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

Mergers & Acquisitions Outline

Chapter 1: Introduction to Acquisitions

A. Introduction

Corporation- vehicle designed to aggregate and grow capital (pool and grow capital)

Allows business owners to limit their liabilities for losses and permits them to have unlimited opportunity for gains TO encourage passive investment in a business managed by professionals
These managers are under a fiduciary duty to create investment.
Why this is great for investorsà

Doesn’t have to bother with mechanics of running business (passive investors)
Limits risk by allowing them to sell their interest and diversify their investments
Low risk, low cost in terms of info and administrative costs
Takes advantage of market- large, efficiently developed

Pinnacle of concept of corporation is shareholder- the equity owner

Main purpose of corporation is to enhance shareholder wealth

Corporate statutory modelà

Residual Owners (s/h)- assumed to be passive (no role in management)

Get bundle of rights- most important right is to elect Board

Board of Directors- charged with corporation’s management

Are not agents of corp
To do their job, appoint Officers

Officers- are agents of corp, carry out directives of BOD; 2 roles . . .

1) Officers
2) Agents/Employees/Servants of corp- authority to bind, able to render liable in tort
Hire other servants . . .


These people create agency costs- costs imposed on group who try to do business through group of another people

Agents have personal interests that may be incongruent with s/h or corp’s interests
“inevitable divergence of interests” b/w owner and agent

Fiduciary duty- Major effort in corporate design is to minimize divergence through imposition of fiduciary duties

Management (directors and officers) owes FDs to s/h and corp
Duty of Loyalty and Duty of Care- recognize distinction!

Duty of care for directors is not very high- are not trustees; only have to use level of care of ordinary person in similar circumstances, which is ordinary negligence

Ordinary negligence isn’t actionable b/c directors have defense of BJ—directors/officers are not liable for a negligent breach of duty of care as long as breach occurred as part of good-faith, well-informed business judgment

Breach duty of loyalty by:

Self dealing
Usurpation of corporate opportunity

BJR doesn’t provide defense against breach of duty of loyalty at all or against gross negligence in duty of care

Corp is jural person- has own interests, rights, and powers
M & A governed by:

Tax law
Accounting standards
State corporate law- focus on individual investor
Federal securities regulation- focus on corporation
State Securities Laws – “Blue Sky Laws”
Antitrust law

Merger notebook- shows how each regulatory area impacts the M & A transaction
Major regulated interest is to maximize s/h value- b/c corporate law is all about attracting investors, making them want to invest their money in risky enterprise
Directors have duty to push price of deal to intrinsic value

Variations on Value

Book value- balance sheet
Liquidation value- sell everything
Market value- stock price
Del. & SEC use intrinsic value à value of corp as going concern

number of shares

Intrinsic value is usually more than market value, so M & A question is who gets the difference b/w intrinsic and market
Market value is lower b/c:

Market uses trailing indicators- using historical information on value
Natural conservatism of investors to not pay highest dollar

Once takeover is announced, market begins to climb toward intrinsic [WHY] Management is not permitted to sell company unless they’ve made a good faith effort to drive price to intrinsic value- law tries to avoid an outsider getting premium difference b/c s/h should get it- results in buyers paying too much

What happens to the s/h of the buying corp? Business Week article- 61% of buyers reduce their s/hs’ wealth in purchase transactions- amalgamated companies were worth less after transaction

And bad deals don’t get better with time
Private companies do a better job of negotiating appropriate prices b/c are protected from market hubris

M & Aà a process of transferring an operating business from one owner to another

B. M & A Terminology

Acquisition/Purchase- A pays for all assets or all stock of B; B sells assets or stock

Consideration can be anything except equity instruments in purchasing firm
Two Types of Acquisitions
(1) Asset Acquisition – buy assets

Selling firm often dissolves and passes transaction proceeds on to its s/h in a liquidating distribution
Successor Liability- In an asset purchase, purchasing firm can choose not to assume selling firm’s liabilities

(2) Stock Acquisition- buy stock

Purchasing firm ends up with controlling interest and parent/subsidiary status
Liabilities of selling firm remain w/ firm after control change; P would have to pierce veil to get to parent

Owners of selling firm lose control and interest in selling firm’s assets

Merger- owners of separate, roughly equal-sized firms pool interests in a single firm

Surviving firm owns the assets and assumes the debts and other liabilities previously owned or owed by the separate firms
A merges with B to create C
State corporate statutory concept- file form w/ Sec. of State and poof! The State allows Mergers to take place
Merger among equals- two roughly equal-sized firms merge and power positions split

Distinction b/w purchase & merger is position o

s outside ordinary course
c) Dissolution

· d) Merger

2) Right to dissent and seek appraisal of shares

S/h votes are expensive- managers would like to avoid
Dissent/Appraisal disrupts merger financial planning
Classic merger- s/h of both corps vote and have appraisal rights
Classic sale- s/h of selling firm vote and have appraisal rights

33 and 34 Acts-

Compliance with the Securities Act of 1933 – regulates registration of issue of new securities by issuer; § 5- every sale must be registered, unless it qualifies for an exemption; important to M & A b/c acquiring firm might issue new shares to raise capital. You must file a registration statement which mainly consists of a prospectus. This prospectus goes to those who buy the security. Preliminary registration statement is called a Red Herring which you distribute to investment banking community. They use it to see how much interest there is etc. Once your registration statement is approved, then they can begin placing the security with customers of the investment bankers. Remedies: requires registration statement to be complete and accurate. Private Placement Exemption: privately placing securities to sophisticated persons does not need to be registered. Regulation D: permits a short form registration
Securities Exchange Act of 1934 – regulates the trading in public securities. Requires annual and quarterly reporting. The purpose of ’34 is to get this continual reporting.

Mandatory Continuing Disclosure- 10K (annual), 10Q (quarterly), 8K (unusual happenings update)
Proxy Solicitations- required for s/h votes
Tender Offer- corp A solicits tenders from corp B’s s/hs; end runs management; Williams Act provisions included
Section 10b says that any offer of sale of security accompanied by false or misleading statement, then you are liable under 10b which also implies a private civil cause of action
10b-5: expands the reach of section 10b. Insider Trading is covered by this rule. An insider in possession of non public material information must disclose this info to the trading partner or abstain from trading (Texas Gulf Sulphur). Effectively this makes an insider refrain from trading because fiduciary duties prevent the release of that info. Material means something that would affect the investment decision of a normal person. Note that the Supreme Court has gradually eroded remedies under 10b-5.

Both have antifraud provisions