MERGERS AND ACQUISITIONS EXAM OUTLINE
Characteristics of Merger’s and Acquisition
– Consolidation transactions and removing excess capacity
– Economy creation: Advantages from economies of scale or distribution available after dereg
– Divesture transactions: used to raise cash or shed under-producing subsidiaries
– Leveraged buyouts (LBO): borrow financing by pledging assets as collateral
– Negotiated transactions
Motivation for M&A’s
Economies of Scale- Allows companies with high ‘tool-up’ costs to spread over greater number of units
Economies of Scope – Companies with related products combine to expand name power
Synergies – Companies combine to gain competitive advantage
Market Share – Well-recognized brand names command premium price
Diversification – stabilize income and cash flows, and reduces riskiness of debt and equity.
Acquisition of New Technology
“Internal Affairs” doctrine grant states power to set terms under which corporations organized in state shall operate.
EFFICIENT MARKET THOERY
The efficient market theory of capital markets states all stocks are fairly priced and incorporate the wealth of information into that price. How then can an acquiror capitalize on value in these stocks if price always reflects actual value?
Two explanations:
(1) Exploitation of shareholders responses to takeover bid allows bidder to capitalize
(2) Information asymmetries-bidder has superior information allowing him to exploit shareholders when price falls below value of assets.
I. DEAL OVERVIEW
i. Taxable Transactions
Transaction may result in taxable event depending on form, including:
(a) Asset purchases – taxable once upon acquisition if sale price exceeds basis, and second upon liquidation.
(b) Share purchases – one level of taxation on gain received by shareholders
ii. Tax Free Reorganizations
“Reorganization” – no taxable event is recognized (gains deferred until disposition). Shareholders do not incur tax liability where disposing in tax-free reorg if qualifying consideration received. Three types:
(1) “A” Reorganizations – Statutory merger or consolidation, most flexible, merger must be between acquiring and acquired firm. Some consideration must be stock, but not all. Taxed on only the “boot.”
(2) “B” Reorganizations – Exchange of at least 80% of voting and nonvoting stock of target for that of acquirer, least flexible, receipt of ANY non-qualifying consideration (“boot”) destroys tax-free status, usually confined to acquisition of closely helds.
(3) “C” Reorganization – Exchange of substantially all assets of corporation for voting stock of acquirer, up to 20% may be in non-qualifying consideration (“boot”), selling corporation must liquidate
Qualifying Characteristics:
(c) Continuity of Interest –portion of consideration must be paid in stock of acquiring corporation. Focus on proportion of consideration received, not on proportion of bidder’s stock held by target.
(d) Business Purpose – Regulations requiring a business purpose to exist for acquisition
(e) Continuity of Business Enterprise – requires acquiring corporation continue a line of target’s historic business or use significant part of assets in any business.
2. CORPORATE DEALS
A. MERGERS
Mergers involve corporate action. Prototypical merger involves A, by virtue of corporate action, “becomes” part of B (surviving corp.) under similar corporate action.
Procedures –
(a) Boards agree on plan of merger
(b) Shareholders must then approve plan after being given sufficient advance notice
(c) Merger consummated upon filing of statement of merger with Sec. of State.
Voting requirements- Generally higher than normal (“fundamental corporate change”).
è Model Act allow by majority vote if quorum is present.
è Most statutes also provide voting rights to all classes of stock in situations of merger. Model Act, MBCA.
è Delaware provides voting rights for charter amendments but does not provide for separate class of voting rights in mergers as a matter of law, though they may be contracted for.
Shareholder Rights:
(1) Dissenting Rights – shareholders outvoted in merger may dissent and receive fair value
(2) Appraisal Rights – if seeking, must notify corporation of dissent.
è DE and Model Act deny appraisal rights where public company receives stock in ano
neral Rule: Shareholder Approval Required: in sale of “all or substantially all of the assets” of Delaware corporation (qualitatively and quantitatively measured to see if vital to operation)
(a) “Unusual” Transaction Test: If transaction “unusual, “striking at heart of corporate existence and purpose,” or, where fundamentally changes business by destroying means to accomplish purposes or objects which corporation was incorporated and actually performs. Gimbel v. The Signal Companies
(b) Line of Business Change Test: if change of business traditionally engaged in, and constitutes over 51% of net assets, constitutes “substantially all.” Katz v. Bregman.
If assets responsible for only minimal amount of revenue (such as 23%), may fall short of “substantially all.”
(c) If two entities make up a corporation, sale of one and not more than 10% of assets not necessarily “substantially all.” Hollinger v. Hollinger
è Delaware and California [qualitative approach]; Model Act [safe harbor for transactions where seller left with 25% of assets and 25% of income]
è Model Act §12.01 allows assets of direct or indirect subsidiary to be considered as assets of the parent for purposes of the test.
B. DE FACTO MERGERS
Where asset transaction has harsh effects on a constituency-mainly shareholders, courts may recast as de facto merger to ameliorate effects of: liability avoidance, shareholder voting rules, and unavailability of appraisal rights to shareholders.
– Legal Standard – where combination so fundamentally changes corporate charter and interests of the shareholders therein, that refusing shareholders rights and remedies of dissent would in effect force him to give up shares in one corporation and accept those of another against his will.
