Chapter Twelve
Changes in the Corporate Structure
and Corporate Combinations
Corporate Combinations
Merger: combination of two of more
corporations into one corporate entity
Consolidations: combination of two or more
corporations into one new entity
Takeover Defenses
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Staggered Boards. It might take an aggressor several years to obtain
control of a board of directors that is staggered (meaning one whose
directors stand for election at different times).
Golden Parachutes. The corporation may grant senior managers golden
parachutes requiring that these individuals, if ousted, be compensated in
some extraordinary amount. The golden parachutes may make a takeover
prohibitively expensive for an aggressor.
Poison Pills. A poison pill (or shareholder rights plan) is triggered by a
tender offer. Once the tender offer is announced, shareholders are
automatically given certain rights, such as increased voting rights or rights
to acquire additional shares of the target at bargain prices. These rights
make acquisition of control by a bidder far more difficult and may be
extremely costly.
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Takeover Defenses
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Crown Jewel Defense. The target may begin selling off its most valuable
assets to make itself less attractive to the bidder. This is the crown jewel
defense. Of course, the risk is that if the bidder abandons its takeover
plan, the target may be left so weakened that it must dissolve.
Suicide Pacts. The managers of the target may enter into a suicide pact
(sometimes called a ‘‘people pill’’) whereby they agree that if any of them
are fired after a takeover, they will all resign. Such an en masse walkout
leaves the aggressor without any stability or continuity in management.
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Domestication
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Domestication: the changing of a corporation’s
state of incorporation
Plan of domestication: the plan that provides the
terms and conditions of a corporation’s change of
its state of incorporation
Articles of domestication: the document filed with
the state to effect a change of a corporation’s state
of incorporation
Entity Conversion
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Entity conversion: a business’s change of its
structure, for example, converting from a
corporation to an LLC
Plan of entity conversion: the plan that provides the
terms and conditions of a business’s change in its
structure
Articles of entity conversion: the document filed
with the state to effect a change in a business’s
structure
Key Features of Corporate Changes and
Combinations
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Significant changes to a corporation typically require
shareholder approval.
A corporation may amend its articles at any time by
resolution by the directors followed by shareholder
approval. Articles of amendment must be filed with
the state agency.
A corporation may restate its articles to create one
composite document superseding prior amendments;
shareholder approval is unnecessary because nothing
new is being added to the articles.
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Key Features of Corporate Changes and
Combinations
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Amending corporate bylaws is typically handled by
directors without shareholder approval inasmuch as
the bylaws regulate only the internal affairs of the
corporation.
A merger is the combination of two or more
corporations into one corporate entity. The survivor
succeeds to all of the business, debts, liabilities, and
assets of the extinguished corporation. Shareholders
of both corporations must approve the transaction.
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Key Features of Corporate Changes and
Combinations
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Shareholders who dissent from a merger or
consolidation have the right to have their shares
appraised and purchased from them at fair value.
In a share exchange, the target’s shareholders
exchange their shares for cash or shares in the
acquiring corporation.
As an alternative to merger, one corporation can
purchase all of substantially all of another’s assets.
Liabilities are generally not purchased.
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Key Features of Corporate Changes and
Combinations
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One corporation can purchase a majority or all of
another corporation’s stock as a means of gaining
control of a corporation. If the acquisition is consensual,
all directors and the seller’s shareholders will vote. In a
hostile acquisition or takeover, the bidder bypasses the
target’s management and appeals directly to the
shareholders.
Some takeovers are regulated by federal law.
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Key Features of Corporate Changes and
Combinations
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Corporations may implement a variety of measures to
ward off a takeover.
A corporation may change its state of incorporation
(domestication) or may convert its business structure to an
unincorporated form (such as to an LLC).
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