Mergers and Acquisitions Outline – Badawi Fall 2020
Introduction
I. Drivers of M&A
a. Economic
i. Gain scale/eliminate competition
ii. Add complementary business units, seek synergies through
combination
iii. (sometimes, like conglomerates) diversification strategy
iv. Access to human capital (Acqui-hiring)
v. Hubris hypothesis: empire building; look at agency costs
vi. But also operational/cultural challenges and unclear value
b. Regulatory
i. Regulatory arbitrage – attempt to reduce regulatory costs, including
taxes (ex: inversion)
c. Theoretical accounts
i. Coase – why is border of firm at a certain line? For M&A, can acquire
company or K with them
ii. Williamson: markets and hierarchies
1. Acquire when have a holdup problem (e.g. GM and car bodies,
but tires from marketplace)
2. More vertical than horizontal integration
II. Sources of Law
a. State corporate law (DE): statutory requirements, fiduciary duties, anti-
takeover laws
b. Federal securities law
i. How a tender offer must be conducted
ii. Disclosures
1. SHs receive from public companies
2. SHs get with stock/debt issued in M&A
3. Those acquiring >5% of company
iii. SEC – proxy rules, tender offers, insider trading
Statutory Issues
I. Transaction Structures
a. Mergers – statutory options
i. Long form merger – § 251(a) – one-step merger
1. Constituent corporations only those involved in transaction;
surviving and non-surviving (or disappearing corp)
2. Procedures
a. Each board must adopt resolution approving of agreement
of merger or consolidation and declare advisability of
agreement
b. Agreement approved must include details of terms,
consideration, and method of implementation
ii. Intermediate form merger – § 251(h) – no vote of T SHs required to
approve second-step merger following a tender offer if acquirer owns
, at least the percentage of each class of target stock required to
approve a merger (between 50% and 90%). Need:
1. Friendly deals only
2. T’s shares must be listed on a national securities exchange/held
of record by more than 2k holders
3. Consideration in the back-end merger must be the same as in
the tender offer
iii. Short form merger – § 253
1. Own >90% of outstanding shares and merger between parent
and subsidiary
2. Just file documents; no voting
iv. Legal effects of statutory merger
1. All rights, privileges, powers, and assets of disappearing corp
become rights, power, and assets of surviving corp
a. Surviving corp also gets property and debt
2. Fitzsimmons v. Western Airlines - CBA with union carries
through merger; can’t avoid contract by merging
3. Surviving corp substituted for disappearing corp as a party in a
civil, criminal, or admin matter
a. Exception: derivative suit (lose standing because no
longer SHs, but hold rights to receive cash/stock of
surviving corp)
b. Mergers – voting requirements
i. § 251(c): requires affirmative vote of majority of outstanding shares of
corporation; if bylaws allowed, may be approved by written consent
ii. § 251(f): shareholders of surviving corp do not need to vote on merger
if:
1. Certificate of incorporation not amended
2. No change to characteristics of outstanding stock of surviving
corp; AND
3. Surviving corp does not issue >20% of outstanding stock in
connection with transaction
a. Biggest roadblock to using § 251(f)
iii. Even with § 251(f), votes of shareholders of disappearing corporation
still required
iv. Stock exchange requirements – NYSE Rule 312 and Nasdaq Rule
4350(i)
1. Any listed corporation issuing >20% shares (authorized and
outstanding, though base is outstanding shares) regardless of
whether for merger
c. Mergers – structure choices
i. Direct merger – T merges with and into the acquirer
1. Follow rules for a long-form statutory merger
ii. Triangular mergers – generally § 251
1. Forward subsidiary merger – T merges with and into acquisition
sub
a. T votes, but maybe not sub/purchaser
, b. Buyer can pay more cash and still get tax free exchange
treatment for stock issuance
i. Up to approximately 50% cash
2. Reverse subsidiary merger – acquisition sub merges with and
into T
a. Everyone votes here (pro forma for sub)
b. Surviving company T so less concern about assignment of
Ks
i. Ks can still contain change of control provisions
c. No more than 20% cash for tax free exchange treatment
d. Sale of All or Substantially All of the Assets
i. Governed by § 271 – sale/lease/exchange of all or substantially all of
property and assets requires majority SH vote
1. 2 steps
a. Actual sale of assets
i. Resolution from board deeming asset sale in best
interests of corporation
ii. Resolution recommending dissolution upon
completion of sale
iii. Majority vote of outstanding stock adopting both
iv. Assets to buyer, consideration to seller – used to pay
off liabilities/taxes then distributed as special
dividend
v. Voluntary dissolution
b. Voluntary dissolution under § 275
ii. Leaves certain liabilities behind, but at the cost of speed – title for
each of identified assets must be individually transferred to buyer
1. Also have sales tax implications
iii. “all or substantially all”
1. Hollinger – need quantitatively and qualitatively vital
a. Quantitative: substantially all does not equal >50%
b. Qualitative: integration with rest of company, whether
moving markets; big question is whether company can be
profitable post-sale
2. If meet quantitative, will likely meet qualitative
iv. DE rejects de facto merger doctrine; separate process from § 251
1. Upshot: avoid appraisal rights
v. Fraudulent conveyance – actual intent to defraud creditors at time of
transaction of if consideration received from the assets was not
adequate value; can give rise to an action for damages against both
seller and buyer
1. Solve with lawyer’s opinion
2. Can claw back those transactions
e. Asset purchase v mergers
i. In an asset purchase, you can pick and choose liabilities to assume;
issues w/ tax treatment and assignment of contract
ii. In a merger, you take everything; Subsidiary merger confines
liabilities to operating business
, f. Tax considerations
i. Cash component always taxable
ii. If acquirer wants to pay >20% consideration in stock but still have
non-taxable stock component, forward triangular merger only option
g. Example structure: Dr. Pepper – weird and complex
i. Reverse triangular merger, where acquirer paid out dividend to Dr.
Pepper, which was then returned to Dr. Pepper SHs as a special
dividend
1. Dr. Pepper SHs went from owning 100% to 13% of Dr. Pepper
ii. No SH vote: Dr. Pepper shares are identical
iii. No appraisal rights; not constituent corporation
iv. Still subject to NYSE rules
II. Appraisal Rights
a. Allows SHs to “dissent”; can go to court to demand higher price for shares;
receive fair value in DE
i. Alternative to receiving consideration from buyer
ii. SHs transformed from SH to unsecured creditor (so some credit risk)
iii. Low premium deals more likely to be subject to appraisal
iv. Risky: uncertain pay out + attorney’s fee + time
b. When available
i. Potentially available for SHs of constituent corporation under § 251
ii. Always available for target SHs in § 253 short-form mergers
iii. Not available in asset sales or tender offers
iv. Consideration type
1. Cash = appraisal rights
2. Stock = no appraisal rights (market out) - § 262(b)(2)
a. No appraisal rights if receive shares of any other publicly-
traded corporation (stock-for-stock exchange)
i. Why: market can value the shares, so no need for
the judge to do so
1. Continuously traded in a highly liquid market
3. Mixed consideration = appraisal for cash, but not for stock
c. Who gets appraisal rights?
i. Is dissenting SH a SH of constituent corporation in a statutory
merger?
1. No no appraisal rights
ii. Did dissenting SH have vote in merger? Check for § 251(f) exceptions
1. No no appraisal rights unless short form under § 253
iii. Is the merger under § 253?
1. Yes appraisal rights
iv. Pre-merger, does dissenting SH hold stock of publicly traded
corporation?
1. No appraisal rights
2. Yes appraisal rights only if dissenting SH required to accept
as consideration something other than stock of surviving corp or
publicly-traded stock of a third corporation (e.g., cash or stock
of a third company not publicly-traded
d. Perfecting appraisal rights
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