The Acquisitions Market Outline

Introduction

• Ownership structure of co. + voting system allocates control among corporate actors

• Variety of transactions can restructure, extend, or transfer corporate control

• A shareholder with 50% = absolute control, as no one can break her grip on the board

• A shareholder with 40% has de facto control, as she can defense against any would-be competitor and remove control from the market entirely with a small purchase of additional shares

• Important when management has shares (even little)

• Management retains considerable power to dispose of corporate assets and block outsiders from purchasing control, even when management holds little/ no equity Interest in the firm (as long as there’s no large shareholder/ organised shareholder opposition)

• Shareholders with 50% owns duty of care to minority shareholders

• Without 100% ownership, controlling shareholders cannot pledge/ sell the co’s assets to finance private investment opportunities

• for most corporate acquisition, buyer need 100% ownership of target firms (not just control)

Outline for this section

1. Corporate mergers and sales of assets

2. protecting minority investors when a merger/ other involuntary transaction is initiated by a controlling shareholder for the express purpose of freezing out minority shareholders

3. rights and duties of controlling shareholder who freezes in minority shareholders by selling her control bloc of shares to an outside acquirer

4. regulation of hostile tender offers

   1. Acquirer: Williams Act, state anti-takeover legislation (structuring the acquirer’s effort to capture control by marking an open bid on the market)

   2. Target: leeway to defend against an outside acquirer, or to select its own buyer, regardless of the preferences of its shareholders

A. Corporate Combinations and Appraisal Rights

Corporate combinations: assets (and laities) of 2 companies are bought under 1

• What happen going down:

  • Governed by state law, assets and liabilities of both companies become the assets and liabilities of the surviving co.

  • type of assets whose ownership is governed by federal law not automatically transferred exceptions

• What happen to shareholders

  • share merger – owner of both co become owner of the combined

    • Shareholder of the non-surviving co becomes shareholders of the surviving co.

    • shareholder of surviving co. retains its shares

  • Cash out (+ debt securities, preferred stock etc.)

    • separate economic and legal definition

      • legal

      • economic

1) Merger (and consolidations)

• [Consolidation: 2 co. combined and neither survives (but due to regulatory benefit to have a surviving co., consolidations are very rare)]

• Merger: statutory mechanism to combine 2 corporations a co. is merged with and into the surviving corporation

  • assets and liabilities of both co. become assets and liabilities of the surviving co as a matter of law

  • In cash mergers: shareholders of a co. may receive cash, while the other co.’s shareholders receive/ retain stock of the surviving corporation

  • In stock mergers: shareholders from both co. receive stock of the surviving co.

  • But treatment of shareholder doesn’t depend on whether their co. survive - possible to have a cash merger where shareholders of the surviving co. are cashed out and the other co.’s shareholders receive stock of the surviving co.

• 1) Regular merger - DGCL §251(c) standard

  • long form merger, no condition, any merger can be structured as this, like a default merger

  • Required Approval: Directors and Shareholders of both companies

  • Special Conditions: None

• 2) Short-Form Mergers - DGCL §253: Parent > Sub

  • When the Parent owns at least 90% of the stock of the other co (Sub) generally only need parent co.’s board to approve a short-form merger

  • Rationale:

    • 1) merger is presumed to have no major economic effect on the parent’s shareholders [90% to 100% not a big deal]

    • 2) given parent’s stock ownership, requiring approval by the subsidiary board and shareholders would be meaningless formality [since parent control the sub]

  • Required Approval: Directors of “Parent” (if parent surviving)

  • Special Conditions: “Parent” must own at least 90% of stock of subsidiary

• 3) DGCL §251(h): [NEW] Public co.

  • Required Approval: Directors and shareholders of Acquiring Corporation; directors of “target”

  • Special Conditions: Merger quickly follows tender offer for all outstanding shares of target. Bidder owns requisite majority of shares after offer.

  • 2 unaffiliated companies, 1 makes a tender offer and then a merger

  • no tender offer and merger right away (Van Gorkon)

  • 2 step merger – tender offer and merger; 1 step merger – merger right away

    • tender offer is faster, only take ~1 month [speed of having a blocking minority is important] though sometimes tender offer may not be faster]

    • merger is slower need shareholders voting and disclosure (during which someone else may make a better offer)

  • Public co. don’t need shareholder vote of target co. following a tender offer by the acquirer (since it already have majority of shares) speeds up the process

  • Requirements:

    • acquirer makes a tender offer and

    • owns a majority of stock after the consummation of the tender offer

• 4) DGCL §251(f): not important in practice

  • Required Approval: Directors of “Acquiring Corporation; directors and shareholders of “Target”

    • No need Target co.’s shareholder approval (only one set of shareholder approval and 2 sets of board approval) if:

      1. shareholders of that co retain their shares

      2. co.’s charter is not changed

      3. no. of any newly issued shares to shareholders of the acquired does not exceed 20% of the shares of the acquirer’s outstanding shares prior to the merger

[stock exchange rules require listed co. to obtain shareholder approval whenever they issue new shares in excess of 20% of outstanding shares]

• Special Conditions:

  • Number of outstanding shares of acquired company does not increase by more than 20%;

  • no change in charter of acquired company

  • no change to existing shares of acquired company

• ...

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