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Merger and Acquisitions
University of Illinois School of Law
Aviram, Amitai

Mergers and Acquisition Aviram Spring 2015

Section 1a

Types of M&A transactions: Freezeout, Takeover, Merger of equals.

Constitutional Documents

Creation of constitutional documents:

Charter [DGCL §101(a)]: incorporator

Bylaws [DGCL §109]: Until stock is issued – board; after – SHs (charter may also allow board)

Amendment of constitutional documents

Charter [DGCL §242(b)]

First, board must adopt the proposed amendment

Then, SHs approve the proposed amendment (in some circumstances, SHs vote in separate groups [DGCL §242(b)(2)])

Bylaws [DGCL §109]

SHs always allowed to amend

By default board can’t amend bylaws, but charter may allow board to amend

When a majority of directors are tainted, a good way to cut them out of the loop is to create a board committee of independent directors and authorize the committee to handle the transaction

Best practices of such delegation to an independent committee are:

Transaction negotiated & approved by a special committee or an independent board majority

-Committee is independent

-Committee satisfied its duty of care

-Committee authorized to freely select its advisors (& they’re independent)

-Committee authorized to use firm’s full bargaining power (e.g., implement takeover defenses) & to consider all of the firm’s options

FD Analysis

1. Negligence

(1) Negligent act—BJR rebutted?—if yes,—if gross negligence[S1] —if yes—FD breached

(2) Neg. Inaction—BJR automatically rebutted— FD breached if gross negligence.[S2]

2. Bad faith

(1) Bad faith act—Illegality?[S3] Or Corporate waste[S4] —if any of the two yes—BJR rebutted—FD automatically breached.

(2) Bad faith inaction—BJR automatically rebutted—Disregard of duty? [S5] Or failure to disclose?[S6] —if any of the two yes—FD breached.

3. Self-dealing

Conflict of interest[S7] / unauthorized benefit form fiduciary position—entire fairness test. (看Beam案例)

Entire fairness test:

1.Was undertaking the act (e.g. hiring CEO’s spouse) in the firm’s interest?

2.Were the terms of act (e.g., employment contract) similar to what firm would have received in an arm’s length transaction?

Fair process (for determining price/other terms) – indirect assessment

Fair price (valuation/comparison) – direct assessment of the terms

Enhanced Scrutiny

-Applies when A deploys corporate power against B, (allegedly) to achieve greater good for the firm

A adopts takeover defenses (Unocal)

A limits ability to sell shares, to preserve tax benefits (Selectica)

A runs SH meeting in way that interferes with SHs’ vote (Blasius)

-The test: quasi-BJR (did actor make a business judgment, was actor independent & did actor act in good faith?) + reasonableness (is act a reasonable way to address threat?)


1. Identity: Appropriate approver:


Person who has authority to approve on behalf of B & doesn’t have CoI with B regarding the behavior that is approved.

Authority may be assumed if person has authority to conduct on behalf of the beneficiary the same behavior that is subject to approval (unless specifically prohibited from approving or delegating that behavior)[S8] [S9]

2. Attributability:

A must have acted or purported to act on B’s behalf [Rest. 4.03]

B must exist at the time of the act [Rest. 4.04]

No public policy reasons to prevent B from approving.

3. Capacity:

Approver must have legal capa

next slide) transaction is called a long-form merger (“LFM”)

LFMs require approval by majority of SHs (SFMs don’t require SH approval)

How to ensure a fair price of MSHs in a Freezeout transaction? (Step 1 + step 2)









Example 1: Suppose Amy’s unauthorized purchase of Blackacre was ratified not by Paul but by Alex (another agent of Paul). Alex is an appropriate approver if Paul authorized him to buy property at $210K (or to ratify such deals)

Example 2: if Paul authorized Alex to buy property at $210K, but specifically prohibited him from delegating the purchase to others, the authority to approve is not assumed (since if he approved Amy’s act it would amount to a delegation of his authority to Amy)


E.g., B knowingly accepts the benefits of A’s act, even if B manifests disagreement to accepting the act’s legal consequences


E.g., A buys car for B from T without actual or apparent authority. T persuades B to ratify by falsely telling him car has a new engine. B not bound to T.