Someone recently bought our

students are currently browsing our notes.

X

M&A Outline

Law Outlines > Mergers & Acquisitions Outlines

This is an extract of our M&A Outline document, which we sell as part of our Mergers & Acquisitions Outlines collection written by the top tier of Georgetown University Law Center students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Mergers & Acquisitions Outlines. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Incentives that Shape Mergers......................................................................................................... 2
Statutory Framework for Mergers ................................................................................................... 3
Deal Negotiation Process ................................................................................................................ 5
Material Adverse Effects (MAEs) ......................................................................................... 6
Defense Options .............................................................................................................................. 7
Director Duties ................................................................................................................................ 8
Sale of Control ............................................................................................................................... 10
Control Premiums ................................................................................................................ 11
Judicial Review of Defensive Tactics ........................................................................................... 12
Deal Protection Devices ...................................................................................................... 14
Poison Pills .......................................................................................................................... 15
Voting Contests: Proxy Fights & Bylaws ........................................................................... 17
Cash-Out Mergers by Majority Shareholder ................................................................................. 19
Cleansing Transactions .................................................................................................................. 20
LBO-Specific Considerations ........................................................................................................ 21
Federal Law Considerations .......................................................................................................... 23
Insider Trading .................................................................................................................... 23
Disclosure ............................................................................................................................ 25
Appraisal........................................................................................................................................ 26

1 Thompson's core legal principles in corporate law: who gets to decide?
1) Trust directors to make corporate decisions (most of the time)
o BJR / § 141

But sometimes we don't, in which case we let shareholders vote 2) Shareholders do only a few things to constrain agency costs arising from directors having so much power—vote, sell, and sue

Focused power (not plenary)
3) Courts can constrain director decisions, usually by enforcing fiduciary duties 4) Legal rules defer to the business and economic reality that managers are usually the first mover in corporate governance

INCENTIVES THAT SHAPE MERGERS
Macroeconomic factors that contribute to merger waves:
- Economic conditions—rising stock market provides currency to finance mergers
- Credit availability—available lenders and/or low interest rates
- Industry shocks, changes in government policy, and innovation
- Globalization—decreased costs and access to new markets
Synergy benefits:
- Economies of scale
- Vertical integration
- Economies of scope
- Market power
Change of control benefits:
- Replacing weak managers or reversing bad management decisions
- Improving management incentives
- Financial and asset restructuring
- Purchasing undervalued assets
Cost of acquisitions:
- Merger integration costs
- Taxes (if cash deal)
- M&A advisory fees
- Weak implementation
- Flawed motives for pursuing a merger…
o Empire building and weak performance incentives

Acquisitions to hide poor performance

Hubris

Entrenchment
Financial considerations:
- How deal will be financed (cash vs. stock, cost of capital, potential tax shield benefits)
- Impact on acquirer's capital structure and cost of capital 2

Ownership structure
Tax liability

Who captures the benefits?
- Usually the target more so than the acquirer
- Managers often fare well
- Many other stakeholders are affected (e.g. employees, debt holders, consumers, etc.), and this can be positively or negatively

STATUTORY FRAMEWORK FOR MERGERS
Internal affairs doctrine: state of incorporation governs the way in which internal affairs/corporate governance operates

§ 251 Merger

1. A Corp. Board Approves Merger
Agreement (§ 251(a-b))

3. A SHs Vote (§ 251(c)), unless 251(f)
applies

2. T Corp. Board Approves Merger
Agreement

4. T SHs Vote

5. T SHs Exit—dissenters may have appraisal rights (§ 262)

6. T Assets/Liabilities Transfer (§ 259(a))

7. Taxes Due (if cash merger)

Forward and reverse triangular mergers are standard § 251 transactions
- No voting on the merger itself by acquiring SHs (because parent board controls the sub)
o Per NYSE requirement, parent company shareholders still have to vote if share issuance if 20%+
251(f): carve out to 251(c)—no acquirer shareholder vote required for a merger if….
1) Agreement does not amend articles of incorporation;
2) Each share is identical (i.e. before and after effective date); AND
3) Total shares used in acquisition doesn't exceed 20% of outstanding shares (typically these shares will be coming from corporate treasury)
Section 312.03(c) of NYSE Listed Company Manual: requires shareholder approval prior to issuance of shares in excess of 20% of the number of common stock outstanding before the issuance [NASDAQ and all other major exchanges have effectively the same rule]

3 Two-Step Tender (§ 251(h))

1. A Corp. Board Approves Merger
Agreement (§ 251(a-b))—must specifically approve second step of tender (§ 251(h))

3. A SHs Vote (§ 251(c)), unless 251(f)
applies

2. T Corp. Board Approves Merger
Agreement

4. T SHs Tender 50.1%+

5. A + T Merge as soon as practical (no vote)

6. T SHs Exit—those that didn't tender may have appraisal rights (§ 262; Volcano)

7. T Assets/Liabilities Transfer (§ 259(a))

8. Taxes Due (if cash merger)
In § 251(h) merger, board must specifically approve second step of tender.

Short-Form Merger (§ 253)

1. Parent Board Decides to Merge with Sub
(ONLY IF parents owns 90%+ of sub)

2. Parent + Sub Merge

3. T SHs have appraisal rights

§ 253 mergers are only available to corporate parents (see Pubco)

Sale of Substantially All Assets (§ 271)

1. A Corp. Board Approves Plan of
Acquisition

2. T Corp. Board Approves Plan of
Acquisition

3. T SHs vote

5. T typically dissolves (no appraisal right in
DE; MBCA does provide one in other states)

4. Assets transfer to A

6. T Assets/Liabilities Transfer (§ 259(a))

7. Taxes Due (if cash acquisition)
DE does not recognize de facto merger doctrine (some other states do)—DE favors form over substance
§ 259(a): upon effectuation of a merger…
- Separate companies cease to be separate entities 4

Merger corporation has all rights, privileges, powers, and franchises of each corporation
All property and debt is vested in new corporation

DEAL NEGOTIATION PROCESS
Stages of negotiating a merger:
- Casual pass (CEO to CEO contact)
o Initial meeting

Getting to know each other and building trust

Making a proposal and showing you're serious
- If CEO is not receptive à Bear hug—bypassing the CEO
o Usually a letter to the target board

Basic elements:
§ Offer price
§ Form of consideration

• Source of financing
§ Conditions
§ Rationale for transaction
§ Acquirer's commitment to transaction
§ Social issues

• Who will be CEO

• Treatment of target management and employees
§ Reply date
§ Public disclosure date
- If board is not receptive à Go around the board

Proxy fight

Tender offer

Toe hold
§ Bidder quietly purchases up to 5% of outstanding shares
§ Creeping acquisition: bidder can continue purchasing on the open market and not disclose for a couple days (as long as it is within 10 days and thus complies with Schedule 13D)
§ Reduces cost of purchasing target shares (pre-bid news so no premium)
§ Gives bidder voting rights and legal standing
Common key issues in mergers:
- Who will be the CEO of the combined company
- Makeup of combined company board
- Name of new company
- Headquarters of new company
- Place of incorporation of new company (particularly important in cross-border deals)
- Role of block holders or founding families

5 Stages of effectuating a merger:
- Due diligence

Financial documents

Operations (IT, assets, IP, HR)
o Legal issues

Liability and risk assessment
- Negotiating the agreement

Deal terms
§ Financial
§ Social

Representations and warranties (i.e. promises regarding state of companies—that something is true)
o Covenants (i.e. promises regarding future actions/activities, agreement to NOT do something, deal will not close or other implications triggered if something DOES
occur))
o Conditions (i.e. promises regarding future actions/activities, agreement to DO
something, deal will not close or other implications triggered if something does
NOT occur)

Vulcan Materials (Del. 2012)
- Martin and Vulcan entered into NDA and JDA agreeing not to disclosing any "evaluation material" or using it for any purpose other than the merger at hand

Martin disclosed the info throughout course of exchange offer and proxy contest
(to advisors then to the public)
- Court found Martin violated NDA and JDA—enjoined for 4 months, at which point the confidentiality agreements would expire

Material Adverse Effects (MAEs)
MAE = rep and warranty
MAEs must be viewed within the meaning of the agreement and in the context of the company as a whole (IBP)
- Short-term setbacks (e.g. failure to meet analyst projections for a given quarter/year)
are unlikely to be significant for an acquirer seeking to purchase the company as part of a long-term strategy (see IBP)
- Akorn court suggested that 20% of equity value may be a threshold for MAE

6 IBP (Del. Ch. 2001)
- Tyson was given substantial information regarding poor performance at IBP and accounting fraud relating to one of its subsidiaries ($30M in charges to earnings), but signed Merger Agreement anyway—IBP ended up missing earnings projections
- Court held no MAE within the meaning of the agreement and ordered specific performance (effectuate merger)
o Court stressed that Tyson was aware of cyclical performance in recent years and lackluster projected performance in upcoming years
Akorn (Del. Ch. 2018)
- After signing, potential for massive FDA violations came to light, and mas

Underlying behavior (widespread regulatory issues and misleading the FDA)
was not disclosed before the merger agreement was signed
- Example of MAE being triggered (only example thus far in DE)
o Court estimated it would cost $900m to remedy the regulatory issues
§ MAE represented 21% of equity value of the company

Distinguished from IBP because in that case buyers backed out due to problems in their business and broader economic factors

Also found that consistent ~ 25% drops in revenue each of last 5 quarters was
"durationally significant" and not attributable to broader economic factors

DEFENSE OPTIONS
Financial defenses to a merger:
- Getting rid of excess cash (e.g. dividend)
- Purchasing another company

Depletes cash and potentially creates new antitrust problems
- Share repurchases

Drives up share price, less public float for acquirer to obtain
- Selling the "crown jewel"
- Golden parachutes
- White knight—friendly bidder acquires the company instead of hostile bidder
- White squire—a friendly bidder who acquires a substantial (but not controlling) stake in the company so that the hostile bidder is unable to obtain a controlling stake
Legal defenses to a merger:
- Poison pill

Makes the target significantly more expensive to acquire

Addresses shareholders' ability to sell
- Staggered board (max of 3 tranches)
o More time necessary for acquirer to obtain control, additional proxy fight(s) and therefore additional costs to acquire—target may not be as appealing after this

Addresses shareholders' ability to vote
- Shareholders can sue to enjoin

7

Buy the full version of these notes or essay plans and more in our Mergers & Acquisitions Outlines.