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Merger and Acquisitions
University of North Carolina School of Law
Gaeta, Anthony N.

Mergers & Acquisitions – Prof. A. Gaeta – Fall 2012
1. Ways of doing business & Public companies
–  forms of doing business :
–  sole proprietorship (no corporate veil, personal/unlimited liability);
–  partnership (general partners – on the hook for everything / limited partners – only liable for their investment);
–  limited liability company (corporate veil);
–  corporation (corporate veil, management-directors-shareholders, separate entity, ownership of the shareholders and fiduciary duties.
–  public versus private corporations :
–  IRS : C (double taxation – co. income tax on profits, shareholders on dividends) and S (single tax structure, no income tax) co.;
–  public co. : securities registration (SE 1933) and reporting obligations (SEA 1934) ∈ 10-K (annual – on financials/management/business), 10-Q (quarterly, financial issues), 8-K (current reports on material events – amendments), MD&A (management discussions and analysis – in 10-K and 10-Q), proxy statements (have to be filed with SEC);
–  becoming a public company :
–  (a) grow into it : more of 500 shareholders of records (name on the stock certificate/in company’s books ≠ beneficial owners who passed through nominee name e.g. brokers (have property rights but title of another)) and $10M in assets must file with SEC a Form 10;
–  (a)’ de-registration : threshold of 300 shareholders of record;
–  (b) IPO (initial public offering) : (1) registration of shares with SEC (§5 SA 1933), (2) SEC’s review of prospectus, (3) SEA 1934 reporting rules triggered – don’t need the threshold of 500 shareholders of record;
–  shareholders meeting : notice of time and place, state the purpose if special meeting, quorum of 50%+1 so use of proxy i.e. brief statement appointing someone to vote shares in your name (give it specific authority or carte blanche, signed and dated for validation, freely revocable is not coupled with an interest, §14 SEA 1934).
2. Structure of deals – Five ways of taking control of a public company
a. relevant questions
–  identify/analyze : type of business run, how to finance, aim on future liability, etc.;
–  very important : external/public image and information (cf. mandatory.required public disclosures) know the numbers (cf. due diligence process), etc.;
–  structure of deals available for each business entity form :
Purchase and Assumption Agreement
Share Exchange
Tender Offer
Investment Contract / Capital Agreement
Sole proprietorship
–  can also gain control through a proxy contest;
–  three principal issues : (1) who gets to vote on the combination, (2) who has appraisal rights due to the combination, (3) procedural aspect of the combination.
–  watch out for securities regulation issues : when a shareholder vote is necessary, and votes or proxies will be solicited;
b. purchase and assumption
–  steps for sale of – substantially – all assets : (1) director approval (majority), (2) shareholder approval by shareholders of selling corporation (generally : simple majority of shares entitled to vote and appraisal remedy available – no vote at all if sale in ordinary course of business) – no vote for shareholders of acquiring corporation (but if exchange of assets : both corporations’ shareholders get to vote);
–  fairness to minority shareholders (not fraudulent or oppressive to the minority or conflict of interest or illegality);
–  obligation to protect the creditors;
–  general idea : purchase the assets, and assume the liabilities of the part you buy – typically used for smaller deals;
–  board of directors negotiate the deal, no approval needed from the shareholders of the purchasing company, but selling company’s shareholders get to vote (with recommendation of the board of directors on the deal) and get appraisal rights;
–  NC statutes :
–  55-12-02 – sale of assets other than in the regular course of business (more formalities required for company selling) : board of directors proposal/recommendation (unless the board has a conflict of interest) board can condition the submission of its proposal, and notification to shareholders for their approval – simple majority of all the votes entitled to be cast, after authorization of transaction board can freely abandon it ;
–  clauses and articles in a purchase and assumption agreement :
–  (1) effective time (when the purchase will start, can include a «drop dead» date in order to have an out in the deal);
–  (2) transfer and consideration (what is exactly the seller selling and what is the buyer paying for it – specify assets sold and valuation);
–  (3) obligations of the buyer ∈ employee issues, delivery of opinion by counsel (opine that the purchase and assumption doesn’t violate any laws, existing contracts «of which the counsel has knowledge», make sure to have all approval needed);
–  (4) obligations of the seller ∈ agreement, delivery of opinion by counsel;
–  (5) covenants ∈ indemnification, things promised to be done or not to be done before the effective date of the deal (// business activities);
–  (6) representations and warranties (duly organized under state law and authorized by board of directors, no violations of law or undisclosed obligations, etc.);
–  (7) conduct of business prior to effective date (e.g. can’t do anything out of the ordinary course of business).
c.  merger
–  forms of merger :
–  (a) statutory merger (seller no longer a legal entity by operation of law) : seller mergers into buyer and so seller’s corporate existence goes away and is enveloped in buyer;
–  (b) forward triangular merger (seller disappears) : seller merges into buyer’s subsidiary in exchange of money/shares coming from buyer – seller’s board of director and shareholders must negotiate and approve the action but only buyer’s board of directors must approve the plan;
–  (c) reverse triangular merger (subsidiary disappears) : buyer’s subsidiary mergers into seller’s company and seller pays to buyer – seller’s history and reputation is kept;
–  reasons for triangular mergers : (1) may help acquiring company avoid acquired company’s liabilities, (2) acquiring company’s shareholders may not get to vote or appraisal rights, (3) reverse triangular merger and maintenance of acquired company’s rights that are contingent of its survival;
–  basically, procedure : (1) director approval of the «plan of merger», (2) shareholder approval (by majority of voting shares) – acquiring corporation’s shareholder vote not required for «small-scale» merger (typically involving the issuance of no more than 20% of the acquiring previously outstanding shares and not requiring change in acquiring company’s articles or incorporation) nor for short-terms merger (parent-subsidiary relationship, and threshold of ownership), (3) filing of articles of merger with Secretary of State;
–  can’t merge in part, surviving/acquiring company takes all the liabilities from every company involved in the merger;
–  appraisal rights exceptions : shareholder of parent company in short-form merger, shareholder of acquiring company in small-scale merger, if corporation listed on national stock exchange, corporation of more 2000 shareholders and $20M assets;
–  vote requirement : usually majority of outstanding stock entitled to vote;
–  abandonment of merger : organized by plan of merger, or must occur before issuance of certificate by Secretary of State;
–  de facto merger : in substance, but not in form;
–  corporate freeze-out : majority shareholder wants to boot minority shareholders out of the corporation (cf. potential for self-dealing) – methods of freezing-out : sale of substantially all the assets, merger for cash, reverse stock split, short-form merger – validity : entire fairness, or requirement of business purpose in some states;
–  NC statutes :
–  55-11-01 – mergers : board of each corporation must adopt the plan of merger, and the shareholder must approve it too (cf. 55-11-03), what plan of merger must and may include – cf. in NC, cannot discriminate within a class of shareholder as to what kind of property you must take in exchange of stock (shares treated the same in value and in kind), but however shareholders can elect to take alternative forms of consideration;
–  55-11-03 – action on the plan and avoiding shareholder approval : after approval he board of director on each party of th

ly regulated, unless state has a specific tender offer statute;
–  federal rules – only for public companies :
–  (1) §13(d) (SEA 1934) : early warning provision with requirement to file a Schedule 13D for anyone acquiring more than 5% of beneficial ownership of stock of a §12 company;
–  (2) filing of Schedule TO (SEA 1934) when official tender offer is made – §14(d) (SEA 1934) dictates the procedure for filing Schedule TO, §14(d)-4 an required notice to SEC;
–  tender offer rules :
–  (1) best price rule : all shareholders get the best price proposed during pendency of offer;
–  (2) all holders rule : can’t exclude a shareholder or group of shareholder from a tender offer – must be open to all holders of a class;
–  (3) duration : at least twenty days – §14(e)-1;
–  (4) withdrawal rights : shareholder who has tendered shares may withdraw during pendency of offers.
g. investment contract – capital agreement
–  seller remains untouched and still hold certificates;
–  board of directors sells authorized stock in exchange for share in company and control (reducing the pre-existing ownership interest) so that they can turn around the company ;
–  offering of authorized but non-issued shares : shareholder approval not required.
h. similarities and differences
–  purchase and assumption, merger, share exchange and tender offer : deal with existing shares to gain control ≠ investment contract or stock purchase contract : injecting new capital to diminish prior shareholder majority (reduction of proportional amount);
–  sale of assets : acquired corporation usually dissolved and shareholders get cash for their shares (same with sale of assets i.e. shareholders of selling corporation get cash from the sale of the corporation assets) ≠ merger : shareholders of acquired corporation receive stock for their shares from the acquiring corporation;
–  merger ≠ consolidation : whether or not one of the combining companies survives;
–  purchase and assumption : assume the liabilities linked with the assets you buy ≠ merger : assume all liabilities ;
–  cash merger ≈ sale of assets (but with cash merger : certainty that acquired company cease to exist, and transfer of all assets and liabilities of acquired company to acquiring company as matter of law);
–  triangular merger versus ordinary merger : (1) triangular avoids automatic assumption of liabilities by buyer which would occur in straight merger, (2) triangular avoids voting and thus appraisal rights for buyer’s shareholders since buyer is not technically part of the merger, (3) using subsidiary mitigates some problems;
–  triangular merger versus purchase and assumption : (1) triangular has greater flexibility in types of consideration, (2) triangular avoids problem of transferring tile, (3) reverse triangular allows seller to remain in existence, (4) triangular eliminates extra steps of liquidating the seller;
–  triangular versus share exchange : (1) buyer is assured he’ll get entire control of the seller, (2) exchanges requires more shareholders to consent than triangular.
[1] 20% rule : if the number of shares buyer had before merger plus the number of shares buyer will acquire from seller will not exceed 20% of the number of shares buyer had immediately before merger, you can bypass approval of buyer’s shareholders i.e. buyer’s shareholders need to vote only if the company’s number of shares is increased by 20% or more as a result of the merger.