#16465 - The Acquisitions Market - Corporation

Introduction

• Ownership structure of co. + voting system allocates control among corporate actors

• Variety of transactions can restructure, extend, or transfer corporate control

• A shareholder with 50% = absolute control, as no one can break her grip on the board

• A shareholder with 40% has de facto control, as she can defense against any would-be competitor and remove control from the market entirely with a small purchase of additional shares

• Important when management has shares (even little)

• Management retains considerable power to dispose of corporate assets and block outsiders from purchasing control, even when management holds little/ no equity Interest in the firm (as long as there’s no large shareholder/ organised shareholder opposition)

• Shareholders with 50% owns duty of care to minority shareholders

• Without 100% ownership, controlling shareholders cannot pledge/ sell the co’s assets to finance private investment opportunities

• for most corporate acquisition, buyer need 100% ownership of target firms (not just control)

Outline for this section

1. Corporate mergers and sales of assets

2. protecting minority investors when a merger/ other involuntary transaction is initiated by a controlling shareholder for the express purpose of freezing out minority shareholders

3. rights and duties of controlling shareholder who freezes in minority shareholders by selling her control bloc of shares to an outside acquirer

4. regulation of hostile tender offers

   1. Acquirer: Williams Act, state anti-takeover legislation (structuring the acquirer’s effort to capture control by marking an open bid on the market)

   2. Target: leeway to defend against an outside acquirer, or to select its own buyer, regardless of the preferences of its shareholders

A. Corporate Combinations and Appraisal Rights

Corporate combinations: assets (and laities) of 2 companies are bought under 1

• What happen going down:

  • Governed by state law, assets and liabilities of both companies become the assets and liabilities of the surviving co.

  • type of assets whose ownership is governed by federal law not automatically transferred exceptions

• What happen to shareholders

  • share merger – owner of both co become owner of the combined

    • Shareholder of the non-surviving co becomes shareholders of the surviving co.

    • shareholder of surviving co. retains its shares

  • Cash out (+ debt securities, preferred stock etc.)

    • separate economic and legal definition

      • legal

      • economic

1) Merger (and consolidations)

• [Consolidation: 2 co. combined and neither survives (but due to regulatory benefit to have a surviving co., consolidations are very rare)]

• Merger: statutory mechanism to combine 2 corporations a co. is merged with and into the surviving corporation

  • assets and liabilities of both co. become assets and liabilities of the surviving co as a matter of law

  • In cash mergers: shareholders of a co. may receive cash, while the other co.’s shareholders receive/ retain stock of the surviving corporation

  • In stock mergers: shareholders from both co. receive stock of the surviving co.

  • But treatment of shareholder doesn’t depend on whether their co. survive - possible to have a cash merger where shareholders of the surviving co. are cashed out and the other co.’s shareholders receive stock of the surviving co.

• 1) Regular merger - DGCL §251(c) standard

  • long form merger, no condition, any merger can be structured as this, like a default merger

  • Required Approval: Directors and Shareholders of both companies

  • Special Conditions: None

• 2) Short-Form Mergers - DGCL §253: Parent > Sub

  • When the Parent owns at least 90% of the stock of the other co (Sub) generally only need parent co.’s board to approve a short-form merger

  • Rationale:

    • 1) merger is presumed to have no major economic effect on the parent’s shareholders [90% to 100% not a big deal]

    • 2) given parent’s stock ownership, requiring approval by the subsidiary board and shareholders would be meaningless formality [since parent control the sub]

  • Required Approval: Directors of “Parent” (if parent surviving)

  • Special Conditions: “Parent” must own at least 90% of stock of subsidiary

• 3) DGCL §251(h): [NEW] Public co.

  • Required Approval: Directors and shareholders of Acquiring Corporation; directors of “target”

  • Special Conditions: Merger quickly follows tender offer for all outstanding shares of target. Bidder owns requisite majority of shares after offer.

  • 2 unaffiliated companies, 1 makes a tender offer and then a merger

  • no tender offer and merger right away (Van Gorkon)

  • 2 step merger – tender offer and merger; 1 step merger – merger right away

    • tender offer is faster, only take ~1 month [speed of having a blocking minority is important] though sometimes tender offer may not be faster]

    • merger is slower need shareholders voting and disclosure (during which someone else may make a better offer)

  • Public co. don’t need shareholder vote of target co. following a tender offer by the acquirer (since it already have majority of shares) speeds up the process

  • Requirements:

    • acquirer makes a tender offer and

    • owns a majority of stock after the consummation of the tender offer

• 4) DGCL §251(f): not important in practice

  • Required Approval: Directors of “Acquiring Corporation; directors and shareholders of “Target”

    • No need Target co.’s shareholder approval (only one set of shareholder approval and 2 sets of board approval) if:

      1. shareholders of that co retain their shares

      2. co.’s charter is not changed

      3. no. of any newly issued shares to shareholders of the acquired does not exceed 20% of the shares of the acquirer’s outstanding shares prior to the merger

[stock exchange rules require listed co. to obtain shareholder approval whenever they issue new shares in excess of 20% of outstanding shares]

• Special Conditions:

  • Number of outstanding shares of acquired company does not increase by more than 20%;

  • no change in charter of acquired company

  • no change to existing shares of acquired company

• Triangular merger

  • In practice, most mergers would be structured into a triangular merger

    • Shareholder approval by one company is often avoided/ made into formality by structuring a merger [XYZ – Sub merge with Target]

    • Legally, triangular merger is usually a merger under §251(c) (but can also be a merger under §253 or §251(h).

  • One corporation (“acquirer”) forms a Target acquiring subsidiary (XYZ Acquisition Corp., has no asset/ liability)

    • Target acquiring sub then merges with the Target co. in a merger under §215(c)

    • Surviving corporation would always be Target shareholders of Target Acquisition will gets shares of the surviving corporation

    • End result: Target would become subsidiary of Acquiring co.; T shareholders will get cash out

  • Merger requires approval of Sub’s and Target’s shareholders and directors

    • Sub’s sole shareholder is XYZ; Sub’s shares are voted by XYZ managers (who also control Sub’s board of directors) Sub’s shareholder approval can be easily obtained

    • XYZ shareholder approval is not necessary, unless required by stock exchange rules

      • if XYZ issues new shares of more than 20% of outstanding shares); or

      • if merger requires an amendment to XYZ certificate of incorporation (e.g. to increase the no. of authorised shares)

    • Because acquirer controls the board and owns all the stock of XYZ, voting requirements are easy to meet.

  • If a public co. wants to do a stock merger no need shareholder approval, but need SEC’s approval

    • Stock exchange rules may require vote by acquirer shareholders if merger consideration is acquirer stock; but easier to meet than Delaware requirement.

    • Rather deal with SEC approval then Delaware vote: less no. of vote required, NYSE has little enforcement power – not eager to penalize co.’s failure to observe rules that protect shareholders

  • In stock merger, either company can be “acquirer”

  • Cash and stock mergers can both be structured as triangular mergers

    • Cash merger: shareholders of the corporation that are cashed out will have to vote on the mergers [As XYZ doesn’t participate in the triangular merger, XYZ shareholders cannot be cashed out]

  • Triangular shareholders can do all and more than what can be done in §251(f) merger

  • Benefit of triangular merger:

    • Shield XYZ’s other assets from Target’s (unknown) liabilities – T is a separate legal entity - as Target’s operations will be run through a separate subsidiary, XYZ won’t be liable if the liabilities of the Sub exceed its assets

    • Already exist as a vehicle to sell/ spin-off T only need to sell stock of T easier to sell target later on

  • Merger agreement is a contract, governed by corporate law in Delaware

2) Asset purchase

• Target sells (substantially all assets to acquirer)

  • Required Approval: Shareholders and directors of target (Section 271)

  • Special Conditions: None

  • Other Considerations: Requires extensive title work; what happens to liabilities of target.

  • a co. acquires assets of another co. (often assumes its liabilities) by contract

  • if co. wants to sell all assets need shareholders and board’s approval

  • Acquiring co. can pay cash or in its own shares

• If the selling co. liquidates after the asset sale end result would be economically similar to a merger

• Sales of all/ substantially all of the assets require approval of the board of directors + shareholders of the selling co. §271 DGCL

  • Approval of the shareholders of the acquiring co. is not required

  • subject to stock exchange rules and charger amendments

• Disadvantage:

  • since assets are transferred by contract, not automatically as matter of law requires more extensive...