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Merger and Acquisitions
University of South Carolina School of Law
Means, Benjamin

Mergers and Acquisition – Means – Fall 2013
 
Three Basic Mergers
·         Statutory Merger, Cash-for-Asset Acquisition, and Cash-for-Stock Acquisition
1) Statutory Merger  § 251
·         B corp mergers with and into A corp  — A corp becomes the survivor
o   Effect, a stock for stock merger (stock swap merger):
§  B stock is cancelled and B ceases to exist (“disappears”) and A survives
§  A assumes assets and liabilities as a matter of law 
§  Old B SHs now own A stock. 
o   Taxation
§   A-Reorganization: Non-taxable event – continuing on as an investor; not being cashed out (IRC § 338(a)(1)(A)).
o   Controlling Statute: § 251
§  § 251(a) – authorizes both firms to engage in the transaction
§  251(b) – requires that the board of directors of both firms pass a resolution approving an “Agreement of Merger” and a statement “declaring its advisability.”
·         Agreement of Merger- The agreement states the terms and conditions of the merger and may amend the certificate of incorporation of the survivor.
§   § 251(c) – requires that both constituent corps then must submit the agreement to shareholder vote. 
·         A majority of all the outstanding shares “entitled to vote” must ratify the agreement – of both corporations (key)
o   So got to get a super majority
o    “Up and down vote”: the shareholders of neither constituent corporation can initiate the acquisition vote, nor can they amend the agreement.
o    After the vote, the agreement (or a summary of the agreement, the certificate of merger) is filed with the DE Secretary of State to become effective on a date certain in the future. On that date, reps of the constituent corps meet to close the transaction. 
o   3 Exceptions shareholders of surviving firm don’t get a vote when
§   § 251(f): the 20% rule or small-scale merger exception
·         1) A Corp.’s Certification of Incorporation is unchanged
·         2) the rights, preferences and privileges of their shares survive the merger
·         3) shares are not diluted by more than the specified amount (20%)
o   In general, under § 251(c), a merger must be approved by the shareholders of Delaware corporations.  However, there are three major exceptions. 
o   First, under Del. § 251(f), shareholders of the SURVIVING firm in a statotury merger don’t get a vote when: 1) A Corp.’s Certification of Incorporation is unchanged; 2) the rights, preferences and privileges of their shares survive the merger; and 3) shares are not diluted by more than the specified amount (20%)
o   This could potentially apply; it eliminates the voting requirement for shareholders of the surviving corporation if certain conditions are met.  Alpha will be the surviving company.  Two of the required conditions are met.  First, each outstanding share before the merger will be an identical outstanding share after the merger.  Del. § 251(f)(2).  And the amount of stock issued by Alpha in the transaction will not exceed 20% of the amount outstanding immediately prior to the merger.  Del. § 251(f)(3).  Alpha currently has 105,000 outstanding shares and the 20,000 shares to be issued is less than 20% of that.  However, the third condition is not met.  Section 251(f)(1) requires that the merger agreement not amend “in any respect” the certificate of incorporation of the surviving corporation.  Here, Alpha’s certificate will be amended, to provide for cumulative voting.  Since, the § 251(f) exception does not apply, the general rule in § 251(c) governs, and Alpha’s shareholders have voting rights.
§  §253 – a short-form merger or parent-90% sub exception–
·         the statutory merger of a parent corporation and a subsidiary when the parent holds over 90% of each class of the subsidiary’s voting a stock
§  §251(g) – holding company exception –
·         no shareholder vote is required in specified reorganizations of holding companies or in specified creation of holding company structure
o   § 251(e) – corporate charter of A (the buyer) can be amended
·          Voting
o   General Rule – shares which do not have general voting rights (non-voting common shares and preferred shares with no voting rights unless there are dividend arrearages) do not vote in major transactions.  
§  Yet, Delaware voting power of shareholders can be augmented by K, but it can never be reduced by K.
·         Preferred stock contracts in Delaware firms can and often do provide preferred stock shareholders a class vote in acquisitions.  The Delaware voting rights of preferred stockholders can be augmented in the preferred stock investment contract.
·          i.e.: preferred stock contracts often provide preferred stock SHs a “class vote” in acquisitions through special provisions in the certificate of incorporation.
§  Class voting enables each class or type of shareholder to veto an acquistion 
o   Vote Required – the minimum vote required in the Delaware statutes is a majority of all outstanding shares, whether or not those shares are represented at the shareholder meeting. 
§  Because shareholder turnout is often less than 75%, a successful vote on a merger can require an affirmative vote of well over a majority of those represented at or attending the shareholder’s meeting.
§  you need well over a majority of those represented at the meeting.  If only 75 percent of the outstanding shares are represented, then need 67 percent of the shares presesent.
·         Compare w/ ABA Rev. Model Bus. Corp. Act § 11.04(e
 
 
Hypo
Teac Corp, a closely held copr, plans to merge into All Drinks Corp., also closelyheld.  The lan of merger calls for Tea Corp shareholders to receive All Drinks Common Stock amounting to 30% of All Drink’s outstanding common stock after the merger is completed.  All Drinks has sufficient authorized and unissued shares to complete the transaction.
 
2. Cash-for-Assets Acquisition  (39)  § 122 and 271
o   Idea: A corp pays B corp (not the shareholders) cash consideration for B corporation’s assets.  There is no change in constitutional documents.
o   A may choose to accept B’s liabilities
o   Optional second step: B dissolves and liquidates; the B charter is cancelled and B shares extinguished; after paying the residual liabilities not assumed by A corp, the assets held by B corp and the cash received in the transaction from A corp are transferred to the B corp SHs in a liquidating distribution;
o   Controlling S

tinuing business activity”
(Mention Coase in exam)
 
3) Cash-for-stock Acquisition: Delaware (§§ 122, 203)
o   Idea: A Corp buys the stock directly from B Corp shareholders in exchange for cash. 
·         After the transaction, A corp owns the B Corp stock; A becomes the parent corporation corporation of a new subsidiary corporation, B Corp.  Old B Corp shareholders have tendered and exchanged their shares for cash. 
·         If A Corp cannot convince all of the B Shareholder to tender their shares for the cash consideration, then a minority block of B Corp stock remains outstanding.  Then B Corp would not be wholly-owned subsidiary; remaining B Corp shareholders become minority shareholders of a controlled subsidiary
o   Controlling Statute
·         §122(4), (11) – general grant of powers to purchase and hold stock of another corp
·         §122(10) – empowers A Corp to manage the affairs of B Corp
o   The authority for A Corp to purchase and hold the stock of another corporation is found in §§ 1224(f) and (11) and § 123.  Also, § 122(1) empowers A Corp to manage the affairs of B Corp. 
o   Voting Rights
·         Neither shareholders of A or B Corp have any rights under DGCL to vote on the stock acquisition
o   In theory, B Copr shareholders do not need the protection of a right to vote because each B shareholder individually decides whether or not accept the consideration offered by A Corp for their shares.  The B shareholders right to refuse the offer is a substitute for their right to dissent in a vote. 
o   Antitakeover provisions
·          § 203 – known as a business combination or freeze-out statute – applies to stock acquisitions for publicly-traded companies
o   Gives B shareholders voting rights not on the stock acquisitions itself but on the effect of the acquisition:
§  Whether the bidder can cash-out statutory merger to gain 100% of the B stock (§ 203)
o   Exceptions:
§  Board of directors approve of the transaction
§  If A buys 85% of shares you can enter into combination
§  The board approves business combination, and 2/3rds of the shares outstanding approve the combination
o   Taxable!
 
4) Stock-for-Asset Acquisitions (§§ 122, 271)
o   Idea:  
o   looks like a cash-for-assets acquisition, but replace the cash consideration going to Corp. B with Corp. A common stock;
o   same end result as stock-for-stock merger in that the shareholders of the constituent firm have pooled their ownership interests in a corporation that itself has the combined assets and liabilities of both firms