Wendy is an officer and director of Carrot Company, Inc. (‘CCI’). CCI is incorporated in the state of Maine, which has adopted the ALI Principles of Corporate Governance § 5.05. CCI distributes carrots, and food products containing carrots, to grocery stores throughout the US. One day when Wendy is at the supermarket looking at the different types of carrots available, a man named Bugs comes up to her and shows her a new invention which is the best carrot peeler Wendy has ever seen. When Wendy tells Bugs that she works for CCI, Bugs asks Wendy if CCI would be interested in buying the invention. Wendy explains that CCI would probably not be interested, but that she would be willing to form a company with Bugs to produce and distribute the invention. Wendy quits her job at CCI, starts a company with Bugs and makes millions of dollars. CCI finds out and sues Wendy for taking a CCI corporate opportunity.
A mining company (‘Bidder’) considers expanding business operations. The board identifies assets held by another company (‘Target’) as a possible acquisition. In the questions below consider the liability of a director (‘A’) on the board of Bidder.
- Director A is also majority shareholder in Target, holding 60 percent of the outstanding share capital of the company. As majority shareholder of Target, he is interested in an acquisition that is beneficial to Target. He proposes that Bidder purchase the assets for 10 million $ knowing that the value ranges between 7 and 8 million $. Director A does not disclose his interest in Target to the board of Bidder. A majority of the directors approves the acquisition. A’s vote was not decisive for the positive vote.
- When the shareholders of Bidder learn of A’s interest in Target, they ratify the transaction, believing that it is in the company’s interests. Can the shareholders authorize or ratify a related-party transaction?
(a) Super Star Sales, Inc. (‘SSS’), a publicly traded company incorporated in Delaware, is trying to fight off a hostile tender offer by Takeover Team Corporation (‘TTC’). The tender offer is for $50 a share, amounting to a total of $2 billion in cash. After some investigation, SSS confirms its fears that TTC is known for breaking up companies and selling off their assets. SSS is concerned that the price of the tender offer is too low, and that if the takeover occurs, SSS employees and customers will suffer.
In order to fight the takeover attempt, SSS tells its shareholders that SSS will repurchase up to 30% of the shares of SSS for $70 a share, if and only if, a shareholder acquires 50% or more of the outstanding shares of SSS. The strategy prevents TTC from acquiring SSS.
- TTC, which already owns some SSS shares, sues the Board for breach of duty. Advise TTC.
- Assume now that the SSS offer to repurchase its own shares is no longer in place and that TTC still wants to acquire SSS. The CEO of TTC, Amy, tells SSS it will raise its offer to $75 a share for the SSS shares. The SSS Board hates the idea of selling the company to TTC, who it knows will break up and sell SSS.
SSS approaches a ‘white knight’ in a company called Galaxy Good Guys, Inc. (‘GGG’). SSS arranges a deal for GGG to buy SSS at the same price per share as was being offered by TTC ($75 per share). GGG also plans a partial break-up of the company, by selling a division of SSS, and will borrow against some of the SSS assets to pay for the acquisition.
The SSS board quickly approves the deal without allowing TTC to make a counter offer.
SSS then offers GGG a $500 million break-up fee so that TTC could no longer afford to buy SSS if SSS were to pay that fee.
TTC, which already owns some SSS shares, files an action, alleging that the SSS Board has breached its duty to its shareholders and seeking to force SSS and GGG to eliminate the breakup fee so that TTC can continue to bid on SSS. Advise TTC.
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