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Merger and Acquisitions
University of Illinois School of Law
Aviram, Amitai

Amitai Aviram Mergers & Acquisitions Spring 2016
Freezeout: SH who controlled majority of shares now owns 100% of the firm.
Control and Assets do not change
Takeover: someone who didn’t control the firm now controls it or wholly owns it
Control and Assets change.
Merger of Equals: two firms combine, neither firms SHs control the combined firm
No control change but there is an asset change (Almost Never Happens)
We’re not paying you as much as you want because we are in this together.
Politically sounds better than a takeover.
Target (X): firm that is being acquired
Target’s board and targets SHs
Acquirer (Y): firm that is trying to buy X
Acquirers board and SHs
Supporting Players:
Sometimes X merges with Y’s subsidiary (S) not Y: usually a shell entity
BA Boot Camp
EDGAR – 10k is annual report, 10Q is quarterly report, 8k is new “material” developments must be filed within 4 business days, 14A is the proxy statement (disclosure required to be given to SH before SH meeting)
Share Ownership
Ownership Structures
Managerial Agency Costs
Majoritarian Agency Costs
Access to Equity capital
Sole (no MSHs)
Concentrated (C + MSHs)
Dispersed (no C)
Dispersed (w/empowered SHs)
Sole ownership: one person has all firm’s control & economic rights
Concentrated ownership: Controller + MSHs (control agenda to raise it and win the vote?) [dominant way in most countries)
Dispersed Ownership: United States system – no controller  only Minority SH (no body keeps management in check, can issue as many shares as law allows thus easy to raise more capital)
Dispersed w/ Empowered SHs: SH litigation & voting (proxy access, controlling the agenda)
Pros/Cons: when interests rates are not access to equity capital is not of concern, sole to concentrated or dispersedissue shares to MSH, concentrated to dispersed same.
Concentrated to Sole: single SH could hold out and sue if Mike Dell uses Dell in other ventures. Solution: freezeout via short form merger (SFM) – SH that have less than 10% get a fair check and can be kicked out – they have the right to challenge the fair price in Court. Must get to 90% to be Controller
Dispersed to concentrated/sole: (Option 1) when you get to 90% then can do a short form merger (Option 2) freezeout via long-form merger (LFM): deal between C & firm’s board that forces MSHs to sell their interest in the firm to C. have to have a majority SH vote. Board selects who represents the MSH- abuse.
Ensuring a Fair Price: appraisal – reject the price and go to court to determine fair price on the SH that sued for appraisal get the appraisal price.
Why not universal appraisal? Judges have tough time making appraisal,
Delaware process to ensure fair process – FD challenge to freeze out is evaluated under BJR, If C & board follow process that bypasses CoI. (1) transaction negotiated & approved by a special committee or independent board majority (2) transaction approved by majority of ALL MSHs (not just those present at the meeting).
Owner motivations (Not relevant for the exam)
Strategic owners: Y wants to acquire X for the impact on Y’s other assets (controllers not MSH normally)
Financial Owners: Y interested in owning X for the financial gains from X’s assets
The interests
Ownership mechanics
Every company has a SH list – record SHs
Designee/nominee – someone who holds shares on another’s (beneficial SH) behalf.
Ex: Jane Doe (beneficla SH) Citibank (broker), DTC is Designee/record SH – Shares sold from US bank to Citibank the record SH name doesn’t change.
Designee has ability to vote the shares of non-voters. Effects quorum.
Only if matter is routine then can vote.
How share ownership is registered
Effects of this on SH voting & SH litigation
Wednesday – Youtube video & read case (flip through exhibits) outline main points.
FD on controllers so that they cant hide behind the directors( organs) – same logic as apparent authority
C owes FD if it can influence the board – board would breach their FD if give C preferential treatement over the MSH
Court examine whether deals between firm & C are fair or if C has opportunity to tunnel (get more favorable deal than the MSH) – entire fairness applies
Courts aren’t good at allocating value so law tries to precent CoI by giving C and firm an incentive to negotatie deals that approximates arms-length transaction
Deal negotiated by a special committee of independent directors
Deal apprived by a majority of MSHs
Fairness review is used as a threat if this proicess is not followed
When does a SH owe a FD to MSHs?
SH owes a FD only if it owns a majority interest in or exercises control over the business affairs of the corporation Ivanhoe partners
Can demonstrate control over the board by factual evidence…
Control groups: multiple SHs considered as a single control group when connected i

don’t like the idea of having a random new C)
“Tag along” provision (C promises to sell only if MSHs also included in deal)
MSHs receive a “put option” (option to sell to C for the same price), triggered if C sells to someone else.
When would C agree to such terms?? Some laws require acquirer who buys control to offer to buy MSHs shares at the same price.
C’s Act with Firm Involved:
in some cases a firms act isn’t a transaction in which C can be on the other side or receive different terms than MSHs
in such cases when you apply MFW or Frank you can use an older precedent as a backup under Sinclair Oil Corp SoR is entire fairness if C receives something to the exclusion of & detriment to MSHs, otherwise SoR is BJR.

(1) transaction negotiated & approved by a special committee or an independent BoD majority
Committee is independent
Committee satisfied its duty of care
Committee authorized to freely select its advisors
Committee authorized to sue firms full bargaining power & to consider all of the firms options
(2) Transaction approved by majority of MSHs
Approval is informed
There is no coercion of the minority
Majority of ALL MSHs not just those present at the meeting
What if firm implemented each of these protections but did not make them – SoR is entire fairness
What if firm implemented only one of the 2 protections – Kahn v. Lynch – burden on C after P proves self-dealing but if transaction was approved by the special committee or the majority MSHs burden to show unfairness shifts to P
Different Consideration Ex: frank v. Elgamal: MSHs are cashed out at $2.87/share while control group gets same price for about ¾ of their shares but gets shares in Great Point for the other ¼ of their shares.
Gives incentive to C to stay and work hard for the company even though they aren’t controllers anymore.
Duty: multiple SHs considered single control group – they have contract to work together towards a shared goal. Don’t pick min. needed for control just everyone involved in the agreement.