You are a market analyst at one of the biggest biscuit manufactures of the country – BizQuit Corp. One day you hear BizQuit approaches Creamy Dreamy Inc- a large ice-cream maker with the hope to combine and Creamy Dreamy board gives a positive response, also thinking that there are lots of synergies out there for 2 businesses to exploit. CreamyDreamy is a corporation privately held by 5 shareholders.
- The CEO of the company calls you up and tells you the following: “As you know we are preparing to buy CreamyDreamy. I want you to think of the best deal structure in the light of the following: I do not want to bother with many legal documentation, agreements and stuff: pick the simplest possible structure. Also note that, I was told by our lawyer that they are subject to some contentious lawsuits. We definitely do not want to be exposed to those liabilities or assume them. Is there a way we could exclude only those liabilities? Lastly, the lawyer also told that Creamy Dreamy have very essential contractors under which they cannot transfer the contract rights to any third parties”.
Analyze all the deal structures: i.e. mergers, asset purchase and stock purchase in the light of the consideration provided by CEO and provide explanations why each structure should/should not be chosen.
- After you picked the deal structure, now the CEO wants you to help him with the deal consideration. Note that CreamyDreamy Inc. is valued $10 million and your company has only $6 million in cash, which means BizQuit Corp. must pay the rest of the consideration with stock (for some reason. The CEO says that borrowing is “out of the question”). However, CEO was told by the lawyers that issuing new stock as a deal consideration would clearly be “selling” under section 5 of the 1933 Act and it is unlawful to sell any securities, unless a registration statement is in effect. Since preparing and filing a registration statement is very costly, CEO does not want to do that either.
Do you agree with lawyers’ reasoning? Is there a way out of this dilemma? Discuss (your discussion should not include borrowing as a solution)
- BizQuit hires the valuation firm – “Bookworm and Associates LLP” as their external advisor to conduct the independent valuation of the CreamyDreamy as a standalone entity. While working on the deal, Mr. Stuplin, a partner with the firm, predicting that Creamy Dreamy stock will go up after the announcement of the takeover, tells his brother-in law about this. Brother-in-law rushes to discuss the news with a good friend of his- George, who is a manager of a large mutual find. George’s fund immediately buys the shares, and after the announcement, sells them for huge profits. Mr. Stuplin himself did not trade based on that information or get any share of this profit or some other personal benefit from the deal. He just gave that information to his brother-in-law as a sign of gratitude. Brother-in-law’s main purpose in discussing the issue with George was not to “tip him off”. He was genuinely interested in the mechanics and synergies of the deal and wanted to have George’s views on that as a professional in the field. Brother-in-law did not share in the profits obtained by George either.
Did each of Mr. Stuplin, his brother-in-law or George commit any wrong? If yes, under what theory (ies)