M&A – Spring 2010
I. Deal Structure
i. States every corporation organized under the DCGL shall be run by a BOD
b. 242(a) – After a corp has rec’d payment for any if it’s capital stock, it may amend COI in any way desired. In particular to:
i. (3) – Increase or decrease authorized capital stock or to reclassify the same, by changing the number, par value, designations, preferences, or relative, participating, optional, or other special rights of the shares.
ii. (4) – To cancel or otherwise affect the right of the holders of the shares to received dividends
iii. (5) – To create new classes of stock having rights and preferences either prior and superior or subordinate and inferior to any stock then authorized
i. (1) – If corp has capital stock, it’s BOD shall adopt a resolution setting for the amendment proposed, declaring its advisability, and either calling for a special meeting of s/h OR directing that amendment be considered at next s/h meeting.
ii. (2) – If amendment would increase or decrease the aggregate number of shares of a class, increase or decrease par value of shares of a class, or alter or change the powers of a class, the holders of the outstanding shares of a class shall be entitled to vote as a class on the proposed amendment.
d. 251(a) – Merger, Consolidation , or Conversion.
i. (a) – any two or more corps may merge into a single corporation, pursuant to a merger agreement
ii. (b) – BOD of each corp shall adopt a resolution approving the agreement, which shall contain:
1. Terms and conditions of merger
2. Mode of carrying them into affect
3. Changes to COI, in case of merger
4. Attached copy of effective COI, in case of consolidation
5. Manner of converting shares of stock from one corp to another
6. Any other pertinent details
iii. (c) – Agreement shall be submitted to s/h of each corp at an annual meeting or special meeting. If approved, it shall be filed. In lieu of such filing, a new certificate of M&A can be filed which contains:
1. Name and state of incorporation of each corporation involved
2. That an agreement has been approved by each corp.
3. The name of the surviving corp.
4. Amendments or changes to COI in event of merger
5. Copy of effective COI, in case of consolidation
6. That the executed agreement is on file at the office of the surviving corporation, stating such address
7. That a copy of agreement shall be furnished to any s/h upon request at no cost
iv. (f) –
v. (g) – Important asections
1. (2) Same Stock
2. (4) Same COI and by-laws & BOD
3. (7) any matter except election of directors requires approval of s/h of holding company
e. 253(a) – Merger of parent into subsidiary
i. BOD of corp that owns at least 90% of outstanding shares of each subsidiary may merge the subsidiary into the parent w/o any action being taken by subsidiary corp BOD
ii. (d) – If all stock of a subsidiary party to a merger is not owned by the parent corp immediately prior to the merger, the s/h of the subsidiary corp shall have appraisal rights
f. 262 – appraisal rights
i. (b) – Such appraisal rights are available to any class or series of stock of a constituent corporation involved in a merger or consolidation
ii. (b)(1) – biggest exception to appraisal rights:
a. Listed on national securites exchange; OR
b. Held by more than 2000 stockholders.
iii. (b)(2) – even if its publicy traded, you get appraisal rights if the consideration is anything except: shares of stock in the surviving corporation; OR shares of stock of any other corporation; OR cash in lieu of fractional shares; OR any combination of the three
g. Asset Transactions & De Facto Mergers
i. Farris v. Glenn Alden Corp.
1. this is a “fig. B” merger
2. this suit isn’t about the right to vote (the s/hs did actually vote), but about whether dissenting s/hs were allowed appraisal rights
a. appraisal rights are only available when a merger (not an asset acquisition) occurs
3. in this case, although this was ostensibly a sale of assets, the court held this transaction was a merger b/c even though it was structured as an asset sale, it had the same outcome as a merger, and therefore it was a de facto merger and the s/hs were entitled to appraisal rights
4. this case is the leading case concerning de facto mergers
ii. Hariton v. Arco Electronics, Inc.
1. “fig. B” transactions —> sale of assets in exchange for buyer stock
a. the seller is required to dissolve once the transaction is over
2. the gist of this case is that DE doesn’t have a de facto merger doctrine; ergo, no appraisal rights for assets sales, even if it is in fact a de facto merger in DE
3. this comes from a fundamental principle of DE Corp Law; if the law gives two ways to arrive at the same result independently of each other, then they have independent legal significance and cannot be merged
II. Due diligence
a. this is primarily th
diligence defense. Such defense required a showing that defendant had made a reasonable investigative effort or had had a reasonable basis for believing that the information was true.
iii. OUTCOME: The court denied various motions by the parties made a trial, issued findings of fact and conclusions of law in respect to certain issues, and retained jurisdiction for the resolution of cross claims and other remaining issues and claims peculiar to particular plaintiffs.
III. Acquisition Agreement
a. O’Tool v. Genmar
i. This case involved an earn-out provision based on the target corp.’s gross revenue
ii. After the closing of the deal, the bidder changed the name of the product (wasting any goodwill), changed the design of the product, and made the target corp. absorb the cost of r&d for producing new products, and then sold the product for below-cost; all of this drastically reduced the value of the earn-out provisions for the former owner of the target and he brought suit for breach of contract b/c of the implied covenant of good faith and fair dealing
iii. The court ultimately ruled that even though there were no provisions in the acquisition agreement that prevented the bidder from doing what it did, there was a breach of contract b/c the bidder acted dishonestly and oppressively in its actions after the closing of the deal
1. Part of this was the fact that the cash consideration was $2.3m, but the earn-out provision was potentially worth $5.2m; by doing what it did, the bidder prevented the owner of the target from getting his due consideration
iv. Provisions that could have prevented this outcome
1. Keeping the name of the product for a certain period
2. Requiring the bidder to continue the target’s product line for a certain period
3. Requiring that the target will only spend a pro rata share of its revenues on r&d
4. Requiring that products produced by the target corp would be sold for the same amt. as other subsidiaries of the bidder