Mergers, Takeovers, and Corporate Law PDF

Chapter 41: Mergers and Takeovers Mergers and Takeovers -​ Corporate growth can occur through: -​ Reinvesting earnings – equipment, employees, R&D -​ Combining with another corporation through merger, consolidation or share exchange -​ Purchasing the assets of, o...

Chapter 41: Mergers and Takeovers Mergers and Takeovers -​ Corporate growth can occur through: -​ Reinvesting earnings – equipment, employees, R&D -​ Combining with another corporation through merger, consolidation or share exchange -​ Purchasing the assets of, or controlling interest in, another corporation Merger, Consolidation and Share Exchange -​ Merger- A contractual and statutory process in which one corporation acquires the assets and liabilities of another corporation. -​ One of the Firms Survives -​ The surviving corporation is recognized as a single corporation. -​ The surviving corporation’s articles of incorporation are deemed amended to include any changes stated in the articles of merger. -​ The corporation that was acquired no longer exists as an entity. -​ Surviving Corporation Inherits All Legal Rights and Obligations of the Other Firm -​ Possesses all of the rights, privileges, and powers of itself and the corporation that it acquired -​ Automatically acquires all of the acquired corporation’s property and assets -​ Becomes liable for all of the acquired corporation’s debts and obligations -​ Corporation A and Corporation B decide to merge. They agree that A will absorb B, so after the merger, B no longer exists as a separate  entity, and A continues as the surviving corporation. -​ Consolidation- A contractual and statutory process in which two or more corporations join to become a completely new corporation. -​ A New Corporation Is Formed -​ The consolidated corporation’s articles of consolidation take the place of the terminated corporations’ original corporate articles. -​ New Corporation Inherits All Legal Rights and Obligations of Both Predecessors -​ Inherits all of the rights, privileges, and powers previously held by the terminated corporations -​ Automatically acquires title to the terminated corporations’ property and assets -​ Assumes liability for all debts and obligations owed by the terminated corporations -​ Corporation A and Corporation B consolidate to form an entirely new organization, Corporation C. In the process, A and B terminate, and C comes into existence. -​ Merger vs. Consolidation? -​ Why may for-profit corporations prefer mergers and not-for-profit corporations prefer consolidation? -​ For-profit wants a merger because it might benefit them like if they have better technology, better brand, new product line, they might be a competitor and they can take their profits back  -​ Not-for-profits might want a consolidation because they might want to do something new and come out with a new company, leave the past behind, more resources, more people interested in the company, start from scratch instead of a dominant company remain -​ Share Exchange- A process in which some or all of the shares of one corporation are acquired or exchanged for some or all of the shares of another corporation, and both corporations continue to exist. -​ Parent corporation- A corporation that owns the shares of a subsidiary corporation. -​ Share exchanges are often used to create holding companies. -​ Merger, Consolidation, and Share Exchange Procedures -​ All states have statutes authorizing mergers, consolidations, and share exchanges. -​ Revised Model Business Corporation Act (RMBCA) sets forth basic requirements: -​ 1. The board of directors of each corporation involved must approve the plan. -​ 2. The plan must: -​ Specify any terms and conditions -​ State how the value of the shares will be determined and how they will be converted into shares or other securities, cash, property, or additional interests in another corporation. -​ 3. The majority of the shareholders of each corporation must vote to approve the plan. -​ 4. Once the plan is approved, the surviving corporation files the plan (articles of merger, consolidation, or share exchange) with the appropriate state official—usually the secretary of state. -​ 5. When state formalities are satisfied, the state issues a certificate: -​ A certificate of merger to the surviving corporation -​ A certificate of consolidation to the newly consolidated corporation -​ Short-Form Mergers  -​ RMBCA provides a simplified procedure for the merger of a substantially owned subsidiary corporation into its parent corporation. -​ A short-form merger—a/k/a a parent–subsidiary merger—can be accomplished without the approval of the shareholders of either corporation. -​ The parent corporation must own at least 90% of the outstanding shares of each class of stock issued by the subsidiary corporation. -​ Once the board of directors of the parent corporation approves the plan: -​ The plan is filed with the state. -​ Copies are sent to each shareholder of record in the subsidiary corporation. -​ Shareholder Approval -​ Mergers and other combinations are considered “extraordinary” business matters, meaning that the board of directors must normally obtain the shareholders’ approval and provide appraisal rights. -​ Sometimes, a transaction can be structured in such a way that shareholder approval is not required. -​ Because shareholders can challenge the transaction in court, the board of directors may request shareholder approval even when it might not be legally required. -​ Appraisal Rights -​ Dissenting shareholders have a statutory right to be paid the fair value of the shares they held on the date of the merger or consolidation. -​ Appraisal right- The right of a dissenting shareholder to have their shares appraised and to be paid the fair value of the shares by the corporation if they object to an extraordinary transaction of the corporation. -​ “Fair value of the shares” normally is the value on the day prior to the date on which the vote was taken. -​ Each state establishes the procedures for asserting appraisal rights. -​ Shareholders may lose their appraisal rights if they do not follow the procedures. -​ See concept summary 41.1, p. 759. Merger The legal combination of two or more corporations, with the result that the surviving corporation acquires all of the assets and obligations of the other corporation, which then ceases to exist. Consolidation The legal combination of two or more corporations, with the result that each corporation ceases to exist and a new one emerges. The new corporation assumes all of the assets and obligations of the former corporations. Share A form of business combination in which some or Exchange all of the shares of one corporation are exchanged for some or all of the shares of another corporation, but both firms continue to exist. Procedure Determined by state statutes. Basic requirements are the following: The board of directors of each corporation involved must approve the plan of merger, consolidation, or share exchange. The shareholders of each corporation must approve the merger or other consolidation plan at a shareholders’ meeting. Articles of merger or consolidation (the plan) must be filed, usually with the secretary of state. The state issues a certificate of merger (or consolidation) to the surviving (or newly consolidated) corporation. Short-Form When the parent corporation owns at least 90 Merger percent of the outstanding shares of each class of (Parent-Subsid stock of the subsidiary corporation, shareholder ary Merger) approval is not required for the two firms to merge. Appraisal Rights of dissenting shareholders (provided by  Rights state statute) to receive the fair value for their shares when a merger or consolidation takes place. If the shareholder and the corporation do not agree on the fair value, a court will determine it. Purchase of Assets -​ Ex. machinery, land, technology, IP -​ Buyer- When a corporation acquires all or substantially all of the assets of another corporation by direct purchase, the acquiring corporation simply extends its ownership and control over more assets. -​ The acquiring corporation usually does not need to obtain shareholder approval for the purchase unless: -​ 1. The corporation must issue additional shares of stock to pay for the assets. -​ Possible dilution -​ 2. The acquiring corporation’s stock is traded on a national stock exchange and it will be issuing a significant number of shares. -​ Seller: In contrast, the corporation that is selling all of its assets must obtain approval from both its board of directors and its shareholders. -​ More of an extraordinary matter that could affect the share price and profitability of the organization -​ Dissenting shareholders can usually demand appraisal rights. -​ Successor Liability in Purchases of Assets -​ Generally, a corporation that purchases the assets of another corporation is not automatically responsible for the liabilities of the selling corporation. -​ In the following situations, the acquiring corporation will be held to have assumed both the assets and the liabilities of the selling corporation: -​ 1. Express or implicit agreement -​ 2. De facto merger -​ Ex. someone buying so many assets to avoid taking on liabilities even though it was actually a merger -​ 3. Continuation of seller’s business  -​ Ex. they kept same board, employees, business, shareholders and nothing changed so it's more of a merger and not purchase of assets -​ 4. Fraud -​ Heavenly Hana, LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, p. 760. Purchase of Stock -​ An alternative to the purchase of another corporation’s assets is the purchase of a substantial number of the voting shares of its stock to gain control. -​ Target corporation– The corporation to be acquired in a corporate takeover; a corporation to whose shareholders a tender offer is submitted. -​ Tender offer– An offer to purchase made by one company directly to the shareholders of another (target) company; often referred to as a“takeover bid.” -​ Can be conditional -​ Offer usually higher than market price per share -​ Application of Securities Laws -​ Federal securities laws strictly control the terms, duration, and circumstances under which most tender offers are made. -​ Many states have passed antitakeover statutes. -​ The offering corporation does not need to notify the SEC or the target corporation’s management until after the tender offer is made. -​ If the takeover is successful, the offeror must then disclose to the SEC: -​ 1. The source of the funds used in the offer -​ 2. The purpose of the offer -​ 3. The acquiring corporation’s plans for the firm -​ Responses to Tender Offers -​ A firm may respond to a tender offer in numerous ways -​ If the target firm’s board of directors views the tender offer as favorable, the board will recommend that the shareholders accept it.  -​ If the target corporation’s management opposes the proposed takeover, the target company may try to resist the hostile takeover by employing a variety of tactics. -​ The Terminology of Takeover Defences -​ Takeover Defenses and Directors’ Fiduciary Duties -​ In a hostile takeover attempt, sometimes board of directors’ fiduciary duties collide with their self-interest. -​ Self-interest- board members might lose their job, they might hate the company trying to takeover -​ The shareholders, who would have received a premium for their shares as a result of the takeover, may file lawsuits for breach of duty. -​ Courts apply the business judgment rule when analyzing whether the directors acted reasonably in resisting the takeover attempt. -​ The directors must show that they had reasonable grounds to believe that the tender offer posed a danger to the corporation’s policies and effectiveness. Corporate Termination -​ The termination of a corporation’s existence has two phases: -​ 1. Dissolution -​ The formal disbanding of a business entity -​ Dissolution can be voluntary or involuntary, and brought about by: -​ 1. An act of the state -​ 2. An agreement of the shareholders and the board of directors -​ 3. The expiration of a time period stated in the certificate of incorporation -​ 4. A court order -​ 2. Winding Up -​ Process by which corporate assets are liquidated and distributed among creditors and shareholders according to specific rules of preference -​ Voluntary Dissolution -​ Two methods of voluntarily dissolving a corporation: -​ 1. By the shareholders’ unanimous vote -​ 2. By a proposal of the board of directors that is submitted to the shareholders at a shareholders’ meeting -​ When a corporation is dissolved voluntarily, the corporation must: -​ File articles of dissolution with the state -​ Establish a date (at least 120 days after the date of dissolution) by which all claims against the corporation must be received -​ Notify its creditors of the dissolution. -​ If a corporation’s assets are liquidated without notice to a party who has a claim against the firm, shareholders of the former corporation can be held personally liable for the debt. -​ Involuntary Dissolution -​ The secretary of state or the state attorney general can bring an action to dissolve a corporation that has failed to: -​ Pay its annual taxes -​ Submit required annual reports -​ A state court can dissolve a corporation for:  -​ Making fraudulent misrepresentations to the state during incorporation -​ Engaging in mismanagement -​ The RMBCA permits any shareholder to initiate an action for dissolution when: -​ The directors are deadlocked in the management of corporate affairs, and the shareholders are unable to break the deadlock. -​ The acts of the directors or officers are illegal, oppressive, or fraudulent. -​ Corporate assets are being misapplied or wasted. -​ The shareholders are deadlocked in voting power and have failed, for a specified period (usually two annual meetings), to elect successors to directors whose terms have expired or would have expired with the election of successors. -​ WInding Up -​ Winding up differs to some extent based on whether voluntary or involuntary dissolution has occurred. -​ Voluntary dissolution- the board of directors act as trustees of the corporate assets. -​ They are responsible for winding up the affairs of the corporation for the benefit of corporate creditors and shareholders. -​ They are personally liable for any breach of fiduciary duties in the winding up process. -​ Involuntary dissolution- or if board members do not wish to act as trustees—the court will appoint a “receiver” to wind up the corporate affairs. -​ Courts may also appoint a receiver when shareholders or creditors can show that the board of directors should not be permitted to act as trustees of the corporate assets. -​ On dissolution, the liquidated assets are used to pay creditors first and any remaining assets are distributed to shareholders according to stock rights. P. 765-766 LOOK AT THIS CHART TO STUDY