Business Law CH41 S2025 LEW

Chapter 41: Mergers and Takeovers

Corporate Growth Strategies

• Growth can occur through:

  • Reinvesting Earnings: E.g., enhancing equipment, hiring employees, investing in R&D.

  • Combining with Another Corporation: Through merger, consolidation, or share exchange.

  • Purchasing Assets: Acquiring the assets or controlling interest in another corporation.

Chapter Outline

• Key Topics:

  • Merger, Consolidation, and Share Exchange

  • Purchase of Assets

  • Purchase of Stock

  • Corporate Termination

Mergers, Consolidations, and Share Exchanges

Merger

• Definition: A process where one corporation acquires the assets and liabilities of another.

• Characteristics:

  • One corporation survives as a recognized entity.

  • Surviving corporation inherits all rights and obligations of the other.

  • Automatically acquires the acquired corporation’s property and liabilities.

Example of Merger

• Exhibit 41-1: Corporation A absorbs Corporation B; B no longer exists separately.

Consolidation

• Definition: Two or more corporations join to form a new corporation.

• Characteristics:

  • New corporation formed replaces original articles of the terminated corporations.

  • Inherits all rights, assets, and liabilities of predecessors.

• Articles of merger spell out changes

• The consolidated corporation’s articles of consolidation take the place of the terminated corporations’ original corporate articles.

Example of Consolidation

• Exhibit 41-2: Corporations A and B consolidate to create Corporation C.

Mergers vs. Consolidations

• Question: Why do for-profit corporations prefer mergers, while not-for-profit corporations opt for consolidation?

Share Exchange

• Definition: Acquiring shares of one corporation in exchange for shares of another, with both continuing to exist.

• Parent Corporation: Owns the shares of a subsidiary corporation; often involved in forming holding companies.

Procedures for Mergers, Consolidations, and Share Exchanges

Basic Procedures

1. Approval: Board of directors must approve the plan.

2. Plan Requirements: Must specify conditions, share valuation methods, and conversion details.

3. Shareholder Vote: Majority of shareholders must approve the plan.

Execution of the Plan

• After approval, the surviving corporation files necessary documents with state authorities. Certificates of merger or consolidation are issued by the state.

Short-Form Mergers

• Definition: Simplified mergers for parent-subsidiary setups, usually without shareholder approval.

• Requirements: Parent must own at least 90% of subsidiary shares.

Shareholder Approval

• Mergers are classified as “extraordinary” business matters requiring shareholder approval. However, transactions can be structured to avoid this requirement.

• Appraisal Rights: Shareholders have rights to challenge and seek fair compensation during mergers.

Purchase of Assets

• Buyer: When a corporation buys assets, it expands ownership without needing shareholder approval unless additional share issuance is required.

• Seller: Must obtain approval from its board and shareholders, and dissenters may seek appraisal rights.

Successor Liability

• Generally, a purchasing corporation is not liable for the seller’s debts unless certain conditions are met such as express agreements or fraud.

Purchase of Stock

• Method: Buying voting shares to gain control is an alternative to asset purchase.

• Key Terms:

  • Target Corporation: The one to be acquired.

  • Tender Offer: Direct offer made to a target company’s shareholders, typically at a premium.

Securities Law Applications

• Strict regulatory framework governs tender offers and related disclosures post-successful bids.

Responses to Tender Offers

• Target corporations may respond positively, oppose, or employ defensive strategies against hostile takeovers.

Terminology of Takeover Defenses

• Crown Jewel: Selling valuable assets to fend off a takeover and make the purchase less attractive

• Golden Parachute: Benefits for management if taken over.

• Greenmail: Paying a premium to regain stock control back from a buyer.

• Pac-Man Defense: Target attempts to take over its acquirer.

• Poison Pill: Issuing rights to shareholders to make takeover costly by issuing cheap shares

• White Knight: Seeking a more favorable merger proposal from a third party to make the aquisition more expensive.

Takeover Defenses and Director Duties

• Directors’ fiduciary duties must align with shareholder interests during hostile takeovers, risk facing breach lawsuits if shareholders are negatively affected.

  • if they dont, shareholders can sue for breach of duty and business judgment rule will be used to assess reasonability

Corporate Termination

Phases of Corporate Termination

1. Dissolution: Formal disbanding, voluntary or involuntary. brought by….

   1. An act of the state

   2. An agreement of the shareholders and the board of directors

   3. The expiration of a time period stated in the certificate of incorporation

   4. A court order

2. Winding Up: Liquidation of assets and distribution among creditors and shareholders.

Voluntary Dissolution Methods

• Can be achieved by shareholders’ unanimous vote or by a board proposal with shareholder meeting approval. Must file dissolution articles with the state.

  • must notify creditors and establish a date to recieve all recieables etc

Involuntary Dissolution

• Can result from failure to meet tax or reporting requirements or from mismanagement allegations.

• involuntary dissolution under the RMBCA allows shareholders to request a court to dissolve a corporation

  • The directors are deadlocked in the management of corporate affairs, and the shareholders are unable to break the deadlock.

  • The acts of the directors or officers are illegal, oppressive, or fraudulent.

  • Corporate assets are being misapplied or wasted.

  • The shareholders are deadlocked in voting power and have failed, for a specified period (usually two annual meetings), to elect successors to directors whose terms have expired or would have expired with the election of successors.

Winding Up Procedures

• Voluntary dissolution - the board of directors act as trustees of the corporate assets.

  • They are responsible for winding up the affairs of the corporation for the benefit of corporate creditors and shareholders.

  • They are personally liable for any breach of fiduciary duties in the winding up process.

• Involuntary dissolution - or if board members do not wish to act as trustees—the court will appoint a “receiver” to wind up the corporate affairs.

  • Courts may also appoint a receiver when shareholders or creditors can show that the board of directors should not be permitted to act as trustees of the corporate assets.

• On dissolution, the liquidated assets are used to pay creditors first and any remaining assets are distributed to shareholders according to stock rights.