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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 r~ c ; , ! (/ jlf]t ~q /f- ;:'I ',..,.. 'i {1/

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 Academic Publishing, 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 Bankruptcy Reform Act of 1978, as amended (11 U.S.C. § 101 et Code 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 Securities Exchange Act of 1934, as amended (15 U.S.C. § 78a et Act seq.)

Exchange Rules promulgated by the SEC under the Exchange Act (1 7 CFR Act Rules 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 viii ABBREVIATIONS

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 buy-out 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 (market)

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 Securities Act of 1933, as amended (15 U.S.C. § 77a et seq.) Act

Securities Rules promulgated by the SEC under the Securities Act (17 CFR Act Rules 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 Summary of Contents

Page

PREFACE V

ABBREVIATIONS VII

PART 1. VALUING THE GOING-CONCERN

CHAPTER 1. DISTINCTIONS BETWEEN PUBLICLY-TRADED AND PRIVATELY-HELD COMPANIES 3 § 1. Publicly-Traded Companies 3 § 2. Privately-Held Companies 11

CHAPTER 2. WORKING WITH FINANCIAL STATEMENTS 21 § 3. Introduction 21 § 4. Accountants and the Audit Function 22 § 5. Fundamental Financial Statements 25

CHAPTER 3. TIME VALUE OF MONEY 39 § 6. Overview 39 § 7. Interest Rate Components 40 § 8. The Importance of the Federal Reserve .41 § 9. Key Interest Rates 47 § 10. Simple Interest Versus Compound Interest .49

CHAPTER 4. FUTURE VALUE AND PRESENT VALUE 51 § 11. Future Value 51 § 12. Present Value 53

CHAPTER 5. BOND VALUATION 61 § 13. Introduction to Bond Valuation 61 § 14. Inverse Relationship Between Interest Rates and Bond Values 61 § 15. Calculating Yield to Maturity 65 § 16. Zero Coupon Bonds 66 § 17. Bond Market Pricing Terminology 66

CHAPTER 6. VALUING COMPANIES 69 § 18. Balance Sheet-Based Valuation Methods 70 § 19. Profit and Loss Statement-Based Valuation Methods 74 § 20. Cash Flow-Based Valuation Methods 76

CHAPTER 7. EFFICIENT CAPITAL MARKET HYPOTHESIS (ECMH) 83 § 21. Overview 83 § 22. ECMH in the Courtroom 85

ix x SUMMARY OF CONTENTS

CHAPTER 8. VALUATION IN THE COURTROOM 89 § 23. Appraisal or Dissenters' Rights 89 § 24. Valuation by Agreement 102 § 25. Valuation in Oppression Proceedings 104 § 26. Valuation in Other Legal Contexts 108

PART 2. RISK AND RETURN

CHAPTER 9. MEASURES OF RISK 113 § 27. Portfolio Theory 113 § 28. Beta and the Capital Asset Pricing Model (CAPM) 114

CHAPTER 10. DERIVATIVE INSTRUMENTS 119 § 29. Definition 119 § 30. Speculation Versus Risk Reduction 119 § :n. The Building Blocks of Derivatives 120 § 32. Developments in the Derivatives Market.. 138

PART 3. CLAIMANTS ON THE ENTERPRISE

CHAPTER 11. DEBT HOLDERS 157 § :rn. The Use of Leverage (Debt) and Its Impact on Capital Structure 157 § :!'1. Characteristics of Debt.. 161 § :J5. The Trust Indenture Act of 1939 1 70 § :rn. Key Contractual Terms and Protective Provisions 175 § :17. Legal Treatment of Debt Holders 189 § 38. Insolvency Reorganization 202 § :39. Asset· Backed Securitization 215

HAPTER 12. PREFERRED STOCKHOLDERS 225 § 40. Overview 225 § '11. Similarity to Debt and Equity 225 § 42. The Preferred Stock Contract.. 227 § 4;3, Characteristics of Preferred Stock 228 § 44. Fiduciary and Good Faith Duties 241

CHAPTER 13. CONVERTIBLE SECURITY HOLDERS 249 § ·15. Economics of Convertible Securities 249 § 46. Protecting the Conversion Right 255

CHAPTER 14. COMMON STOCKHOLDERS 267 § 17. Characteristics of Common Stock 267 § 18. Corporate Governance and Fiduciary Protections 268 § 19. Declaration and Payment of Dividends and Distributions 280 § !iO. Dilution and Preemptive Rights 297 § 51. Stock Repurchases and Redemptions 302 § !i2. Recapitalizations and Restructurings 305 SUMMARY OF CONTENTS xi

PART 4. MERGERS AND ACQUISITIONS

CHAPTER 15. FUNDAMENTAL CONCEPTS 309 § 53. Operating in a Regulatory Mine Field 309 § 54. M&A Deal Structures 310

CHAPTER 16. FEDERAL LAW ASPECTS 339 § 55. Introduction 339 § 56. Proxy Regulation 339 § 57. Federal Tender Offer Regulation-The Williams Act 343

CHAPTER 17. STATE LAW ASPECTS 365 § 58. Introduction 365 § 59. The Duty of Care and the Business Judgment Rule 366 § 60. The Duty of Loyalty 369 § 61. State Anti-Takeover Legislation 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 AND PRIVATELY-HELD COMPANIES 3 § 1. Publicly-Traded Companies 3 A. Overview 3 B. Exchange Act Reporting Requirements 5 C. Pros and Cons of "Going Public" 8 (1) Pros 8 (2) Cons 10 § 2. Privately-Held Companies 11 A. Generally 11 B. Closely-Held Companies 13 (1) Characteristics 13 (2) Control and Voting 14 (3) Stock Ownership and Transfer 15 a. Forced Resale Provisions 15 b. Restrictions on Transferability 15 c. Valuation by Agreement 19

CHAPTER 2. WORKING WITH FINANCIAL STATEMENTS 21 § 3. Introduction 21 § 4. Accountants and the Audit Function 22 A. Oversight Generally 22 B. Role of the Accountants 23 § 5. Fundamental Financial Statements 25 A. Balance Sheet 25 (1) Introduction 25 (2) Components 25 a. Assets 25 b. Liabilities 25 c. Shareholders' Equity 26 (3) Limitations of the Balance Sheet 27 (4) Working with the Balance Sheet 28 a. Rates of Return 28 b. Exposure to Debt 28 c. Measures of Liquidity 29 (i) Working Capital 29

xiii xiv TABLE OF CONTENTS

(ii) Liquidity Ratios 29 B. Profit and Loss Statement 30 (1) Introduction 30 (2) Earnings Per Share (EPS) 32 (3) EBITDA 33 ( 4) Measures of Profitability 33 C. Statement of Changes in Shareholders' Equity 34 D. Statement of Cash Flows 36 (1) Introduction 36 (2) Composition 36 (3) Measures of Liquidity 37 (4) Startup Companies and the "Burn Rate" 37

CHAPTER 3. TIME VALUE OF MONEY 39 § 6. Overview 39 § 7. Interest Rate Components 40 § 8. The Importance of the Federal Reserve 41 A. Background 41 B. The Fed's Role in the Economy 42 (1) The Federal Funds Rate of Interest 42 (2) Open Market Operations 43 (3) Reserve Requirements 43 (4) Discount Rate 44 (5) The Financial Crisis of 2008 and Expanded Fed Powers .44 § 9. Key Interest Rates 4 7 A. U.S. Treasury Instruments 47 B. Prime Rate 47 C. LfBOR 48 § I 0. Simple Interest Versus Compound Interest .49 A. Generally 49 B. Rule of 72s 50 C. Rule of 110 50

CHAPTER 4. FUTURE VALUE AND PRESENT VALUE 51 § 11. Future Value 51 § 12. Present Value 53 A. PV of a Lump Sum 53 B. PV of an Annuity 55 (1) Ordinary ("Deferred") Annuity 55 (2) Annuity Due 57 C. Using PV to Determine Rate of Return 58

CHAPTER 5. BOND VALUATION 61 § 1 :i. Introduction to Bond Valuation 61 § l '1. I nverse Relationship Between Interest Rates and Bond Values 61 A. Lower Valuation When Interest Rates Increase 62 B. Higher Valuation When Interest Rates Decrease 63 C. Predicting Sensitivity 64 (I) Sensitivity to Changing Interest Rates 64 TABLE OF CONTENTS xv

(2) Sensitivity to Changes in an Issuer's Creditworthiness 65 § 15. Calculating Yield to Maturity 65 § 16. Zero Coupon Bonds 66 § 17. Bond Market Pricing Terminology 66

CHAPTER 6. VALUING COMPANIES 69 § 18. Balance Sheet-Based Valuation Methods 70 A. Book Value 70 B. Adjusted Book Value 71 C. Net Asset Value 72 § 19. Profit and Loss Statement-Based Valuation Methods 74 § 20. Cash Flow-Based Valuation Methods 76 A. Dividend Discount Method (DDM) 76 B. Discounted Cash Flow Method (DCF) 79

CHAPTER 7. EFFICIENT CAPITAL MARKET HYPOTHESIS (ECMH) 83 § 21. Overview 83 § 22. ECMH in the Courtroom 85

CHAPTER 8. VALUATION IN THE COURTROOM 89 § 23. Appraisal or Dissenters' Rights 89 A. Background 89 B. Availability of the Appraisal Remedy 89 C. Perfection and Forfeiture of Appraisal Rights 91 D. Valuation in an Appraisal Proceeding 92 (1) Introduction 92 (2) Burden of Proof on Issue ofValuation 93 (3) Valuation Methodology 93 (4) Minority Discounts and Control Premiums 95 (5) Synergies and Other Benefits of the Merger 97 (6) Subsequent Events 98 (7) The Issue of Interest 99 E. Exclusivity of Appraisal Rights 101 § 24. Valuation by Agreement 102 § 25. Valuation in Oppression Proceedings 104 A. Introduction 104 B. Judicial Responses 105 C. Statutory Responses 106 § 26. Valuation in Other Legal Contexts 108

PART 2. RISK AND RETURN CHAPTER 9. MEASURES OF RISK 113 § 27. Portfolio Theory 113 § 28. Beta and the Capital Asset Pricing Model (CAPM) 114 A. Generally 114 B. The CAPM Formula 115 C. Alpha 116 D. CAPMA ssumptions and Empirical Evidence 116 xvi TABLE OF CONTENTS

CHAPTER 10. DERIVATIVE INSTRUMENTS 119 § 29. Definition 119 § 30. Speculation Versus Risk Reduction 119 § 31. The Building Blocks of Derivatives 120 A. Options 120 (1) Overview 120 (2) Underlying Assets 120 (3) Types of Options 121 a. Call Option 121 b. Put Option 122 ( 4) Expiration or Maturity Date 122 (5) Manner of Exercise 123 (6) Physical Settlement and Cash Settlement 123 (7) Setting Option Premiums 124 (8) Reducing Risk Through Options 125 (9) Using Options in Connection with Concentrated Equity Positions 125 a. Deep-in-the-Money Call Options 126 b. Cash-Settled Collars 127 c. Out-of-the-MoneyCa ll Options 129 (10) Exchange Traded Options 130 (11) Distinction from Warrants 130 B. Forward Contracts 131 (1) Overview 131 (2) Determining the Forward Price 132 a. Cost to Carry 132 b. Distributions 132 (3) Distinction from Options 133 (4) Counterparty Credit Risk 133 C. Futures Contracts 133 (1) Distinction from Forward Contracts 133 a. Cash Settlement 133 b. Standardized Contracts 133 c. Elimination of Counterparty Credit Risk 134 d. Daily Settlement 134 e. Margin Requirements 134 (2) Futures Markets 135 D. Swaps 135 (1) Overview 135 (2) Types of Swaps 136 (3) ISDA and the Standardization of Swap Contracts 137 (4) Credit Default Swaps and the Financial Crisis of 2008 137 § :32. Developments in the Derivatives Market.. 138 A. Abusive Use of Derivatives 138 B. Turf Wars 140 C. Regulatory Initiatives, the CFMA and Dodd-Frank 142 (1) Events Leading Up to the Commodity Futures Modernization Act of 2000 142 TABLE OF CONTENTS xvii

(2) Credit Default Swaps, the Financial Crisis of 2008 and Dodd-Frank's Regulation of the Swap Market 144 a. Overview 144 b. Swaps Covered 145 c. Other Jurisdictional Allocations 145 d. Key Definitions and Definitional Matters 145 e. Clearing, Trading and Reporting 146 f. Mandatory Trade Execution Requirements for Swaps 147 g. Business Conduct Requirements 148 h. Capital and Margin Requirements 149 i. Position Limits and Large Swap Trader Reporting 149 j. The Swaps Pushout Rule and Federal Assistance 150 D. Interpreting the Derivatives Contract 151

PART 3. CLAIMANTS ON THE ENTERPRISE

CHAPTER 11. DEBT HOLDERS 157 § 33. The Use of Leverage (Debt) and Its Impact on Capital Structure 157 A. Overview 157 B. Pure Leverage Effect 159 C. Optimal Level of Debt 160 § 34. Characteristics of Debt 161 A. Types of Debt Instruments 161 (1) Bonds 161 (2) Debentures 162 (3) Notes 162 B. Credit Rating Agencies 162 (1) Generally 162 (2) Regulation of Credit Rating Agencies 165 a. Introduction 165 b. Credit Rating Agency Reform Act of 2006 166 c. Dodd-Frank 166 d. Downgrading the U.S.A 169 § 35. The Trust Indenture Act of 1939 170 A. Introduction 170 B. Summary of the TIA 1 70 (1) Exemptions 171 (2) Qualification of the Indenture 1 71 (3) Trustee Eligibility Requirements 172 ( 4) Conflicts of Interest 172 (5) Mandatory and Permissive Indenture Provisions 1 73 (6) Legal Actions by Debt Holders 173 C. Duties and Obligations of a Trustee Under the TIA 174 (1) Pre-Default Versus Post-Default 174 (2) Limitations on a Trustee's Liability 175 § 36. Key Contractual Terms and Protective Provisions 175 A. The Promise to Pay and Provisions Designed to Support It 175 xviii TABLE OF CONTENTS

B. Subordination 176 (1) Generally 176 (2) "Junk" Bonds 177 C. Covenants 178 (1) Affirmative Covenants 178 (2) Negative Covenants 178 a. Limitation on the Incurrence oflndebtedness 178 b. Restricted Payments 180 c. Asset Sales 180 d. Merger, Consolidation or Sale of All or Substantially All of the Issuer's Assets 181 e. Dividend and Other Payment Restrictions on Subsidiaries 182 f. Limitation on the Sale or Issuance of Stock of Subsidiaries 182 g. Transactions with Affiliates 183 h. Restrictions on Liens 183 J. Limitation on Sale-Leaseback Transactions 183 J. SEC Reports 184 k. Line of Business 184 (3) Financial Covenants 184 D. Redemption 185 (1) Optional Redemption 185 (2) Mandatory Redemption 186 E. Events of Default 188 ( 1) Generally 188 a. Default in the Payment of Interest or Principal 188 b. Breach of a Covenant, Warranty or Representation 188 c. Bankruptcy/Insolvency 188 d. Cross-Default 189 (2) Acceleration 189 § :l7. Legal Treatment of Debt Holders 189 A. Fiduciary Duties 189 (1) Generally 189 (2) Actual Insolvency and the "Zone" oflnsolvency 190 a. History 190 b. Insolvency Entitles Creditors to Sue Derivatively 191 c. Exculpatory Charter Provision Works Against Creditors 193 B. Implied Covenant of Good Faith and Fair Dealing 194 C Right to Sue 197 (1) Direct Actions 197 a. Payment Defaults 197 b. Non-payment Defaults 197 c. Special Situations 199 (2) Derivative Actions 200 § a8. I nsolvency Reorganization 202 Fraudulent Conveyance 202 B. Overview of a Chapter 11 Bankruptcy Proceeding 203 ( 1) (h•nPrally 203 (2) The Rise of the Section 363(b) Asset Sale 205 TABLE OF CONTENTS xix

C. Pre-Packaged Bankruptcies 208 D. Key Concepts in Bankruptcy 210 (1) Automatic Stay 210 (2) Preference 210 (3) Absolute Priority Rule and "Cramdown" 211 (4) New Value Exception 212 (5) Treatment of Secured Creditors 214 (6) Equitable Subordination 214 § 39. Asset-Backed Securitization 215 A. Introduction 215 B. Mortgage-Backed Securities and the Financial Crisis of 2008 216 C. The Securitization Process 217 D. Risks Associated with Securitization 218 (1) Bankruptcy Remoteness 219 (2) "True Sale" Objections 219 a. Recourse 220 b. Retained Rights and Right to Surplus 221 c. Pricing Mechanism 221 d. Administration and Collection of Accounts 221 e. Miscellaneous Factors 221 (3) Fraudulent Transfer Concerns 221 ( 4) Substantive Consolidation 222 E. Dodd-Frank's Credit Retention Requirements 222

CHAPTER 12. PREFERRED STOCKHOLDERS 225 § 40. Overview 225 § 41. Similarity to Debt and Equity 225 § 42. The Preferred Stock Contract 227 § 43. Characteristics of Preferred Stock 228 A. Preference Rights 228 (1) Dividend Preference 228 (2) Liquidation Preference 228 B. Noncumulative and Cumulative Preferred Stock 229 (1) Noncumulative Dividend Rights 229 (2) Cumulative Dividend Rights 231 C. General Terms of a Preferred Stock Contract 232 (1) Number of Shares and Price Per Share 232 (2) Yield 232 (3) Subordination 232 (4) Voting Rights 233 a. Generally 233 b. Contractual Right to Elect Directors 233 c. Contractual Right to Approve Mergers and Related Transactions 235 (5) Redemption Provisions 237 a. Optional Redemption 237 b. Mandatory Redemption 237 (6) Conversion Rights 238 xx TABLE OF CONTENTS

(7) Exchange Rights 239 (8) Participation Rights 239 (9) Affirmative and Negative Covenants 240 § 4<1. Fiduciary and Good Faith Duties 241

CHAPTER 13. CONVERTIBLE SECURITY HOLDERS 249 § 45. Economics of Convertible Securities 249 A. Generally 249 B. Investment Value and Conversion Value 250 C. Calling the Security 253 D. -Iustifications for Convertible Securities 254 § 46. Protecting the Conversion Right 255 A. Introduction 255 B. Fiduciary Duties 255 C. Contractual Rights 255 (1) Notice ofRedemption 256 (2) Antidilution 257 a. Cash Dividends 257 b. Forward and Reverse Stock Splits and Stock Dividends 258 c. "Cheap Stock" 261 d. Distribution of Evidences of Indebtedness and Assets 262 (3) Antidestruction 263 ('1) Appraisal Rights 264

CHAPTER 14. COMMON STOCKHOLDERS 267 § n Characteristics of Common Stock 267 § 4 8. Corporate Governance and Fiduciary Protections 268 A. Corpora tc Governance 268 (1) Stockholders 268 (2) Directors 269 (3) Officers 269 B. Fiduciary Duties 270 (1) The Duty of Care 270 (2) The Duty of Loyalty 271 a. Self-Interested Transactions 272 b. Interlocking Directorate 272 c. Corporate Opportunities 275 d. Entrenchment 276 (:3) The Duty of Good Faith 276 § '19. Declaration and Payment of Dividends and Distributions 280 A. Introduction 280 B. Legal Capital Rules 280 (1) Basic Theory 280 (2) Par Value 281 (3) Traditional Statutes 282 (t) New Model Statutes 284 C. Cash Dividends 285 (1) Overview 285 TABLE OF CONTENTS xxi

(2) Dividend Policy Theories 285 a. The Traditional Theory 285 b. The Irrelevance Theory 286 c. The Tax Preference Theory 286 (3) Dividend Payment Process 287 D. Non-Cash Dividends and Stock Splits 289 (1) Generally 289 (2) Stock Dividends 289 (3) Stock Splits 290 a. Forward Stock Splits 290 b. Reverse Stock Splits 292 (4) Distinguishing Stock Dividends from Stock Splits on the Balance Sheet 294 a. Stock Dividends 294 b. Stock Splits 295 E. Board's Discretion in Paying Dividends 295 § 50. Dilution and Preemptive Rights 297 A. Value Dilution 297 B. Voting Dilution and Preemptive Rights 300 § 51. Stock Repurchases and Redemptions 302 A. Overview 302 B. Stock Repurchases 302 (1) Generally 302 (2) Repurchases by Privately-Held Companies 303 (3) Repurchases by Publicly-Traded Companies 303 C. Stock Redemptions 304 § 52. Recapitalizations and Restructurings 305

PART 4. MERGERS AND ACQUISITIONS

CHAPTER 15. FUNDAMENTAL CONCEPTS 309 § 53. Operating in a Regulatory Mine Field 309 § 54. M&AD eal Structures 310 A. Overview 310 B. Acquisition or Purchase Transactions 311 (1) Asset Acquisitions 311 a. Cash-for-Assets Acquisition 311 (i) Generally 311 (ii) "All or Substantially All" Standard 312 b. Stock-for-Assets Acquisition 314 c. Drawbacks to Asset Acquisitions 316 d. Successorship Issues in Asset Acquisitions 317 (2) Stock Acquisitions 318 a. Cash-for-Stock Acquisition 318 b. Stock-for-Stock Acquisition 319 C. Mergers, Consolidations and Statutory Exchanges 320 (1) Stock Swap (Stock-for-Stock) Statutory Mergers 321 (2) Cash-Out (Cash-for-Stock) Statutory Mergers 321 xxii TABLE OF CONTENTS

(3) Triangular Mergers 323 (4) Approving a Merger 326 a. Board Approval 326 b. Stockholder Approval 326 (i) Small Scale Merger Exception 326 (ii) Short- Form Exception Under Section 253 32 7 (iii) Short-Form Exception Under New Section 251(h) 327 (iv) Holding Company Exception 328 (5) Statutory Exchanges 329 (6) Appraisal Rights 329 D. Conversions and Reincorporations 329 E. Leveraged Buy-Outs 330 F. Recapitalizations 331 (1) Strategic Recapitalizations 331 (2) Leveraged Recapitalizations 333 G. Restructurings 336

CHAPTER 16. FEDERAL LAW ASPECTS 339 § 55. Introduction 339 § 56. Proxy Regulation 339 A. Dual Federal and State Regulation 339 B. Federal Proxy Regulation 340 (1) Applicability and Filing Requirements 340 (2) Proxy Statement Disclosure 340 (3) Interaction with the Securities Act 342 (4) Liability Under Federal Proxy Rules 343 § 57. Federal Tender Offer Regulation-The Williams Act 343 A. Overview 343 B. Terminology 345 C. What Is a Tender Offer? 345 D. Exchange Act Section 13(d) Trigger 349 E. Applicability of Exchange Act Regulations 14D and 14E 351 (1) Minimum Time Period 351 (2) Anti-Discrimination Rules 353 a. Pro Rata Treatment 353 b. All Holders Rule 353 c. Best Price Rule 354 d. Purchases Outside the Tender Offer 354 (3) Prohibition on Market Manipulation 355 F. Tender Offer Disclosure Documents 355 (1) Bidder's Disclosure 356 (2) Target's Disclosure 357 G. Issuer Tender Offers and "Going Private" Transactions 358 (1) Issuer Tender Offers 358 (2) "Going Private" Transactions 359 H. Interaction with the Securities Act 360 (1) Exchange Tender Offers 360 a. Generally 360 TABLE OF CONTENTS xx iii

b. Hostile Exchange Tender Offers 361 (2) Statutory Mergers and Asset Acquisitions 361 (3) Resales of Securities 362

CHAPTER 17. STATE LAW ASPECTS 365 § 58. Introduction 365 § 59. The Duty of Care and the Business Judgment Rule 366 A. A Board's Decision to Sell the Company 366 B. A Board's Decision to Purchase a Company 368 § 60. The Duty ofLoyalty 369 A. Transactions with Controlling Stockholders 369 (1) Entire Fairness Test-Generally 369 (2) "Cleansing" an Acquisition of a Minority Interest in a Controlled Subsidiary 371 a. Long-Form Mergers 372 b. Tender Offer/Short-Form Merger Combination 374 (3) Applicability to Short-Form Mergers 377 (4) Sale of a Controlled Subsidiary to a Third Party 377 B. Which Directors Are "Conflicted"? 379 C. A Board's Decision to Sell the Company-Revlon Duties 380 D. Takeover Defenses and a Board's Ability to Adopt Them 384 (1) Takeover Defenses 384 a. Shark Repellent Charter Provisions 384 b. Poison Pills 385 c. Asset-Based Defensive Strategies 388 d. Liability-Based Defensive Strategies 390 (2) A Board's Ability to Adopt Takeover Defenses 390 § 61. State Anti-Takeover Legislation 395 A. Anti-Takeover Statutes 396 B. Other State Statutes 397

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