LEGAL ASPECTS OF

CORPORATE FINANCE
LexisNexis Law School Publishing
Advisory Board
Paul Caron
Charles Hartsock Professor of Law
University of Cincinnati College of Law
Olympia Duhart
Associate Professor of Law
Nova Southeastern University, Shepard Broad Law School
Samuel Estreicher
Dwight D. Opperman Professor of Law
Director, Center for Labor and Employment Law
NYU School of Law
Steve Friedland
Professor of Law
Elon University School of Law
Joan Heminway
College of Law Distinguished Professor of Law
University of Tennessee College of Law
Edward Imwinkelried
Edward L. Barrett, Jr. Professor of Law
UC Davis School of Law
Paul Marcus
Haynes Professor of Law
William and Mary Law School
John Sprankling
Distinguished Professor of Law
McGeorge School of Law
Melissa Weresh
Director of Legal Writing and Professor of Law
Drake University Law School
LEGAL ASPECTS OF
CORPORATE FINANCE

FIFTH EDITION
Richard T. McDermott
Adjunct Professor
Fordham University School of Law
ISBN: 978-0-7698-5945-3
LL ISBN: 978-0-7698-5946-0
eBook ISBN: 978-1-5791-1715-3
Library of Congress Cataloging-in-Publication Data
McDermott, Richard T.
Legal aspects of corporate finance / Richard T. McDermott, Adjunct Professor, Fordham University School of
Law. -- Fifth edition.
p. cm.
Includes index.
ISBN 978-0-7698-5945-3
1. Corporations--Finance--Law and legislation--United States. 2. Securites--United States. I. Title.
KF1428.M33 2013
346.73'0666--dc23
2013010291

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PREFACE

This book is the result of my experience in teaching a class in Corporate Finance at the
New York University School of Law for 19 years and at the Fordham University School
of Law for 12. That experience, in turn, is based upon the 37 years I spent practicing
business law.
One of my objectives in the course has been to provide a forum in which terms and
concepts pertaining to corporate finance and related matters can be discussed, defined,
and explained in an atmosphere in which the students are not reticent to disclose that they
have not yet completely mastered the field of business law. When I began to practice
corporate and securities law, I was unfamiliar with the field, and began my education as a
bag carrier and note taker at conferences, while trying to appear as if I actually knew
what was going on. In some respects, my course and, to a certain extent this book, could
be entitled “Everything You Wanted to Know About Corporate Finance but Were Afraid
to Ask.” Indeed, I make it a point to admonish my students that the only “stupid”
question in my classroom is the one that is not asked. In addition to the cases, statutes,
and textual materials, I have included excerpts from various corporate finance documents,
such as debentures, trust indentures, preferred stock provisions, and acquisition
agreements. It has been my experience that it is helpful for students to study the actual
form of the documentation under consideration while they are also dealing with various
explanatory secondary materials. I have inserted the documentation examples in the text,
rather than as appendices, to encourage their being read with the other materials. I
subscribe to the view, originally espoused by Christopher Columbus Langdell of the
Harvard Law School (see Ames, Professor Langdell — His Services to Legal Education,
20 HARV. L. REV. 12 [1906]), that the most useful way of studying law is an analysis of
legal opinions deciding actual cases or controversies. I believe that the principles of the
case method can also be utilized to consider and analyze the corporate finance documents
themselves. Their terms, often the product of complex and sophisticated negotiations and
resulting in workable solutions to a myriad of business and financial issues, while at the
same time being responsive to decisional and statutory law, are in a very real sense “the
law of the case” with regard to a particular corporate finance transaction.
In the context of corporate finance and related transactions, the views of Professor
Langdell were supplemented by Paul D. Cravath, who, nearly 100 years ago, advised
young lawyers and general practitioners that:
The provisions of the modern reorganization agreement and the modern corporate
mortgage are the result of the experience and prophetic vision of a great many able
lawyers. Every new provision is suggested either by some decision of the courts or
by an actual experience or by some lawyer’s conception of a possible exigency.
Ordinarily in drafting a document a lawyer must draw chiefly upon his own
experience and the results of his own observation, but corporate mortgages and
reorganization agreements are public documents so that each lawyer can have the
benefit of the experience of many others. . . . I advise you to adhere to precedent
iii
PREFACE
and, in most cases, you will find the long reorganization agreement based on
precedent much safer than the agreement half as long drawn by your neighbor who
scorns precedent.
CRAVATH, REORGANIZATION OF CORPORATIONS IN SOME LEGAL PHASES OF CORPORATE
FINANCING, REORGANIZATION AND REGULATION 153, 178 (1917).
The materials in this book are those dealt with in my course in Legal Aspects of
Corporate Finance. As the title suggests, this book is for the most part concerned with the
legal aspects of corporate finance. Particular emphasis is placed upon the nature of the
legal relationships created by corporate finance transactions. Indeed, the matters dealt
with in this book and my course touch upon a number of areas of substantive law in
addition to state corporation laws, including contracts, torts, antitrust, negotiable
instruments, tax, securities, bankruptcy and creditors’ rights, environmental law,
constitutional law, and conflict of laws. It is important that students understand that
outstanding corporate practitioners are versatile lawyers who apply their substantive
knowledge to transactions. They are not technocrats engaged in some arcane subspecialty
with little connection to the law. In a sense, these lawyers do their “litigating” by
discerning and resolving issues at the negotiating table when transactions are being
structured. The study of case law is important in corporate finance because it is essential
that deal lawyers understand how judges approach disputes and construe documents in
this area. Having a “judge’s eye view” is thus of great value to one who is negotiating or
drafting documents, and the cases in this book were selected with that in mind.

September 4, 2012

iv
ACKNOWLEDGMENTS

I wish to express my appreciation for the contributions of my partners at Alexander &

Green, Rogers & Wells, and Clifford Chance, particularly Klaus H. Jander. I also wish to
thank Professor Jack Slain of the faculty of the New York University School of Law, and
Michael Martin, Dean of the Fordham University School of Law. I also wish to
acknowledge the outstanding administrative assistance, organizational skills, and editorial
support of Randé L. DeGidio, Marge Oehler and my editor, Cristina Gegenschatz, the
invaluable assistance of Frances Schoenfield (Reference Librarian) of Clifford Chance, as
well as the contributions of Dave Thomas, Richard R. Howe, James Leyden, John Mark
Zeberkiewicz, Robert Powel, Marissa Marco, Lawrence Lederman, Jack Porter, Nolan
Welch, Jason Jones, and Palen McDermott.
I would certainly be remiss if I did not thank my children, Richard Bissell McDermott
and Christina Henderson and their spouses, Martha Mary Rossi and Judson Roberts
Henderson, who, in addition to their encouragement and support, contributed their names
to the various entities which appear in the Problem and Example sections of various
chapters, as do those of our grandchildren Palen, Carmel and Richard Peter McDermott
and Maisie, Hutch and Mac Henderson. My wife, Mary Pat McDermott, has made the
many sacrifices that the spouse of a lawyer necessarily and often inconveniently must
endure. Her own participation in this process dates from her typing (and the now quaint
use of carbon paper, cut and paste insertions and white-out) the countless drafts and
revisions of my first legal publication: Note, Taxation — Seller’s Proceeds of “Bootstrap
Sale” to Tax-Exempt Organization Held Taxable at Capital Gains Rates, 34 FORDHAM L.
REV. 358 (1965). Finally, I am most grateful to my father, Richard A. McDermott, with
whom I first traversed the legal thickets.

v
TABLE OF CONTENTS
Chapter 1 CORPORATE FINANCE AND THE PROCESS OF
CAPITAL FORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1

§ 1.01 CORPORATE FINANCE — GENERAL OBSERVATIONS . . . . . . . . . . 1

§ 1.02 DEBT AND EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
[A] Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
[1] Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
[2] Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
[3] Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
[4] Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
[5] Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
[B] Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
[1] Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
[2] Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
[C] Convertible and Exchangeable Securities . . . . . . . . . . . . . . . . . . . . . . . 7
[D] American Depositary Receipts (ADRs) . . . . . . . . . . . . . . . . . . . . . . . . . 8
[E] Debt-Equity Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
§ 1.03 REDEMPTION AND REPURCHASE OF DEBT AND EQUITY
SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
§ 1.04 ACQUISITIONS AND OTHER TYPES OF INVESTMENTS BY
CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
§ 1.05 PARTIES TO AND BASIC STRUCTURE OF CAPITAL FORMATION
TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
§ 1.06 INVESTMENT BANKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Securities Industry Association v. Board of Governors . . . . . . . . . . . . 16
§ 1.07 THE CREDIT CRISIS OF 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
§ 1.08 PERTINENT STATUTORY MATERIAL . . . . . . . . . . . . . . . . . . . . . . . 23

Chapter 2 VALUATION OF THE CORPORATE ENTERPRISE —

PURPOSES AND METHODOLOGY . . . . . . . . . . . . . . . . 95
§ 2.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
§ 2.02 VALUATION TERMINOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
§ 2.03 METHODS USED IN THE VALUATION PROCESS FOR BUSINESS
CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
[A] Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
[B] Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
[C] Capitalization of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
§ 2.04 APPLICATION OF VALUATION TECHNIQUES; FAIRNESS
OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Cawley v. SCM Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
vii
TABLE OF CONTENTS
Friedman v. Beway Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
M.G. Bancorporation v. Le Beau . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Global GT LP v. Golden Telecom, Inc. . . . . . . . . . . . . . . . . . . . . . . . 133
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Chapter 3 DEBT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

§ 3.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

§ 3.02 LEGAL AUTHORITY FOR ISSUANCE . . . . . . . . . . . . . . . . . . . . . . . 157
§ 3.03 DEBENTURE FORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
§ 3.04 THE INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Broad v. Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . 175
Concord Real Estate CDO 2006-1 v. Bank of Am. N.A. . . . . . . . . . . . 179
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
[A] Express Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Rievman v. Burlington N.R. Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Affıliated Computer Services v. Wilmington Trust Co. . . . . . . . . . . 200
Racepoint Partners, LLC v. JPMorgan Chase Bank, N.A. . . . . . . . . 204
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
[B] Implied Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
Metropolitan Life Ins. Co. v. RJR Nabisco, Inc. . . . . . . . . . . . . . . . 208
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
§ 3.05 REDEMPTION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Christina Cosmetics, Inc. 10% Subordinated Debentures . . . . . . . . . . 233
Morgan Stanley & Co. v. Archer Daniels Midland Co. . . . . . . . . . . . 234
Mutual Sav. Life Ins. Co. v. James River Corp. . . . . . . . . . . . . . . . . . 249
§ 3.06 “NO ACTION” CLAUSES AND THE INDENTURE TRUSTEE . . . . . 255
Birn v. Childs Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Feldbaum v. McCrory Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Rabinowitz v. Kaiser-Frazer Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 265
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
§ 3.07 THE MEANING OF THE TERM “ALL OR SUBSTANTIALLY ALL”
OF THE ASSETS OF A BUSINESS CORPORATION IN THE
CONTEXTS OF TRUST INDENTURES AND OTHER ASPECTS
OF CORPORATE FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Story v. Kennecott Copper Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
Katz v. Bregman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
viii
TABLE OF CONTENTS
§ 3.08 THE TRUST INDENTURE ACT OF 1939 . . . . . . . . . . . . . . . . . . . . . 279
[A] Historical Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Zeffıro v. First Pennsylvania Banking & Trust Co. . . . . . . . . . . . . . 280
[B] Excerpts from Regulation S-K of the Securities and Exchange
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
FSC Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
[C] Requirements of, and Form of Compliance with, Section 315 of the
Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
Elliott Assoc. v. J. Henry Schroder Bank & Trust Co. . . . . . . . . . . . 286
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
[D] Acceleration Provisions and Section 316 of the Trust Indenture Act . . . 294
Friedman v. Chesapeake & O. R.R. Co. . . . . . . . . . . . . . . . . . . . . 295
Notes and Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
[E] Filing Requirements of the Trust Indenture Act . . . . . . . . . . . . . . . . . 299
Affıliated Computer Servs. v. Wilmington Trust Co. . . . . . . . . . . . . 299
§ 3.09 THE SUPPLEMENTAL INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . 302
Bank of N.Y. v. Tyco Int’l Group, S.A. . . . . . . . . . . . . . . . . . . . . . . . 302
§ 3.10 SUBORDINATED DEBT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 309
In re Envirodyne Indus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
§ 3.11 NEW YORK STOCK EXCHANGE LISTING REQUIREMENTS
REGARDING DEBT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 318
§ 3.12 CERTAIN RESTRUCTURING AND REORGANIZATION ISSUES . . 319
Katz v. OAK Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
In re Chateaugay Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
Union Bank v. Wolas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
Problem A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
Problem B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342

Chapter 4 PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

§ 4.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

§ 4.02 LEGAL AUTHORITY FOR ISSUANCE . . . . . . . . . . . . . . . . . . . . . . . 345
§ 4.03 EXCERPTS FROM A CERTIFICATE OF INCORPORATION
AUTHORIZING THE ISSUANCE OF PREFERRED STOCK . . . . . . . 345
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
Waggoner v. Laster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
Staar Surgical Company v. Waggoner . . . . . . . . . . . . . . . . . . . . . . . 359
§ 4.04 CORPORATE RESOLUTIONS CREATING A SERIES OF
PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
In re Sunstates Corporation Shareholder Litigation . . . . . . . . . . . . . 377
ix
TABLE OF CONTENTS
§ 4.05 PREFERRED STOCK DIVIDEND PROVISIONS . . . . . . . . . . . . . . . . 383
Guttmann v. Illinois Central R. Co. . . . . . . . . . . . . . . . . . . . . . . . . . 384
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387
§ 4.06 ADJUSTABLE DIVIDEND RATE PREFERRED STOCK . . . . . . . . . . 387
§ 4.07 THE LIQUIDATION PREFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . 388
Anderson v. Cleveland-Cliffs Iron Co. . . . . . . . . . . . . . . . . . . . . . . . 388
Robinson v. T.I.M.E.-DC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392
LC Capital Master Fund v. James . . . . . . . . . . . . . . . . . . . . . . . . . . 396
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406
§ 4.08 INTERPRETATION AND EFFECT OF CLASS VOTING
PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
[A] Special Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
Baron v. Allied Artists Pictures Corp. . . . . . . . . . . . . . . . . . . . . . . 408
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414
[1] Duties of Directors Elected By Holders of Preferred Stock . . . . . . . . 416
In re Trados Incorporated Shareholder Litigation . . . . . . . . . . . 416
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425
[B] Judicial Construction of Preferred Stock and Statutory Voting
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426
Fletcher International, Ltd v. ION Geophysical Corporation . . . . . 426
Terry v. Penn Central Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437
Warner Communications Inc. v. Chris-Craft Industries, Inc. . . . . . . 437
Elliott Associates v. Avatex Corporation . . . . . . . . . . . . . . . . . . . . 446
Federated Department Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 460
§ 4.09 REDEMPTION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464
Notice of Redemption of all of the Outstanding Shares of $2.25
Cumulative Series a Preferred Stock of Xyz, Inc. . . . . . . . . . . . . . . . 465
Rauch v. RCA Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466
§ 4.10 NEW YORK STOCK EXCHANGE LISTING REQUIREMENTS
REGARDING PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 471
703.05 Preferred Stock Offerings Listing Process . . . . . . . . . . . . . . . . . . . . . . . 471
313.00 Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472
§ 4.11 MODIFICATIONS OF PREFERRED STOCK PROVISIONS . . . . . . . . 474
Bove v. Community Hotel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 474
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482
Problem A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483
Problem B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484

Chapter 5 CONVERTIBLE SECURITIES . . . . . . . . . . . . . . . . . . . . 487

§ 5.01 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487
Pittsburgh Terminal Corp. v. Baltimore & O. R.R. Co. . . . . . . . . . . . 487
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§ 5.02 LEGAL AUTHORITY FOR ISSUANCE . . . . . . . . . . . . . . . . . . . . . . . 489
§ 5.03 CONSIDERATION FOR SHARES ISSUED UPON CONVERSION OF
SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490
§ 5.04 PROVISIONS RELATING TO CONVERTIBLE SECURITIES . . . . . . 491
[A] Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491
[B] Example of Preferred Stock Conversion Rate Provisions . . . . . . . . . . . 491
[C] Example of Preferred Stock Conversion Price Provisions . . . . . . . . . . 495
[D] Convertible Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502
[E] Duties of Convertible Debenture Indenture Trustee . . . . . . . . . . . . . . 503
§ 5.05 THE CONVERSION PREMIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504
§ 5.06 COVENANTS GENERALLY MADE BY THE ISSUER OF
CONVERTIBLE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504
§ 5.07 INTERPRETATION AND EFFECT OF ANTI-DILUTION
PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
Broad v. Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . 506
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537
Stephenson v. Plastics Corp. of Am. . . . . . . . . . . . . . . . . . . . . . . . . . 538
Wood v. Coastal States Gas Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 548
Lohnes v. Level 3 Communs., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 558
Reiss v. Fin. Performance Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 569
Bernstein v. Canet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572
Broenen v. Beaunit Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585
§ 5.08 EFFECT OF REDEMPTION UPON THE CONVERSION RIGHT . . . . 585
Van Gemert v. Boeing Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585
Meckel v. Continental Resources Co. . . . . . . . . . . . . . . . . . . . . . . . . 597
§ 5.09 STAND-BY PURCHASE ARRANGEMENTS . . . . . . . . . . . . . . . . . . 603
§ 5.10 EXCHANGEABLE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 604
§ 5.11 NEW YORK STOCK EXCHANGE LISTING REQUIREMENTS
REGARDING CONVERTIBLE SECURITIES RESERVES FOR
CONVERTIBLE SECURITIES LISTING PROCESS . . . . . . . . . . . . . . 608
§ 5.12 POISON PILL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609
[A] Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609
Moran v. Household International, Inc. . . . . . . . . . . . . . . . . . . . . 610
Account v. Hilton Hotels Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 620
Bank of New York Co. v. Irving Bank Corp. . . . . . . . . . . . . . . . . . . 626
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 629
Versata Enters. v. Selectica, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 629
Problem A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650
Problem B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652

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Chapter 6 DISTRIBUTIONS IN RESPECT OF EQUITY
SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655

§ 6.01 LEGAL AND BUSINESS ASPECTS OF DIVIDENDS . . . . . . . . . . . . 655

British Printing & Communication Corp. PLC v. Harcourt Brace
Jovanovich, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 657
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670
Ivanhoe Partners v. Newmont Mining Corp. . . . . . . . . . . . . . . . . . . . 671
Gabelli & Co. v. Liggett Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 673
In re C-T of Virginia, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 678
Munford v. Valuation Research Corp. (In re Munford, Inc.) . . . . . . . . 686
In re Envirodyne Indus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690
Isquith v. Caremark Int’l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
§ 6.02 STOCK DIVIDENDS AND STOCK SPLITS . . . . . . . . . . . . . . . . . . . . 701
Applebaum v. Avaya, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 711
§ 6.03 PURCHASE BY A CORPORATION OF ITS OWN SHARES . . . . . . . 723
[A] State Statutory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723
[B] Other State Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724
Heckmann v. Ahmanson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 732
In re SPM Mfg. Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733
Unocal Corp. v. Mesa Petroleum Co. . . . . . . . . . . . . . . . . . . . . . . 743
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754
[C] Certain Sections of the Securities Exchange Act of 1934 and Certain
Rules Promulgated by the Securities and Exchange Commission
Thereunder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755
Securities Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755
SEC Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755
McCormick v. Fund Am. Cos. . . . . . . . . . . . . . . . . . . . . . . . . . . . 764
SEC v. Carter Hawley Hale Stores, Inc. . . . . . . . . . . . . . . . . . . . . 779
Problem A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788
Problem B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789

Chapter 7 INVESTMENT BY THE ISSUER OF SECURITIES —

ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 791
§ 7.01 TYPES OF ACQUISITION TRANSACTIONS . . . . . . . . . . . . . . . . . . 791
[A] Corporate Acquisitions — Various Structures . . . . . . . . . . . . . . . . . . 791
[B] Certain Legal Consequences of Acquisitions . . . . . . . . . . . . . . . . . . . 792
Schmidt v. Financial Resources Corp. . . . . . . . . . . . . . . . . . . . . . 794
Schumacher v. Richards Shear Co. . . . . . . . . . . . . . . . . . . . . . . . . 796
Loving & Assocs. v. Carothers . . . . . . . . . . . . . . . . . . . . . . . . . . . 798
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§ 7.02 DUTIES OWED TO AND RIGHTS OF THE SECURITY HOLDERS
OF THE ACQUIRED CORPORATION . . . . . . . . . . . . . . . . . . . . . . . 806
Clagett v. Hutchison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 806
Zetlin v. Hanson Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811
Chromalloy American Corp. v. Sun Chemical Corp. . . . . . . . . . . . . . 812
Editek, Inc. v. Morgan Capital, L.L.C. . . . . . . . . . . . . . . . . . . . . . . . 820
Enterra Corp. v. SGS Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . 825
Ams. Mining Corp. v. Theriault . . . . . . . . . . . . . . . . . . . . . . . . . . . . 837
Schulwolf v. Cerro Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 870
Alpert v. 28 Williams St. Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 874
Weinberger v. UOP, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 882
In re Pure Res., Inc., S’holders Litig. . . . . . . . . . . . . . . . . . . . . . . . . 883
Smith v. Van Gorkom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954
Landreth Timber Co. v. Landreth . . . . . . . . . . . . . . . . . . . . . . . . . . 955
§ 7.03 CERTAIN ACQUISITION DOCUMENTATION . . . . . . . . . . . . . . . . . 965
MBI Acquisition Partners, L.P. v. Chronicle Publ’g Co. . . . . . . . . . . 965
[A] Example of Letter of Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 973
[B] Cash for Stock Merger Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 975
[C] Contingent Value Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 978
[D] Stock-for-Stock Merger Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 980
[E] Pre-Filing Clearance Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981

TABLE OF CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TC-1

INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1

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