Business Law

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Quiz 41 :

Mergers and Takeovers

Quiz 41 :

Mergers and Takeovers

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A QUESTION OF ETHICS: Purchase of Stock. Topps Co. makes baseball and other cards, including the Pokemon collection, and distributes Bazooka bubble gum and other confections. Arthur Shorin, the son of Joseph Shorin, one of Topps's founders and the inspiration for "Bazooka Joe" (a character in the comic strip wrapped around each piece of gum), worked for Topps for fifty years and had served as its board chair and chief executive officer since 1980. Shorin's son-in-law, Scott Silverstein, served as Topps's president and chief operating officer. When Topps's financial performance began to lag, the board considered selling the company. Michael Eisner (formerly head of Disney Studios) offered to pay $9.75 per share and to retain Topps's management in a merger with his company. Upper Deck Co., Topps's chief competitor in the sports-card business, offered $10.75 per share but did not offer to retain the managers. Topps demanded that Upper Deck not reveal its bid publicly, but Topps publicized the offer, without accurately representing Upper Deck's interest and disparaging its seriousness. Upper Deck asked Topps to allow it to tell its side of events and to make a tender offer to Topps's shareholders. Topps refused and scheduled a shareholder vote on the Eisner offer. Topps's shareholders filed a suit in a Delaware state court against their firm, asking the court to prevent the vote. [ In re Topps Co. Shareholders Litigation, 926 A.2d 58 (Del.Ch. 2007)] (a) The shareholders contended that Topps's conduct had "tainted the vote." What factors support this contention? How might these factors affect the vote? (b) Why might Topps's board and management be opposed to either of the offers for the company? Is this opposition ethical? Should the court enjoin (prevent) the scheduled vote? Explain.
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a). Taint the Vote:
In the case In re Topps Co. Shareholders Litigation, 926 A.2d 58 (Del.Ch. 2007) the Court granted the motion for a preliminary injunction was granted.
The stockholders contended that the Merger vote was tainted by Topps's failure to disclose material facts about the process that led to the Merger Agreement and about Topps's subsequent dealings with Upper Deck.
The stockholders also argued that Topps denied them the chance to decide which bid to accept.
b). Board and Management Opposition:
Some of the Directors for Topps opposed the Eisner Merger because of their issues with the way it was negotiated. They contended that they were not given an opportunity to review or comment on the company's disclosures about it, including the undisputed facts that were not in the proxy statement.
Basically, the board and management would be opposed to any change in ownership because change means cuts. If Upper Deck's offer were accepted it did not stipulate what changes would be incumbent in the takeover. Upper Deck could have completely replaced management and the board with its own people.
Further, there was concern about how Topps would be run. The incumbent directors wanted to help Shorin preserve his influence over the business that his family started through his son-in-law Silverstein. It is highly likely that Upper Deck has its own plans for the future of the company.
Additionally, a change in ownership could negatively impact the share value and the reputation of the business. In this case a proper market valuation was not performed, so the value of the shares could have been different than the offer.

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Corporate Dissolution Trans-System, Inc. (TSI), is an interstate trucking business. In 1994, to provide a source of well-trained drivers, TSI formed Northwestern Career Institute, Inc., a school for persons interested in obtaining a commercial driver's license. Tim Scott, who had worked for TSI since 1987, was named chief administrative officer and director. Scott, a Northwestern shareholder, disagreed with James Williams, the majority shareholder of both TSI and Northwestern, over four equipment leases between the two firms under which the sum of the payments exceeded the value of the equipment by not more than $3,000. Under four other leases, payments were $40,000 less than the value of the equipment. Scott also disputed TSI's one-time use, for purposes unrelated to the driving school, of $125,000 borrowed by Northwestern. Scott was terminated in 1998. He filed a suit in a Washington state court against TSI, seeking, among other things, the dissolution of Northwestern on the ground that the directors of the two firms had acted in an oppressive manner and misapplied corporate assets. Should the court grant this relief?If not, what remedy might be appropriate? Discuss. [ Scott v. Trans-System, Inc., 148 Wash.2d 701, 64 P.3d 1 (2003)]
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Corporate Dissolution:
In the case Scott v. Trans-System,, Inc. , 148 Wash.2d 701, 64 P.3d 1 (2003) the court awarded double damages to Scott for back wages and attorney fees. The Court of Appeals affirmed the dissolution.
The court gave Scott and TSI the opportunity to create a mutually agreeable settlement in order to avoid the judicial dissolution of Northwestern. After the parties were unable to reach an agreement, the trial court determined the requirements of RCW 23B.14.300(2)(b) and (d) had been met.
The court determined that Northwestern should be dissolved because the directors of Northwestern and TSI had acted in an oppressive manner and misapplied or wasted corporate assets. 
Among the inappropriate activities perpetrated by TSI include TSI's decision to borrow against Northwestern's line of credit while requiring Northwestern to fund the interest payments, as well as the the four inequitable equipment lease agreements. 
Therefore, the court was within its authority to grant the dissolution of Northwestern as appropriate relief.

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CASE PROBLEM WITH SAMPLE ANSWER: Dissolution. Clara Mahaffey operated Mahaffey's Auto Salvage, Inc., in Dayton, Ohio, as a sole proprietorship. In 1993, Kenneth Stumpff and Mahaffey's son , Richard Harris, joined the firm. Stumpff ran the wrecker and bought the vehicles for salvage. Harris handled the day-to-day operations and the bookkeeping. They became the company's equal 50 percent shareholders on Mahaffey's death in 2002. Harris, who inherited the land on which the firm was located, increased the rent to $1,500 per month. Within two years of Mahaffey's death, and without consulting Stumpff, Harris raised the rent to $2,500. Stumpff's wife died, and he took a leave of absence, during which the company paid him $2,500 a month and provided health insurance. After two years, Harris stopped the payments, discontinued the health benefits, and fired Stumpff, threatening to call the police if he came on the premises. Stumpff withdrew $16,000 from the firm's account, leaving a balance of $113. Harris offered to buy Stumpff's interest in the business, but Stumpff refused and filed a suit in an Ohio state court against Harris. A state statute permits the dissolution of a corporation if the owners are deadlocked in its management. Should the court order the dissolution of Mahaffey's? Why or why not? [ Stumpff v. Harris, ___ N.E.2d ___ (Ohio App. 2006)]
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Dissolution:
In the case Stumpff v. Harris, ___N.E.2d ___, 2d Dist. Montgomery No. 21407, 2006-Ohio-4796 the court issued a judgment that included an order to dissolve Mahaffey's. The state intermediate appellate court upheld the lower court's order.
The court stated that the decision to order the judicial dissolution of Mahaffey's, Inc., required that Harris and Stumpff were deadlocked in the management of the corporate affairs.
Harris requested that the corporation be dissolved, while Stumpff opposed the dissolution. Moreover Harris and Stumpff were unable to work together as was evidenced by the firing and unilateral withdraw of funds.
Therefore, the court did not err when it ordered judicial dissolution of Mahaffey's pursuant to R.C. 1701.91(D).

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Corporate Takeover Alitech Corp. is a small midwestern business that owns a valuable patent. Alitech has approximately 1,000 shareholders with 100,000 authorized and outstanding shares. Block Corp. would like to have the use of the patent, but Alitech refuses to give Block a license. Block has tried to acquire Alitech by purchasing Alitech's assets, but Alitech's board of directors has refused to approve the acquisition. Alitech's shares are selling for $5 per share. Discuss how Block Corp. might proceed to gain the control and use of Alitech's patent.
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In November 2005, Mario Bonsetti and Rico Sanchez incorporated Gnarly Vulcan Gear, Inc. (GVG), to manufacture windsurfing equipment. Bonsetti owned 60 percent and Sanchez owned 40 percent of the corporation's stock, and both men served on the board of directors. In January 2009, Hula Boards, Inc., owned solely by Mai Jin Li, made a public offer to Bonsetti and Sanchez to buy GVG stock. Hula offered 30 percent more than the market price per share for the GVG stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the third member of the GVG board of directors. In April 2011, an irreconcilable dispute arose between Bonsetti and Sanchez over design modifications of their popular Baked Chameleon board. Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, despite Bonsetti's dissent. Gnarly Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information presented in the chapter, answer the following questions. Suppose that after the merger, a person who was injured on a Baked Chameleon board sued Hula (the surviving corporation). Can Hula be held liable for an injury? Why or why not? DEBATE THIS: Corporate law should be altered to prohibit incumbent management from using most currently legal methods to fight takeovers.
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Corporate Acquisitions Gretz is the chair of the board of directors of Faraday, Inc., and Williams is the chair of the board of directors of firebrand, Inc. Faraday is a manufacturing corporation, and Firebrand is a transportation corporation. Gretz and Williams meet to discuss the possibility of combining their corporations and activities into a single corporate entity. They consider two alternative courses of action: (1) Faraday acquires all of the stock and assets of Firebrand, or (2) the two corporations combine to form a new corporation, Farabrand, Inc. Both chairs are concerned about the necessity of a formal transfer of property, liability for existing debts, and the need to amend the articles of incorporation. Explain what the two proposed combinations are called, and discuss the legal effect each has on the transfer of property, the liabilities of the combined corporations, and the need to amend the articles of incorporation.
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Successor Liability In 2004, the Watergate Hotel in Washington, D.C., obtained a loan from PB Capital. At this time, hotel employees were represented by a union (see Chapter 34), and under a collective bargaining agreement, the hotel agreed to make contributions to an employees' pension fund run by the union. In 2007, the hotel was closed due to poor business, although the owner stated that the hotel would reopen in 2010. Despite this expectation, PB Capital-which was still owed $40 million by the hotel owner-instituted foreclosure proceedings (see Chapter 31). At the foreclosure sale, PB Capital bought the hotel and reopened it under new management and with a new workforce. The union sued PB Capital, contending that it should pay $637,855 owed by the previous owner into the employees' pension fund. Should PB Capital, as the hotel's new owner, have to incur the previous owner's obligation to pay into the pension fund under the theory of successor liability? Why or why not? [ Board of Trustees of Unite Here Local 25 v. MR Watergate, LLC , 677 F.Supp.2d 229 (D.D.C. 2010)]
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In November 2005, Mario Bonsetti and Rico Sanchez incorporated Gnarly Vulcan Gear, Inc. (GVG), to manufacture windsurfing equipment. Bonsetti owned 60 percent and Sanchez owned 40 percent of the corporation's stock, and both men served on the board of directors. In January 2009, Hula Boards, Inc., owned solely by Mai Jin Li, made a public offer to Bonsetti and Sanchez to buy GVG stock. Hula offered 30 percent more than the market price per share for the GVG stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the third member of the GVG board of directors. In April 2011, an irreconcilable dispute arose between Bonsetti and Sanchez over design modifications of their popular Baked Chameleon board. Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, despite Bonsetti's dissent. Gnarly Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information presented in the chapter, answer the following questions. What is the term used for Hula's offer to purchase GVG stock? By what method did Hula acquire control over GVG? DEBATE THIS: Corporate law should be altered to prohibit incumbent management from using most currently legal methods to fight takeovers.
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Successor Liability In January 1999, General Star Indemnity Co. agreed to insure Indianapolis Racing League (IRL) race cars against damage during on-track accidents. In connection with the insurance, General Star deposited $400,000 with G Force, LLC (GFCO), a Colorado firm, to enable it to buy and provide parts for damaged cars without delay. GFCO agreed to return any unspent funds. Near the end of the season, Elan Motorsports Technologies (EMT) acquired GFCO. In 2000, EMT incorporated G Force, LLC, in Georgia (GFGA), and GFCO ceased to exist. GFGA renewed the arrangement with General Star and engaged in the same operations as GFCO, but EMT employees conductedGFGA's business at EMT's offices. In 2002, EMT assumed ownership of GFGA's assets and continued the business. EMT also assumed GFGA's liabilities, except for the obligation to return General Star's unspent funds. General Star filed a suit in a Georgia state court against EMT, seeking to recover its deposit. What is the rule concerning the liability of a corporation that buys the assetsof another? Are there exceptions? Which principles apply in this case? Explain. [ General Star Indemnity Co. v. Elan Motorsports Technologies, Inc., 356 F.Supp.2d 1333 (N.D.Ga. 2004)]
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In November 2005, Mario Bonsetti and Rico Sanchez incorporated Gnarly Vulcan Gear, Inc. (GVG), to manufacture windsurfing equipment. Bonsetti owned 60 percent and Sanchez owned 40 percent of the corporation's stock, and both men served on the board of directors. In January 2009, Hula Boards, Inc., owned solely by Mai Jin Li, made a public offer to Bonsetti and Sanchez to buy GVG stock. Hula offered 30 percent more than the market price per share for the GVG stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the third member of the GVG board of directors. In April 2011, an irreconcilable dispute arose between Bonsetti and Sanchez over design modifications of their popular Baked Chameleon board. Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, despite Bonsetti's dissent. Gnarly Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information presented in the chapter, answer the following questions. Could the parties have used a short-form merger procedure in this situation? Why or why not? DEBATE THIS: Corporate law should be altered to prohibit incumbent management from using most currently legal methods to fight takeovers.
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Purchase of Assets Paradise Pools, Inc. (PPI), also known as "Paradise Pools and Spas," was incorporated in 1981. In 1994, PPI entered into a contract with Bromanco, Inc., to build a pool in Vicksburg, Mississippi, as part of a Days Inn Hotel project being developed by Amerihost Development, Inc. PPI built the pool, but Bromanco, the general contractor, defaulted on other parts of the project, and Amerihost completed the construction itself. Litigation ensued in Mississippi state courts, and Amerihost was awarded $12,656.46 against PPI. Meanwhile, Paradise Corp. (PC) was incorporated in 1995 with the same management as PPI, but different shareholders. PC acquired PPl's assets in 1996, without assuming its liabilities, and soon became known as "Paradise Pools and Spas." Amerihost obtained a writ of garnishment against PC to enforce the judgment against PPI. PC filed a motion to dismiss the writ on the basis that it was "not a party to the proceeding." Should the court dismiss the case? Why or why not? [ Paradise Corp. v. Amerihost Development, Inc., 848 So.2d 177 (Miss. 2003)]
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In November 2005, Mario Bonsetti and Rico Sanchez incorporated Gnarly Vulcan Gear, Inc. (GVG), to manufacture windsurfing equipment. Bonsetti owned 60 percent and Sanchez owned 40 percent of the corporation's stock, and both men served on the board of directors. In January 2009, Hula Boards, Inc., owned solely by Mai Jin Li, made a public offer to Bonsetti and Sanchez to buy GVG stock. Hula offered 30 percent more than the market price per share for the GVG stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the third member of the GVG board of directors. In April 2011, an irreconcilable dispute arose between Bonsetti and Sanchez over design modifications of their popular Baked Chameleon board. Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, despite Bonsetti's dissent. Gnarly Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information presented in the chapter, answer the following questions. What rights does Bonsetti have (in most states) as a minority shareholder dissenting to the merger of GVG and Hula Boards? DEBATE THIS: Corporate law should be altered to prohibit incumbent management from using most currently legal methods to fight takeovers.
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QUESTION WITH SAMPLE ANSWER: Corporate Merger. Alir owns 10,000 shares of Ajax Corp. Her shares represent a 10 percent ownership in Ajax. Zeta Corp. is interested in acquiring Ajax in a merger, and the board of directors of each corporation has approved the merger. The shareholders of Zeta have already approved the acquisition, and Ajax has called for a shareholders' meeting to approve the merger. Alir disapproves of the merger and does not want to accept Zeta shares for the Ajax shares she holds. The market price of Ajax shares is $20 per share the day before the shareholder vote and drops to $16 on the day the shareholders of Ajax approve the merger. Discuss Alir's rights in this matter, beginning with the notice of the proposed merger.
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Purchase of Assets Grand Adventures Tour Travel Publishing Corp. (GATT), a Texas corporation, provided travel services to interliners (airline employees). Duane Boyd was a GATT director when the firm hired him as an unpaid consultant to address its financial problems. Consequently, Boyd resigned his directorship and made loans to GATT for security interests in its assets. GATT defaulted on the loans. Boyd incorporated Interline Travel Tour, Inc., and transferred all rights under his loans to GATT to Interline. At a public sale, Interline bought GATT's assets. Interline moved into GATT's office building, began to provide travel services to GATT's customers, and hired former GATT employees. Another GATT creditor, Call Center Technologies, Inc., fi led a complaint in a federal district court to collect the unpaid amount on a contract with GATT from Interline. Is Interline liable? Why or why not? [Call Center Technologies, Inc. v. Grand Adventures Tour Travel Publishing Corp., 635 F.3d 48 (2d Cir. 2011)]
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