Question 1

Explain the general process of a corporate transaction.

Accepted Answer

Generally the acquirer will issue a letter of intent that bind the parties to confidentiality during the due diligence phase. After this the acquirer researches and investigates the financials of the target corporation to determine if there are any liabilities or challenges in the target corporation. Once this is complete the parties will draw up an agreement which lays out the conditions that must exist before the transaction will go through, any representation or warranties that represent a claim by the parties, any covenants which regulate the conduct of the parties, a legal approval clause and an indemnification clause which releases parties of liability of the transactions.

Question 2

Renaldo Inc. wishes to acquire Messi Corporation but is uncertain which would be the best method to use to accomplish this. Messi has substantial debt due to back taxes and also debt due to unprofitable business decisions. Renaldo is deciding between a stock purchase and an asset purchase and seeks your opinion on the matter. What would you tell them about their options?

Accepted Answer

A stock purchase is when an acquirer purchases equity in the target and by doing so gains control of the company intact. Therefore, any existing debts or liabilities are carried over in the transaction. An asset purchase is when a buyer buys the assets of the target leaving the target as an empty shell. This is done when the acquirer wants to limit any future liabilities from the conduct of the previous target company. Therefore, liabilities and debts do not carry over with an asset purchase. Tax liability is an exception to that general rule of no successor liability. Therefore, in this situation, I would state that a stock purchase would not achieve Renaldo's goals of no successor liability for debt. And while the asset purchase option would do that for some of the debt of Messi because generally there is no successor liability, tax debt is an exception to that. However, the asset purchase would lessen the burden more than the stock purchase.

Question 3

The Board of Layne Corporation recently stated that under no circumstances would it allow Gwen Corporation to take-over its corporation. The problem is that the Board only owns five percent of the shares. Therefore, Gwen Corporation contacts all of the other shareholders and offers to purchase their shares of stock. What is this process called?

Accepted Answer

A)  Stock takeover 
B)  Stock merger 
C)  Stock leveraging 
D)  Stock purchase 
A)  Stock takeover 
B)  Stock merger 
C)  Stock leveraging 
D)  Stock purchase D

Question 4

Can litigation prevent a hostile takeover?

Accepted Answer

A)  Yes litigation is a defense strategy to a hostile takeover. 
B)  No since there is no law against a hostile takeover there is no legally recognized wrong. 
C)  No because all is fair in venture capitalism. 
D)  Yes if the court determines that another option will generate more tax revenue. 
A)  Yes litigation is a defense strategy to a hostile takeover. 
B)  No since there is no law against a hostile takeover there is no legally recognized wrong. 
C)  No because all is fair in venture capitalism. 
D)  Yes if the court determines that another option will generate more tax revenue.

Question 5

In the case, Gimball v. Signal Companies, Inc., the court determined that the "substantially all" test

Accepted Answer

A)  Does not require that every major restructuring of the corporation be approved by shareholders. 
B)  Requires shareholder approval for all major restructuring of the corporation. 
C)  Requires that the court approve all major restructuring of the corporation. 
D)  Does not require the court to use the "substantially all" test for private corporation. 
A)  Does not require that every major restructuring of the corporation be approved by shareholders. 
B)  Requires shareholder approval for all major restructuring of the corporation. 
C)  Requires that the court approve all major restructuring of the corporation. 
D)  Does not require the court to use the "substantially all" test for private corporation.

Question 6

A transaction in which the board of a target company has no prior knowledge of an acquirer's purchase offer is called a

Accepted Answer

A)  Blind offer 
B)  Invisible offer 
C)  Blind takeover 
D)  Hostile takeover 
A)  Blind offer 
B)  Invisible offer 
C)  Blind takeover 
D)  Hostile takeover

Question 7

In a merger agreement it states, "the board of both parties will be held harmless for the losses incurred as a result of a breach of its contractual obligations in the purchase agreement" is called

Accepted Answer

A)  Termination agreement 
B)  Breakup clause 
C)  Warranty agreement 
D)  Indemnification clause 
A)  Termination agreement 
B)  Breakup clause 
C)  Warranty agreement 
D)  Indemnification clause

Question 8

In the case, Unitrin v. American General Corp. the court employed the definition of a non-employee and non-management director to be

Accepted Answer

A)  A disinterested party 
B)  A disengaged party 
C)  An outside director 
D)  An outside influence 
A)  A disinterested party 
B)  A disengaged party 
C)  An outside director 
D)  An outside influence

Question 9

Successor liability never exists in an asset purchase.

Accepted Answer

A) True 
 B)False

Question 10

The board of Zen Corporation was close to insolvency when Alpha Inc. approached the board wanting to merge. The merger could have potentially saved Zen from insolvency. However, the members of board of Zen despised the board members of Alpha as Alpha recently defeated them in a company softball tournament. Therefore, there were a lot of hard feelings and the board of Zen refused to even talk with Alpha Inc. Zen slid closer to insolvency but Zen would not budge. All of the following statements are true except

Accepted Answer

A)  The board owes a fiduciary duty to act in the best interests of the corporation rather than their own personal interests when considering mergers and acquisitions. 
B)  The board owes a duty of care to seek the advice and counsel of third parties when evaluating whether to merge. 
C)  The board has a right of self-interest and preservation to understand that if two boards cannot work together it will have negative effects on the corporation when considering a merger or acquisition. 
D)  The board owes a fiduciary duty of loyalty to the corporation when considering a merger or acquisition. 
A)  The board owes a fiduciary duty to act in the best interests of the corporation rather than their own personal interests when considering mergers and acquisitions. 
B)  The board owes a duty of care to seek the advice and counsel of third parties when evaluating whether to merge. 
C)  The board has a right of self-interest and preservation to understand that if two boards cannot work together it will have negative effects on the corporation when considering a merger or acquisition. 
D)  The board owes a fiduciary duty of loyalty to the corporation when considering a merger or acquisition.

Question 11

Rex Incorporated, engages in an asset purchase of Tex Inc. In the process, Rex states that it will pay off all of Tex's creditors. After the transaction is complete, Rex Incorporated states that it will no longer honor that promise. What most likely be the outcome of this situation?

Accepted Answer

A)  In all asset purchases, the debt of the target company never transfers to the buyer therefore Rex will not have to pay the debt despite the promise. 
B)  In all asset purchases the debt of the target company always travels with the buyer. Therefore, Rex will have to assume the debt of the target company. 
C)  While generally the buyer does not assume the debt of the target company when the buyer expressly agrees to assume the debt of the seller then the buyer will have to pay the debt. 
D)  Tex is solely responsible for its own debt and Rex will not be obligated to pay under any circumstances. 
A)  In all asset purchases, the debt of the target company never transfers to the buyer therefore Rex will not have to pay the debt despite the promise. 
B)  In all asset purchases the debt of the target company always travels with the buyer. Therefore, Rex will have to assume the debt of the target company. 
C)  While generally the buyer does not assume the debt of the target company when the buyer expressly agrees to assume the debt of the seller then the buyer will have to pay the debt. 
D)  Tex is solely responsible for its own debt and Rex will not be obligated to pay under any circumstances.

Question 12

Termination rights in an asset purchase agreement may

Accepted Answer

A)  Include fees and the payment of damages caused by certain events. 
B)  Allow both parties a 90 "cooling off" period if the transaction becomes hostile. 
C)  Require the termination to be handled with due diligence. 
D)  Allow the court to intervene judicially if it believes one of the parties is making unwise decisions or that one party possesses. 
A)  Include fees and the payment of damages caused by certain events. 
B)  Allow both parties a 90 "cooling off" period if the transaction becomes hostile. 
C)  Require the termination to be handled with due diligence. 
D)  Allow the court to intervene judicially if it believes one of the parties is making unwise decisions or that one party possesses.

Question 13

In a share purchase agreement the following statement was included, "Both parties agree to operate with the utmost professionalism, integrity and good character in all corporate transaction such that it instills confidence and respect for the process and the result." This is an example of a(n)

Accepted Answer

A)  Obligatory statement 
B)  Approval clause 
C)  Warranty 
D)  Covenant 
A)  Obligatory statement 
B)  Approval clause 
C)  Warranty 
D)  Covenant

Question 14

In evaluating corporate transactions, the board has all of the following fiduciary duties except the duty of

Accepted Answer

A)  Care 
B)  Loyalty 
C)  Act in the best-interests of the corporation 
D)  Wisdom 
A)  Care 
B)  Loyalty 
C)  Act in the best-interests of the corporation 
D)  Wisdom

Question 15

All of the board members of Bruint Hockey Corporation despise the board members of the Bluet Hockey Corp. because of the Bluet's recent defeat of the Bruint Hockey team in the national championship series. The Bluet Hockey Corp. approaches Bruint to discuss an acquisition of their company. What advice would be the best to give to the Bruint Hockey Corporation board so that they may honor their fiduciary duties?

Accepted Answer

A)  Seek the advice and counsel of third parties such as attorneys, investment bankers and valuation experts before deciding whether to approve the proposed acquisition. 
B)  Decline the offer because if the board does not like them then it is never in the best interests of the Bruint Hockey Corporation. 
C)  Look for alternative acquisition opportunities. 
D)  Appeal to the court to offer judicial protection by judicial decree to avoid any acquisition. 
A)  Seek the advice and counsel of third parties such as attorneys, investment bankers and valuation experts before deciding whether to approve the proposed acquisition. 
B)  Decline the offer because if the board does not like them then it is never in the best interests of the Bruint Hockey Corporation. 
C)  Look for alternative acquisition opportunities. 
D)  Appeal to the court to offer judicial protection by judicial decree to avoid any acquisition.

Question 16

Psi Pharmaceuticals, Inc. created a patented drug that cures cancer. Omega Corporation wishes to takeover Psi Pharmaceuticals but does not want to incur all of the previous debt and liabilities that Psi Pharmaceuticals incurred in the creation of the drug. Which type of transaction should Omega pursue to achieve this goal?

Accepted Answer

A)  Stock purchase 
B)  Asset purchase 
C)  Merger 
D)  Dissolution 
A)  Stock purchase 
B)  Asset purchase 
C)  Merger 
D)  Dissolution

Question 17

List and explain four times when there is an exception to the general rule that there is to successor liability in an asset purchase.

Accepted Answer

When there is an implied and express agr

Question 18

In general, as long as an asset transfer is conducted at arm's length and it is reasonable it will not be considered fraudulent.

Accepted Answer

A) True 
 B)False

Question 19

A merger agreement should contain all of the following except

Accepted Answer

A)  Regulatory approvals 
B)  Representations 
C)  A schedule of events 
D)  Warranties 
A)  Regulatory approvals 
B)  Representations 
C)  A schedule of events 
D)  Warranties

Question 20

Generation Next Corporation proposes to merge with the target Millennial Corporation. In the process, Generation Next reviews the finances and accounting of Millennial to determine if there are any liabilities or challenges with that target. This process is called

Accepted Answer

A)  Discover 
B)  Due diligence 
C)  Intentional investigation 
D)  Financial evaluation 
A)  Discover 
B)  Due diligence 
C)  Intentional investigation 
D)  Financial evaluation

Exam 31: Corporate Transactions: Acquisitions and Mergers

Explain the general process of a corporate transaction.

Can litigation prevent a hostile takeover?

In the case, Gimball v. Signal Companies, Inc., the court determined that the "substantially all" test

A transaction in which the board of a target company has no prior knowledge of an acquirer's purchase offer is called a

In a merger agreement it states, "the board of both parties will be held harmless for the losses incurred as a result of a breach of its contractual obligations in the purchase agreement" is called

In the case, Unitrin v. American General Corp. the court employed the definition of a non-employee and non-management director to be

Successor liability never exists in an asset purchase.

Rex Incorporated, engages in an asset purchase of Tex Inc. In the process, Rex states that it will pay off all of Tex's creditors. After the transaction is complete, Rex Incorporated states that it will no longer honor that promise. What most likely be the outcome of this situation?

Termination rights in an asset purchase agreement may

In a share purchase agreement the following statement was included, "Both parties agree to operate with the utmost professionalism, integrity and good character in all corporate transaction such that it instills confidence and respect for the process and the result." This is an example of a(n)

In evaluating corporate transactions, the board has all of the following fiduciary duties except the duty of

List and explain four times when there is an exception to the general rule that there is to successor liability in an asset purchase.

In general, as long as an asset transfer is conducted at arm's length and it is reasonable it will not be considered fraudulent.

A merger agreement should contain all of the following except

Generation Next Corporation proposes to merge with the target Millennial Corporation. In the process, Generation Next reviews the finances and accounting of Millennial to determine if there are any liabilities or challenges with that target. This process is called

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