MERGERS, ACQUISITIONS & DISSOLUTIONS - CLASS 1
I.
CORPORATE REORGANIZATIONS
A. Types of Reorganization:
1. Merger: Different types of Mergers…
a. Straight Merger: 2 corporations merge into a single
survivor
(1) A + B = A
(2) SH’s of A & B receive shares of the “new” A
b. Triangular Merger:
(1) Parent Corporation buys Target Corporation.
(2) Target Corporation SH’s get shares of Parent
(3) Target Corporation is merged into Subsidiary of
Parent Corporation
(4) Result:
(a) Target’s assets & liabilities now part of
subsidiary, but Target SH’s now own
shares in the Parent Corporation.
(b) Target has now “disappeared”. Parent &
Subsidiary “survive”.
(c) P buys T; T + S = S; now P & S survive
(d) Picture this…
buys
P
.
T
merges into
S
c. Reverse Triangular Merger: Goal is to preserve Target’s
existence…
(1) Parent forms a Subsidiary and transfers shares of
the Parent to the Subsidiary in exchange for
Subsidiary’s stock (a partial Stock Exchange
therefore occurs…see later discussion).
(2) Subsidiary is merged into Target Corporation, with
Parent Corporation getting Target’s shares and
Target’s SH’s getting shares in Parent
Corporation.
(3) Result:
(a) Parent now has controlling interest in
Target Corporation but Target’s SH’s also
own stock in the Parent.
(b) Subsidiary has now “disappeared”. Parent
and Target remain.
(c) P creates S; S + T = T; P and T survive.
(d) Picture this…
P
.
T
merges
into
creates
S
2. Consolidation: A + B = C
3. Stock Purchase – With Cash: A buys B’s stock with CASH
4. Stock Exchange – A buys B’s stock with Stock of A.
5. Asset Purchase: A buys B’s assets (but not its stock or
liabilities).
6. Asset Sale Reorganization: A buys B’s assets in exchange
for A shares.
B. Factors to Consider in Choosing
1. Is SH’s approval Required?
a. Merger/Consolidation: Both corporation’s SH’s must
approve
b. Purchase of Stock/Assets: Only Seller Corporation’s
SH’s need approve
c. Stock Exchange – only Seller Corporation’s SH’s need
approve.
d. Sale of Asset Reorganization – both Boards and SH’s
must approve
2. Liabilities: They are assumed in a Merger, Consolidation,
Stock Purchase but NOT in an asset purchase.
3. Restrictions on Sale: If either corporation restricts stock
sales, maybe a merger might work.
4. Tax Issues: See discussion below
5. Appraisal/Dissenter’s Rights:
6. Other Issues: Bulk Sales laws, Antitrust, securities
regulation, WARN Act (50+ employees laid off must give
notice to employees before merger occurs), Property Tax
reassessment
C. Taxation of Mergers, etc.:
1. General Overview of Taxation:
a. Income Tax Rates – Individuals (10% to 35%)
b. Income Tax Rates – Corporations (15% to 35%)
c. Sale of Property:
(1) Types of Property: Ordinary, Capital and § 1231
(2) Ordinary – subject to ordinary rates
(3) Capital Assets – Individuals (5 or 15%);
Corporations (no special rate)
(4) § 1231 Assets – Gains are @ 5 or 15%, but may
be partially ordinary (due to recapture rules).
d. Goal - To minimize or defer taxation in a reorganization.
2. Basic Corporate Taxation:
a. Sale of Stock – Leads to Capital Gains & special 5/15%
tax rates
b. Sale of Assets – Leads to partial Capital Gains (5/15%)
and partial ordinary gains (as high as 35%)
3. Merger/Consolidation/Stock Exchange/Sale of Assets
Reorganization:
a. Tax Free to SH’s of both companies.
b. Basis of NEW stock received is the Basis of the OLD
stock owned.
4. Purchase of Assets: Results in Capital or Sec. 1231 Gains
for selling corporation.
5. Purchase of Stock (with CASH): Results in Capital Gain or
Loss to selling SH’s.
D. 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. Agreement or Plan of Merger – must contain…
(1) Names of corporations
(2) Places of incorporation
(3) Terms (ratio of shares, SH rights)
b. Approval by a majority of BOTH the SH’s and the Board
of Directors.
(1) If merger proposed by Corporate Insider who
stands to gain, must get an independent written
opinion from a qualified individual (e.g. investment
banker).
(2) Opinion must be given to SH’s with notice of
proposed merger
(3) Board must also notify SH’s of any competing
offers.
(4) Shareholder Approval:
i.
Can come before or after BOD approval.
ii.
Supermajority required? NO, unless…
 Articles say so
 Close corporation – requires 2/3 approval
 If disparate (rather than equal) treatment
to occur among the classes of shares.
iii.
Some mergers do not require SH approval…
 Preferred shares unaffected by merger
 Short Form Merger (upstream or
downstream – P  S or S  P)
c. Officer’s Certificate of Approval d. File Request with FTB for “Tax Clearance Certificate”
e. When all documents are ready, file with the Secretary of
State…
(1) Merger Agreement
(2) Certificate of Approval
(3) Tax Clearance Certificate
f. Upon filing of documents, old corporation(s) disappear(s)
and the assets & liabilities of the old corporations now
belong to the new entity. Title to property now presumed
to be in name of new entity.
g. Notice of Dissenters Rights must be given to SH’s
together with Notice of Merger’s approval.
h. 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
i. Interspecies Merger
E. 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).
F. 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.
G. 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. Spinnaker v. Nicholson: dd
B. Schwadel v. Uchitel: dd
C. Davis v. Estate of Davis: