M&A Outline
CORPORATE ACQUISITIONS: AN INTRODUCTION
· General Rules:
o DGCL §141- business and affairs of shall be managed by or under the direction of a BOD
o DGCL §161- issuing stock- BoD may (if all the share of capital stock is authorized and have not been issued) issue for additional shares of stock up to amount authorized in the certificate of incorporation.
o DGCL §242- Single-form reorganizations of capital structure, which specifies the requirements for amending a corporation’s charter.
o DGCL §251- Procedure for effecting a statutory merger
o DGCL §252- Mergers between domestic and foreign corporations
§ §252(f)- Cash Mergers
o DGCL §253- Short Form Merger
o DGCL §259, 261- Legal effect of a merger
o DGCL §262- Appraisal rights for dissenting SHs
o DGCL §264 Mergers between corporations and LLCs
o DGCL §271- Asset sale
o NYSE §312- Shareholder Approval Policy
· Economic Considerations
o Premiums used to be at 50%, but not more like 20-30
o Wealth Creation Explanation-A purchases T at premium bc they profit by making changes to increase the value of T
§ (1) Synergy- A might put T’s assets to more productive use and the market might not be aware of this. Also, the assets might be more valuable when combines with A’s assets.
· Horizontal Economies of Scale- cost per unit of production falls as more units produced.
· Scope economies of production- cost of unit of production can be reduced by combining the manufacture of different products that draw on the same resources.
o Ex. When Phillip Morris bought Kraft, it may have been hoping to sell two products of different companies through the same distribution networks.
· Vertical integration-eliminates hold up and postcontractual opportunism by eliminating outsides owners of resources.
§ (2) Gains on Restructuring- Usually LBO, 2 Step. Management run now gives more incentives to maximize profits as well as in improved shareholder monitoring. LBO promoter is now better at monitoring too. Also, there with a high debt/equity ratio, there is less money for the management to waste—the revenues must be used to service the company’s debt. Heavy principal and interest payments required in highly leveraged company is better for disciplining management.
§ (3) Other reasons: May try to prevent acquisition of the company by another by buying themselves (defensive measure) or buy to reduce competition (affirmative), technological gains, globalizations, management greed, interest rate consideration (might buy with debt and interest rate might be low, making the acquisition cheaper).
o Wealth Redistribution Explanations
§ (1) Injuries to Acquirer SHs- Winner’s curse is when A overpayment occurs because of innocent miscalculations of potential gains by the managers of A. Winners win when bid exceed the true value of the T, meaning it will usually be too high.
· For financial buyer, by winning it might mean you were willing to accept lowest returns.
· Management, by using funds not as dividends but acquisitions, may be seeking own power, stature, or compensation.
§ (2) Injuries to Target SHs- If price of acquisition is actually a bargain price, meaning the market undervalues the target.
§ (3) Injury to T Stakeholders- This would apply to employees and creditors. Might leave firm close to insolvency or harm employees by lowering wages and benefits.
· Response- They might not be really harmed—new owners are under same constraints (contracts and such). Thus, and A should not take actions that impose net costs on stakeholders unless stakeholders have, in effect, consented to those actions in advance by agreeing to forego K protections in exchange for higher initial salaries or higher interest rates!!
§ (4) Injury to nonSH and nonstakeholders, including consumers- happens if there is reduced competition and increased prices.
FORMS OF CORPORATE LEVEL TRANSACTIONS AND PROCEDURES
· §251. Long Form Merger of Consolidation of Domestic Corporations and Limited Partnership.
· (a) Any 2 or more entities may merge into a single corporation, which may be any one of the constituent entities or may consolidate into a new corporation. There must first be an agreement of merger or consolidation
· (b) The BoD of each corporation which desires to merge must adopt a resolution approving an agreement of merger and declaring its advisability. The agreement must state:
§ (1) terms and conditions of merger; (2) mode of carrying the same into effect; (3) in the case of a merger, such amendments or changes in the certificate of incorporation of the surviving corporation as are desired to be effected by the merger, OR if there are no changes, a statement stating that the COI of the surviving corp shall be the current COI; (5) the manner of converting the shares of each of the constituent corps into shares or other securities of the surviving corporation
· *and, if any shares of the constituent corp are not to be converted into shares of the survivor, what cash, property rights, or securities of any other corporation, shall be the fair conversion for the target’s shares
§ (6) any other details, for instance, a provision for the payment of cash in lieu of the issuance of a fractional share
· *most companies will not recognize only “part” of a share, and thus will pay cash for that fraction of a share that will not be converted
· (c )- SH voting rights- the merger agreement required by subsection (b) must be submitted to the stockholders of each constituent corporation at an annual or special meeting for the purpose of acting on the agreement. Due notice must be given to each SH, whether they vote or not, at least 20 days prior to the day of the meeting. The notice must contain a copy of the merger agreement or an acceptable brief summary.
§ **if a majority of the outstanding stock of the corporation entitled to vote thereon shall have voted in favor of the adoption of the agreement, that fact is certified on the agreement by the secretary of the corporation
§ ***if the agreement is adopted and certified by each constituent corporation, it is then filed and becomes effective in accordance with §103
§ *in lieu of filing the agreement of merger required by this section, the surviving corporation may file a certificate of merger in accordance with §103 which states:
· (f)- Small-scale merger exception or cash deal: Notwithstanding subsection (c ) or unless required by its certificate of incorporation, no vote of SH of a constituent corporation that survives the merger is necessary to authorize the merger [NO VOTE] IF: (Only applies to surviving Corp)
§ (1) the agreement of merger does not amend in any respect the certificate of incorporation
§ (2) each share of stock of such constituent corp outstanding immediately prior to the merger is to be an identical outstanding or treasury share of the surviving corp after the effective date of the merger
§ (3) either no shares of common stock of the surviving corp are to be issued or delivered under the merger plan OR the authorized unissued shares of the surviving corp that will be issued do not exceed 20% of the shares of common stock of such constituent corp outstanding immediately prior to the effective date of the merger
§ *if less than or equal to 20% of the shares outstanding before the merger takes place are to be issued to new SH, then there is no voting rights permitted for AC-SH
§ **§251(f)- 20% prior consummation = 16.7% post-consummation needed to trigger.
· §253 Short-Form Merger
· (a) In any case in which at least 90% of the outstanding shares of each class of stock of a corporation, who would otherwise be entitled to vote on such a merger, is owned by another corporation….the corp having such stock ownership (at least 90%) may either merge the other corporation (its subsidiary) into itself, OR, merge itself into the other corporation (merge into the subsidiary) if:
§ they have executed and filed a certificate of such ownership and merger setting forth a copy of the resolution of its board of directors to so merge and the date of the adoption
§ *provided, however, that when the parent corporation owns less than all of the subsidiary’s stock (between 90-99.9%), the resolution of the BOD of the parent corp must state the: terms and conditions of the merger, including securities, cash, property, or rights to be issued, paid, delivered or granted by the surviving corp upon surrender of each share of the subsidiary corp not owned by the parent
§ **if the parent corp is NOT the surviving corp {rare case of parent merging into its subsidiary}, the resolution must include the provision for the pro rata issuance of stock of the surviving corp to the SH of the parent corp AND the certificate of ownership and merger shall state that the proposed merger has been approved by a majority of the outstanding stock of the parent corp entitled to vote at a meeting called, where 20 days notice was given
· (c ) Section 262 of this title {concerning appraisal rights} shall not apply to any merger effected under this section, except as provided in subsection (d) of this section.
· (d) in the event all of the stock of a subsidiary Delaware corporation party to a merger effected under this section is not owned by the parent corp immediately prior to the merger, the SH of the subsidiary DE corporation party to the merger shall have appraisal rights as set forth in §262 of this title
§ **as long as between 90-99.9% is owned by parent, then SH of subsidiary will still have appraisal rights!**
· §259 Status, Rights Liabilities, of Constituent and Surviving or Resulting Corporations Following Merger or Consolidation
· (a) when any merger has become effective under this chapter, for all purposes of the laws of DE, the separate existence of all such constituent corporations except the one into which the others have been merged, shall cease and the constituent corporations are merged into one corporation, which now possesses all the rights, privileges, powers and franchises of a corp
· **all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter the property of the surviving corp as they were of each individual constituent corp
· ***all rights of creditors and all liens upon any property of any constituent corp shall be preserved unimpaired, and all debts, liabilities, and duties of each constituent corp shall then attach to the surviving corp, and may be enforced against it to the same extent as if said debts, liabilities, and duties had been incurred or contracted by it
· NOTE: basically, surviving corp of the merger assumes all debts and liabilities of each constituent corp that comprises it
§ Penalties include suspension of trading and/or delisting
· NYSE §312.03(c)- SH approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:
· (1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock or of securities convertible into or excersiable for common stock, OR
· (2) the # of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.
· HOWEVER, SH approval not required for any public offering for cash or any bona fide private financing
· NYSE §312.07- The minimum vote which will constitute SH approval is defined as approval by a majority of votes cast, provided that the total vote cast, represents over 50% in interest of all securities entitled to vote
· Transactional Forms and Statutes
· Statutory Merger (Long Form)-only if owners of a majority of the outstanding SHs approve. DGCL §251(c). This is a more stringent requirement than ordinary SH action that requires majority of the SHs present.
§ Step # 1- DGCL §251(b)
· T and A negotiate deal and terms of merger agreement
· They adopt a resolution approving the merger agreement and declaring the advisability of the transaction
· A charter may be amended. DGCL §251(b)(3)
§ Step #2- DGCL §251(c
20 days after the effective date of the merger or consolidation. DGCL §262(e)
§ Corp Responsibilities-Corp is required to provide notice to SHs of the availability of appraisal rights at least 20 days prior to the SHs meeting where the appraisal-triggering transaction will be considered and included with a copy of DGCL §262. §262(d)(1).
· Expense of Appraisals- Court is permitted to tax the costs of the proceedings to the parties as the Court deems equitable and to order all or a portion of the expenses incurred by any stockholder, including, without limitation, reasonable attorney’s fees and the fees and expenses of experts, to be charge pro rata against the value of all the shares entitles to an appraisal.
· Risk in appraisal- Court may settle on a value lower than that previously offered to the SH. SH right to withdraw a demand for appraisal and to accept the terms offered upon the merger or consolidation terminates 60 days after the effective date of the merger or consolidation.
· Delay in payment- Can take years to complete.
§ DGCL §262(k)- Provides that from and after the effective date of the merger or consolidation, no SH who has demanded appraisal rights shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions in stock.
§ So they are locked with, but is denied financial return on the investment and any voice in corporate affairs.
DETERMINING FAIR VALUE
· Determining Fair Value- Determining Fair Value of Total Enterprise- On exam, we will not have to calculate. We will have to understand what they are, and what things to consider if we want higher or lower price.
· Some people claim a difference between the market and intrinsic value. This is a theme for the course.
· DGCL §262(h)- The Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any to be paid upon the amount determined to be the FV. In determining such FV, the Court shall take into account all relevant factors.
· Weinberger- Abandoned the strict use of “Delaware Block”. Now elements of future value, “including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” They could use any method now.
· 3 Methods for Determining Fair Value: Not looking for liquidation value, we want value for on-going basis.
§ Note: DCF we ask whether the business will be run the same as it moves forward, and Multiples asks if the other companies are actually comparable.
· (1) Discounted Cash Flow Analysis (Non Control Based-based on minority ownership)- Total Enterprise Value = PV of Cash Flows. This projects future cash flow and discounts back to present value. Cash flow is what the SH can expect to get out of the business. Discount rate is simply the opportunity cost of capital, adjusted for risk.
§ Cost of capital- cost of a company’s funds (debt and equity) or from an investor’s point of view “the expected return on a portfolio of all the company’s existing securities. It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
§ (1) Project (on an after tax basis) how much cash the business will generate or consume during each future period (usually a year). This is often different than its accounting profits bc some sales might be made on credit and there might be non-cash charges, such as depreciation. This is usually for 5 years.
· FORMULA: Free Cash Flow= EBIT * (1-t) + Non-cash expenses (depreciation/amortization)– Capital Expenditures (Capex) – Incremental Working Capital
· In general: NI +Depreciation/Amortization – Changes in Workings Capital – Capital Expenditure
§ (2) Discount this to present value, using a discount rate that reflect the time value of money and the risk inherent in the company’s operations—the greater the risk (greater variance in the possible future outcomes from the expected result) the larger the discount rate and the smaller the present value of the cash flow for a particular period. One thing that adjusts discount rate is the cost of capital (minimum rate of return the firm can produce to satisfy their investors)—this includes cost of equity and debt, which produces weighted average cost of capital. The discount rate reflects 2 things: (i) time value of money (risk free rate) bc investors would rather have cash immediately and (ii) risk premium- which reflects the extra return investors demand bc they want to be compensated for the risk that the cash flow might not materialize after all.
· In addition to discount factor (such as WACC) there is a discounting period where you need to discount back to the full year.
