EXAM# _______________
GREENBERG: Business Associations, Fall 2011, Final Exam 10 of 11
Part 2 – Essay Question – Sixty (60) points
Monarch Corporation is a San Francisco based pharmaceutical drug company that is developing
Pretoxide, a new treatment for cancer. The development of this drug has taken over six years,
during which time Monarch has not been making any profit, due to the high cost and delay in
getting Pretoxide to market. The research and development costs for Pretoxide have exceeded
$25 million dollars and the prototype of the drug has been submitted to the U.S. Food and Drug
Administration for approval to be sold to the general public. The decision of the FDA regarding
approval is scheduled to be announced in February 2012.
Monarch is a publicly traded corporation with over $50 million in assets and over 600
shareholders of record. Paul Redford, CEO of Monarch, has just received a confidential, non-
public tip from a friend in the FDA that approval of Pretoxide is going to be delayed again, by up
to another 10 months. When news of this delay becomes public in February, it is likely that
Monarch stock will drop in value by at least 20%, due to uncertainty about whether Pretoxide
will ever be approved.
Redford shares news of the delay with the members of the Monarch Board of Directors, and
notes that he plans to sell 50% of his stock holdings in the company, presently trading at $20 per
share, before the February announcement to limit the losses in value the stock will incur. He and
the rest of the Board proceed to sell 50% of their personal stock holdings, completing their sales
by December 30, 2011.
On February 1, 2012, the FDA announces it is delaying approval of Pretoxide. The
announcement does not include the fact that approval will be delayed at least 10 months―no
mention of this time period, which Redford and the Monarch Board know about, is included in
the public announcement.
As anticipated by Redford and the Board, the FDA announcement results in a 20% drop in the
value of Monarch stock. By selling their stock before the announcement, Redford and the
Monarch Board are saved from a loss of $1 million dollars for each of the 11 board members
(including Redford). The same is not true, of course, for the rest of the shareholders of Monarch,
who all suffer 50% losses in the value of their stock.
On February 5, 2012, the Board of Directors of the Bay Corporation announce that they are
making a hostile takeover bid for control of Monarch, citing the delay in approval of Pretoxide as
evidence that the Monarch Board is mismanaging the corporation. The Bay Corporation
proposes to buy a controlling share in the company’s stock, installing their own experienced
Board members on the Monarch Board, and promises to get Pretoxide approved without further
delays. The Bay Corporation is also a pharmaceutical company, with a long and successful
history of development of experimental drug treatments, and is equal in size and assets to
Monarch.
The Monarch Board takes two steps in response to the Bay takeover bid. In the first step, it
authorizes the deployment of a dead-hand poison pill of 12 months duration―the result of which
is that even if Bay were to take control of Monarch, Bay’s new directors could not be seated on
the Monarch Board for 12 months, making their promise to obtain quick approval of Pretoxide
impossible to achieve. In its second step, the Monarch Board sends out a proxy notice to its
shareholders setting an election date for all members of the Board, to occur in the next 60 days,
