Source: https://www.professorbainbridge.com/professorbainbridgecom/mergers-and-takeovers/page/2/
Timestamp: 2019-04-26 09:40:16+00:00

Document:
Mars, which is based in McLean, Va., and has $35 billion in annual sales, is the privately held maker of brands such as M&M’s, Snickers, Milky Way, Skittles, Dove chocolate and Wrigley’s gum.
What's the logic of bringing pet food and animal hospitals under one roof, especially when that roof is owned by a candy maker?
But if that's Mars' reasoning, it's a lousy business idea. We have been here before, after all.
Once upon a time, companies often made strategic acquisitions for the sake of diversification. But why would a company choose to diversify its business when shareholders can very cheaply diversify?
For example, back in the 1960s ITT made telephones and other communication equipment. They also ran some phone companies. Then they decided to become a conglomerate: a holding company that owned lots of different businesses. They bought: Hilton Hotels, Wonder Bread, a steamship line, and a host of other companies. None of which had anything to do with telephones or each other.
Why would they do this? The theory was that a recession-sensitive industrial company (like ITT) could buy a non-recession sensitive company (like Wonder Bread), making it stronger by enabling it to always have some division that was doing well.
But this made no sense as a business strategy. Diversification necessarily reduces the maximum gains a conglomerate can produce. When one segment is doing well, it is being pulled down by a segment that is doing less well.
Moreover, the theory only worked if good telephone company managers also make good bakery managers. But it simply wasn’t true that management expertise could be transferred from one industry to the other.
True, the company lowered its exposure to unsystematic risk by diversifying. But so what?
Investors could diversify away unsystematic risk in their own portfolios. Indeed, they can do it more cheaply, because they need not pay a control premium. Shareholders thus are not better off because of diversification. Management may be better off, because their employer is subject to less risk, but making themselves better off is not management’s job.
Economists generally now agree that the conglomerate mergers were very bad for the economy. Most are negative NPV transactions. Indeed, many of the hostile takeovers were de-conglomerations in which somebody bought up conglomerates cheaply (due to their depressed prices) and sold off the pieces at a profit.
Granted, Mars is a private company. But it's owners are now in the fourth generation and the company now has non-family managers. To the extent its shareholders are now mostly passive investors their situation is not all that different from public shareholders of an exchange listed conglomerate.
In Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court made clear that the board of directors of a target corporation is not a passive instrumentality in the face of an unsolicited tender offer or other takeover bid. To the contrary, so long as the target board's actions are neither coercive nor preclusive, the target's board remains the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders.
Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues that Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: on the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making; on the other hand, because directors are obligated to maximize shareholder wealth, there must be mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out cases in which directors have abused their authority from those in which directors have not.
Despite the long odds, Mr. McCausland prevailed, by winning on appeal at the Delaware Supreme Court. The case preserved the ability of companies to defend themselves against hostile takeovers, without input from shareholders.
Despite the mewling and howling from the takeover industry, activist hedge and pension funds, and their academic allies along the Acela corridor, courts have given boards the power to determine what is in the best interests of the company ... if only the board has the stomach for it.
Steven Davidoff Solomon has a great rundown of the complex structure of the Yahoo-Verizon transaction. But inquiring minds still want to know if there might be any Sharon Steel issues.
Did Trados' innovation of entire fairness result from opportunity cost conflicts?
In Opportunity-Cost Conflicts in Corporate Law, I explore a fundamental question: what precisely triggered fairness review in Trados? Early analysis of the case focused on differences between preferred and common cash flow rights. Analogizing to creditor-shareholder conflicts, these commentators noted that a fixed claimant (like a creditor) will have different incentives than a residual claimant (like a common shareholder). Fixed claimants may want to act conservatively in situations where residual claimants prefer rolling the dice. And so a director affiliated with a VC fund holding preferred stock may want to sell the company and collect the liquidation preference while common shareholders might instead want to attempt a risky turnaround with at least some prospect of return to common holders.
The preceding post comes to us from Abraham J. B. Cable, Associate Professor at the University of California Hastings College of the Law. The post is based on his article, which is entitled “Opportunity-Cost Conflicts in Corporate Law” and available here.
Personal pet peeve: What do "best efforts" and variants mean?
Which brings me to one of my pet peeves: Lawyers using "best efforts" and its variants without understanding its meaning.
Update: In an earlier version of the post, I inadvertently failed to credit the author of the study from which the summary chart was taken. With sincere apologies, I do so now: Kenneth A. Adams, Understanding “Best Efforts” And Its Variants (Including Drafting Recommendations). It's an extremely helpful guide that I strongly recommend.
Bottom line: Lawyers use these phrases without thinking about what they mean or how a court will interpret them.
What I tell my class is simple: Define the terms (unless you've got a really good strategic reason for not doing so that's been validated by at least two experienced M&A lawyers).
Is a sale of stock qualitatively different than a sale of other assets?
I had occasion today to be working on a project involving Katz v. Bregman, 431 A.2d 1274 (1981). As informed readers will now, of course, in it Plant Industries sold off a series of unprofitable divisions. When it proposed to sell one of its principal remaining subsidiaries, however, a shareholder sued claiming the transaction would entail a sale of all or substantially all the remaining assets. Through its various subsidiaries, the company had been in the business of manufacturing steel storage and shipping drums. Using the proceeds of its various sales, the company planned to go into the business of manufacturing plastic shipping and storage drums.
The legal issue presented was whether the transaction constituted a sale of substantially all Plant Industries’ assets, such that shareholder approval was required under DGCL § 271(a). In assessing whether shareholder approval was required, the Chancellor began with quantitative metrics. The subsidiary to be sold represented 51% of the firm’s remaining assets, which generated 44.9% of total revenues and 52.4% of pre-tax earnings. Turning to qualitative measures, the court opined that the planned switch from steel to plastic drums would be “a radical departure,” by which the corporation would sell off the core part of the business in order to go into an entirely new line of business. Taken together, the nature of the transaction, plus the fairly high percentage of assets being sold, satisfied the “all or substantially all” standard and shareholder approval therefore was required.
Here's the part that caught my eye. The court noted in passing that “in the case of Wingate v. Bercut (C.A. 9) 146 F.2d 725 (1945), in which the Court declined to apply the provisions of 8 Del.C. § 271, it was noted that the transfer of shares of stock there involved, being a dealing in securities, constituted an ordinary business transaction.” Should a sale of stock be treated any differently than a sale of any other asset?
There’s no obvious reason that a sale of stock should be treated differently than a sale of any other asset. Suppose Holding Corp. has three unincorporated divisions: Alpha (80% of Holding’s assets), Beta (10%), and Charlie (%%), with 5% consisting of headquarters assets. If Holding sells all of the assets of Alpha to a buyer, it is likely to be deemed a sale of substantially all Holding’s assets. Why should the answer change if the subsidiaries were separately incorporated and Holding sold all of the stock of Alpha?
Wingate is properly understood as holding that the stock in question, “although a principal asset of the Holding Company, was not ‘all its property and assets, including its good-will and corporate franchises’” on the facts of the specific case before it. It should not be understood as holding that sales of stock are somehow qualitatively different than sales of other assets.
 Wingate v. Bercut, 146 F.2d 725, 729 (9th Cir. 1944) (quoting the lower court decision).
When an acquirer spots red flags: Should Microsoft's board beware?
Satya Nadella, the Microsoft chief executive, may have abandoned his prudent approach.
His $26.2 billion deal to buy LinkedIn could reinvigorate the software giant’s slipping grip on corporate computer systems and employee interactions. Paying a nearly 50 percent premium for a flawed business raises several red flags, however.
Of course, this is a different situation than those in the Caremark lineage. Here we have an acquisition with potential red flags. Acquirer boards are rarely sued in M&A cases and almost never lose. Yet, there have been some red flag cases in the M&A context.
The 30% drop in LinkedIn's stock price since its high.
Well-publicized warnings about slowing growth.
Microsoft's history of overpaying in acquisitions.
The worst thing a board--acquirer or target--can do in the M&A context is to just rubber-stamp the CEO's plans. When the financial press is warning that "Concrete indications of the deal’s financial benefits are in worryingly short supply," the board needs to be especially careful in conducting a deliberative process.
... the print version uses a small format, so the figures are small, with small type. And the figures are a big part of the book. So go here for a PDF version of the figures; if you buy the print version of the book, you might want to consult a printout of the PDF. You’re welcome.

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