Introduction To M & A……………………………………………………………………………………….. 3
Assignment 1: Introductory Materials, pp 1-40……………………………………………………….. 3
M & A Policy Considerations…………………………………………………………………………………… 6
Assignment 2: A Brief History of Acquisitions……………………………………………………….. 8
Acquisition Techniques………………………………………………………………………………….. 12
Introduction to Acquisition Techniques……………………………………………………………….. 12
The internal Affairs Doctrine………………………………………………………………………………. 14
251 Stock-for-Stock Statutory Mergers………………………………………………………………. 16
Asset Purchases……………………………………………………………………………………………………… 18
Cash-for-Stock Purchases (Tender Offers)…………………………………………………………… 19
Comparison With Corporate Codes in Other States……………………………………………… 21
Stock Swaps…………………………………………………………………………………………………………….. 22
Stock-for-Asset Acquisitions………………………………………………………………………………………. 22
Reverse Asset Sale……………………………………………………………………………………………………. 24
Stock-for-Stock Acquisitions………………………………………………………………………………………. 25
Squeeze Out Mergers……………………………………………………………………………………………… 26
Cash-Out Mergers…………………………………………………………………………………………………… 27
Triangular Acquisitions………………………………………………………………………………………… 29
Two-Stage Stock Acquisitions……………………………………………………………………………….. 32
Partnerships & Long term supply contracts…………………………………………………………………. 32
Single-firm reorganizations, Reincorporations, and Conversions………………………. 33
Spin-Offs, Split Offs and other Miscellaneous Transaction Structioures………….. 35
Acquisition Mechanics……………………………………………………………………………………. 37
Introduction to Drafting Complex Agreements…………………………………………………… 37
Introduction to Negotiating Complex Agreements……………………………………………… 37
The Acquisition Agreement……………………………………………………………………………………. 38
The Basic Agreement……………………………………………………………………………………………….. 38
Acquisition Documents………………………………………………………………………………………….. 39
Preliminary Documents……………………………………………………………………………………………. 39
Duty to Disclose Preliminary Merger Negotiations……………………………………………. 41
Litigation Among Parties to an Acquisition Agreement………………………………………. 41
Buyer Purchases a “Pig in a Poke”…………………………………………………………………………… 41
Buyer Refuses to Close — Material Adverse Change Clause (MAC clause)…………………….. 42
Third Party Beneficiary Claims…………………………………………………………………………………. 43
Successorship to Assets and Liabilities…………………………………………………. 45
ASSIGNMENT 13: 206-225 DO FIRST TIME………………………………………………………………. 45
Assignment 14: Successor Liability (REDO)………………………………………………………….. 46
Statutory Responses to Liability Avoidance Strategies (REDO)………………………………………. 47
Assignment 15: Successor Liability and Federal Statutes…………………………………… 47
Labor Law……………………………………………………………………………………………………………… 47
Environmental Liabilities………………………………………………………………………………………….. 49
Legal Regulation of Mergers & Acquisitions……………………………………… 51
Assignment 16: Stock Exchange Listing Requirements…………………………………………. 52
Federal Securities Laws: Registration and Reporting Requirements………………….. 53
Assignment 17: Federal Proxy Regulations…………………………………………………………… 53
Federal Securities Laws: The Williams Act (Tender Offers)……………………………….. 56
Assignment 18: Purchasing Financially Troubled Companies & Federal Bankruptcy 59
Purchasing Assets from a Bankrupt Company………………………………………………………. 61
Class 17 Review – tender offers and proxy statements…………………………………………. 62
Assignment 19: Antitrust……………………………………………………………………………………….. 62
Antitrust Issues: Horizontal Merger Guidelines……………………………………………………………. 62
Antitrust Issues: Pre-Merger Notification Requirements………………………………………………… 63
Foreign Acquisitions of US Companies: Special Rules………………………………………………….. 63
Accounting and Tax in M & A………………………………………………………………………… 66
Assignment 20: Accounting for Mergers & Acquisitions………………………………………. 66
Assignment 21: Tax Treatment of M & A…………………………………………………………………. 71
Class……………………………………………………………………………………………………………………… 72
Fiduciary Duties and Contests for Corporate Control……………….. 75
Assignment 23: Dissenting Shareholders’ Appraisal Remedies and Valuations….. 75
Assignment 24: Takeover Defenses…………………………………………………………………………. 80
Data on the Effect of Takeover Defenses……………………………………………………………… 84
Fiduciary Duty and a Board’s Decision to Block Takeovers………………………………… 84
The Revlon Zone: Blocking Multiple Bidders……………………………………………………….. 88
The Combination Tender-Offer/Proxy-Fight (Belasis)………………………………………….. 89
Deal Protection Measures – Stalking Horse Protections……………………………………. 93
State Anti-Takeover Statutes……………………………………………………………………………….. 95
Introduction To M & A
Assignment 1: Introductory Materials, pp 1-40
Test: 3 hours; 1 merger question; 3 short answer question: “what is pooling accounting and how did it effect business in the 80’s”
Definitions
M & A is a process of transferring an operating business from one owner to another.
Acquisition (Purchase): a sale of B’s assets or stock to A.
· Asset purchase: the acquiring firm buys all the assets of the selling trgt. The acquiring firm may choose not to assume the liabilities of the selling firm, and the selling firm continues to exist in unless dissolved, holding the proceeds received in the sale.
· Stock purchase: the acquiring firm buys the majority of stock from the selling corporation. After the transaction the sellers have no ownership interest in the surviving firm. The acquiring firm has bought ownership of the legal entity sold and holds the entity as a new subsidiary – unless the subsidiary is dissolved into the parent.
· Basic Problem: involves telling the difference between the sale of a firm as a business and the sale of some of the firm’s property or st
quid market fo the purchaser’s securities used in the deal as consideration, the parties can negotiate for CVRs. Sellers getting buyer stock and having significant leverage in the deal can force a buyer to minimize post closing risk through CVRs. – If the buyer’s stock trades below a set price (target price) for a defined period of time post closing, the selling shareholders will receive additional compensation equal to the difference between the target price and the market price. GOOD ONE.
M & A Policy Considerations
Efficient Capital Market. It is a model that assumes investors can select the stocks with the best risk-return relationships. It also assumes that these choices will drive the prices of other securities to offer comparable returns to comparable risks.
Weak Form: All publicly distributed information about issuers was reflected in the stock price. Additionally, nothing in the sequence of past stock prices enabled us to predict future price movements.
Semi-Strong form: asserted that all publicly available information about issuers was reflected in the stock price.
Strong Form: all such information, public or not, was reflected. However, insiders do earn above normal returns on their trading.
Significance. Where stock markets are efficient, public announcements will immediately affect the price of a security, without the necessity of any trading, as traders rapidly adjust reservation prices to reflect the new information. If there is obvious value to be gained from acquiring the firm, why didn’t investors recognize that and drive the price of the target’s stock up to reflect that value?
Synergies: value created from the action of combining the two companies. The two things together are worth more than the sum of the parts.
Paradox of the search for values. If there is obvious value to be gained from acquiring the firm, why didn’t investors recognize that and drive the price of the target’s stock up to reflect that value?
Grossman & Stiglitz: If markets were perfectly efficient at all times, traders would have no incentive to engage in research about particular companies.
Williams Act: requires that bids be kept open for a specific period of time so that there is not a race to sell–shareholders do not want to be the minority shareholders left and treated poorly. Nevertheless, the shareholder who held out for a better price was left behind.
Bidder overpayment in Takeovers: Target shareholders gain because the bidder pays to much. These overpayments don’t cause the bidder stock prices to drop because the investors already expect the bidder to waste money, one way or another.
How can bidders lose money: Competition among value-maximizing bidders can’t be the whole story. Competition can drive stock price returns to Zero, but not beyond.
Why Do Companies Engage in M & A:
· CEO Pay goes up after every merger because they are managing larger companies. E.g. In the Time-Warner merger, the stock price didn’t increase for 6 years, but management got 900 million dollars.
· Efficiency—e.g., moving acquiring a copper mine to provide your copper-wire making plant with cheap copper.
· Guaranteed Supply—getting a copper mine to guarantee the supply of copper.
· New Technology (outside research and development) Microsoft is buying companies every single day. This includes people. This includes customers.
· Tax reasons: Up until 1986 there were a lot of M&A for tax shelters.