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Merger and Acquisitions
University of South Carolina School of Law
McWilliams, Martin C.


Mostly centered around corporations – what is a corporation? It is an artificial jural person – it is a vehicle designed to aggregate and grow capital. Why an artificial jural person? Because of public policy – for public benefit.

Why do we have a statutory system that permits the equity owners not to be liable for liabilities, but have unlimited access to the profit of the business? To encourage passive investment, pooling capital in a business managed by professionals

What is the structure of the corporation? The standard corporate model is as follows: Shareholders (passive investors – they do not own the corporation – they have a bundle of rights – such as voting) elect the board of directors (charged by statute to manage the corporation – they are not agents – they are creatures created by statute – they may only act with a properly noticed and convened meeting with a quorum present) who then appoint officers (agents of corporation – authority delegated to them by the board – corp can only act through directors and officers) who will hire employees (servants of the corporation)

Four extraordinary corporate actions which require SH approval: mergers, dissolution, sale of assets, amending the articles – they represent fundamental changes in the nature of the investment that the SH’s made.

– Otherwise, officers run day to day, etc…

How do we know that management is going to do what is best for the corporation? SH’s may elect new directors, sell their shares (vote with their feet) – however this is still not enough to combat the inevitable divergence of interest b/t officers and directors, and SH’s. SH’s want the stock price to go up – the directors want to make money – so do the officers – they do not particularly care whether the stock price goes up or down.

How do we regulate this inevitable divergence of interest? With fiduciary duty – the duty of management to act in the best interest of the SH’s (as a whole) and the corporation itself. (standard of conduct within the statutes)

– Duty of loyalty and duty of care – the duty of care of corporate director is that of the ordinary person in similar circumstances. So if the SH’s sue over a breach of duty of care – the directors have a good defense if they have acted like an ordinary person.
– Duty of loyalty – a duty of exclusivity – if directors act in their own or some other parties best interest they may be subject to a suit by SH’s. Directors must act in the SH’s and corporations best interest. Directors must show intrinsic fairness in order to avoid liability. Much more difficult standard than duty of care defense

Makes a big difference whether a director breaches the duty of care or duty of loyalty – to very different defenses and likely outcomes

Thus fiduciary duty was invented to minimize the inevitable divergence of interest b/t the director/officers and SH’s.

When talking about mergers and acqs – we are talking about combinations of corporations – two or more jural persons – gets a bit complicated – How do we know whether a merger or acq benefits the SH’s of corporation A or corporation B? What about the constituencies – how do we take all of their interests into effect?

There must be regulation – the corporate form itself is inadequate to perform all of the regulation that is needed to make mergers and acq’s work.

General Terms

Acquisition – is a purchase from the buyers side – a sale from the seller’s side. In an acquisition, the SH’s of the selling corporation lose control of their assets – the title goes to someone else – they also lose interest in the asset – no longer have an economic interest. It is a transaction where the SH’s of the selling side have no ownership interest thereafter.

Two ways to sell:

1) Asset sale – one corporation sells all assets to the other for cash – A has all of the assets and B has all of the cash. B still exists as a corporation – it just has cash in place of assets. Why? Because one company (A) doesn’t want the liabilities of the other (B) – important b/c there may be lurking contingent liabilities.
a. Normally, B then dissolves and gives cash to SH’s

2) Stock sale – A buys the stock of B – thus A now has B and all of its assets while B’s SH’s have the cash. B is still a corporation – it’s just owned by A. A takes on all of the assets and liabilities of B.

Merger – owners of two separate corporations (A and B) pool their interests into a surviving company (C). The SH’s of A and B are now the SH’s of the survivor (C).

Look at the final positions of the SH’s of the firms.

Merger of Equals – each company is about the same size – one doesn’t really take over the other.

Mergers and Acquisitions may be used for a variety of purposes.

Take over – usually a stock purchase offer in which the acquiring firm buys a controlling block of stock in a target, most often a majority of the outstanding voting stock. One company will usually submit a tender offer – the management of one corporation solicits tenders of shares from the SH’s of the target company in an effort to obtain a majority ownership in the target company, thereby making the target essentially a subsidiary of the aggressor. This would be known as a hostile take over.

Leveraged Buy-Out – Buy out that is accomplished using borrowed money – typically A will go to the bank and borrow a pot full of money in order to purchase the assets or shares of B – B then issues debt – a public loan – then B must uses any profits from operations to pay off the loan from the borrowed money.


p. 8 – ways in which merger and acq activity is regulated – just about the most heavily regulated activity there is – tax, accounting, corporate law are all involved.

State corporate codes – the structure of merger and acq activity is state corporate law. Delaware is the state we will focus on.

Accounting – accounting regulates MA activity heavily – between the distinction of purchase and sale and merger.

Talking about how business people structure the transaction – governed by all kinds and manners of law.

Securities Regulation – 33 Act public sale of new securities – talking a

ion they will send a wire – one corporation’s bankers send to the others.

– Tip – never close on a Friday b/c the money may be stuck in the bank over the weekend – banks do this all the time.

– Conditions – contingencies to closing – must make sure all contingencies are satisfied. Merger contingencies – documents must be filed in sec of state’s office.

Negotiated Allocation of Risk and Cost

Multiple issues – one that comes up a lot – whether A is buying B for cash or for something other than cash – what are you going to exchange and when do you decide what you are going to exchange – the price, the way in which it is paid must all be taken into account in terms of who will be taking the risk in the transaction

– Suppose two CEOs decide on a 3 billion dollar price – who will take the risk for what happens between the time the deal is approved and the deal closes – suppose B goes under or has a surge in share price – must work all of these issues out – someone must take the risk.

– Often, there will be valuation conditions to approval of the deal – if x happens then the deal is off

– Exchange ratio – again determines who is going to take the risk

– The market judges these deals – whomever is getting the great deal in the eye of the market gets a bump in share price – both share prices could go up – both could go down

Sellers may ask for down-side price protection – if deal turns out to be too expensive – one side will want a change in the exchange ratio or a termination of the deal.

– Floating exchange ratios – use the stock price close to the closing as opposed to the time the deal is actually struck – there are problems – if the exchange ratio is determined in a short period of time, you may have to rely on short term projections which may be inconsistent. Must also consider dilution as a possible pitfall:
o Dilution: when a corporation is attempting to attract investors it has three major things to offer: 1) power of control (vote); 2) cash flow; 3) proceeds of dissolution. Known as the three pizzas – each security has a bit of each. When additional benefits are given to, for example, the SH’s of the other merging corporation (B), the current SH’s of A may be diluted. When you price a transaction, you must consider whether the SH’s will be diluted in some way (cash flow, voting power, etc…). If you price your deal wrong, the market will pass judgment on that deal and drop the share price until it reaches equilibrium.