Governing Law

Governing Law

To the extent that state law applies to a corporation, the law of the state of incorporation applies. Except as otherwise indicated, the Certificate of Incorporation of any corporation discussed contains only the basic provisions required by Sec. 102(a) of the DGCL.

Governing Law

To the extent that state law applies to a corporation, the law of the state of incorporation applies. Except as otherwise indicated, the Certificate of Incorporation of any corporation discussed contains only the basic provisions required by Sec. 102(a) of the DGCL.
Identify and analyze any legal issues arising out of the following facts:

 

Bowman Holdings (“Bowman”), a timber company, is controlled by Jerome Garcia, who holds common stock representing 68% of the firm’s voting power.  The remaining 32% is held by public shareholders.

For many years, Bowman had paid an annual $1.00 dividend on its common stock.  In 2011, Bowman issued a press release with two announcements: first that Bowman’s earnings were lower than analysts had expected, and second that it was suspending its quarterly dividend and did not expect to resume paying dividends within the next four years.  Garcia was delighted at the news, as he had long pressured the company to forego paying a dividend because of the high tax rates he faced on income received as dividends.  The company’s press release said that it did not have any specific plans for the cash it would save by not paying dividends, but that it planned to “conserve the cash in case it could be of use in future acquisitions or expansions.”

Bowman stock dropped on the announcement.  Garcia found the new prices attractive and over the succeeding weeks began acquiring more stock.  Many shareholders were upset at the discontinuance of the dividend.  In an attempt to placate disgruntled shareholders, Bowman offered shareholders the opportunity to exchange their stock on a one-to-one basis for a new class of stock called PEPS.  The PEPS would pay holders an annual dividend of $1.00.  The PEPS had a maximum term of four years.  The certificate of incorporation detailing the terms of the PEPS provided that they would be redeemed in three possible ways. First, Bowman was required to redeem the PEPS for Bowman common stock on a one-for-one basis on May 10, 2015 if the PEPS were still outstanding at that time.  Second, Bowman had the option to redeem the PEPS at a fixed price for either cash or stock prior to May 10, 2015.  Third, Bowman would be required to redeem the PEPS at a premium if, at any time prior to May 10, 2015, Bowman “shall declare and pay a dividend on the common stock at a cumulative rate per annum equal to or greater than $2.00 per share.” The 2011 exchange offer was fully subscribed, though Garcia himself did not participate.  After Garcia’s acquisitions and the PEPS exchange offer, his ownership of the firm’s voting power increased to 83%.

Throughout 2012, the timber business continued to deteriorate. Bowman had accumulated a large amount of cash thanks to stopping the dividend, and in late 2012 it used the cash to acquire all of the common stock of a mining business.  By early 2013, the mining business represented approximately 43% of the Bowman’s overall profits and assets.  Bowman had a class of bonds outstanding, and the indenture provided that: “Bowman shall not consolidate with or merge into, or sell, assign, transfer, lease, convey or otherwise dispose of any substantial portion of its operating assets to any entity or entities unless the successor entity or entities shall expressly assume the due and punctual payment of the principal of and interest on all the bonds.”

In March 2013, Bowman issued an announcement that they were going to resume paying an annual cash dividend of $0.50 per year, which was first paid in April 2013.  In July 2013, Bowman announced that it would distribute the common stock of the mining business as a dividend to its common stockholders of record on August 15, 2013.  The spinoff of the
mining business angered both the bondholders and the holders of the PEPS.  The PEPS holders contended that the spinoff triggered their accelerated redemption provision, and the bondholders argued that it was prohibited by the indenture.  On August 7, 2013, the Bowman board of directors met to consider the value of the mining business.  They had received an opinion from Hannigan & Loki, an investment bank that had done work in the past for Bowman and for Garcia.  Hannigan & Loki estimated that the value of the mining company stock that each shareholder would receive was between $1.45 and $2.90.  After considering the Hannigan & Loki opinion, the board determined that the value of the mining stock that each stockholder would receive was $1.45 per share.  They also resolved to exercise the company’s option to redeem the PEPS for cash, which was effected the day after the stock dividend, August 16.

On September 15, 2013, the Bowman board met and determined that it wished to award a large performance bonus to its CEO Sharon Meyers. It wanted to give her a $10 million cash award for increasing shareholder wealth so dramatically over the past four years.  The problem for the board was that the company did not have $10 million in cash.  Instead, it awarded Sharon Meyers a large quantity of stock options at the closing price on September 15, as required by Bowman’s standard stock option plan. The board expected that when the company announced its improved earnings on September 19, the stock price would rise, and the increase would immediately deliver Meyers approximately $10 million of value through the appreciation of the stock options.  The board was especially pleased with the option award because in addition to delivering the bonus amount directly to Sharon Meyers, it also created an ongoing incentive for her to grow the stock price even further.

 

 

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