Chapter 9
Corporate Mergers and
Divisions
• Section One: Corporate Merger
• Two Forms: closely-related Concepts
• Consolidation: two or more existing corporations
combine into a new corporation and the existing
corporations dissolve.
• Merger: two or more existing corporations combine
into one of them, and the rest disappear.
• Now consolidation is of diminishing importance in
corporate practice.
• Reason: A creates a shell subsidiary, then A、B and C
enter into a tripartite agreement to merger into the
shell subsidiary.
The Forms of Merger in China
• Article 173
• Mergers of companies may take the form of mergers
by absorption or mergers by new establishment.
• Mergers by absorption shall mean that one company
admits one or more other companies into its own
company, whereby the admitting company survives
and the admitted company or companies are
dissolved. Mergers by new establishment shall mean
that two or more companies merge to establish a new
company, whereby each party to the merger is
dissolved.
Statutory Protections in Merger
• The mergers carry with them three layers
of protection:
 Board initiation and approval (and the fiduciary
protection that entails)
 Shareholder approval (and disclosure rights
under fiduciary rules and securities law)
 appraisal remedies (for shareholders in certain
mergers)
 Disclosure rights for creditors
Procedure of Corporate Merger
• 1. Board Initiation
• Article 47 The board of directors shall be
accountable to the shareholders’ meeting
and shall exercise the following duties and
powers:
• (7) formulate the plan for merger, division,
dissolution or change of company structure;
• The merger plan outlines the terms and
conditions of the merger, and the
consideration that shareholders of the
acquired corporation will receive.
Board Initiation
• The Duties during the Board initiation Process
 Fiduciary Duties: If the merger is with a
controlling shareholder (parent corporation) or
otherwise involves a conflict of interest, the
merger is subject to review as a self-dealing
transaction.
 Disclosure Duties: If the merger involves a
issuance of securities as consideration, the
rules of disclosure will apply.
Procedure of Corporate Merger
• 2. Shareholders’ approval
• After board adoption, the merger plan must
generally be submitted to the shareholders of each
corporation for their separate approval.
• Q1: Shall the approval be made by unanimous
consent?
• Q2: Shall the approval be made by all voting
classes ?
Shareholders’ Approval
• Generally, no unanimous consent is required, and
dissenting shareholders are bound by the will of the majority
• In US
Originally, most statutes required two-thirds approval of all
outstanding shares to approve.
Now most statutes require only a majority of all outstanding
voting shares.
• In China
Article 44 Resolutions passed by a shareholders’ meeting
on …… merger, division, dissolution shall be passed by
shareholders holding two-thirds or more of the voting rights.
Article 104 Resolutions of a shareholders’ general meeting
on …… merger, division, dissolution shall be passed by two
thirds majority of votes cast by shareholders present at the
meeting.
Shareholders’ Approval
• In US
• If a corporation has more than one class of voting stock
outstanding, many statutes require separate approval by
each voting class. MBCA §11.03(e)
• A few statutes even require approval by each voting and
nonvoting class, regardless of the merger’s effect.
• However, Delaware requires approval only by all
outstanding voting shares.
• In China
Article 104 Shareholders attending a shareholders’
general meeting shall exercise one vote per share.
Company shares held by the company shall not carry
voting rights.
Shareholders’ Approval
• Approval by shareholders of the acquired corporation is
always required, but it is not the case for acquiring
company.
• When a big firm absorbs a much smaller company, the
effect on the acquiring company may be minimal, not
justifying the expense and trouble of shareholder
approval.
• Most statutes exempt the acquiring corporation from
obtaining shareholder approval in a whale-minnow
merger where—
• The articles of the surviving corporation are unchanged;
• The acquiring corporation’s shareholders continue to hold the same
number of voting shares as before the merger, etc.
• In China, both shareholders’ approval are required.
Appraisal Remedies for Shareholders
• Please see the previous section.
• Article 75, 143 (5)
Disclosure rights for creditors
• Article 174
 The parties to a merger shall enter into a merger
agreement for a company merger and prepare a balance
sheet and a list of assets.
 The company shall notify its creditors within ten days
from the date of the resolution on the merger and publish
an announcement on the newspapers within 30 days.
 The creditors may demand, within 30 days from receipt
of the notice (or within 45 days for those creditors who
did not receive the notice), that the company settles the
debts or provide the corresponding guarantee.
Debt Assumption after Merger
• Article 175
• The surviving company or the newly
established company of a merger will
assume the claims and debts of the
parties to the merger.
Corporate Division
•
Board Initiation
•
Shareholders Approval
•
Assets Division
(a balance sheet and a list of assets)
•
•
•
Notification & Announcement
Debt Assumption
Corporate Division
• Article 176
In the event of a division, the assets of the company
shall be divided accordingly.
A company which proposes a division shall prepare a
balance sheet and a list of assets. The company shall
notify their creditors within ten days from the date of
resolution on the division and publish an announcement
on the newspapers within 30 days.
• Article 177
The surviving company of a division shall bear joint
liability for the debts of a company prior to its division,
unless the company prior to the division and its creditors
have entered into an agreement in writing on debt
settlement.