Merger and Acquisitions Outline

MERGERS & ACQUISITIONS OUTLINE
 
Tuesday, May 26 – Introduction to M&A, Overview of Basic Structures
*M&A law refers to a particular kind of business activity whereby one business decides to take control (to purchase or acquire) the income-producing operations of some other business entity. Hence M&A is largely about combining previously independent, freestanding businesses into one organization. Many laws apply, such as securities, tax, antitrust, environmental, labor/employee benefits and corporate. Industry specific laws and regulations such as banking laws, insurance statutes & stock exchanges also apply. 
*The companies that plan to combine together are usually referred to as “constituent corporations.”
-Acquisition: Transfer of a business from the current owner to a new owner.
-Merger: A prescribed (by statute) way in which two businesses are combined. All of the liabilities and assets are acquired by the bidder – cannot take only certain assets and leave others behind.
–The Story of Pfizer’s Acquisition of Pharmacia: Announced in July, 2002, the deal was valued at $60 billion with Pharmacia shareholders to receive 1.4 shares of Pfizer stock for each share of Pharmacia they owned. The press release stated the goal was to create a global powerhouse in the pharmaceutical industry, not the least among the strategic incentives was Celebrex, the arthritis drug that represented the crown jewel of Pharmacia’s business (which was credited with the financial turnaround of Pharmacia). Pharmacia claimed that merging with Pfizer presented an opportunity to participate in a fast-growing company that should have the resources to bring new pharmaceutical products to the market quickly. Once consummated, Pfizer’s shareholders would end up holding approximately 77% of the combined company and Pharmacia’s shareholders the remaining 23% (the deal closed in March, 2003). Some projected tough scrutiny under the anti-trust laws, and other didn’t foresee a problem as the market share would only increase from 8% to 11% after the merger. Due to a number of factors, Pfizer’s sales and stock price dropped significantly in the years immediately following the acquisition. This ultimately resulted in the resignation of Pfizer’s CEO who had spearheaded the acquisition.
–The Story of Nestlé’s Acquisition of Chef America: In the fall of 2002, Nestlé offered to buy Chef America, a closely held corporation in Colorado (since it is a privately held family business, little information is known about its financial affairs and stock ownership). Moreover, Nestlé is a foreign corporation organized under Swiss law and subject to limited disclosure obligations under U.S. law. Nestlé was involved in a string of acquisitions in the U.S., taking full control of Haagen-Dazs, and Ralston-Purina. By combining with Nestlé, Chef America could achieve greater distribution of, and much greater marketing base for its products by assessing Nestlé’s well established, worldwide delivery and product distribution system, and Nestlé would gain a competitive edge in the frozen-food industry by acquiring the “Hot Pockets” brand. The $2.5 billion offer represents a premium to Chef America, and illustrates the increased attractiveness of up-and-coming food businesses like Chef America to major players. 
*Many closely held firms may seek investment funds from venture capital or private equity firms in order to establish and/or grow their business. The time horizon for use of their capital varies, but it is usually 3-7 years; this means that at the time of investing its capital and buying stock, the VC or PE firm is usually going to consider its exit strategy as part of its overall investment decision. Another common variation of M&A deals is where one small business is acquired by another small business.
*There are essentially three methods by which business acquisitions get done; these are statutory mergers, asset purchases and stock purchases. 
**The major source of protection for those SH who object to a proposed business combination is the law of fiduciary duty. A fundamental premise of modern state corporate law is that the company’s senior executive officers and board of directors owe fiduciary obligations to the company itself. 
1. Duty of Care; obligating the board to manage the company’s business affairs in a manner that they reasonably believe to be in the company’s best interest.
2. Duty of Loyalty; like the duty of care, this obligation runs directly to the corporation itself. This duty of loyalty requires the board to make business decisions that are not tainted by any conflict of interest, and avoiding an appearance of a conflict of interest. 
–Direct (Statutory) Merger: The boards of both bidder and target initiate a transaction that contemplates bidder swallowing up target, who will then cease to exist as a separate entity when the transaction is complete. Modern state corporation codes usually require approval of a merger doctrine by both boards of the constituent corporations, which then must be submitted to the SH for their approval (adds to transaction costs). Bidder inherits target’s liabilities (whether they like it or not), and target disappears. There may be business reasons to keep it alive, certain contacts could be affected.
DGCL §251-262, MBCA § 11.01-11.08, Problem Sets #1-2
–Asset Purchase for Cash: Most state corporation statutes require that the board of the selling corporation must approve the transaction. Target’s board must then obtain approval from SH in order to complete the transaction, on the grounds that the sale of all of the company’s assets constitutes a fundamental change. As for bidder, state corporation codes usually impose no board or SH voting requirements, largely on the grounds that this transaction does not involve a fundamental change for bidder. Bidder will remain in place, having used its cash resources to acquire the business operations.
DGCL § 141,271, MBCA § 8.01, 12.01-12.02, Problem Set #3
–Stock Purchase for Cash: Bidder may approach target SH and offering to buy their shares directly. So long as the relevant state corporation statute authorizes bidder to own shares of another company, and assuming bidders powers are not otherwise limited, there are no specific statutory prerequisites to be satisfied to validate this type of a transaction. In the case of a stock purchase, both businesses remain intact, this type of acquisition will leave target to be operated as a wholly owned subsidiary of bidder, hence this method is often referred to as a “change of control transaction” because there has been a change in ownership of all – or at least a controlling interest – in targets stock. The cash is moving directly from the bidder to the SH of the target; here, according to statute, the target company gets subsumed into the surviving corporation.
DGCL § 141(a), 152, MBCA §6.21(f), Problem Set #4
–Triangular Transactions; the goal is for the acquiring corporation to own the acquired business as a wholly owned subsidiary. There are often compelling business reasons for leaving target in place rather than having it disappear by merging into the surviving corporation as called for in a direct merger. To address this limitation in the merger procedure (and thereby allow bidder to acquire target and operate it as a wholly owned sub rather than disappear), the law authorized three-party, or triangular mergers.                
In a triangular merger, the merger consideration will be provided by bidder. Pursuant to the terms of their agreement, target will be merged with a wholly owned sub of bidder. In order to consummate this plan of merger, bidder will incorporate a new, wholly owned sub (NewCo) that will then merge with target. The merger agreement will usually provide that target SH will receive bidder shares, NOT shares of NewCo, in exchange for their target shares.
1. Forward Triangular Merger: NewCo will be the surviving corporation and target will disappear once the merger is consummated. As a result of the merger, the target becomes part of the original subsidiary of the acquirer. 
2. Reverse Triangular Merger: NewCo will merger into target, leaving target as the surviving company once the merger is consummated. As a result of the merger, the target would become a wholly owned subsidiary of the acquirer and SH of the target would get shares of the acquirer. This is the favored way of proceeding since the assets are not moving and the structure is where the bidder is isolating its liabilities.
**Federal proxy rules: Reporting companies under the 1934 Act fall into two categories;
                1. Companies whose shares are listed for trading on a national exchange, or
2. Companies that have a class of SH numbering 500 or more AND have assets totaling $10 million or more.
*Also, whenever bidder proposes to use its stock as the acquisition consideration, bidder needs to comply with the requirements of the Securities Act of 1933. Briefly summarized, the 1933 Act regulates the distribution of shares by requiring the issuer (bidder) to register the distribution (the offer and sale) of bidder’s shares unless an exemption from registration is available. The goal of the registration requirements is to protect the purchaser of the securities by requiring the issuer to disclose all material facts regarding the proposed issuance of its securities so that the prospective investor can make an informed investment decision.
 
Thursday, May 28 – Corporate Formalities: Merger, Asset & Stock Transactions
§251 is the basic merger statute in Delaware, and Chapter 11 contains the basic merger procedures under the MBCA. Typically, fundamental changes are approved by the board and SH.
*§251 authorizes the merger of any two domestic corporations, in addition §252 authorizes a domestic corporation to merge with a foreign corporation, and further authorizes either a domestic corporation or the foreign corporation must be designated the surviving corporation. Under §251, the board of directors of each constituent corporation that is Delaware corporation must approve the merger agreement (reflecting the corporate norm that the board manages the business affairs).
*Generally speaking, §251[c] requires that the merger agreement be submitted to the SH for their approval in order for the merger to become effective (see also MBCA 11.04). The voting standard has been relaxed from 2/3 to “a majority of the outstanding shares entitled to vote.”
*As far as Delaware law is concerned, virtually any type of consideration is now permissible in a merger (most often it is cash or bidder stock). A cash merger allows the bidder to acquire all of target’s business operations while eliminating target’s SH from any continuing equity ownership in the combined firm. With a stock for stock merger, a great deal of transaction costs are avoided, and the stock in the target corporation ceases to exist. This conversion occurs by operation of law without the need for any action on the part of the SH and notwithstanding any objections or reservations that any minority SH may have.
*In the case of a direct merger, the surviving corporation succeeds to all the rights and all the liabilities of both constituent corporations by operation of law once the merger takes place. §251 also allows the board of any constituent corporation to abandon a merger without the approval of the SH – even if the plan of merger has already been approved by the SH – as long as the merger agreement expressly reserves that power to the board. 
*§262 and Delaware case law makes clear that the SH right to appraisal is “entirely a creature of statute.” §262(b) grants a right of appraisal to the shares of any class or series of stock of a constituent corporation in a merger to be effected pursuant to 252. 
*As do many states, §262(b) (1) eliminates the right of appraisal as to any shares that are listed on a national exchange or traded on NASDAQ. Even if not so listed, the right of appraisal will be eliminated as to those shares that meet certain criteria set forth in the Delaware statute (intended to show that the shares are so widely held as to imply a liquid and substantial trading market.
–SH Right of Appraisal: The right of SH to demand the fair payment of securities undergoing a merger by a third-party valuator. It’s a protection policy for SH; preventing corporations involved in the merger from paying less than the company is worth to the SH.
*Even in those cases where the “market out” exception applies, their right to an appraisal may be restored if the tests of §262(b) (2) are satisfied; EXCEPTION TO THE EXCEPTION.
*Under MBCA §13.02(a), appraisal rights are available in the case of those mergers that require SH approval. However, appraisal rights are denied as to any shares of the surviving corporation that remains outstanding after the merger is completed. Like Delaware, the MBCA includes “market out exception,” which eliminates the right of appraisal in certain cases where the shares are publicly traded.
**First, before the SH vote on the proposed merger, the objecting SH must notify the