FIN 4311 Week 9: Mergers and Acquisitions — Part 2

Vocabulary flashcards covering corporate governance standards, legal precedents, fiduciary duties, and M&A defensive mechanisms from FIN 4311 Week 9 lecture notes.

Business Judgment Rule

The default Delaware legal standard where courts defer to the decisions of directors who are informed, act in good faith, and have no conflicts of interest.

Unocal Standard (1985)

A Delaware enhanced scrutiny standard for takeover defenses requiring the board to show that it acted in response to a reasonable threat and that its defensive measures were proportionate.

Revlon Duty (1986)

A Delaware legal doctrine dictating that once the sale or breakup of a company becomes inevitable, directors must act as auctioneers seeking the best price reasonably available for shareholders.

Entire Fairness

The most rigorous Delaware standard of judicial review applied when directors or controlling shareholders are conflicted, requiring proof of both fair dealing and fair price.

Acqui-hire

A transaction structure where a company hires key leadership and technical teams and licenses proprietary technology from a firm (often paying licensing fees) without formally executing a full corporate acquisition.

Duty of Loyalty

A fiduciary duty requiring corporate directors to place the corporation's interests ahead of personal interests, prohibiting unauthorized self-dealing in interested transactions.

Delaware Section 144

A Delaware corporate statute providing safe harbors for interested-director transactions through full disclosure plus approval by disinterested directors or shareholders, or a showing that the transaction is fair.

Hart-Scott-Rodino (HSR) Filing

A mandatory notification filed with the Federal Trade Commission (FTC) and Department of Justice (DOJ) for large M&A transactions, triggering a required $30\text{-day}$ waiting period.

Fairness Opinion

A formal evaluation produced by an investment bank assessing whether the transaction price or financial consideration offered in a merger is fair to shareholders.

Smith v. Van Gorkom (1985)

A landmark Delaware Supreme Court case in which directors were held personally liable for breaching their duty of care by hastily approving a corporate sale after an approximately two-hour meeting with no formal valuation study.

Delaware Section 102(b)(7)

A statutory provision permitting companies to include exculpatory clauses in their charters that protect corporate directors from personal monetary liability for breaches of the fiduciary duty of care.

Special Committee

A group of independent, disinterested directors formed to evaluate and negotiate a transaction when corporate management or a controlling shareholder is on the buying side of an M&A deal.

Market for Corporate Control

An external corporate governance mechanism through which underperforming firms are acquired by external buyers who reallocate corporate assets and management control to more efficient hands.

Poison Pill (Shareholder Rights Plan)

A defensive tactic giving existing shareholders (excluding the hostile bidder) rights to purchase additional shares at a steep discount once a bidder exceeds a specified ownership threshold, diluting the bidder's stake.

Flip-in Pill

A poison pill structure that allows existing target shareholders to buy discounted shares of the target firm upon a triggering ownership threshold being crossed.

Flip-over Pill

A poison pill structure that allows existing target shareholders to buy discounted shares of the surviving acquirer firm after a hostile merger takes place.

Morning-After Pill

A poison pill adopted reactively by a target board after a hostile bid or accumulation of shares has already appeared, designed to buy time for the board to assess options rather than permanently block a deal.

Pac-Man Defense

A high-risk defensive tactic in which a target company responds to a hostile acquisition attempt by launching a counter-offer to acquire the bidding firm.

Antitrust Strategy

A takeover defense in which the target firm utilizes regulatory and governmental scrutiny—such as CFIUS or competition reviews—to delay, complicate, or derail a hostile acquisition.

White Knight

A friendly third-party acquirer solicited by a target firm's board to submit a higher or more agreeable bid to prevent a takeover by a hostile bidder.

White Squire

A friendly external investor who purchases a substantial minority equity stake in a target company to assist the board in blocking an unsolicited hostile takeover without buying the entire firm.

Crown-Jewel Defense

An extreme defensive maneuver where a target sells or spins off its most valuable divisions or assets to make itself unattractive to a hostile acquirer.

Termination Fee

A negotiated fee (typically $1\text{--}4\text{\%}$ of transaction value) that a target company must pay to an initial bidder if the target accepts a superior competing bid.

Reverse Termination Fee

A contractual payment owed by an acquirer to the target firm in the event that an agreed-upon transaction collapses, frequently triggered by regulatory obstacles or failure to close.

Dual-Class Structure

A capital structure separating voting power from economic ownership, allowing founders and corporate insiders to maintain majority voting control through high-vote shares while holding a minority equity stake.

Two-Tier Tender Offer

A coercive tender offer structure that pays a high cash price for an initial controlling stake (such as $51\%$) and a significantly lower price or inferior consideration for remaining shares.

Free-Rider Problem (in Takeovers)

A market dilemma where individual target shareholders refuse to tender their shares to a bidder, hoping to retain their ownership and free-ride on the post-takeover value gains created by the acquirer.

Universal Proxy Card

An SEC rule enacted in 2022 requiring a single proxy card that lists both management and dissident nominees, allowing shareholders in a contested election to mix and match individual candidates.