PARTNERSHIPS,CORPORATIONS

AND THE VARIANTS

PROF. BRUCE MCCANN

SPRING SEMESTER LECTURE 6 2011 TAKEOVERSPP. 785-835

Business Organizations2010-2011 Lectures

Stalking Horse

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

The initial bidder with whom the debtor negotiates a purchase agreement is called the "stalking horse" bidder. The term is an old hunting term referring to either a real horse or an image of a horse (typically some type of screen) behind which a hunter would hide to conceal himself from, and get closer to, his prey.

DGCL Section 251 - Mergers

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Board of each corporation must first adopt resolution approving merger agreement.

Agreement shall set forth terms of the merger, mode of bringing into effect, manner of converting shares.

The agreement shall then be submitted to the shareholders of each corporation for vote on no less than 20 days notice. Merger is not effective until requisite number of shares approve it.

Unocal

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Is offer in the best interests of the corporation?

If contend it is not, the board must show: Offer is threat to corporate policy or effectiveness

Via evidence of investigation The defensive response is “proportional” to the threat.

Omnicare Refinements to Unocal

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Where defensive measures are invoked to protect a merger agreement, Unocal proportionality test is applied as follows:

1. Court must first determine if the measures are preclusive or coercive. If either, measures are illegal.

2. If measures pass that threshold test, then the Board must establish their measures were within a “range of reasonable responses.”

“Force The Vote” Provisions

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Refers to board commitment to suitor that the board will submit the proposed transaction to the shareholders for a vote even if the board does not recommend that the shareholders approve the transaction.

Such provisions now expressly permitted under Delaware law and the Model Act

Why bother? Because often the merger agreement is signed simultaneously with voting agreements binding the majority of shares to vote for the transaction if it is put to a vote. The suitor knows the transaction will be approved even if, under a “fiduciary out,” the board must withdraw its approval.

Apr 1, 2006 Apr 2, 2006 May 11, 2007 May 12, 2007 Jul 9, 2007

Lyondell Chronology

Apr ??, 2006

Basell AF offers $26.50 to $28.50 vial letter to Lyondell Chemical Co.

May 11, 2007

Access Industries (Blavatnik holding company) files Sched 13d reporting has purchased right to 8.3% of stock of Lyondell Chemical Co.

May 11, 2007

Lyondell Chemical Co. stock goes from $33 to $37 due to Access Industries (Blavatnik holding company) filing

Jul 9, 2007

Bassell Owner Blavatnik and Smith meet to discuss $40 offer from Basell AF Told its too low, Bassell Owner Blavatnik goes to $44-45, then $48. Offer required $400 m break up fee and signed merger agreement by 7/16/2007.

~ May 12, 2007

Lyondell Chemical Co. board meets to consider impact of Sched 13D filing, decides to "wait and see" what develops

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

May 12, 2007 Jul 9, 2007 Jul 10, 2007 Jul 11, 2007 Jul 12, 2007

Lyondell Chronology

May 11, 2007

Access Industries (Blavatnik holding company) files Sched 13d reporting has purchased right to 8.3% of stock of Lyondell Chemical Co.

May 11, 2007

Lyondell Chemical Co. stock goes from $33 to $37 due to Access Industries (Blavatnik holding company) filing

Jul 9, 2007

Bassell Owner Blavatnik and Smith meet to discuss $40 offer from Basell AF Told its too low, Bassell Owner Blavatnik goes to $44-45, then $48. Offer required $400 m break up fee and signed merger agreement by 7/16/2007.

Jul 10, 2007

Lyondell Chemical Co. board meets less than an hour to discuss. Has further requests. Bassell Owner Blavatnik requires board give firm indication of interest by 7/11/2007

Jul 11, 2007

Lyondell Chemical Co. board meets again for less than an hour, authorizes smith to negotiate with Bassell Owner Blavatnik

Jul 12, 2007

Lyondell Chemical Co. board meets again, tells Smith to seek higher price, a "go shop" agreement and reduced break up fee. Bassell Owner Blavatnik refuses except reduces break up fee slightly.

~ May 12, 2007

Lyondell Chemical Co. board meets to consider impact of Sched 13D filing, decides to "wait and see" what develops

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Jul 12, 2007 Jul 13, 2007 Jul 14, 2007 Jul 15, 2007 Jul 16, 2007

Lyondell Chronology

Jul 11, 2007

Lyondell Chemical Co. board meets again for less than an hour, authorizes smith to negotiate with Bassell Owner Blavatnik

Jul 12, 2007

Lyondell Chemical Co. board meets again, tells Smith to seek higher price, a "go shop" agreement and reduced break up fee. Bassell Owner Blavatnik refuses except reduces break up fee slightly.

Jul 16, 2007

Lyondell Chemical Co. board meets again. Told that fiduciary out is sufficient, that price is a "home run", and other bidders unlikely. Board approves merger and recommends to shareholders

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Jul 14, 2007 Jul 15, 2007 Jul 16, 2007 Nov 20, 2007

Lyondell Chronology

Jul 16, 2007

Lyondell Chemical Co. board meets again. Told that fiduciary out is sufficient, that price is a "home run", and other bidders unlikely. Board approves merger and recommends to shareholders

Nov 20, 2007

Shareholders approve by more than 99%

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Lyondell Sched. 13D

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

SCHEDULE 13D Under the Securities Exchange Act of 1934

Lyondell Chemical Company (Name of Issuer) Common Stock (Title of Class of Securities) 552078 (Cusip Number) Alejandro Moreno AI

Chemical Investments LLC c/o Access Industries, Inc. 730 Fifth Avenue, 20th Floor New York, New

York 10019 Tel. No.: (212) 247-6400

Sched. 13D

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware

7 SOLE VOTING POWER -0- 8 SHARED VOTING POWER NUMBER OF SHARES BENEFICIALLY 20,990,070*

OWNED BY EACH REPORTING PERSON WITH 9 SOLE DISPOSITIVE POWER -0- 10 SHARED DISPOSITIVE POWER 20,990,070* 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY

EACH REPORTING PERSON 20,990,070* 12 CHECK IF THE AGGREATE AMOUNT IN ROW (11)

EXCLUDES CERTAIN SHARES [ ] (SEE INSTRUCTIONS)

13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 8.3%

Sched 13D

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

This statement is filed by:(i) AI Chemical Investments LLC, a limited liability

company organized under the laws of Delaware ("Newco"). The address of the principal office of Newco is 730 Fifth Avenue, 20th Floor, New York, New York 10019. The principal business of Newco is holding the Forward Contract (as defined below) to acquire Shares, as more fully described in Item 6 hereof; and

(ii) Leonard Blavatnik, an individual whose principal occupation is Chairman of Access Industries, Inc. ("Access") with a business address at 730 Fifth Avenue, 20th Floor, New York, New York 10019 ("Mr. Blavatnik" and, together with Newco, the "Reporting Persons"). The principal business of Access is holding strategic investments in a variety of industries worldwide. Mr Blavatnik is the sole member of Newco. Mr. Blavatnik is a United States citizen.

Sched. 13D

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Item 4. Purpose of Transaction Newco has entered into the Forward Contract as a strategic

investment. …The Reporting Persons may, depending on market conditions, the trading prices of Shares, alternative investment opportunities, the availability of funds and the outlook for the petrochemicals industry and the Issuer, acquire additional …Upon acquiring the Shares pursuant to the Forward Contract, Newco intends to assess its ownership and voting position in the Issuer. The Reporting Persons may seek to engage in discussions with the Issuer concerning, among other possible scenarios, the merits of an offer to acquire all of the Shares of the Issuer and the merits of a merger, combination or similar transaction between the Issuer and affiliates of Newco, including Access or Basell Holdings B.V. The Reporting Persons have not yet determined which, if any, of the above courses of action they may ultimately take.

LYONDELL

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Revlon duties do not arise simply because a company is “in play.”

The duty to obtain best price arises only when the company itself embarks on a transaction that will result in a change of control. Either on its own initiative or In response to an unsolicited offer

Lyondell

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Bad Faith Breach of Duty of Loyalty

Bad faith breach of duty of loyalty requires: a. subjective bad faith, actual intent to harm or b. a conscious disregard for one's responsibilities,

lack of due care beyond mere gross negligence.

Any ambiguity requires showing directors knew they were not discharging their fiduciary obligations

Shareholder Derivative Litigation

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

An action by shareholders to remedy an alleged wrong to the corporation. A wrong by the directors or controlling shareholders

or A wrong by a third party, such as a supplier

The action is “founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff.” Daily Income Fund, Inc. v. Fox 464 US 523, 528 (1984)

Shareholder Derivative Litigation

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Two actions in one:

A. A suit to compel the corporation to sue andB. A suit by the corporation (asserted by the

shareholder –plaintiffs) against those liable to it

Shareholder Derivative Litigation

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

The stockholder’s right to litigate is secondary to the corporate right until such time as the corporation has refused to bring suit.

So…

Shareholder must first demand the corporation take action

Shareholder Derivative Litigation

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

In addition to demand requirement, shareholders filing derivative action must first

post a bond to pay the defendants’ costs if the plaintiffs lose or abandon the litigation (in certain states);

establish they are “adequate representatives” of the shareholder s in general and counsel is able to prosecute the action

Whose Ox Was Gored?

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Is the action “direct” or “derivative”?

A direct action is available where There is a special duty (such as a contract) between

the shareholder and the wrongdoer. The shareholder suffers injury “separate and distinct”

from that suffered by other shareholders.

Direct vs. Derivative

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Claim Direct Derivative

Δs conpired to deplete corporate assets √

Δs diverted corporate assets √

Δs paid dividends to only certain shareholders in class

√ √

Δs conduct caused share value to decline √

Δs diluted minority shares for benefit of majority s/h

√

Δs refused to allow inspection of corporate records

√

Δs prevented shareholder from voting √

Δs proposed action is ultra vires √

Δs wrongfully failing to dissolve the corporation √

Δs are acting fraudulently √

Demand Futility

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Demand requirement waived if “futile”Test is whether there is a reasonable doubt

that The directors are disinterested and independent (as to

the action proposed by the plaintiff) and The transaction being challenged was the product of

the valid exercise of business judgment

The Corporate Response

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

BJR shields directors as to 1. Their response to the demand 2. Decision to dismiss the derivative suit 3. If suit is directed against them, the directors have the

BJR shield as a defense.

PROVIDED:

1. Directors are disinterested as to any decision in question 2. The directors have not been grossly negligent with

respect to their duty to inform themselves regarding the decisions(s)

Approaches to Demand Futility

Lec. 6 Sem 2, pp 785-835 Corps Prof. McCann

Model Act: Absent a showing of irreparable harm if demand is required, a demand must always be made before a derivative action can be pursued. “Universal Demand.”

New York: Demand required unless plaintiff shows: 1. Majority of board are not disinterested as to the

transaction 2. Board did not inform themselves as to the

transaction; or 3. Transaction is so egregious could not have resulted

from sound business judgment.

Shareholder Derivative Litigation

Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann

Two actions in one:

A. A suit to compel the corporation to sue andB. A suit by the corporation (asserted by the

shareholder –plaintiffs) against those liable to it

The Corporate Response

Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann

Auerbach: BJR shields directors as to 1. Their response to the demand 2. Decision to dismiss the derivative suit 3. If suit is directed against them, the directors have the

BJR shield as a defense.

PROVIDED:

1. Directors are disinterested as to any decision in question 2. The directors have not been grossly negligent with

respect to their duty to inform themselves regarding the decisions(s)

The Rise of the ILC

Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann

The “Structural Problem” of the ILC

Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann

The “Independent Litigation Committee” Who appointed them? What will the appointees be doing once the ILC

disbands? Whose Country Club do they belong to? Plaintiffs or

defendants? How do they feel about rabble-rousing shareholders? “There but for the grace of God go I.”

Zapata

Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann

In balancing corporation’s right to avoid being hi-jacked by fringe shareholders with shareholders right to protect themselves from directors’ failure to act,

In deciding corporation’s motion to dismiss derivative suit, court test the motion as follows:

1. First, was board (committee) independent and acting in good faith?1. If no, motion shall be denied.

2. If passes that test, court may still test the decision applying the court’s own “business judgment” if court suspects corporation’s interests so require

The Limited

Lec. 7 Sem 2, pp 774-811 Corps Prof. McCann

Aronson test re demand futility is operative Complaint must allege with particularity facts raising

reasonable doubt that Directors had financial interest or Directors were motivated by desire to remain in power

(entrenchment) or Directors were dominated or controlled by person

interested in the transaction

Test as to director’s independence is subjective: Did that particular director lack independence under

the circumstances?