overview
§ 7. Interest Rate Components
§ 8. The Importance of the Federal Reserve
§ 9. Key Interest Rates
§ 10. Simple Interest Versus Compound Interest
39
39
40
.41
47
.49
CHAPTER 4. FUTURE VALUE AND PRESENT VALUE
§ 11. Future Value
§ 12. Present Value
51
51
53
CHAPTER 5. BOND VALUATION
§ 13. Introduction to Bond Valuation
§ 14. Inverse Relationship Between Interest Rates and Bond Values
§ 15. Calculating Yield to Maturity
§ 16. Zero Coupon Bonds
§ 17. Bond Market Pricing Terminology
61
61
61
65
66
66
CHAPTER 6. VALUING COMPANIES
§ 20. Cash Flow-Based Valuation Methods
69
70
74
76
CHAPTER 7. EFFICIENT CAPITAL MARKET HYPOTHESIS (ECMH)
§ 21. Overview
§ 22. ECMH in the Courtroom
83
83
85
§ 18. Balance Sheet-Based Valuation Methods
§ 19. Profit and Loss Statement-Based Valuation Methods
ix
x
SUMMARY OF CONTENTS
CHAPTER 8. VALUATION IN THE COURTROOM
§ 23. Appraisal or Dissenters' Rights
§ 24. Valuation by Agreement
§ 25. Valuation in Oppression Proceedings
§ 26. Valuation in Other Legal Contexts
89
89
102
104
108
PART 2. RISK AND RETURN
CHAPTER 9. MEASURES OF RISK
§ 27. Portfolio Theory
§ 28. Beta and the Capital Asset Pricing Model (CAPM)
113
113
114
CHAPTER 10. DERIVATIVE INSTRUMENTS
§ 29. Definition
§ 30. Speculation Versus Risk Reduction
§ :n. The Building Blocks of Derivatives
§ 32. Developments in the Derivatives Market..
119
119
119
120
138
PART 3. CLAIMANTS ON THE ENTERPRISE
CHAPTER 11. DEBT HOLDERS
§ :rn. The Use of Leverage (Debt) and Its Impact on Capital Structure
§ :!'1. Characteristics of Debt..
§
§
§
§
§
:J5. The Trust Indenture Act of 1939
:rn. Key Contractual Terms and Protective Provisions
:17. Legal Treatment of Debt Holders
38. Insolvency Reorganization
:39. Asset· Backed Securitization
157
157
161
1 70
175
189
202
215
§
§
§
§
HAPTER 12. PREFERRED STOCKHOLDERS
40. Overview
'11. Similarity to Debt and Equity
42. The Preferred Stock Contract..
4;3, Characteristics of Preferred Stock
§ 44. Fiduciary and Good Faith Duties
225
225
225
227
228
241
CHAPTER 13. CONVERTIBLE SECURITY HOLDERS
§ ·15. Economics of Convertible Securities
§ 46. Protecting the Conversion Right
249
249
255
CHAPTER 14. COMMON STOCKHOLDERS
§ 17. Characteristics of Common Stock
§ 18. Corporate Governance and Fiduciary Protections
§ 19. Declaration and Payment of Dividends and Distributions
§ !iO. Dilution and Preemptive Rights
§ 51. Stock Repurchases and Redemptions
§ !i2. Recapitalizations and Restructurings
267
267
268
280
297
302
305
SUMMARY OF CONTENTS
xi
PART 4. MERGERS AND ACQUISITIONS
CHAPTER 15. FUNDAMENTAL CONCEPTS
§ 53. Operating in a Regulatory Mine Field
§ 54. M&A Deal Structures
309
309
310
CHAPTER 16. FEDERAL LAW ASPECTS
§ 55. Introduction
§ 56. Proxy Regulation
§ 57. Federal Tender Offer Regulation-The Williams Act
339
339
339
343
CHAPTER 17. STATE LAW ASPECTS
§ 58. Introduction
§ 59. The Duty of Care and the Business Judgment Rule
§ 60. The Duty of Loyalty
§ 61. State Anti-Takeover Legislation
365
365
366
369
395
EXHIBIT I. FUTURE VALUE AND PRESENT VALUE FACTOR TABLES
399
EXHIBIT II. PROBLEMS INVOLVING FUTURE AND PRESENT VALUE
.403
TABLE OF CASES
421
TABLE OF STATUTES
425
INDEX
429
Table of Contents
Page
PREFACE
V
ABBREVIATIONS
VII
PART 1. VALUING THE GOING-CONCERN
CHAPTER 1. DISTINCTIONS BETWEEN PUBLICLY-TRADED
PRIVATELY-HELD COMPANIES
§ 1. Publicly-Traded Companies
A. Overview
B. Exchange Act Reporting Requirements
C. Pros and Cons of "Going Public"
(1) Pros
(2) Cons
§ 2. Privately-Held Companies
A. Generally
B. Closely-Held Companies
(1) Characteristics
(2) Control and Voting
(3) Stock Ownership and Transfer
a. Forced Resale Provisions
b. Restrictions on Transferability
c. Valuation by Agreement
CHAPTER 2. WORKING WITH FINANCIAL STATEMENTS
§ 3. Introduction
§ 4. Accountants and the Audit Function
A. Oversight Generally
B. Role of the Accountants
§ 5. Fundamental Financial Statements
A. Balance Sheet
(1) Introduction
(2) Components
a. Assets
b. Liabilities
c.
Shareholders' Equity
(3) Limitations of the Balance Sheet
(4) Working with the Balance Sheet
a. Rates of Return
b. Exposure to Debt
c.
Measures of Liquidity
(i) Working Capital
xiii
AND
3
3
3
5
8
8
10
11
11
13
13
14
15
15
15
19
21
21
22
22
23
25
25
25
25
25
25
26
27
28
28
28
29
29
TABLE OF CONTENTS
xiv
B.
C.
D.
(ii) Liquidity Ratios
Profit and Loss Statement
(1) Introduction
(2) Earnings Per Share (EPS)
(3) EBITDA
( 4) Measures of Profitability
Statement of Changes in Shareholders' Equity
Statement of Cash Flows
(1) Introduction
(2) Composition
(3) Measures of Liquidity
(4) Startup Companies and the "Burn Rate"
CHAPTER 3. TIME VALUE OF MONEY
§ 6. Overview
§ 7. Interest Rate Components
§ 8. The Importance of the Federal Reserve
A. Background
B. The Fed's Role in the Economy
(1) The Federal Funds Rate of Interest
(2) Open Market Operations
(3) Reserve Requirements
(4) Discount Rate
(5) The Financial Crisis of 2008 and Expanded Fed Powers
§ 9. Key Interest Rates
A. U.S. Treasury Instruments
B. Prime Rate
C.
LfBOR
§ I 0. Simple Interest Versus Compound Interest
A. Generally
B. Rule of 72s
C.
Rule of 110
29
30
30
32
33
33
34
36
36
36
37
37
39
39
40
41
41
42
42
43
43
44
.44
47
47
47
48
.49
49
50
50
CHAPTER 4. FUTURE VALUE AND PRESENT VALUE
§ 11. Future Value
§ 12. Present Value
A. PV of a Lump Sum
B. PV of an Annuity
(1) Ordinary ("Deferred") Annuity
(2) Annuity Due
C. Using PV to Determine Rate of Return
51
51
53
53
55
55
57
58
CHAPTER 5. BOND VALUATION
§ 1 :i. Introduction to Bond Valuation
§ l '1. I nverse Relationship Between Interest Rates and Bond Values
A. Lower Valuation When Interest Rates Increase
B. Higher Valuation When Interest Rates Decrease
61
61
61
62
63
64
64
C.
Predicting
(I)
Sensitivity
Sensitivity to Changing Interest Rates
TABLE OF CONTENTS
(2) Sensitivity to Changes in an Issuer's Creditworthiness
xv
§ 16. Zero Coupon Bonds
§ 17. Bond Market Pricing Terminology
65
65
66
66
CHAPTER 6. VALUING COMPANIES
§ 18. Balance Sheet-Based Valuation Methods
A. Book Value
B. Adjusted Book Value
C. Net Asset Value
§ 19. Profit and Loss Statement-Based Valuation Methods
§ 20. Cash Flow-Based Valuation Methods
A. Dividend Discount Method (DDM)
B. Discounted Cash Flow Method (DCF)
69
70
70
71
72
74
76
76
79
CHAPTER 7. EFFICIENT CAPITAL MARKET HYPOTHESIS (ECMH)
§ 21. Overview
§ 22. ECMH in the Courtroom
83
83
85
§ 15. Calculating Yield to Maturity
CHAPTER 8. VALUATION IN THE COURTROOM
§ 23. Appraisal or Dissenters' Rights
A. Background
B. Availability of the Appraisal Remedy
C. Perfection and Forfeiture of Appraisal Rights
D. Valuation in an Appraisal Proceeding
(1) Introduction
(2) Burden of Proof on Issue ofValuation
(3) Valuation Methodology
(4) Minority Discounts and Control Premiums
(5) Synergies and Other Benefits of the Merger
(6) Subsequent Events
(7) The Issue of Interest
E. Exclusivity of Appraisal Rights
§ 24. Valuation by Agreement
§ 25. Valuation in Oppression Proceedings
A. Introduction
B. Judicial Responses
C. Statutory Responses
§ 26. Valuation in Other Legal Contexts
89
89
89
89
91
92
92
93
93
95
97
98
99
101
102
104
104
105
106
108
PART 2. RISK AND RETURN
CHAPTER 9. MEASURES OF RISK
§ 27. Portfolio Theory
§ 28. Beta and the Capital Asset Pricing Model (CAPM)
A. Generally
B. The CAPM Formula
C. Alpha
D. CAPMAssumptions and Empirical Evidence
113
113
114
114
115
116
116
xvi
TABLE OF CONTENTS
CHAPTER 10. DERIVATIVE INSTRUMENTS
§ 29. Definition
§ 30. Speculation Versus Risk Reduction
§ 31. The Building Blocks of Derivatives
A. Options
(1) Overview
(2) Underlying Assets
(3) Types of Options
a. Call Option
b. Put Option
( 4) Expiration or Maturity Date
(5) Manner of Exercise
(6) Physical Settlement and Cash Settlement
(7) Setting Option Premiums
(8) Reducing Risk Through Options
(9) Using Options in Connection with Concentrated Equity Positions
a. Deep-in-the-Money Call Options
b. Cash-Settled Collars
c. Out-of-the-MoneyCall Options
(10) Exchange Traded Options
(11) Distinction from Warrants
B. Forward Contracts
(1) Overview
(2) Determining the Forward Price
a. Cost to Carry
b. Distributions
(3) Distinction from Options
(4) Counterparty Credit Risk
C. Futures Contracts
(1) Distinction from Forward Contracts
a. Cash Settlement
b. Standardized Contracts
c. Elimination of Counterparty Credit Risk
d. Daily Settlement
e. Margin Requirements
(2) Futures Markets
D. Swaps
(1) Overview
(2) Types of Swaps
(3) ISDA and the Standardization of Swap Contracts
(4) Credit Default Swaps and the Financial Crisis of 2008
§ :32. Developments in the Derivatives Market..
A. Abusive Use of Derivatives
B. Turf Wars
C. Regulatory Initiatives, the CFMA and Dodd-Frank
(1) Events Leading Up to the Commodity Futures Modernization Act
of 2000
119
119
119
120
120
120
120
121
121
122
122
123
123
124
125
125
126
127
129
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135
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TABLE OF CONTENTS
(2)
D.
Credit Default Swaps, the Financial Crisis of 2008 and Dodd-Frank's
Regulation of the Swap Market
a. Overview
b. Swaps Covered
c. Other Jurisdictional Allocations
d. Key Definitions and Definitional Matters
e. Clearing, Trading and Reporting
f.
Mandatory Trade Execution Requirements for Swaps
g. Business Conduct Requirements
h. Capital and Margin Requirements
i.
Position Limits and Large Swap Trader Reporting
j.
The Swaps Pushout Rule and Federal Assistance
Interpreting the Derivatives Contract
xvii
144
144
145
145
145
146
147
148
149
149
150
151
PART 3. CLAIMANTS ON THE ENTERPRISE
CHAPTER 11. DEBT HOLDERS
§ 33. The Use of Leverage (Debt) and Its Impact on Capital Structure
A. Overview
B. Pure Leverage Effect
C. Optimal Level of Debt
§ 34. Characteristics of Debt
A. Types of Debt Instruments
(1) Bonds
(2) Debentures
(3) Notes
B. Credit Rating Agencies
(1) Generally
(2) Regulation of Credit Rating Agencies
a. Introduction
b. Credit Rating Agency Reform Act of 2006
c.
Dodd-Frank
d. Downgrading the U.S.A
§ 35. The Trust Indenture Act of 1939
A. Introduction
B. Summary of the TIA
(1) Exemptions
(2) Qualification of the Indenture
(3) Trustee Eligibility Requirements
( 4) Conflicts of Interest
(5) Mandatory and Permissive Indenture Provisions
(6) Legal Actions by Debt Holders
C. Duties and Obligations of a Trustee Under the TIA
(1) Pre-Default Versus Post-Default
(2) Limitations on a Trustee's Liability
§ 36. Key Contractual Terms and Protective Provisions
A. The Promise to Pay and Provisions Designed to Support It
157
157
157
159
160
161
161
161
162
162
162
162
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165
166
166
169
170
170
1 70
171
1 71
172
172
1 73
173
174
174
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175
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TABLE OF CONTENTS
xviii
B.
Subordination
(1) Generally
(2) "Junk" Bonds
C. Covenants
(1) Affirmative Covenants
(2) Negative Covenants
a. Limitation on the Incurrence oflndebtedness
b. Restricted Payments
c. Asset Sales
d. Merger, Consolidation or Sale of All or Substantially All of the
Issuer's Assets
e. Dividend and Other Payment Restrictions on Subsidiaries
f.
Limitation on the Sale or Issuance of Stock of Subsidiaries
g. Transactions with Affiliates
h. Restrictions on Liens
J.
Limitation on Sale-Leaseback Transactions
J.
SEC Reports
k. Line of Business
(3) Financial Covenants
D. Redemption
(1) Optional Redemption
(2) Mandatory Redemption
E.
Events of Default
( 1) Generally
a. Default in the Payment of Interest or Principal
b.
Breach of a Covenant, Warranty or Representation
c. Bankruptcy/Insolvency
d. Cross-Default
(2) Acceleration
§ :l7. Legal Treatment of Debt Holders
A. Fiduciary Duties
(1) Generally
(2) Actual Insolvency and the "Zone" oflnsolvency
a. History
b.
Insolvency Entitles Creditors to Sue Derivatively
c. Exculpatory Charter Provision Works Against Creditors
B. Implied Covenant of Good Faith and Fair Dealing
C
Right to Sue
(1) Direct Actions
a. Payment Defaults
b.
Non-payment Defaults
c. Special Situations
(2) Derivative Actions
§ a8. I nsolvency Reorganization
Fraudulent Conveyance
B. Overview of a Chapter 11 Bankruptcy Proceeding
( 1) (h•nPrally
(2) The Rise of the Section 363(b) Asset Sale
176
176
177
178
178
178
178
180
180
181
182
182
183
183
183
184
184
184
185
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186
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194
197
197
197
197
199
200
202
202
203
203
205
TABLE OF CONTENTS
C.
D.
xix
Pre-Packaged Bankruptcies
Key Concepts in Bankruptcy
(1) Automatic Stay
(2) Preference
(3) Absolute Priority Rule and "Cramdown"
(4) New Value Exception
(5) Treatment of Secured Creditors
(6) Equitable Subordination
§ 39. Asset-Backed Securitization
A. Introduction
B. Mortgage-Backed Securities and the Financial Crisis of 2008
C. The Securitization Process
D. Risks Associated with Securitization
(1) Bankruptcy Remoteness
(2) "True Sale" Objections
a. Recourse
b. Retained Rights and Right to Surplus
c. Pricing Mechanism
d. Administration and Collection of Accounts
e. Miscellaneous Factors
(3) Fraudulent Transfer Concerns
( 4) Substantive Consolidation
E. Dodd-Frank's Credit Retention Requirements
208
210
210
210
211
212
214
214
215
215
216
217
218
219
219
220
221
221
221
221
221
222
222
CHAPTER 12. PREFERRED STOCKHOLDERS
§ 40. Overview
§ 41. Similarity to Debt and Equity
§ 42. The Preferred Stock Contract
§ 43. Characteristics of Preferred Stock
A. Preference Rights
(1) Dividend Preference
(2) Liquidation Preference
B. Noncumulative and Cumulative Preferred Stock
(1) Noncumulative Dividend Rights
(2) Cumulative Dividend Rights
C. General Terms of a Preferred Stock Contract
(1) Number of Shares and Price Per Share
(2) Yield
(3) Subordination
(4) Voting Rights
a. Generally
b. Contractual Right to Elect Directors
c.
Contractual Right to Approve Mergers and Related
Transactions
(5) Redemption Provisions
a. Optional Redemption
b. Mandatory Redemption
(6) Conversion Rights
225
225
225
227
228
228
228
228
229
229
231
232
232
232
232
233
233
233
235
237
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238
xx
TABLE OF CONTENTS
(7) Exchange Rights
(8) Participation Rights
(9) Affirmative and Negative Covenants
§ 4<1. Fiduciary and Good Faith Duties
239
239
240
241
CHAPTER 13. CONVERTIBLE SECURITY HOLDERS
§ 45. Economics of Convertible Securities
A. Generally
B. Investment Value and Conversion Value
C. Calling the Security
D. -Iustifications for Convertible Securities
§ 46. Protecting the Conversion Right
A. Introduction
B. Fiduciary Duties
C. Contractual Rights
(1)
Notice ofRedemption
(2) Antidilution
a. Cash Dividends
b. Forward and Reverse Stock Splits and Stock Dividends
c. "Cheap Stock"
d. Distribution of Evidences of Indebtedness and Assets
(3) Antidestruction
('1) Appraisal Rights
249
249
249
250
253
254
255
255
255
255
256
257
257
258
261
262
263
264
CHAPTER 14. COMMON STOCKHOLDERS
§ n Characteristics of Common Stock
§ 4 8. Corporate Governance and Fiduciary Protections
A. Corpora tc Governance
(1) Stockholders
(2) Directors
(3) Officers
B. Fiduciary Duties
(1) The Duty of Care
(2) The Duty of Loyalty
a. Self-Interested Transactions
b. Interlocking Directorate
c. Corporate Opportunities
d. Entrenchment
(:3) The Duty of Good Faith
§ '19. Declaration and Payment of Dividends and Distributions
A. Introduction
B. Legal Capital Rules
(1) Basic Theory
(2) Par Value
(3) Traditional Statutes
(t) New Model Statutes
C. Cash Dividends
(1) Overview
267
267
268
268
268
269
269
270
270
271
272
272
275
276
276
280
280
280
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284
285
285
TABLE OF CONTENTS
(2) Dividend Policy Theories
a. The Traditional Theory
b. The Irrelevance Theory
c.
The Tax Preference Theory
(3) Dividend Payment Process
D. Non-Cash Dividends and Stock Splits
(1) Generally
(2) Stock Dividends
(3) Stock Splits
a. Forward Stock Splits
b. Reverse Stock Splits
(4) Distinguishing Stock Dividends from Stock Splits on the Balance
Sheet
a. Stock Dividends
b. Stock Splits
E. Board's Discretion in Paying Dividends
§ 50. Dilution and Preemptive Rights
A. Value Dilution
B. Voting Dilution and Preemptive Rights
§ 51. Stock Repurchases and Redemptions
A. Overview
B. Stock Repurchases
(1) Generally
(2) Repurchases by Privately-Held Companies
(3) Repurchases by Publicly-Traded Companies
C. Stock Redemptions
§ 52. Recapitalizations and Restructurings
xxi
285
285
286
286
287
289
289
289
290
290
292
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PART 4. MERGERS AND ACQUISITIONS
CHAPTER 15. FUNDAMENTAL CONCEPTS
§ 53. Operating in a Regulatory Mine Field
§ 54. M&ADeal Structures
A. Overview
B. Acquisition or Purchase Transactions
(1) Asset Acquisitions
a. Cash-for-Assets Acquisition
(i) Generally
(ii) "All or Substantially All" Standard
b. Stock-for-Assets Acquisition
c.
Drawbacks to Asset Acquisitions
d. Successorship Issues in Asset Acquisitions
(2) Stock Acquisitions
a. Cash-for-Stock Acquisition
b. Stock-for-Stock Acquisition
C. Mergers, Consolidations and Statutory Exchanges
(1) Stock Swap (Stock-for-Stock) Statutory Mergers
(2) Cash-Out (Cash-for-Stock) Statutory Mergers
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D.
E.
F.
G.
(3) Triangular Mergers
(4) Approving a Merger
a. Board Approval
b. Stockholder Approval
(i) Small Scale Merger Exception
(ii) Short- Form Exception Under Section 253
(iii) Short-Form Exception Under New Section 251(h)
(iv) Holding Company Exception
(5) Statutory Exchanges
(6) Appraisal Rights
Conversions and Reincorporations
Leveraged Buy-Outs
Recapitalizations
(1) Strategic Recapitalizations
(2) Leveraged Recapitalizations
Restructurings
CHAPTER 16. FEDERAL LAW ASPECTS
§ 55. Introduction
§ 56. Proxy Regulation
A. Dual Federal and State Regulation
B. Federal Proxy Regulation
(1) Applicability and Filing Requirements
(2) Proxy Statement Disclosure
(3) Interaction with the Securities Act
(4) Liability Under Federal Proxy Rules
§ 57. Federal Tender Offer Regulation-The Williams Act
A. Overview
B. Terminology
C. What Is a Tender Offer?
D. Exchange Act Section 13(d) Trigger
E. Applicability of Exchange Act Regulations 14D and 14E
(1) Minimum Time Period
(2) Anti-Discrimination Rules
a. Pro Rata Treatment
b. All Holders Rule
c. Best Price Rule
d. Purchases Outside the Tender Offer
(3) Prohibition on Market Manipulation
F. Tender Offer Disclosure Documents
(1) Bidder's Disclosure
(2) Target's Disclosure
G. Issuer Tender Offers and "Going Private" Transactions
(1) Issuer Tender Offers
(2) "Going Private" Transactions
H. Interaction with the Securities Act
(1) Exchange Tender Offers
a. Generally
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b. Hostile Exchange Tender Offers
(2) Statutory Mergers and Asset Acquisitions
(3) Resales of Securities
CHAPTER 17. STATE LAW ASPECTS
§ 58. Introduction
§ 59. The Duty of Care and the Business Judgment Rule
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A. A Board's Decision to Sell the Company
B. A Board's Decision to Purchase a Company
§ 60. The Duty ofLoyalty
A. Transactions with Controlling Stockholders
(1) Entire Fairness Test-Generally
(2) "Cleansing" an Acquisition of a Minority Interest in a Controlled
Subsidiary
a. Long-Form Mergers
b. Tender Offer/Short-Form Merger Combination
(3) Applicability to Short-Form Mergers
(4) Sale of a Controlled Subsidiary to a Third Party
B. Which Directors Are "Conflicted"?
C. A Board's Decision to Sell the Company-Revlon Duties
D. Takeover Defenses and a Board's Ability to Adopt Them
(1) Takeover Defenses
a. Shark Repellent Charter Provisions
b. Poison Pills
c. Asset-Based Defensive Strategies
d. Liability-Based Defensive Strategies
(2) A Board's Ability to Adopt Takeover Defenses
§ 61. State Anti-Takeover Legislation
A. Anti-Takeover Statutes
B. Other State Statutes
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EXHIBIT I. FUTURE VALUE AND PRESENT VALUE FACTOR TABLES
399
EXHIBIT II. PROBLEMS INVOLVING FUTURE AND PRESENT VALUE
403
TABLE OF CASES
421
TABLE OF STATUTES
425
INDEX
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