MERGERS, ACQUISITIONS & DISSOLUTIONS - CLASS 2
I.
CORPORATE REORGANIZATIONS (continued from
Class 1)
A. California Mergers/Reorganization:
1. Short Form Merger:
a. Allowed by Corporations Code Section 1110
where a wholly-owned subsidiary merges into
its Parent.
b. Requires filing of a “Certificate of Ownership”
c. Only allowed if at least ONE of the two is a
California corporation.
2. Mergers by Agreement: Requires…
a. Foreign Corporation merges with California
Corporation…some rules:
(1) If California corporation survives:
 same as 2 California corporations
merging
 Agreement of Merger & Certificate of
Approval
 Tax Clearance also necessary
(2) If Foreign Corporation survives:
 Governed by the OTHER state’s
laws.
 File with Secretary of State:
** Merger Agreement
** Certificate (or equivalent form)
from other state
b. Interspecies Merger – e.g. Corporation
merges with LLC
B. Tax Consequences:
1. SH does not report income/loss unless boot
received
2. SH gets carryover basis equal to cost of old
shares (acquired corporation).
C. Exchange Reorganizations: (stock for stock deals)
1. Acquiring corporation issues some of its own stock
in exchange for stock of target corporation
(thereby creating a Parent –Subsidiary
relationship).
2. Procedure…
a. Tender Offer approved by Board of Directors
of acquiring corporation
b. If proposed by “insider” – Must get
“independent fairness opinion”
c. Approval of acquiring corporation’s SH’s not
required unless the “SH Dilution Test” is not
met.
DILUTION TEST: After the stock exchange,
the acquiring corporation’s SH’s percentage of
ownership of outstanding stock is > or = 5/6
(then SH approval is NOT required)
d. SH’s of acquired corporation do not have to
approve since the offer is being made to the
SH’s themselves.
D. Sale of Assets:
1. Selling Corporation:
a. SH & BOD approval if “substantially all of its
assets”
(IRS defines as > 90% of net value and >70%
of gross value)
b. Negotiated usually by officers.
c. Both BOD must approve.
d. SH’s of purchaser corporation only if a “major
purchase” (involving issuance of shares)
(1) SH dilution test = rebuttable
presumption of major purchase.
(2) If 83.3% (or 5/6) of voting power
retained, no SH approval necessary.
2. Documentation: Normally associated with asset
sale, such as…
a. Bulk Sale
b. Bill of Sale
c. Deeds & documents of title
II.
CASES
A. Rodriguez v. Tech Credit Union Corp. – Successor
corporate liability.
III.
SECURITIES REGULATION:
A.
Overview of the Federal Acts:
1. Securities Act of1933: Focus on Initial Issuances
a. Mergers are usually exempt
b. But Exchanges usually require approval.
c. However, if corporations fall under 1934
Act…different story.
2. Securities Exchange Act of 1934: Focus on Later
Re-Sales
3. Each act also has a Reporting and Anti Fraud
component
4. 1934 Corporations have issues related to…
a. Proxy Solicitations
b. Tender Offers
B. California Securities Laws – “Blue Sky Laws” may apply as
well
1. Generally mergers and sale of assets are exempt
under California Corporations Code § 25104.6.
a. Limited Exchange Transaction incident to a
Merger or Sale of Assets
b. Requires the following:
(1)
Approval by 75% or more of
shares
(2)
No > 10% vote against it
2. Otherwise, must file an Application for
Recapitalization Permit.
a. Requires approval from Dept. of Corporations
b. May require a hearing’
c. May be conditioned on approval by a specified
% of shares.
d. No proxy solicitations may issue until after
DOC approval.
III. 1934 ACT:
A. Requires reports from certain “widely traded”
companies….
1. Traded on National Stock Exchange
- OR -
2. >$ 10,000,000 in assets and 500+ stockholders
B. Requires Proxy Solicitations to be filed with SEC &
contain disclosures.
1. Required for anyone spending > $ 500 to
finance proxy solicitations.
2. Disclosures to SH’s
a. ID and background of participants
b. Interests in the corporation’s securities
c. Copies of solicitation materials, ads, etc.
d. Other information about future plans &
purpose
C. Tender Offers: Takeover offer
1. Required when buyer owns 5% or will own 5%
from the tender offer
2. Certain disclosures: Disclose funding, stock
ownership & future plan to SH’s solicited and to
the SEC.
D. 10(b)5: Anti Fraud provisions requires reporting of
insider trading and return to the company of short swing profits.
1. Insider Trading: Buy/sell by 10%+ SH,
directors, officers, attorneys,etc.
-- It is not illegal for insider to buy/sell, but it is
illegal to use secret information
2. Short Swing Profits: By insider, w/in 6 month
period, must return to Corporation.
IV.
HOSTILE TAKEOVERS
A. Board of Directors – May properly take actions to defend
against hostile takeovers
B. Some Defenses upheld by the Court
1. Pacman – start buying up raider’s shares in
retaliation
2. White Knight – find more attractive corporation to
“raid” target
3. Poison Pill – Issue new preferred shares to
existing SH’s loyal to management with rights that
raider will find unattractive (dilutes value of raider’s
shares)
4. Golden Parachute agreements – so if takeover
goes through, directors get large payouts from
corporation.
5. Lock Up Option – Give valuable asset or division
to “white knight” to make corporation less
attractive to raider.
6. Greenmail – Target “bribes” raider away by
repurchasing shares at increased premium price
V.
APPRAISAL/DISSENTERS RIGHTS
A. Right of Minority SH’s to force Corporate re-purchase of
shares
B. Exist in most states, California and the RMBC
C. Grounds - RMBCA: Corporation must grant these rights
if…
1. Corporation selling/leasing most assets
2. Merger (unless short form)
3. Consolidation
4. Compulsory share exchange
5. Amending articles in material way (e.g.
restructuring of shares)
6. Otherwise provided in Articles or By-Laws.
D. California – Only for “any acquisitive reorganization” CC
§ 1300
1. More restrictive than the RMBCA
2. N/A in California for recapitalizations
E. Exception: Not available if shares publicly traded. Why?
(you can sell on open market)
F. Who is eligible?
1. Outstanding SH’s of record
2. Shares not “marketable”
3. Shares were entitled to vote on Reorganization
4. Opposed to Reorganization
a. Voted NO -ORb. Passive Opposition (abtained)
5. SH Must comply with Procedural Requirements
G. Procedure:
1. Delaware:
a. Corporation must give notice to the SH’s of
their A.R. (Appraisal Rights)
b. SH must notify corporation before the SH
meeting of intent to use A.R.’s
c. Vote no at the meeting (or not vote)
d. File court action if unable to agree on fair price
– SH PAYS COURT COST!
2. RMBCA: Softens the blow some
a. Same procedure to start
b. Corporation must pay FMV immediately
c. Court is “last resort”
d. Corporation pays attorneys fees and court
costs
3. California: 4 steps
a. SH refrains from voting “yes”
b. Timely demand for cash payments in
exchange for shares.
c. Deliver endorsed shares to the Corporation
d. Timely sue to fix price if Corp. and SH cannot
reach agreement on FMV.
4. Timely Demand (California)
a. Listed Corporation – by day of the meeting
b. Other Corporation – 30 days after notice of
approval of reorganization
c. SH Demand must contain:
(1) Number and class of shares
(2) Amount sought for FMV
d. Delivery of shares within 30 days of notice.
5. Payment – will discuss in class tonight.