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Corporate Mergers and Acquisitions

Professor Bradford
April 23, 2012
8:30 a.m.
3 Hours and 30 Minutes

GENERAL INSTRUCTIONS

1. This is a partially open book exam. You may use the casebook; the
required statutory supplement; any handouts provided by the professor; and
any materials, such as notes or outlines, with content written and prepared
exclusively by you. You may not use any other materials, written, digital,
or recorded. You may not consult with or communicate with any other
person during this exam. If you have any other books, notes, briefcases, book
bags, cell phones, PDAs, or other items, you must bring them to the front of
the room now. You may not take any of these items to another designated
exam room.

2. This exam has ten (10) pages, including the instructions. The page
numbers appear on the top right-hand corner of each page. Please check to
be sure that this copy has all the pages.

3. You have three hours and thirty minutes (3:30) to complete the exam.
You must turn in your answers in this room, even if you are taking the exam
somewhere else in the building. If you finish more than five minutes early,
you may turn in your answers in the Deans Office.

4. The exam consists of four (4) questions. The recommended time for each
question is as follows:

Question 1.... 45 Minutes

Question 2.... 50 Minutes
Question 3.... 45 Minutes
Question 4.... 60 Minutes

You have an additional 10 minutes that is not allocated to any question.

Each question will be weighted in accordance with its recommended time.

5. Do not spend all of your time writing. Think about the issues and
organize your answers before writing. Be concise. Be organized. Long,
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disorganized, rambling answers will be penalized, as will merely dumping

portions of your notes or outline into your answers rather than answering the
question posed.

6. This exam will require you to interpret and apply many of the statutory
provisions we have studied. You should not just state general principles, but
should cite the relevant sections and subsections of the statutes and explain
how the language of those provisions applies to the facts of the question. An
answer that doesnt cite and analyze relevant statutes or regulations is
incomplete and will not receive full credit.

7. If you believe that additional facts are needed to answer a question, state
exactly what those facts are and how they would affect your answer. If you
believe that a question is ambiguous or unclear, note the ambiguity or lack of
clarity and indicate how it affects your answer.

8. The Honor Code is in effect.

EXAM 4 INSTRUCTIONS

9. You must take the exam on a computer that has the latest version of the
Exam 4 software installed. Use the OPEN mode. If you have not previously
installed the Exam 4 software, please notify the exam administrator
immediately.

10. Be sure to enter your exam number in the Exam ID field. (Do not use
your NU Card ID number or your social security number.) You will be
required to enter your exam number twice. Select the course name from the
drop-down box. Be sure you find the folder for this course, because that is
where your exam will be stored. Verify that the information is correct just
before you select Begin Exam.

11. Do not worry about headers, footers, page numbers, or double-spacing

your exam; the software does all that for you when the exam is printed.

12. When you are finished, please submit your exam electronically. A pop-
up box will show the status of your exam. It should show a black bar with
100% in it and a message that says, Your file has been successfully stored.
If you do not get this message, please see Vicki Lill in the Deans office
immediately. After successfully submitting your exam, exit Exam 4 before
leaving the classroom.
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13. If you have any technical problems during the exam, please report them
immediately to the Deans Office; we will assume you had no technical
problems until you reported them. Be prepared to finish your exam by
writing it. (Regular notebook paper is O.K.)
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Question One
(45 Minutes)

Alpha Corporation is incorporated in Delaware. It has only one class of

stock, with 1,500 shareholders. Its stock is not traded on the New York Stock
Exchange, NASDAQ, or any other securities exchange.

Beta Corporation is incorporated in a state that has adopted the latest version
of the Model Business Corporation Act. It also has only one class of stock,
with over 50,000 shareholders. Betas stock is traded on the NASDAQ
Exchange.

Alpha and Beta are contemplating a corporate combination. They have

narrowed the form of the acquisition down to two possibilities. (Assume that
the two companies already have sufficient authorized shares to accomplish
either transaction.)

PROPOSED TRANSACTION ONE: Alpha would merge into Beta,

with the Alpha shareholders receiving Beta shares for their Alpha
stock. The Beta shareholders would continue to hold the same Beta
shares. After the transaction, the old Beta shareholders would own
90% of Betas shares and the old Alpha shareholders would own the
remaining 10%.

PROPOSED TRANSACTION TWO: Beta would sell all of its

assets, except for enough cash to pay its creditors, to Alpha in return
for Alpha shares. Beta would then dissolve, pay its creditors, and
distribute the Alpha shares to Betas shareholders. After the
transaction, the old Beta shareholders would own 90% of Alphas
shares and the old Alpha shareholders would own the remaining 10%.

Discuss how the voting and appraisal rights of the two companies
shareholders would differ depending on which form of acquisition is used.
(Do not discuss any other possible way of structuring the transaction.)
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Question Two
(50 Minutes)

Assume that Pfizer and Pharmacia have signed the merger agreement that
appears in Appendix B of the casebook (pp. 785-834), but with all the dates
adjusted to current time. Due diligence has begun, but the closing has not yet
occurred.

In interpreting the agreement, remember that

Parent is Pfizer.
Merger Sub is Pilsner Acquisition Sub Corp., a wholly-owned sub
of Pfizer created for purposes of the merger.
Company is Pharmacia.
A Table of Contents appears on pp. 786-788.

In the course of its due diligence, Pfizer has just discovered that Pharmacia
has violated federal labor law requirements by hiring illegal immigrants and
failing to pay them required minimum wages and overtime. The violations,
which apparently occurred at a number of Pharmacia plants over several
years, could subject the company to possible criminal liability, substantial
government-imposed penalties, and civil lawsuits for wages and overtime
pay.

Pharmacia argues that everyone in the pharmaceutical industry has engaged

in similar practices at one time or another. Federal labor law authorities are
apparently unaware of the violations.

You are an attorney working for the law firm that represents Pfizer. Your
boss, who is about to meet with Pfizer officials to discuss the issue, has just
handed you the agreement and asked you to write a memo discussing the
rights of Pfizer and the Merger Sub under the agreement with respect to the
labor issue. She realizes you only have a limited amount of time, but asked
you to do the best you can in the time available.

NOTE: The author has omitted some of the subsections of the agreement. Limit your
answer to what the author has included and assume that anything omitted does not
apply.
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Question Three
(45 Minutes)

You are an attorney representing Bidder Corporation. Bruce Springsteen, the

chief executive officer of Bidder, has been talking with Paula Prez, the chief
executive officer of Target, Inc., concerning a possible acquisition of Target
by Bidder.

Springsteen recently came to your office and told you that he and Prez have
agreed that a deal probably makes sense and they should proceed further.
Prez has given him the Letter of Intent that appears on the next page of the
exam. Springsteen told you that, assuming everything checks out, Bidder is
definitely interested in doing the deal.

Springsteen said that the terms in the Letter of Intent accurately reflect his
preliminary discussions with Prez, and he would like to sign the letter as a
good faith gesture to facilitate further negotiation and due diligence.
However, before Springsteen signs the Letter of Intent, he wants your
suggestions as to any possible changes.

Advise Springsteen. Include the actual language of any proposed changes,

not just general suggestions, and explain your rationale for any changes you
propose.
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LETTER OF INTENT
(for Question 3)

This letter confirms the understanding reached between Bidder Corporation

(Bidder) and Target, Inc. (Target) concerning the acquisition of Target
by Bidder.

The Transaction

Target will merge into a wholly-owned subsidiary to be created by Bidder. In

the merger, Target shareholders will receive $50 cash for each Target share
they own. This will be the complete consideration for the deal, with no
additional earnout or other payments.

Conditions Precedent

This agreement is subject to completion of the following conditions:

1. The satisfactory completion of a due diligence review by Bidder.

2. Approval by the shareholders of Target.
3. The approval and execution by a majority of the Target directors of an
agreement similar to the one attached hereto. [A full sample agreement
was attached. The terms are fairly standard, although you will probably want
to negotiate about some of the language.]

Other Provisions

1. Target shall give Bidder access to all financial and corporate

information reasonably necessary for Bidder to conduct its due
diligence review. Bidder, its employees, agents, and advisers shall
keep all such information confidential and shall not use it for any
purpose other than to review and complete the acquisition.
2. Target will not negotiate any type of combination or acquisition with
any other party for 90 days from the date of this letter of intent.
3. Bidder and Target shall act in good faith and use their best efforts to
complete the merger.
4. In the event Bidder does not complete the transaction as
contemplated, it shall pay Target a termination fee of $10 million.

SIGNED:

__________________________ ___________________________
Paula Prez Bruce Springsteen
CEO, Target, Inc. CEO, Bidder Corporation
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Question 4
(60 Minutes)

Facts about Target Corporation

Target Corporation is a Delaware corporation. It has two classes of common

stock outstanding, Class A and Class B. Targets certificate of incorporation
requires that the holders of each class of stock separately approve any
corporate transaction that requires shareholder approval.

Targets Class A stock is traded on the New York Stock Exchange and is
owned mostly by sophisticated institutional investors. No one owns more
than 5% of the Class A stock. Targets Class B stock is not publicly traded.
Smith, who is Targets CEO, owns 30% of the Class B stock; no other person
owns more than 5%.

Each class is entitled to elect three directors to Targets six-person board. All
of the Target directors are outside directors and none of them owns a
significant amount of Targets stock.

The Original Merger Agreement

On December 21, 2011, Friendly Corporation approached Target about a

possible corporate combination. Targets board had not previously
considered selling the company and was not seeking a merger at the time, but
the Target board agreed to enter into confidential discussions with Friendly.

From December to February, Friendly examined confidential information

provided by Target, and the two parties negotiated strenuously. On February
22, 2012, the Target and Friendly negotiators approved a stock-for-stock
merger. Under the terms of the agreement, Target would merge into
Friendly. Each Target Class A share would be exchanged for 1.5 Friendly
shares, and each Class B share would be exchanged for 1.6 Friendly shares.
After the merger, the former Target shareholders would own 20% of
Friendlys voting stock.

At the time of the agreement, Target Class A stock was trading at a price of
$100 per share. (The Class B stock is not actively traded, so it has no market
price.) The Friendly shares were traded at a price of $75 a share. Thus, under
the agreement, each Class A share would receive Friendly shares with a
market value of $112.50 per share ($75 x 1.5) and each Class B shareholder
would receive Friendly shares with a market value of $120 per share ($75 x
1.6).
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The Target board unanimously approved the Friendly merger agreement on

February 27. The merger was then announced to the public. The Target
board scheduled a special shareholder meeting on April 24 to consider the
merger and on March 5 sent a proxy solicitation to all of its shareholders
with full disclosure concerning the proposed deal.

The Meanie Offer and Targets Response

On March 9, representatives of Meanie, Inc., contacted Target and asked if it

would be willing to negotiate a corporate combination for a higher price than
the Friendly deal. The Target board met on March 12 and voted
unanimously not to engage in discussions with Meanie (even though the
merger agreement with Friendly did not include a no-shop provision). The
Target board concluded that Friendly was a better strategic fit than Meanie.
In response, on March 16, Meanie announced a tender offer for all of
Targets Class A and Class B stock. Meanie offered $120 cash per share for
each class of stock.

On March 19, the Target board met to discuss the Meanie tender offer. By
identical 4-2 votes, they (1) adopted a poison pill plan and (2) voted to
recommend that the shareholders reject the Meanie offer. All of the Class B
directors and one of the Class A directors voted in favor of the action; the
other two Class A directors voted no. The directors in the majority
concluded that the Friendly combination was a better strategic fit for Target
and would provide more value to the Target shareholders in the long term.

The poison pill rights approved by the board were immediately issued to the
shareholders. If any person or group either (1) acquires more than 40% of
any class of Target stock or (2) acquires the right to vote more than 40% of
any class of Target stock, all holders of the rights, except for the 40%+
shareholder, would be entitled to buy another Target share of their class for
$60. Until someone hits the 40% trigger, the rights are redeemable if the
directors and the holders of 60% of each class of shares vote to redeem them.
Once someone hits the 40% trigger, the rights are not redeemable, but they
automatically expire in three years.

The Modified Deal with Friendly

When the Meanie offer was announced, Target representatives began

meeting with Friendlys representatives about a possible modification of the
Target-Friendly deal. On March 28, by the same 4-2 vote, the Target board
approved a new, modified deal, with the following components:

(1) Target will merge into a wholly-owned sub of Friendly.

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(2) In the merger, the Class A Target shareholders will receive $120 cash
for each of their shares.

(3) The Class B shareholders will receive 1.75 Friendly shares for each
Class B share. Friendly stock has dropped to a market value of $70 a
share since the announcement of the original merger agreement, so
1.75 Friendly shares are currently worth $122.50.

(4) If Target does not complete the transaction for any reason, it must pay
Friendly a $50 million termination fee. (This amount is approximately
5% of the value of the deal.)

On April 5, Meanie again offered to top the Friendly deal if the Target board
would negotiate with it and rescind the poison pill. Meanie indicated it could
probably offer around $125 per share if it could see Targets books to verify
Targets value. The Target board refused, so Meanie dropped its offer.

Discuss whether the Target directors have breached their fiduciary duties.

NOTE:
1. Assume that the Target board and officers adequately informed
themselves before any decisions they made. In other words, do not
discuss any issues arising under the Smith v. Van Gorkom duty to
inform.
2. Do not discuss procedural issues, such as the demand requirement,
related to bringing an action against the Target directors to enforce
their duties.