Managers and the Legal Environment 7th Edition by David Madsen, Constance Bagley

Exercise 7

The Engulf Corporation is a large media and entertainment conglomerate with its stock trading on the New York Stock Exchange. Engulf is a major producer of films and videos and also publishes several magazines. The company has a shareholder rights plan (that is, a poison pill), which would make any hostile takeover financially prohibitive unless the pill is redeemed by Engulf's board of directors. On January 10, the Megaclout Corporation, in a move designed to gain control of Engulf, announced a tender offer for 51% of Engulf's shares at $140, an $11 premium over the market price.
On January 14, in a meeting that lasted more than thirteen hours, the Engulf board of directors met to consider Megaclout's offer. Engulf's lawyers and investment bankers attended and made detailed presentations on the adequacy of the offer. The next day, the directors officially announced that they believed the Megaclout offer was unacceptable for two reasons: (1) the long-term value of the Engulf stock ranged from $160 to $170, so $140 was financially inadequate; and (2) Engulf had a distinct corporate culture that included special ways of doing business, an outstanding record of management-employee relations, and strong support of community projects in the towns in which Engulf businesses were located. Acceptance of Megaclout's tender offer would pose a direct threat to this corporate culture. For these reasons, the board refused to redeem the poison pill.
Megaclout brought suit as an Engulf shareholder against the Engulf board of directors, demanding that the board redeem the poison pill, which would allow all the shareholders to decide whether they wanted to accept the offer by tendering their shares.
a. Must the Engulf board of directors redeem the poison pill at this time?
b. The board argues that the offer, which is $11 over the market price of the stock, is financially inadequate. Is the argument convincing? Why or why not?
c. Should managers be concerned about corporate constituencies other than shareholders, such as employees or communities in which businesses are located? What if these different concerns conflict?