art I

Scenario I

AgroVate, a Delaware corporation, is the target of a bid from Bijoux. Bijoux had originally approached AgroVate’s board with an offer to buy the company, but AgroVate turned down the offer. Now, in newspaper ads and direct mail to shareholders, Bijoux has initiated a tender offer to shareholders well above market price.

The Board of Directors of AgroVate consists of the three Maxxo brothers, Happy, Dopey and Sleepy, as well as eight other directors who are not related to the Marx Brothers. AgroVate’s bylaws provide that eight directors constitute a quorum.

Manly Pearson, the president of Bijoux, wants to take control of AgroVate and merge it with Bijoux. He plans to replace the current board and sell off AgroVate’s widget finishing division, which he thinks is dragging the company down. Pearson has no interest in the widget business; Bijoux makes service uniforms; Pearson simply sees the takeover as a business opportunity.

Pearson doesn’t know it, but AgroVate is in secret talks with Stopper, Inc., a much larger firm in the same business as AgroVate, for a deal that will expand the widget finishing division and push it to the top of its particular market, possibly sending the share price higher than the current tender offer from Pearson.

There is also a good possibility that if the deal goes through, Stopper will want to acquire AgroVate at a good price and merge it into Stopper. Jack Spratt, president of Stopper, is an old business rival of Pearson’s; if Pearson gets control of AgroVate, it is unlikely that the deal will go through; the Maxxo brothers and the other directors will be out of a job. On the other hand, the Maxxo brothers own more than 30% of the outstanding AgroVate stock; they stand to make a lot of money if they accept the tender offer.

Finally, AgroVate is a family business; although it is now publicly traded, it was started by the Maxxo brothers’ great-great grandfather. They can’t stand the thought of Pearson being in control. His management style is cold and impersonal, and they fear many loyal employees will be fired if he takes over.

AgroVate calls their corporate counsel, who first tells them, “Adoption of defensive measures are protected by the business judgment rule so long as: (a) the board had reasonable grounds for believing that a danger to corporate effectiveness existed, and (b) the defensive response was reasonable in relation to the threat posed.” She also said: “Concern about corporate not...appropriate...when there are other stockholders interested in realizing a return on their investment.”

Your Assignment

  1. Is this a hostile takeover? 

  2. Can the AgroVate board legally adopt defensive measures against Bijoux?

  3. Two types of mergers are mentioned here. Define each type.

Part 2

Scenario II

After consultation with corporate counsel and outside financial advisors, the Board of Directors decides to consider the following four responses to the Bijoux proposal.

  1. AgroVate’s board can consider a shareholder rights plan, also known as a poison pill. If Bijoux acquires more than 20% of the stock, current shareholders (but not Bijoux) will be given an additional share for each share they own (a split). This means Bijoux would have to buy many more shares in order to gain control, thus substantially driving up the cost to Bijoux to acquire AgroVate and making the acquisition too expensive. The board can exclude certain current shareholders, such as the Maxxo Brothers, from the split.
  2. AgroVate’s board can take the White Knight option and invite Stopper to make a counter to Bijoux’s takeover bid.
  3. AgroVate’s board can “sell off the crown jewels”—sell its widget finishing division to Stopper or some other buyer.
  4. AgroVate’s board can do nothing and allow Bijoux’s takeover bid to go through.

Your Assignment

  1. What are the specific facts and circumstances which AgroVate’s board must take into consideration in deciding how to respond to Bijoux’s bid?
  2. What are some ways that the Maxxo Brothers could challenge that the poison pill plan would constitute self-dealing on their part?
  3. As a member of AgroVate’s Board of Directors, how would you decide?
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