Mergers and Acquisitions Outline
Professor McWilliams
I. Introduction to Acquisitions:
A. Basic Theory of Corporations– an invention for the purpose of aggregating and growing capital
1. Seminal attributes of a corporation:
a. Limited liability
b. Freely transferable interests
c. Separate Jural Person
d. Professional Management–Allowed investors to be passive—so if they knew nothing about the enterprise
e. Amenable to a public, highly-liquid market–Allowed people to quickly get in and out of investments, diversify, etc
2. Statutory model–SHs who are passive investors elect directors who are charged by the statute with managing the corporation, who then appoint officers, who execute the policies of the directors on a day-to-day basis, and the officers, under authority delegated from the directors, hire employees to perform the day-to-day activities
3. Why do we have a system that externalizes corporate losses to the creditors but has no limit on gains? Because a huge liquid market encouraging the aggregation of capital creates a pure legal fiction that grows the economy and promoted the progress of the 20th century
4. Who owns the corporation? No one—the corporation is all unto itself—the SHs own their investment in the corporation, as well as their right to vote, their right to participate in extraordinary corporate decisions, and a few other rights, and the ability to sell their shares, at least for a public corporation, to someone else and to get their investment back, although they have no right to get the investment back from the corporation (permanent equity investment)
5. Fiduciary duties:
a. Duty of care—breached by negligence and the remedy is normally money damages
▪ Defenses:
i. Duty of care is that of an ordinary person under like circumstances–Very low level duty—management is not a trustee for the investment of the SHs
ii. 33-8-300—where the BOD obtains expert advice, either from internal or external experts, from people who the directors have no reason to believe are not experts, then they have complied with their duty of care—thus they can insulate themselves by getting expert advice on a decision
iii. Business Judgment Rule—Judge-made rule that courts will not substitute their judgment for a business judgment that is made in good faith and fully informed
▪ 3 parts:
1. Good faith
2. Fully informed
3. Business Judgment
▪ Means that management is never liable for ordinary negligence—cases get dismissed for failure to state a claim
▪ But this is not a defense against gross negligence, knowing illegality, or fraud
b. Duty of loyalty—duty of exclusivity in the
ay not take the obligations along with
the assets—this is a matter of negotiation
c. Consideration may be anything BUT equity instruments in the purchasing firm— you do not pay in stock—if you do, this is a merger
2. Merger—when you acquire something with stock
a. usually through the magic of the statute
b. Newly formed corp takes all the assets and all of the liabilities of the two corps
c. All of the SHs of A and B are now the SHs of Newco.
▪ Everyone gets diluted (percentage of ownership reduced)
3. Merger among Equals—a merger between two corps of about the same size where the SHs get
treated about the same, and sometimes the officers work as a tandem going forward
▪ If one of the firms is much larger than another, common usage would call it an acquisition, even if the SHs of the small corp winded up being SHs in the resulting corp
4. Takeover—stock purchase in which the acquiring company buys a controlling block in the
target, then elects its own BOD and takes control
a. Key is voting control
b. Van be friendly or contested
c. A contested tender offer is an attempt to perform an unfriendly takeover
5. Leveraged buy-out—when a group, usually friendly, borrows money from a bank and buys
voting control of a corporation, elects its own BOD, issues debt of the corp, uses the proceeds
