Exam 3: The Corporate Takeover Market:

All of the following are true of poison pills except for

Verizon Acquires MCI—The Anatomy of Alternative Bidding Strategies While many parties were interested in acquiring MCI, the major players included Verizon and Qwest. U.S.-based Qwest is an integrated communications company that provides data, multimedia, and Internet-based communication services on a national and global basis. The acquisition would ease the firm's huge debt burden of $17.3 billion because the debt would be supported by the combined company with a much larger revenue base and give it access to new business customers and opportunities to cut costs. Verizon Communications, created through the merger of Bell Atlantic and GTE in 2000, is the largest telecommunications provider in the United States. The company provides local exchange, long distance, Internet, and other services to residential, business, and government customers. In addition, the company provides wireless services to over 42 million customers in the United States through its 55 percent–owned joint venture with Vodafone Group PLC. Verizon stated that the merger would enable it to more efficiently provide a broader range of services, give the firm access to MCI's business customer base, accelerate new product development using MCI's fiber-optic network infrastructure, and create substantial cost savings. By mid-2004, MCI had received several expressions of interest from Verizon and Qwest regarding potential strategic relationships. By July, Qwest and MCI entered into a confidentiality agreement and proceeded to perform more detailed due diligence. Ivan Seidenberg, Verizon's chairman and CEO, inquired about a potential takeover and was rebuffed by MCI's board, which was evaluating its strategic options. These included Qwest's proposal regarding a share-for-share merger, following a one-time cash dividend to MCI shareholders from MCI's cash in excess of its required operating balances. In view of Verizon's interest, MCI's board of directors directed management to advise Richard Notebaert, the chairman and CEO of Qwest, that MCI was not prepared to move forward with a potential transaction. The stage was set for what would become Qwest's laboriously long and ultimately unsuccessful pursuit of MCI, in which the firm would improve its original offer four times, only to be rejected by MCI in each instance even though the Qwest bids exceeded Verizon’s. After assessing its strategic alternatives, including the option to remain a stand-alone company, MCI's board of directors concluded that the merger with Verizon was in the best interests of the MCI stockholders. MCI's board of directors noted that Verizon's bid of $26 in cash and stock for each MCI share represented a 41.5 percent premium over the closing price of MCI's common stock on January 26, 2005. Furthermore, the stock portion of the offer included "price protection" in the form of a collar (i.e., the portion of the purchase price consisting of stock would be fixed within a narrow range if Verizon’s share price changed between the signing and closing of the transaction). The merger agreement also provided for the MCI board to declare a special dividend of $5.60 once the firm's shareholders approved the deal. MCI's board of directors also considered the additional value that its stockholders would realize, since the merger would be a tax-free reorganization in which MCI shareholders would be able to defer the payment of taxes until they sold their stock. Only the cash portion of the purchase price would be taxable immediately. MCI's board of directors also noted that a large number of MCI's most important business customers had indicated that they preferred a transaction between MCI and Verizon rather than a transaction between MCI and Qwest. While it is clearly impossible to know for sure, the sequence of events reveals a great deal about Verizon's possible bidding strategy. Any bidding strategy must begin with a series of management assumptions about how to approach the target firm. It was certainly in Verizon's best interests to attempt a friendly rather than a hostile takeover of MCI, due to the challenges of integrating these two complex businesses. Verizon also employed an increasingly popular technique in which the merger agreement includes a special dividend payable by the target firm to its shareholders contingent upon their approval of the transaction. This special dividend is an inducement to gain shareholder approval. Given the modest 3 percent premium over the first Qwest bid, Verizon's initial bidding strategy appears to have been based on the low end of the purchase price range it was willing to offer MCI. Verizon was initially prepared to share relatively little of the potential synergy with MCI shareholders, believing that a bidding war for MCI would be unlikely in view of the recent spate of mergers in the telecommunications industry and the weak financial position of other competitors. SBC and Nextel were busy integrating AT&T and Sprint, respectively. Moreover, Qwest appeared to be unable to finance a substantial all-cash offer due to its current excessive debt burden, and its stock appeared to have little appreciation potential because of ongoing operating losses. Perhaps stunned by the persistence with which Qwest pursued MCI, Verizon believed that its combination of cash and stock would ultimately be more attractive to MCI investors than Qwest's primarily all-cash offer, due to the partial tax-free nature of the bid. Throughout the bidding process, many hedge funds criticized MCI's board publicly for accepting the initial Verizon bid. Since its emergence from Chapter 11, hedge funds had acquired significant positions in MCI's stock, with the expectation that MCI constituted an attractive merger candidate. In particular, Carlos Slim Helu, the Mexican telecommunications magnate and largest MCI shareholder, complained publicly about the failure of MCI's board to get full value for the firm's shares. Pressure from hedge funds and other dissident MCI shareholders triggered a shareholder lawsuit to void the February 14, 2005, signed merger agreement with Verizon. In preparation for a possible proxy fight, Verizon entered into negotiations with Carlos Slim Helu to acquire his shares. Verizon acquired Mr. Slim's 13.7 percent stake in MCI in April 2005. Despite this purchase, Verizon's total stake in MCI remained below the 15 percent ownership level that would trigger the MCI rights plan. About 70 percent (i.e., $1.4 billion) of the cash portion of Verizon's proposed purchase price consisted of a special MCI dividend payable by MCI when the firm's shareholders approved the merger agreement. Verizon's management argued that the deal would cost their shareholders only $7.05 billion (i.e., the $8.45 billion purchase price consisting of cash and stock, less the MCI special dividend). The $1.4 billion special dividend reduced MCI's cash in excess of what was required to meet its normal operating cash requirements. Qwest consistently attempted to outmaneuver Verizon by establishing a significant premium between its bid and Verizon's, often as much as 25 percent. Qwest realized that its current level of indebtedness would preclude it from significantly increasing the cash portion of the bid. Consequently, it had to rely on the premium to attract enough investor interest, particularly among hedge funds, to pressure the MCI board to accept the higher bid. However, Qwest was unable to convince enough investors that its stock would not simply lose value once more shares were issued to consummate the stock and cash transaction. Qwest could have initiated a tender or exchange offer directly to MCI shareholders, proposing to purchase or exchange their shares without going through the merger process. The tender process requires lengthy regulatory approval. However, if Qwest initiated a tender offer, it could trigger MCI's poison pill. Alternatively, a proxy contest might have been preferable because Qwest already had a bid on the table, and the contest would enable Qwest to lobby MCI shareholders to vote against the Verizon bid. This strategy would have avoided triggering the poison pill. Ultimately, Qwest was forced to capitulate simply because it did not have the financial wherewithal to increase the $9.9 billion bid. It could not borrow anymore because of its excessive leverage. Additional stock would have contributed to earnings dilution and caused the firm's share price to fall. It is unusual for a board to turn down a higher bid, especially when the competing bid was 17 percent higher. In accepting the Verizon bid, MCI stated that a number of its large business customers had expressed a preference for the company to be bought by Verizon rather than Qwest. MCI noted that these customer concerns posed a significant risk in being acquired by Qwest. The MCI board's acceptance of the lower Verizon bid could serve as a test case of how well MCI directors are conducting their fiduciary responsibilities. The central issue is how far boards can go in rejecting a higher offer in favor of one they believe offers more long-term stability for the firm's stakeholders. Ron Perlman, the 1980s takeover mogul, saw his higher all-cash bid rejected by the board of directors of Revlon Corporation, which accepted a lower offer from another bidder. In a subsequent lawsuit, a court overruled the decision by the Revlon board in favor of the Perlman bid. Consequently, from a governance perspective, legal precedent compels boards to accept higher bids from bona fide bidders where the value of the bid is unambiguous, as in the case of an all-cash offer. However, for transactions in which the purchase price is composed largely of acquirer stock, the value is less certain. Consequently, the target's board may rule that the lower bidder's shares have higher appreciation potential or at least are less likely to decline than those shares of other bidders. MCI's president and CEO Michael Capellas and other executives could collect $107 million in severance, payouts of restricted stock, and monies to compensate them for taxes owed on the payouts. In particular, Capellas stood to receive $39.2 million if his job is terminated "without cause" or if he leaves the company “for good reason." -Who are the winners and losers in the Verizon/MCI merger? Be specific.

Which is true of the following? A white knight

Which of the following are commonly considered alternative models of corporate governance?

The control market is applicable when which of the following conditions are true?

TYCO Rescues AMP from Allied Signal In late November 1998, Tyco International Ltd., a diversified manufacturing and service company, agreed to acquire AMP Inc., an electrical components supplier, for $11.3 billion. In doing so, AMP successfully fended off a protracted takeover attempt by AlliedSignal Inc. As part of the merger agreement with Tyco, AMP rescinded its $165 million share buyback offer and its plan to issue an additional 25 million shares to fund its defense efforts. Tyco, the world’s largest electronics connector company, saw the combination with AMP as a means of becoming the lowest cost producer in the industry. Lawrence Bossidy, CEO of AlliedSignal, telephoned an AMP director in mid-1998 to inquire about AMP’s interest in a possible combination of their two companies. The inquiry was referred to the finance committee of the AMP board, which expressed no interest in merging with AlliedSignal. By early August, AlliedSignal announced its intention to initiate an unsolicited tender offer to acquire all of the outstanding shares of AMP common stock for $44.50 per share to be paid in cash. The following week AlliedSignal initiated such an offer and sent a letter to William J. Hudson, then CEO of AMP, requesting a meeting to discuss a possible business combination. Bossidy also advised AMP of AlliedSignal’s intention to file materials shortly with the SEC as required by federal law to solicit consents from AMP’s shareholders. The consent solicitation materials included proposals to increase the size of AMP’s board from 11 to 28 members and to add 17 AlliedSignal nominees, all of whom were directors or executive officers of AlliedSignal. Within a few days, the AMP board announced its intentions to continue to aggressively pursue its current strategic initiatives, because the AlliedSignal offer did not fully reflect the values inherent in AMP businesses. In addition, the AMP board also replaced Hudson with Robert Ripp as chair and CEO of AMP. The AMP board also authorized an amendment to the AMP rights agreement dated October 25, 1989. The amendment provided that the rights could not be redeemed if there were a change in the composition of the AMP board following the announcement of an unsolicited acquisition proposal such that the current directors no longer comprised a majority of the board. A transaction not approved by AMP’s board and involving the acquisition by a person or entity of 20% or more of AMP’s common stock was defined as an unsolicited acquisition proposal. By early September, AlliedSignal amended its tender offer to reduce the number of shares of AMP common stock it was seeking to purchase to 40 million shares. AlliedSignal also stated that it would undertake another offer to acquire the remaining shares of AMP common stock at a price of $44.50 in cash following consummation of its offer to purchase up to 40 million shares. In concert with its tender offer, AlliedSignal also announced its intention to solicit consents for a proposal to amend AMP’s bylaws. The proposed amendment would strip the AMP board of all authority over the AMP rights agreement and any similar agreements and to vest such authority in three individuals selected by AlliedSignal. In response, the AMP board unanimously determined that the amended offer from AlliedSignal was not in the best interests of AMP shareholders. The AMP board also approved another amendment to the AMP rights agreement, lowering the threshold that would make the rights redeemable from 20% to 10% of AMP’s shares outstanding. AlliedSignal immediately modified its tender offer by reducing the number of shares it wanted to purchase from 40 million to 20 million shares at $44.50 per share. AMP announced a self-tender offer to purchase up to 30 million shares of AMP common stock at $55 per share. The AMP self-tender offer was intended to provide AMP shareholders with an opportunity to sell a portion of their shares of common stock at a price in excess of AlliedSignal’s $44.50 per share offer. Also, on September 28, 1998, AMP stated its intention to create a new ESOP that would hold 25 million shares of AMP common stock. Allied Signal indicated that if the self-tender were consummated, it would reduce the consideration to be paid in any further Allied Signal offers to $42.62 per share . Credit Suisse, AMP’s investment banker, approached a number of firms, including Tyco, concerning their possible interest in acquiring AMP. In early November, Tyco stepped forward as a possible white knight. Based on limited information, L. Dennis Kozlowski, Tyco’s CEO, set the preliminary valuation of AMP at $50.00 per share. This value assumed a transaction in which AMP shares would be exchanged for Tyco shares and was subject to the completion of appropriate due diligence. In mid-November, Ripp and Bossidy met at Bossidy’s request. Bossidy indicated that AlliedSignal would be prepared to increase its proposed acquisition price for AMP by a modest amount and to include stock for a limited portion of the total purchase price. The revised offer also would include a minimum share exchange ratio for the equity portion of the purchase price along with an opportunity for AMP shareholders to participate in any increase in AlliedSignal’s stock before the closing. The purpose of including equity as a portion of the purchase price was to address the needs of certain AMP shareholders, who had a low tax basis in the stock and who wanted a tax-free exchange. Ripp indicated that the AMP board expected a valuation of more than $50.00 per share. Tyco indicated a willingness to increase its offer to at least $51.00 worth of Tyco common shares for each share of AMP common stock. The offer also would include protections similar to those offered in AlliedSignal’s most recent proposal. On November 20, 1998, the AMP board voted unanimously to approve the merger agreement and to recommend approval of the merger to AMP’s shareholders. They also voted to terminate the AMP self-tender offer, the ESOP, and AMP’s share repurchase plan and to amend the AMP rights agreement so that it would not apply to the merger with Tyco. In early August, AlliedSignal filed a complaint against AMP in the United States District Court against the provisions of the AMP rights agreement. The complaint also questioned the constitutionality of certain anti-takeover provisions of Pennsylvania state statutes. Concurrently, AMP shareholders filed four shareholder class-action lawsuits against AMP and its board of directors. The suits alleged that AMP and its directors improperly refused to consider the original AlliedSignal offer and wrongfully relied on the provisions of the AMP rights agreement and Pennsylvania law to block the original AlliedSignal offer. In late August, AMP filed a complaint in the United States District court against AlliedSignal, seeking an injunction to prevent AlliedSignal from attempting to pack the AMP board of directors with AlliedSignal executive officers and directors. The complaint also alleged that the Schedule 14D-1 SEC filing by Allied-Signal was false and misleading. The complaint alleged that the filing failed to disclose that some of AlliedSignal’s proposed directors had conflicts of interest and that the packing of the board would prevent current board members from executing their fiduciary responsibilities to AMP shareholders. In early October, the court agreed with AMP and enjoined AlliedSignal’s board-packing consent proposals until it stated unequivocally that its director nominees have a fiduciary duty solely to AMP under Pennsylvania law. The court also denied AlliedSignal’s request to deactivate anti-takeover provisions in the AMP rights agreement. The court further held that shareholders might not sue the board for rejecting the AlliedSignal proposal. AlliedSignal immediately filed in the United States Court of Appeals for the Third Circuit. The court ordered that although AlliedSignal could proceed with the consent solicitation, its representatives could not assume positions on the AMP board until the court of appeals completed its deliberations. The district court ruled that the shares of AMP common stock acquired by AlliedSignal are “control shares” under Pennsylvania law. As a result, the court enjoined AlliedSignal from voting its AMP shares unless AlliedSignal’s voting rights are restored under Pennsylvania law. AlliedSignal was able to overturn the lower court ruling on appeal. -Should state laws be used to protect companies from hostile takeovers?

Friendly takeovers are negotiated settlements that are often characterized by bargaining, which remains undisclosed until the agreement has been signed.

All of the following are true of a proxy contest except for

A standstill agreement prevents an investor who has signed the agreement from ever again buying stock in the target firm.

Verizon Acquires MCI—The Anatomy of Alternative Bidding Strategies While many parties were interested in acquiring MCI, the major players included Verizon and Qwest. U.S.-based Qwest is an integrated communications company that provides data, multimedia, and Internet-based communication services on a national and global basis. The acquisition would ease the firm's huge debt burden of $17.3 billion because the debt would be supported by the combined company with a much larger revenue base and give it access to new business customers and opportunities to cut costs. Verizon Communications, created through the merger of Bell Atlantic and GTE in 2000, is the largest telecommunications provider in the United States. The company provides local exchange, long distance, Internet, and other services to residential, business, and government customers. In addition, the company provides wireless services to over 42 million customers in the United States through its 55 percent–owned joint venture with Vodafone Group PLC. Verizon stated that the merger would enable it to more efficiently provide a broader range of services, give the firm access to MCI's business customer base, accelerate new product development using MCI's fiber-optic network infrastructure, and create substantial cost savings. By mid-2004, MCI had received several expressions of interest from Verizon and Qwest regarding potential strategic relationships. By July, Qwest and MCI entered into a confidentiality agreement and proceeded to perform more detailed due diligence. Ivan Seidenberg, Verizon's chairman and CEO, inquired about a potential takeover and was rebuffed by MCI's board, which was evaluating its strategic options. These included Qwest's proposal regarding a share-for-share merger, following a one-time cash dividend to MCI shareholders from MCI's cash in excess of its required operating balances. In view of Verizon's interest, MCI's board of directors directed management to advise Richard Notebaert, the chairman and CEO of Qwest, that MCI was not prepared to move forward with a potential transaction. The stage was set for what would become Qwest's laboriously long and ultimately unsuccessful pursuit of MCI, in which the firm would improve its original offer four times, only to be rejected by MCI in each instance even though the Qwest bids exceeded Verizon’s. After assessing its strategic alternatives, including the option to remain a stand-alone company, MCI's board of directors concluded that the merger with Verizon was in the best interests of the MCI stockholders. MCI's board of directors noted that Verizon's bid of $26 in cash and stock for each MCI share represented a 41.5 percent premium over the closing price of MCI's common stock on January 26, 2005. Furthermore, the stock portion of the offer included "price protection" in the form of a collar (i.e., the portion of the purchase price consisting of stock would be fixed within a narrow range if Verizon’s share price changed between the signing and closing of the transaction). The merger agreement also provided for the MCI board to declare a special dividend of $5.60 once the firm's shareholders approved the deal. MCI's board of directors also considered the additional value that its stockholders would realize, since the merger would be a tax-free reorganization in which MCI shareholders would be able to defer the payment of taxes until they sold their stock. Only the cash portion of the purchase price would be taxable immediately. MCI's board of directors also noted that a large number of MCI's most important business customers had indicated that they preferred a transaction between MCI and Verizon rather than a transaction between MCI and Qwest. While it is clearly impossible to know for sure, the sequence of events reveals a great deal about Verizon's possible bidding strategy. Any bidding strategy must begin with a series of management assumptions about how to approach the target firm. It was certainly in Verizon's best interests to attempt a friendly rather than a hostile takeover of MCI, due to the challenges of integrating these two complex businesses. Verizon also employed an increasingly popular technique in which the merger agreement includes a special dividend payable by the target firm to its shareholders contingent upon their approval of the transaction. This special dividend is an inducement to gain shareholder approval. Given the modest 3 percent premium over the first Qwest bid, Verizon's initial bidding strategy appears to have been based on the low end of the purchase price range it was willing to offer MCI. Verizon was initially prepared to share relatively little of the potential synergy with MCI shareholders, believing that a bidding war for MCI would be unlikely in view of the recent spate of mergers in the telecommunications industry and the weak financial position of other competitors. SBC and Nextel were busy integrating AT&T and Sprint, respectively. Moreover, Qwest appeared to be unable to finance a substantial all-cash offer due to its current excessive debt burden, and its stock appeared to have little appreciation potential because of ongoing operating losses. Perhaps stunned by the persistence with which Qwest pursued MCI, Verizon believed that its combination of cash and stock would ultimately be more attractive to MCI investors than Qwest's primarily all-cash offer, due to the partial tax-free nature of the bid. Throughout the bidding process, many hedge funds criticized MCI's board publicly for accepting the initial Verizon bid. Since its emergence from Chapter 11, hedge funds had acquired significant positions in MCI's stock, with the expectation that MCI constituted an attractive merger candidate. In particular, Carlos Slim Helu, the Mexican telecommunications magnate and largest MCI shareholder, complained publicly about the failure of MCI's board to get full value for the firm's shares. Pressure from hedge funds and other dissident MCI shareholders triggered a shareholder lawsuit to void the February 14, 2005, signed merger agreement with Verizon. In preparation for a possible proxy fight, Verizon entered into negotiations with Carlos Slim Helu to acquire his shares. Verizon acquired Mr. Slim's 13.7 percent stake in MCI in April 2005. Despite this purchase, Verizon's total stake in MCI remained below the 15 percent ownership level that would trigger the MCI rights plan. About 70 percent (i.e., $1.4 billion) of the cash portion of Verizon's proposed purchase price consisted of a special MCI dividend payable by MCI when the firm's shareholders approved the merger agreement. Verizon's management argued that the deal would cost their shareholders only $7.05 billion (i.e., the $8.45 billion purchase price consisting of cash and stock, less the MCI special dividend). The $1.4 billion special dividend reduced MCI's cash in excess of what was required to meet its normal operating cash requirements. Qwest consistently attempted to outmaneuver Verizon by establishing a significant premium between its bid and Verizon's, often as much as 25 percent. Qwest realized that its current level of indebtedness would preclude it from significantly increasing the cash portion of the bid. Consequently, it had to rely on the premium to attract enough investor interest, particularly among hedge funds, to pressure the MCI board to accept the higher bid. However, Qwest was unable to convince enough investors that its stock would not simply lose value once more shares were issued to consummate the stock and cash transaction. Qwest could have initiated a tender or exchange offer directly to MCI shareholders, proposing to purchase or exchange their shares without going through the merger process. The tender process requires lengthy regulatory approval. However, if Qwest initiated a tender offer, it could trigger MCI's poison pill. Alternatively, a proxy contest might have been preferable because Qwest already had a bid on the table, and the contest would enable Qwest to lobby MCI shareholders to vote against the Verizon bid. This strategy would have avoided triggering the poison pill. Ultimately, Qwest was forced to capitulate simply because it did not have the financial wherewithal to increase the $9.9 billion bid. It could not borrow anymore because of its excessive leverage. Additional stock would have contributed to earnings dilution and caused the firm's share price to fall. It is unusual for a board to turn down a higher bid, especially when the competing bid was 17 percent higher. In accepting the Verizon bid, MCI stated that a number of its large business customers had expressed a preference for the company to be bought by Verizon rather than Qwest. MCI noted that these customer concerns posed a significant risk in being acquired by Qwest. The MCI board's acceptance of the lower Verizon bid could serve as a test case of how well MCI directors are conducting their fiduciary responsibilities. The central issue is how far boards can go in rejecting a higher offer in favor of one they believe offers more long-term stability for the firm's stakeholders. Ron Perlman, the 1980s takeover mogul, saw his higher all-cash bid rejected by the board of directors of Revlon Corporation, which accepted a lower offer from another bidder. In a subsequent lawsuit, a court overruled the decision by the Revlon board in favor of the Perlman bid. Consequently, from a governance perspective, legal precedent compels boards to accept higher bids from bona fide bidders where the value of the bid is unambiguous, as in the case of an all-cash offer. However, for transactions in which the purchase price is composed largely of acquirer stock, the value is less certain. Consequently, the target's board may rule that the lower bidder's shares have higher appreciation potential or at least are less likely to decline than those shares of other bidders. MCI's president and CEO Michael Capellas and other executives could collect $107 million in severance, payouts of restricted stock, and monies to compensate them for taxes owed on the payouts. In particular, Capellas stood to receive $39.2 million if his job is terminated "without cause" or if he leaves the company “for good reason." -Verizon's management argued that the final purchase price from the perspective of Verizon shareholders was not $8.45 billion but rather $7.05. This was so, they argued, because MCI was paying the difference of $1.4 billion from their excess cash balances as a special dividend to MCI shareholders. Why is this misleading?

An acquiring firm may attempt to limit the options of the target's senior management by making a formal acquisition proposal, usually involving a public announcement, to the board of the directors of the target.

TYCO Rescues AMP from Allied Signal In late November 1998, Tyco International Ltd., a diversified manufacturing and service company, agreed to acquire AMP Inc., an electrical components supplier, for $11.3 billion. In doing so, AMP successfully fended off a protracted takeover attempt by AlliedSignal Inc. As part of the merger agreement with Tyco, AMP rescinded its $165 million share buyback offer and its plan to issue an additional 25 million shares to fund its defense efforts. Tyco, the world’s largest electronics connector company, saw the combination with AMP as a means of becoming the lowest cost producer in the industry. Lawrence Bossidy, CEO of AlliedSignal, telephoned an AMP director in mid-1998 to inquire about AMP’s interest in a possible combination of their two companies. The inquiry was referred to the finance committee of the AMP board, which expressed no interest in merging with AlliedSignal. By early August, AlliedSignal announced its intention to initiate an unsolicited tender offer to acquire all of the outstanding shares of AMP common stock for $44.50 per share to be paid in cash. The following week AlliedSignal initiated such an offer and sent a letter to William J. Hudson, then CEO of AMP, requesting a meeting to discuss a possible business combination. Bossidy also advised AMP of AlliedSignal’s intention to file materials shortly with the SEC as required by federal law to solicit consents from AMP’s shareholders. The consent solicitation materials included proposals to increase the size of AMP’s board from 11 to 28 members and to add 17 AlliedSignal nominees, all of whom were directors or executive officers of AlliedSignal. Within a few days, the AMP board announced its intentions to continue to aggressively pursue its current strategic initiatives, because the AlliedSignal offer did not fully reflect the values inherent in AMP businesses. In addition, the AMP board also replaced Hudson with Robert Ripp as chair and CEO of AMP. The AMP board also authorized an amendment to the AMP rights agreement dated October 25, 1989. The amendment provided that the rights could not be redeemed if there were a change in the composition of the AMP board following the announcement of an unsolicited acquisition proposal such that the current directors no longer comprised a majority of the board. A transaction not approved by AMP’s board and involving the acquisition by a person or entity of 20% or more of AMP’s common stock was defined as an unsolicited acquisition proposal. By early September, AlliedSignal amended its tender offer to reduce the number of shares of AMP common stock it was seeking to purchase to 40 million shares. AlliedSignal also stated that it would undertake another offer to acquire the remaining shares of AMP common stock at a price of $44.50 in cash following consummation of its offer to purchase up to 40 million shares. In concert with its tender offer, AlliedSignal also announced its intention to solicit consents for a proposal to amend AMP’s bylaws. The proposed amendment would strip the AMP board of all authority over the AMP rights agreement and any similar agreements and to vest such authority in three individuals selected by AlliedSignal. In response, the AMP board unanimously determined that the amended offer from AlliedSignal was not in the best interests of AMP shareholders. The AMP board also approved another amendment to the AMP rights agreement, lowering the threshold that would make the rights redeemable from 20% to 10% of AMP’s shares outstanding. AlliedSignal immediately modified its tender offer by reducing the number of shares it wanted to purchase from 40 million to 20 million shares at $44.50 per share. AMP announced a self-tender offer to purchase up to 30 million shares of AMP common stock at $55 per share. The AMP self-tender offer was intended to provide AMP shareholders with an opportunity to sell a portion of their shares of common stock at a price in excess of AlliedSignal’s $44.50 per share offer. Also, on September 28, 1998, AMP stated its intention to create a new ESOP that would hold 25 million shares of AMP common stock. Allied Signal indicated that if the self-tender were consummated, it would reduce the consideration to be paid in any further Allied Signal offers to $42.62 per share . Credit Suisse, AMP’s investment banker, approached a number of firms, including Tyco, concerning their possible interest in acquiring AMP. In early November, Tyco stepped forward as a possible white knight. Based on limited information, L. Dennis Kozlowski, Tyco’s CEO, set the preliminary valuation of AMP at $50.00 per share. This value assumed a transaction in which AMP shares would be exchanged for Tyco shares and was subject to the completion of appropriate due diligence. In mid-November, Ripp and Bossidy met at Bossidy’s request. Bossidy indicated that AlliedSignal would be prepared to increase its proposed acquisition price for AMP by a modest amount and to include stock for a limited portion of the total purchase price. The revised offer also would include a minimum share exchange ratio for the equity portion of the purchase price along with an opportunity for AMP shareholders to participate in any increase in AlliedSignal’s stock before the closing. The purpose of including equity as a portion of the purchase price was to address the needs of certain AMP shareholders, who had a low tax basis in the stock and who wanted a tax-free exchange. Ripp indicated that the AMP board expected a valuation of more than $50.00 per share. Tyco indicated a willingness to increase its offer to at least $51.00 worth of Tyco common shares for each share of AMP common stock. The offer also would include protections similar to those offered in AlliedSignal’s most recent proposal. On November 20, 1998, the AMP board voted unanimously to approve the merger agreement and to recommend approval of the merger to AMP’s shareholders. They also voted to terminate the AMP self-tender offer, the ESOP, and AMP’s share repurchase plan and to amend the AMP rights agreement so that it would not apply to the merger with Tyco. In early August, AlliedSignal filed a complaint against AMP in the United States District Court against the provisions of the AMP rights agreement. The complaint also questioned the constitutionality of certain anti-takeover provisions of Pennsylvania state statutes. Concurrently, AMP shareholders filed four shareholder class-action lawsuits against AMP and its board of directors. The suits alleged that AMP and its directors improperly refused to consider the original AlliedSignal offer and wrongfully relied on the provisions of the AMP rights agreement and Pennsylvania law to block the original AlliedSignal offer. In late August, AMP filed a complaint in the United States District court against AlliedSignal, seeking an injunction to prevent AlliedSignal from attempting to pack the AMP board of directors with AlliedSignal executive officers and directors. The complaint also alleged that the Schedule 14D-1 SEC filing by Allied-Signal was false and misleading. The complaint alleged that the filing failed to disclose that some of AlliedSignal’s proposed directors had conflicts of interest and that the packing of the board would prevent current board members from executing their fiduciary responsibilities to AMP shareholders. In early October, the court agreed with AMP and enjoined AlliedSignal’s board-packing consent proposals until it stated unequivocally that its director nominees have a fiduciary duty solely to AMP under Pennsylvania law. The court also denied AlliedSignal’s request to deactivate anti-takeover provisions in the AMP rights agreement. The court further held that shareholders might not sue the board for rejecting the AlliedSignal proposal. AlliedSignal immediately filed in the United States Court of Appeals for the Third Circuit. The court ordered that although AlliedSignal could proceed with the consent solicitation, its representatives could not assume positions on the AMP board until the court of appeals completed its deliberations. The district court ruled that the shares of AMP common stock acquired by AlliedSignal are “control shares” under Pennsylvania law. As a result, the court enjoined AlliedSignal from voting its AMP shares unless AlliedSignal’s voting rights are restored under Pennsylvania law. AlliedSignal was able to overturn the lower court ruling on appeal. -Was AMP's Board and management acting to protect their own positions (i.e., the Management Entrenchment Hypothesis) or in the best interests of the shareholders (i.e., the Shareholder Interests Hypothesis)?

Proxy contests and tender offers are often viewed by acquirers as inexpensive ways to takeover another firm.

According to the management entrenchment theory,

Which of the following is true about supervoting stock?

Corporate governance refers to a system of controls both internal and external to the firm that protects stakeholders' interests.

TYCO Rescues AMP from Allied Signal In late November 1998, Tyco International Ltd., a diversified manufacturing and service company, agreed to acquire AMP Inc., an electrical components supplier, for $11.3 billion. In doing so, AMP successfully fended off a protracted takeover attempt by AlliedSignal Inc. As part of the merger agreement with Tyco, AMP rescinded its $165 million share buyback offer and its plan to issue an additional 25 million shares to fund its defense efforts. Tyco, the world’s largest electronics connector company, saw the combination with AMP as a means of becoming the lowest cost producer in the industry. Lawrence Bossidy, CEO of AlliedSignal, telephoned an AMP director in mid-1998 to inquire about AMP’s interest in a possible combination of their two companies. The inquiry was referred to the finance committee of the AMP board, which expressed no interest in merging with AlliedSignal. By early August, AlliedSignal announced its intention to initiate an unsolicited tender offer to acquire all of the outstanding shares of AMP common stock for $44.50 per share to be paid in cash. The following week AlliedSignal initiated such an offer and sent a letter to William J. Hudson, then CEO of AMP, requesting a meeting to discuss a possible business combination. Bossidy also advised AMP of AlliedSignal’s intention to file materials shortly with the SEC as required by federal law to solicit consents from AMP’s shareholders. The consent solicitation materials included proposals to increase the size of AMP’s board from 11 to 28 members and to add 17 AlliedSignal nominees, all of whom were directors or executive officers of AlliedSignal. Within a few days, the AMP board announced its intentions to continue to aggressively pursue its current strategic initiatives, because the AlliedSignal offer did not fully reflect the values inherent in AMP businesses. In addition, the AMP board also replaced Hudson with Robert Ripp as chair and CEO of AMP. The AMP board also authorized an amendment to the AMP rights agreement dated October 25, 1989. The amendment provided that the rights could not be redeemed if there were a change in the composition of the AMP board following the announcement of an unsolicited acquisition proposal such that the current directors no longer comprised a majority of the board. A transaction not approved by AMP’s board and involving the acquisition by a person or entity of 20% or more of AMP’s common stock was defined as an unsolicited acquisition proposal. By early September, AlliedSignal amended its tender offer to reduce the number of shares of AMP common stock it was seeking to purchase to 40 million shares. AlliedSignal also stated that it would undertake another offer to acquire the remaining shares of AMP common stock at a price of $44.50 in cash following consummation of its offer to purchase up to 40 million shares. In concert with its tender offer, AlliedSignal also announced its intention to solicit consents for a proposal to amend AMP’s bylaws. The proposed amendment would strip the AMP board of all authority over the AMP rights agreement and any similar agreements and to vest such authority in three individuals selected by AlliedSignal. In response, the AMP board unanimously determined that the amended offer from AlliedSignal was not in the best interests of AMP shareholders. The AMP board also approved another amendment to the AMP rights agreement, lowering the threshold that would make the rights redeemable from 20% to 10% of AMP’s shares outstanding. AlliedSignal immediately modified its tender offer by reducing the number of shares it wanted to purchase from 40 million to 20 million shares at $44.50 per share. AMP announced a self-tender offer to purchase up to 30 million shares of AMP common stock at $55 per share. The AMP self-tender offer was intended to provide AMP shareholders with an opportunity to sell a portion of their shares of common stock at a price in excess of AlliedSignal’s $44.50 per share offer. Also, on September 28, 1998, AMP stated its intention to create a new ESOP that would hold 25 million shares of AMP common stock. Allied Signal indicated that if the self-tender were consummated, it would reduce the consideration to be paid in any further Allied Signal offers to $42.62 per share . Credit Suisse, AMP’s investment banker, approached a number of firms, including Tyco, concerning their possible interest in acquiring AMP. In early November, Tyco stepped forward as a possible white knight. Based on limited information, L. Dennis Kozlowski, Tyco’s CEO, set the preliminary valuation of AMP at $50.00 per share. This value assumed a transaction in which AMP shares would be exchanged for Tyco shares and was subject to the completion of appropriate due diligence. In mid-November, Ripp and Bossidy met at Bossidy’s request. Bossidy indicated that AlliedSignal would be prepared to increase its proposed acquisition price for AMP by a modest amount and to include stock for a limited portion of the total purchase price. The revised offer also would include a minimum share exchange ratio for the equity portion of the purchase price along with an opportunity for AMP shareholders to participate in any increase in AlliedSignal’s stock before the closing. The purpose of including equity as a portion of the purchase price was to address the needs of certain AMP shareholders, who had a low tax basis in the stock and who wanted a tax-free exchange. Ripp indicated that the AMP board expected a valuation of more than $50.00 per share. Tyco indicated a willingness to increase its offer to at least $51.00 worth of Tyco common shares for each share of AMP common stock. The offer also would include protections similar to those offered in AlliedSignal’s most recent proposal. On November 20, 1998, the AMP board voted unanimously to approve the merger agreement and to recommend approval of the merger to AMP’s shareholders. They also voted to terminate the AMP self-tender offer, the ESOP, and AMP’s share repurchase plan and to amend the AMP rights agreement so that it would not apply to the merger with Tyco. In early August, AlliedSignal filed a complaint against AMP in the United States District Court against the provisions of the AMP rights agreement. The complaint also questioned the constitutionality of certain anti-takeover provisions of Pennsylvania state statutes. Concurrently, AMP shareholders filed four shareholder class-action lawsuits against AMP and its board of directors. The suits alleged that AMP and its directors improperly refused to consider the original AlliedSignal offer and wrongfully relied on the provisions of the AMP rights agreement and Pennsylvania law to block the original AlliedSignal offer. In late August, AMP filed a complaint in the United States District court against AlliedSignal, seeking an injunction to prevent AlliedSignal from attempting to pack the AMP board of directors with AlliedSignal executive officers and directors. The complaint also alleged that the Schedule 14D-1 SEC filing by Allied-Signal was false and misleading. The complaint alleged that the filing failed to disclose that some of AlliedSignal’s proposed directors had conflicts of interest and that the packing of the board would prevent current board members from executing their fiduciary responsibilities to AMP shareholders. In early October, the court agreed with AMP and enjoined AlliedSignal’s board-packing consent proposals until it stated unequivocally that its director nominees have a fiduciary duty solely to AMP under Pennsylvania law. The court also denied AlliedSignal’s request to deactivate anti-takeover provisions in the AMP rights agreement. The court further held that shareholders might not sue the board for rejecting the AlliedSignal proposal. AlliedSignal immediately filed in the United States Court of Appeals for the Third Circuit. The court ordered that although AlliedSignal could proceed with the consent solicitation, its representatives could not assume positions on the AMP board until the court of appeals completed its deliberations. The district court ruled that the shares of AMP common stock acquired by AlliedSignal are “control shares” under Pennsylvania law. As a result, the court enjoined AlliedSignal from voting its AMP shares unless AlliedSignal’s voting rights are restored under Pennsylvania law. AlliedSignal was able to overturn the lower court ruling on appeal. -What steps did AlliedSignal take to satisfy federal securities laws?

Corporate anti-takeover defenses are necessarily a sign of bad corporate governance.

Balancing Board and Shareholder Rights: Air Products Aborted Takeover of Airgas Defining the right balance of power between corporate boards and shareholders remains elusive. The Delaware court has ruled that a board can take as long as necessary to consider a bid and can prevent shareholders from voting on takeover bids. Activist investors are increasingly urging shareholders to pressure firms to drop staggered boards because of the potential to entrench management. ______________________________________________________________________________ When, if ever, is it appropriate for a board to agree to a current bid to buy the firm if it, in good faith, believes that the bid undervalues the firm based on the board’s knowledge of the long-term outlook for the firm? When, if ever, is it appropriate for a board to prevent shareholder votes on such matters? The answers to these questions are rooted in whether boards are perceived to be acting in the interests of all shareholders or simply attempting to entrench themselves and current management. How these questions are answered will determine whether the board or shareholders will have leverage in hostile takeover negotiations. What follows is a discussion of what is an important judicial precedent pertaining to board and shareholder rights. The unsolicited offer by Air Products for Airgas on February 2, 2010, has been one of the longest-running hostile bids in U.S. history. After having revised up its offer twice, Air Products sought to bring this process to a close when it asked the Delaware Chancery Court to invalidate Airgas’s poison pill. On February 15, 2011, the court ruled that the board has the right to prevent shareholders from voting on the takeover offer as long as it is acting in good faith. In the wake of the court’s ruling, Air Products withdrew its bid. The court argued that the Airgas board determined, using a good-faith effort, that the Air Products offer of $70 per share was inadequate and allowed Airgas to use a poison pill to defeat the hostile bid by Air Products. A firm is believed to have undertaken a good-faith effort when it has exhausted all reasonable means of resolving an issue. Airgas’s board had demanded a bid of $78 per share. Because the Air Products bid was viewed as inadequate, the court ruled that Airgas could keep the poison pill in place against the will of the shareholders. The court also argued that the poison pill was not preventing Air Products from changing the composition of the board but, rather, extending the amount of time required to do so. The court also ruled that directors have the right to prevent shareholder votes if they believe that shareholders would accept a bid that undervalued the firm out of ignorance of the firm’s true value. In practice, the additional time that would have been required to change the composition of the board when the board is classified, as was the case with Airgas, is usually enough to force the bidder to walk away. Once an unsolicited bid is initiated, the composition of a target firm’s shareholders moves from its long-term investors, who often sell when the offer is announced, to arbitrageurs and hedge funds, seeking to profit from temporary differences in the offer price and the target’s short-term share price. From their perspective, the faster a deal is done, the greater their return on investment. Reflecting the change in composition of their shareholder base, target boards come under intense pressure to sell. However, the fiduciary responsibility of boards is to ensure that any bids are in the best interests of their shareholders; takeover defenses in the view of the board give them more time to evaluate the initial offer and to hold out for higher bids. The court’s decision illustrates how a poison pill can work in concert with a classified or staggered board, in which directors are elected one-third at a time. Bidders must therefore wait two years to elect a majority of the total board and force the poison pill to be rescinded. This combination has proven to be a highly potent antitakeover defense. Air Products’ bid for Airgas highlights the challenges of attempting to take control of another firm’s board. Even if Air Products had been successful in electing a majority of board members, there was no assurance the new board would have supported the $70 Air Products bid. The Airgas rejection of their bid came after three new directors nominated by Air Products had been elected to the Airgas board in 2009. Instead of campaigning for a sale, the three new directors joined the rest of the Airgas board in demanding a higher price from Air Products. The outcome of the court’s ruling has implications for future hostile takeovers. The ruling upholds Delaware’s long tradition of respecting managerial discretion as long as the board is found to be acting in good faith and abiding by its fiduciary responsibilities to the firm’s shareholders. The ruling allows target firm boards to use a poison pill as long as the board deems justified, and it is far-reaching because Delaware law governs most U.S. publicly traded firms. -Under what circumstances do the combination of a poison pill and a staggered board make sense for the target firm's shareholders? Be specific.

Some of Acme Inc.'s shareholders are very dissatisfied with the performance of the firm's current management team and want to gain control of the board. To do so, these shareholders offer their own slate of candidates for open spaces on the firm's board of directors. Lacking the necessary votes to elect these candidates, they are contacting other shareholders and asking them to vote for their slate of candidates. The firm's existing management and board is asking shareholders to vote for the candidates they have proposed to fill vacant seats on the board. Which of the following terms best describes this scenario?