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THE UNIVERSITY OF BRITISH COLUMBIA

PETER A. ALLARD SCHOOL OF LAW

FINAL EXAMINATION — APRIL 2018

LAW 461
Corporate Transactions

Section 1
Professor Hutchison

TOTAL MARKS: 100

TIME ALLOWED: 3 HOURS

NOTE:

1. This is a limited open book examination. Candidates may have with them a
CAN/outline and calculator. Laptops are only permitted for the use of
Examplify/Examsoft.

2. ANSWER ALL QUESTIONS. THIS EXAMINATION CONSISTS OF 23 QUESTIONS

(in 2 parts)
LAW 461.001 Page 2 of 7

Part I
MARKS 40

Answer the following questions in approximately three sentences or less. Each question
is worth two marks.

1. List three market solutions to the problem of adverse selection between sellers and
buyers.

2. How does an “earnout” provision in a corporate purchase agreement address the

problem of moral hazard?

3. Assume the risk-free interest rate is 1.7% and the total stock market return is
9.53%. The return on Coffee Inc. stock is 7.31%. What is Coffee Inc.’s beta?

4. A prominent corporate critic argues that corporate managers focus too much on
keeping short-term stock prices high and should focus more on building long-term
shareholder value. Does this argument seem plausible? Why or why not?

5. In late 2017, the United States Congress passed tax reform limiting the ability of
corporations to deduct interest. Other things being equal, what effect do you think
this will have on leveraged buyouts in the U.S.?

6. Hal Inc. issues preferred stock at $100 per share that pays a nonparticipating
cumulative dividend of 7%. The preferred stock has a liquidation preference and
no voting rights. David purchases 100 shares of preferred stock. In year one, Hal
Inc. does not make a profit and pays no dividends. In year two, Hal Inc. does not
make a profit and pays no dividends. In year three, Hal Inc. becomes profitable
and pays a four percent dividend on its common stock. How much must Hal Inc.
pay David in dividends?

7. Bigmart Inc. has a one billion dollar term loan with Eastern Bank Inc. The loan
agreement specifies that the full amount of the loan will become immediately due
and payable if Bigmart Inc. violates any of its financial covenants. Unfortunately,
Bigmart Inc. posts a quarterly loss, violating one of its financial covenants. What
is the most likely result of this breach?

8. Michelle, an angel investor, purchases a SAFE (simple agreement for future

equity) from Cryptech Inc. for $50,000. The valuation cap is $2,000,000, and the
discount rate is 80%. Cryptech Inc. subsequently closes a Series A Preferred
Stock financing round that values the company at $1.5 million. In exchange for
her SAFE, what percentage of the pre-money equity in the company is Michelle
entitled to?

9. What is the primary purpose of a shareholders’ agreement?

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10. John is the founder of Tarragon Inc., a successful startup company that has
received multiple rounds of venture-capital financing. By way of thanks, John
wants to give some of his Tarragon Inc. stock to his high-school math and science
teachers, who are nearing retirement. Assuming Tarragon Inc. has entered into
standard venture-capital transaction documents, what issues does this raise?

II. Distribution Inc., a diversified logistics company, seeks to acquire Components

Inc., a medium-size components manufacturer. Components Inc.’s tangible
assets consist primarily of recently-purchased plant and equipment. Components
Inc. also has a large number of outstanding purchase orders with customers and
suppliers. Would it be better for Distribution Inc. to structure the transaction as an
asset or stock deal? Briefly explain your answer.

12. The board of directors of Best Price Inc. proposes an amalgamation with Office
Space Inc. Jameson Capital Inc. owns 20% of the outstanding voting stock of Best
Price Inc. and opposes the transaction on economic grounds. Briefly explain how
Jameson Capital Inc. may protect its interests.

13. According to Canadian case law, what is the general legal test in considering
whether to approve a plan of arrangement?

14. Northeastern Industry Inc. plans to amalgamate with Northwestern Industry Inc.
under a plan of arrangement. Pursuant to the plan of arrangement, the
bondholders of Northeastern Industry Inc. will take a 30% haircut on the principal
owed under their bonds. Will a Canadian court require a vote of the bondholders
to approve the plan?

15. Describe a reverse triangular merger.

16. What is a “mini-basket”?

17. Fangdichan Limited, a Chinese real estate company, seeks to acquire 365 Inc., a
Canadian convenience store chain. The enterprise value of 365 Inc. is $800
million. What review requirements will this transaction be subject to under the
Investment Canada Act?
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18. Lizard & Co., a specialized investment firm, plans to acquire North Star Inc., a
Canadian publicly-traded corporation. Like many Canadian publicly-traded
corporations, North Star Inc. has a very small public float. On day one, Lizard &
Co. purchases 50% of North Star Inc.’s bonds on the open market. On day two,
Lizard & Co. purchases 16% of North Star Inc.’s preferred stock on the open
market. On day thee, Lizard & Co. purchases 14.1 % of North Star Inc.’s common
stock on the open market. On day four, Lizard & Co. purchases 7.6% of North
Star Inc.’s common stock on the open market. On day five, Lizard & Co. issues a
public offer for 50% of North Star Inc.’s outstanding common stock. Is Lizard &
Co. subject to National Instrument 62-104’s “take-over bid” regime? If so, on which
day did Lizard & Co. become subject?

19. Explain how a shareholder rights plan discourages hostile take-over bids.

20. Describe the general policy orientation of National Policy 62-202.

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Part 2
MARKS 60

Answer the following questions. Each question (1, 2, and 3) is worth 20 marks.

Power Inc., a private Canadian energy-storage company, seeks to acquire

Processing Inc., a private Canadian machine learning company, in a friendly
transaction. The management of Processing Inc. knows that the corporation’s
main office is not in technical compliance with certain local zoning regulations,
though management believes the risk of significant liability is small. In the course
of negotiations, Power Inc. provides a purchase agreement that includes the
following section:

Compliance with Laws. The Corporation is in compliance with all laws of Canada
and all provinces and municipalities thereof and is duly licensed, registered, or
qualified in all jurisdictions in which the Corporation does business and all such
licenses, registrations, and qualifications are valid, subsisting, and in good
standing and none of the same contains any term, provision, condition, or limitation
that is or may become adverse to the business of the Corporation or may serve to
prohibit or interfere with the transactions contemplated hereby. There are no
outstanding orders, notices, or similar requirements relating to the Corporation
issued or threatened by any governmental authority and there are no matters
under discussion with any governmental authority by the Corporation.
Notwithstanding anything to the contrary in this Agreement, no limitations on
indemnification set forth in Section X [limitations on indemnification], Section Y
[survival of representations and warranties], or any other provision of this
Agreement shall apply to any breach of the representations and warranties set
forth in this section.

a) Imagine you are counsel to Processing Inc. In general terms, how would
you respond to this section? What arguments would you use to negotiate
more favorable terms for your client?

b) Now switch roles and imagine you are counsel to Power Inc. In general
terms, how would you respond to the answer you just gave above? What
arguments would you use to negotiate more favorable terms for your client?

c) What is the economic function (or functions) of this section?

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2. Western Pipelines Inc., a Canadian publicly-traded pipeline company, seeks to

acquire Sunset Refining Inc., a Canadian publicly-traded refining company, in a
friendly transaction valued at $500 million. In the course of negotiations, Western
Pipelines Inc. provides a purchase agreement that includes that following section:

No Solicitation or Negotiation. The Corporation agrees that (i) the Corporation, (ii)
any of its subsidiaries, (iii) any of its directors, officers, or employees (or any
directors, officers, or employees of any of its subsidiaries), (iv) any of its investment
bankers, attorneys, accountants, and other advisors or representatives, and (v)
any other person acting on behalf of the Corporation shall not, directly or indirectly,
solicit, encourage, initiate, facilitate, respond to, engage with, or participate in any
discussion regarding the sale of the Corporation other than to Buyer pursuant to
the transactions contemplated by this Agreement. Under no circumstances shall
any officer or director of the Corporation agree to, recommend, facilitate,
effectuate, or allow any sale of the Corporation other than to Buyer pursuant to the
transactions contemplated by this Agreement.

a) Imagine you are counsel to Sunset Refining Inc. In general terms, how
would you respond to this section? What arguments would you use to
negotiate more favorable terms for your client?

b) Now switch roles and imagine you are counsel to Western Pipelines Inc.
How would you respond to the answer you just gave above? What
arguments would you use to negotiate more favorable terms for your client?

c) What is the economic function of this section?

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3. Imagine you are a policy adviser to the Parliament of British Columbia. The
government is very concerned with environmental responsibility and protecting
jobs in BC. The government is particularly concerned about the possibility of
foreign buyers acquiring BC mining, forestry, and oil development corporations and
pursuing business policies that damage the local environment. The government
is considering passing a law that provides, in relevant part:

“Notwithstanding anything to the contrary in the Business Corporations Act, the

Securities Act, or any rules or regulations promulgated thereunder, the directors of
any company incorporated under the Business Corporations Act may take any
lawful action to reject, oppose, and/or prevent any take-over bid or other
unsolicited acquisition offer for any reason, including, without limitation, a
determination by the directors that such take-over bid or acquisition would not be
in the best interests of the environment, workers, consumers, local communities,
or the broader provincial economy.”

The Legislative Assembly has asked you to answer the following policy questions
(you do not need to address any constitutional or jurisdictional issues raised by the
bill):

a) How might this law protect local environmental and economic interests?

b) What is the likely effect of this law on corporate governance?

c) What is the likely effect of this law on shareholder value?

d) What factors might undermine the effects of this law?

e) Would you advise that the Legislative Assembly pass this law? Why or why
not?

END OF EXAMINATION