Introduction to M&A (1-29)
Three basic state-law structures (30-57)
Statutory Merger: Stock for Stock
Two corporations start as separate legal entities with separate owners. One corporation merges into the other, leaving the corporation being merged into as the sole survivor; or the two corporations can merge into a new corporation formed in the transaction.
Del. Gen. Corp. L. § 251 – governs if both parties are Delaware corporations
§ 251(a) – Authorizes both firms to engage in the transaction
§ 251(b) – Requires that the board of directors of both firms pass a resolution approving an “Agreement of Merger” and a statement “declaring its advisability.” The agreement states the terms and conditions of the merger and may amend the certificate of incorporation of the survivor.
§ 251(c) – Requires both constituent corporations to submit the agreement to a shareholder vote. A majority of all the outstanding shares “entitled to vote” must ratify the agreement.
§ 251(f) – The shareholders of the surviving firm do not have a right to vote on the merger if the rights, preferences, and privileges of their shares survive the merger and if their shares are not diluted by more than a specified amount.
The 20 percent rule – The general rule is that the surviving shareholders must hold at least 83 percent of the voting shares, which means that the surviving corporation cannot issue more than 20 percent new stock in the merger.
§ 251(g) – No shareholder voting is required in specified reorganizations of holding companies or in specified creations of holding company structure, since the transaction does not modify the rights and preferences of the corporation shareholders (holding company exception).
Del. Gen. Corp. L. § 253 – (short-form merger) Permits the merger of the subsidiary into the parent (an upstream merger) solely on a resolution of the parent’s board of directors when the parent corporation holds over 90 percent of each class of the subsidiary’s voting stock. The shareholders of neither the subsidiary nor the parent have a right to vote on the transaction (parent-90 percent sub exception).
In a cash-for-assets acquisition, one corporation purchases the assets of the target corporation in exchange for either cash or for assumption of liability (assuming target corporation’s debt). There is no change in the constitutional documents of either corporation, nor is there any change in the number of shares outstanding in either corporation. Once the asset sale is complete, the target corporation usually uses its cash to settle any outstanding liabilities and pay off its shareholders.
Del. Gen. Corp. L. § 122
§ 122(4) – Empowers Delaware corporations to buy and sell assets
§ 122(13) – Authorizes one corporation to assume the liabilities of another corporation as consideration
Del. Gen. Corp. L. § 271 – Requires a target corporation’s board, whenever it resolves to have the corporation sell “all or substantially all” of its assets, must submit a resolution to its shareholders and a majority of the outstanding shares “entitled to vote” must ratify the transaction.
Del. Gen. Corp. L. § 275 – To dissolve a corporation after an asset sale, the board must submit a resolution of dissolution to its shareholders and a majority of the outstanding shares “entitled to vote” must ratify the resolution.
What constitutes “substantially all” of a corporation’s assets?
Test: An asset constitutes “substantially all” of a corporation’s assets if the assets to be sold “are quantitatively vital to the operation of the corporation” and “substantially affect the existence and purpose of the corporation.”
MBCA § 12.02 – Safe Harbor Provision
If a corporation retains a business activity that represented at least 25 percent of total assets at the end of the most recently completed fiscal year, and 25 percent of either income from continuing operations before taxes or revenues from continuing operations for that fiscal year . . . the corporation will conclusively be deemed to have retained a significant continuing business activity.
Basic Stock Acquisition: Cash for Stock
The acquiring corporation purchases the stock directly from the target corporation’s shareholders in exchange for cash. After the transaction, the acquiring corporation owns all of the stock of the target corporation; the acquiring corporation becomes the parent corporation of a new subsidiar
in a statutory merger. The shareholders of the constituent corporations have pooled their ownership interests into a single corporation.
The benefits of a stock-for-asset acquisition or a stock-for-stock acquisition over a statutory merger is that, under Delaware rules, the shareholders in the purchasing corporation do not have the right to vote on the transaction or to claim appraisal rights.
Reverse Asset Sale: This transaction occurs when the technically purchasing its assets pays with a controlling block of shares. After the transaction, the corporation technically selling its assets ends up with a controlling share of the purchasing corporation. Upon dissolution, the firm that has sold its assets transfers the shares of the other corporation to its shareholders.
The point of a reverse asset sale is to locate shareholder voting for the asset disposition in the purchasing firm, thus minimizing shareholder vote or appraisal rights due the shareholders of the seller.
Do courts accept this structure? (Delaware courts are probably OK with it; other courts probably less so).
No voting rights
No appraisal rights
RMBCA (1999) – voting rights only
In this transaction, A Corp. purchases B Corp.’s assets and liabilities using A Corp.’s stock as consideration. After the transaction, B Corp. becomes a wholly-owned subsidiary of A Corp.
The advantage of the parent-subsidiary structure is that the B Corp. creditors of the subsidiary do not have a claim on A Corp. assets held by the parent. What is more, the same post-transaction structure of a statutory can be accomplished by merging the wholly owned subsidiary into the parent corporation by a board of directors’ resolution.