Mergers and Acquisitions Wilson Spring 2015
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 t
ative aspects and concluded that because the asset was not “vital to the operation of the corporation” and was not “out of the ordinary and substantially affect[ed] the existence and purpose of the corporation.
Shidler v. All American Life and Financial Corp. (Iowa 1980)
GUG was to be merged into All American Delaware Corporation. The merger agreement stipulated that all of GUG common stock would be converted into and exchanged for $3.25. While the merger carried by two-thirds of all GUG shares, it did not carry by two-thirds of the common stock. Plaintiffs asserted that the merger could not go through because the common stock class did not approve the merger; defendants contended that the common stock did not constitute a “class entitled to vote.”
Was the common stock a class by virtue of the effect the merger would have on it?
Because the common stock was to be converted into money, the practical effect of the merger on the common stock as a cancellation. Under the GUG’s articles of incorporation, holders of outstanding shares of common stock are entitled to vote as a class if the effect of an amendment would be cancellation.
: The court rejected defendant’s contention that they could have easily converted the shares prior to the merger and thus not had this problem on the ground that the court had to deal with the facts as they are, not as they could be.