MERGERS & ACQUISITIONS
(M & A)
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COURSE OVERVIEW
1) INTRODUCTION
2) LEGAL FRAMEWORK
3) LEGAL PROCEDURES & DOCUMENTS
4) CASE STUDIES
5) CLASS PRESENTATIONS
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DEFINITIONS
MERGER
ACQUISITION
COMBINATION
(between equals)
TAKEOVER
(large vs. small)
friendly
hostile
stock swap + cash payment
transfer of assets and liabilities
acquire/control target company
(shares / assets)
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TYPES OF MERGERS
STATUTORY MERGER



combination of 2 companies (one survives, other ceases to
exist)
surviving company assumes the assets and liabilities of the
other company
A+B=A
CONSOLIDATION



2 or more companies join to form an entirely new company
consolidated companies are dissolved, only new company
operates
A+B=C
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TYPES OF MERGERS
FORWARD SUBSIDIARY MERGER




target becomes (part of) subsidiary of parent company
S+T=S
Through its 100% ownership of the subsidiary (= acquisition vehicle) the
acquiring parent owns and controls the target
Advantage that acquiring parent is not a constituent party to the merger
agreement:


shareholders of parent company have no right to vote or to exercise appraisal
rights in connection with the merger
insulate liabilities of target by keeping them within the subsidiary rather than the
parent
REVERSE SUBSIDIARY MERGER




acquirer is merged into target’s subsidiary (acquisition vehicle)
A + TS = TS
preserve target company though its control has passed to acquirer
Advantage that target is not a constituent party to the merger agreement:


Avoid application of burdensome charter or by-law provisions of target, or
applicable state corporation laws in the target’s jurisdiction (e.g. supermajority
votes to approve merger; stringent appraisal rights)
Target may be party to a valuable governmental or other contract or licence that by
its terms terminates if target is acquired by another person
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TYPES OF MERGERS
LONG-FORM STOCK-FOR-STOCK MERGER

at least 3-4 months

prepare, file and clear with SEC (Form S-4 Registration Statement)

obtain regulatory approvals and third-party consents to merger (e.g. Hart-ScottRodino Antitrust filing)

obtain shareholder approval

Merger is completed upon filing of Merger Certificate

Dissenting shareholders may exercise statutory appraisal rights or other
remedies.
CASH TENDER OFFER + SHORT-FORM FREEZEOUT MERGER

Merger may be effected as early as the day following the 20th business day of the
tender offer period

Target’s board of directors recommend cash tender offer to target shareholders

Once the acquirer owns a certain threshold (e.g. 90% of the target’s stocks), the
acquirer can eliminate (“cash out”) remaining minority shareholders of target
corporation without formal shareholders’ meeting (short-form freezeout merger).
Minority shareholders of target corporation receive cash amount or may exercise
statutory appraisal rights

Only practical where the target’s shares are purchased for cash and the target is
incorporated in a state that permits short-form freezeout mergers (e.g. Delaware)
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TYPES OF MERGERS
LONG-FORM FREEZEOUT MERGER
 Alternative, when short-form merger not possible
 Acquirer owns majority but not required threshold (e.g. more
than 50% but less than 90% of target’s stocks)
 Acquirer must convene formal meeting of target’s shareholders
 Acquirer will vote its newly purchased majority shares in the
target to approve a freezeout merger where remaining minority
shareholders are eliminated. Consideration paid to minority
shareholders may be less or different than preceding cash
tender offer.
 No guarantee that acquirer can eliminate remaining minority
shareholders under a long-form freezeout merger. E.g.
supermajority vote of approval may be required under the
target’s charter or under applicable state corporation antitakeover statutes; other defensive measures (e.g. shareholder
rights plans = “poison pills”) may preclude a long-form
freezeout merger, or render it excessively expensive or
impractical.
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TYPES OF MERGERS
HORIZONTAL
 same industry
 e.g. competitor + competitor
VERTICAL
 different production stage
 e.g. buyer + seller
CONGLOMERATE
 different industry
 e.g. noncompetitor + noncompetitor
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HOSTILE TAKEOVERS
Bear hug letters
 addressed to target’s board
 Propose takeover negotiations, price, conditions
 Higher price for recommended/negotiated transaction, lower
price if board opposes
Shareholder coercion
 Partial offer (e.g. offer for only 51% of target’s shares) >
individual shareholders afraid of becoming minority
shareholder (“prisoners” dilemma)
 Two-tier offer: higher price in front-end, lower price in backend
 Time pressure (e.g. premium price only offered for 51% of
the target’s shares on a first-come, first-serve basis)
 Minimal public disclosure
 Legality of coercive takeover structures in the US justifies
defensive tactics
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INTERDISCIPLINARY
CORPORATE
LAW
COMPETITION
LAW
OTHER
M&A
LABOUR
LAW
TAX
LAW
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MOTIVES FOR M&A
“EMPIRE
BUILDING”
MARKET
OTHER
M&A
TAX
SYNERGY
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STAKEHOLDERS
MANAGERS
EMPLOYEES
CREDITORS
M&A
CUSTOMERS
OTHERS
SHAREHOLDERS
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FINANCING M&A
CASH
M&A
LOAN
CAPITAL
STOCKS
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M&A PROFESSIONALS
INVESTMENT
BANKERS
VALUATION
EXPERTS
M&A
ACCOUNTANTS
ATTORNEYS
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DEFENSE TACTICS
STAGGERED
BOARD
LEVERAGED
BUYOUT
POISON
PILL
EXCLUSIONARY
SELF-TENDER
M&A
SHARE REPURCHASE
“GREENMAIL”
LAW SUITS
ASSET/LIABILITY
RESTRUCTURING
GOLDEN
PARACHUTE
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DEFENSE TACTICS
PRE-EMPTIVE/ANTICIPATORY MEASURES:

Precautionary before specific takeover threat emerges.

Require advance shareholder approval (exception: Poison pill)
Structural changes to corporation’s constitutional documents (“SHARK REPELLENTS”):
SUPERMAJORITY VOTING REQUIREMENT

Any freezeout merger or similar business combination involving the target and an acquirer (“interested
shareholder”) who owns certain threshold of shares (eg 5%, 10%, 15%) must be approved by a
supermajority vote (eg 2/3, 75%, 85%) of all the target’s shares.

Often coupled with FAIR PRICE PROVISIONS to ensure that minority shareholders are paid a fair price
in any freezeout merger or other business combination
CLASSIFIED/STAGGERED BOARD OF DIRECTORS

board of directors divided into (usually) 3 groups, directors of each class can be elected or removed only
once every 3 years on rotating basis > prevents majority shareholder from replacing the board at once, ie
old directors continue to hold 2/3 of the seats. However, in practice the remaining directors usually resign.
GOLDEN PARACHUTE

lucrative compensation package for target’s management, activated in case of takeover and subsequent
resignation of senior executives
POISON PILLS (SHAREHOLDER RIGHTS PLANS)

Right for existing shareholders (not acquirer) to purchase additional shares at bargain price (eg 50%
discount) once bidder acquires threshold (eg 15%, 20%) > acquirer suffers substantial share dilution

most effective defensive measure, no acquirer has ever “bought through” a poison pill in order to
complete a takeover transaction. powerful deterrent effect discourages potential acquirers from acquiring
certain thresholds which trigger shareholders’ rights, encourages bidder to negotiate with target’s board.

can be adopted by target’s board without advance shareholder approval, board alone typically has power
to redeem the rights issued in connection with poison pill.
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DEFENSE TACTICS
RESPONSIVE DEFENSIVE MEASURES:

Responding to actual existing hostile takeover offer
ASSET RESTRUCTURING

sell assets (“crown jewels”) that the suitor desires to obtain, spin-offs

purchase assets that the bidder does not want or that will create antitrust problems
LIABILITY RESTRUCTURING

issuing shares to a friendly third party (“white squire/knight”) to dilute the bidder's ownership position

leveraged recapitalization: change of capital structure, usually substitute debt for equity, eg take on
significant debt with purpose of either paying large cash dividend to shareholders or repurchasing shares
SHARE REPURCHASE (“GREENMAIL”)

repurchase the shares of an unfriendly suitor at a premium over the current market price

Become insignificant due to anti-greenmail state laws, adverse tax laws, defensive effect of poison pills
EXCLUSIONARY SELF-TENDER

target firm offers to buy back its own stock at a premium from everyone except the bidder

Anti-takeover effect: 1) Reduce number of outstanding shares that a hostile acquirer is able to purchase
2) After decrease in number of outstanding shares the proportionate voting power of remaining
shareholders will increase 3) Method for dispensing of target’s surplus cash
LEVERAGED BUYOUT (LBO)

"go private“, eg group (usually involving existing management) buys up all the publicly held stock

typically structured as LBO (financed primarily with debt secured by the assets of target)
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APPLICABLE LAWS
US FEDERAL REGULATIONS
Securities Exchange Act (1934)
 Disclosure obligations (eg acquisition of 5% of class of registered
securities)
Williams Act (1968)
 Enacted by Congress as amendment to the 1934 Securities
Exchange Act in response to hostile takeovers during the 1960’s
 Cornerstone of US federal regulation governing tender offers
 Intends to protect target shareholders
 Not benefit directors of target company; takeover useful check on
inefficient management
 Policy of full disclosure: Filing requirement in the event of 5%
acquisition! > prevent secretive accumulations, alert investors of
possible changes in corporate control
Hart-Scott-Rodino Antitrust Improvement Act of 1976 (“HSR”)
 Filing and pre-clearance requirements for share purchases above
specific thresholds
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APPLICABLE LAWS
US STATE REGULATIONS
Anti-takeover statutes (defensive tactics) enacted as part of state corporation laws
(e.g. http://delcode.delaware.gov/title8/c001/index.shtml)

First generation anti-takeover statutes enacted in response to coercive tender
offers during the 1960s.

Goal: protect incumbent management from hostile takeovers

Scope: very broad > unconstitutional under Commerce Clause and Supremacy
Clause (Edgar v. MITE Corp., 1982)

Second generation takeover statutes

Goal: protect investors from coercive takeovers, enable shareholders to make
collective takeover decision (CTS Corp. v. Dynamics Corp. of America, 1987)

Scope: regulate only domestically chartered corporations

Third generation anti-takeover statutes

Business combination statutes prohibit an “interested stockholder” (who
purchased large percentage of the target’s voting stock, e.g. 10%-20%) from
post-acquisition “business combination” transactions with the target corporation
for a specified period, unless the business combination is approved by the target’s
board of directors or a supermajority of disinterested shareholders.
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APPLICABLE LAWS
FIDUCIARY DUTIES IN US CORPORATE TAKEOVERS
Standards of judicial review
Business Judgment Rule

Directors must necessarily take business risks > presumption that defendant directors acted in
compliance with their fiduciary duties (good faith, loyalty, due care)

Should plaintiff successfully rebut presumption by producing evidence that director breached duty
of loyalty or care, then burden shifts to director to demonstrate that the challenged action was
nevertheless “entirely fair” to corporation and shareholders (test of entire fairness, cf. Weinberger
v. UOP)
Unocal’s proportionality test

Unocal Corp/ v. Mesa Petroleum Co. (Del. 1985) is one of the most important cases in US
corporate takeover law and marks the beginning of an “era of judicial scepticism and restrictions”
on director discretion.

Initial burden on target’s directors to show that defensive measures are reasonable in relation to
threat posed by hostile offer. Once directors satisfy this initial scrutiny, their actions will again
qualify for the presumptions of the business judgment rule. > directors must overcome initial
burden before invoking business judgment rule.
Revlon Auction duty: Revlon, Inc. v. MacAndrews (Del. 1986)

once the break-up of a corporation is inevitable and the target’s board decides to sell the
corporation, the board assumes role of an auctioneer with duty of maximizing the company’s value
for the benefit of the shareholders
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APPLICABLE LAWS
UK LAW
Companies Act 2006
 http://opsi.gov.uk/acts.htm
U.K. City Code on Takeovers and Mergers (www.thetakeoverpanel.org.uk)
 response to shareholder coercion and other abuses during the 1960’s
 Applies to acquisition of control (30% or more of target’s voting rights)
 In contrast to the Williams Act which is principally a disclosure based statute, the City Code
prescribes substantive and procedural safeguards to ensure fair and equal treatment of
shareholders
 In contrast to the US, where the target’s board of directors play a central role in employing
defensive measures, the City Code restricts the director’s ability to unilaterally adopt
defensive measures ie shareholders should ultimately decide about takeover bid. Selfregulatory nature.
 Administration and enforcement by Panel on Takeovers and Mergers
Stock Exchange Regulations
 Purple Book
Merger control rules
 Enterprise Act 2002 (target company has turnover > British pounds 70 million)
English common law
 Under English common law the director’s general fiduciary duty is owed exclusively to the
company (in contrast to US jurisdictions where such obligations are owed both to the
corporation and its shareholders). UK company law is rooted in principles of contract and
partnership law, whereas US company law stresses internal allocation of powers.
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APPLICABLE LAWS
SCOPE OF APPLICABILITY
 The UK City Code, as well as the UK
perspective and views of the Panel on
Takeover and Mergers, have greatly
influenced the EC Takeover Directive
> applies throughout EU!
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