I really do not want to cover up "Wild Bill," but as we near the end of law school, we must think of others who do not read BLS Advocate. While I have generally been pleased with the posting of my materials on BLS Advocate, there are at times small (nearly imperceptible) changes made to my work that I find to be incorrect. My grammar and writing may be horrible, but I will continue to post the "unedited" versions on Flying Houses. And using info-graphics that may require permission....
NIED #22: Corporations
By Christopher J. Knorps
I took Corporations in the Spring semester of my 2L year. Only one section of it was offered then, and I was disheartened that I had not taken it in the Fall, when four (I think) were available, but I digress. I do remember one Fall 2011 Corporations student’s status message on facebook: “If you are taking corporations in the spring, start outlining.”
Corporations is a strange class—indeed, it is one of the many “upperclass requirements” (along with Evidence, Criminal Procedure, Trusts & Estates, and perhaps Tax or Administrative Law) but does not seem to focus on any single concept for too long except for the Business Judgment Rule. By the end of the semester, you reach mergers & acquisitions, which is probably the hardest part of the course. My professor worried, during an extra help session shortly before the exam, that I might “miss the forest for the trees,” and I was cautioned against doing so. Regardless, I earned a B in the course—certainly the most disappointing grade in my 2L year—and I was later told that I was “boosted” from a B- for my in-class participation. My hope is that after reading this column, you will not fall into the same Corporations trap.
First, if you have online access to BarBri or Themis or Kaplan, you should watch the lecture they have on Corporations. It will not exactly be in depth, but it will tell you everything you need to succeed on the exam. I feel that if I had watched the BarBri lecture, I would have earned a B+ or A- on the exam. This was a class that I worked very hard in—and I knew the cases. But I tend to focus on “the entire case,” rather than the rule to be gleaned from the case, due to a general distrust of “law student laziness.”
“Law student laziness” may or may not be practiced by the top students—but it irks me to no end. Corporations was difficult for me, because of the M&A stuff. To illustrate, consider the Omnicare case. Now, not only was the similarity of “Obamacare” and “Romneycare” a topic of some interest to throw off my concentration, but this case is a toughie. It was the only assignment for that class, and we spent two hours on it. When you have taken good notes from a two-hour class on one case, you have a problem because you have to get rid of all the extraneous stuff. However, it is just like a law school exam to bring you through an extremely complex fact pattern that mimics patterns in certain cases, and forces you to react accordingly with the courts’ decisions in such instances. I have no ideas about how to memorize such situations, but I can only suggest that you enumerate all of the relevant events in the merger negotiation process, and that you focus, laser-like, on the events or transactions most important to the court.
Revlon is a different matter. That is an easy case. If your business is going up for sale, and everyone knows it, you now have an affirmative duty to find the best price for your shareholders.
However, what the “best price” is in any given situation may be difficult to analyze. Particularly if you do not have a very good idea about how analysts price stock.
Now, I asked a question about this in my class, and my professor told me to take Corporate Finance. I did that and got a C+ on that exam. But I do know from that course how people price stock:
XYZ Affair, Inc. has 1,000,000 authorized shares and was started with $1 million in capital.
Each share is worth $1.
If XYZ Affair is very profitable, if it makes $500,000 in its first year of business, each share is now worth $1.50 (issues related to dividends, I will admit, are pretty well-cabined in the Corporate Finance course).
However, that would be too easy. Stock pricing gets more difficult when you start including hostile tender offers that apply a “discount premium.” In such a situation, Ronald Perelman or Carl Icahn is about to “raid” a company. They may pay $4 for that share (probably more realistically they would not be interested in the XYZ Affair, Inc.), and once they own 500,001 shares, they have control. Once they have control, they have a duty to their shareholders (unless the corporation is on the brink of insolvency, in which case the duties shift to the creditors of the corporation). They will pay that $4 in order to get shareholders to sell, but once they have the majority of the stock of the corporation, they will be able to elect everyone to the Board of Directors.
I do not know if “poison pills” and “shark repellant” are essentially the same thing or not, and I am actually unsure of the veracity of the statements in the preceding paragraph by now (i.e. the stuff about voting). But I do know my exam featured a “lock-up agreement” (also, may or may not be the same thing as a “no shop provision”) that I was unable to properly analyze, and so the rest of my answer came out a mess.
But I do know that BJR almost always wins the case for the Board—except in Van Gorkum. And I do know that once it is determined that the Board is made up of “interested” directors, the standard shifts to “entire fairness” and the Board must prove their action was fair to shareholders. Unitrin and Unocal are all about taking defensive measures against takeover attempts, and are easy, like Revlon to sum up in a sentence: the defense mechanism has to be consonant with the severity of the threat.
There are other cases—Caremark looms large, but I seem to remember that one just standing for the proposition that corporations must maintain internal systems of control to “police themselves” from committing fraud.
I really am afraid to write anything more because I don’t want to be wrong. Just watch the lecture. It should help. If you want to comment in the hopes of clarifying some minute aspect of the corporations course, feel free—let this column be a place for impromptu truth-seeking.
Christopher J. Knorps is a 3L at Brooklyn Law School. He enjoys studying bankruptcy law and constitutional law. He is organizing Brooklyn Law School’s 2nd Annual Open Mic—please e-mail him at Christopher.firstname.lastname@example.org if you want to reserve a slot ahead of time. You may read more of his work at flyinghouses.blogspot.com.