Mergers and
Acquisition Both result in same goal; however, the acquisition can
Acquisitions
Parallel Legal Issues to Consider (b/y State
Law)
-NYSE: If a transaciton results in issuance of
>20% of existing outstanding shares, a SH
VOTE is requred.
-SH vote? -> triggers proxy rules.
-Stock purchase? -> Federal securities laws are
triggered (specifically 10b5)
Statutory
Long Form Mergers
Merger.
MBA 11.02 & 11.04
(1) Shareholders of both corps vote on a plan
drafted & presented by BoD.
[UNLESS the dilution of surviving shares would
be < 20% NC rule; MBCA says "small amount";
NYSE says if > 20% dilution then MUST have
vote].
(2) Target corp's SH will be either (a) given
cash [freeze out] or (b) stock in acquiring
company;
(3) Target company dissapears; all assets ->
acquirer by operation of law.
(4) If merger (or an article amendment) would
IMPACT a non-voting class's class rights. They
get to vote.
Short Form Merger MBA 11.05
Merger of subsidiary into main corp. Parent
must own > 90% of the shares of subsidiary.
(1) NEITHER shareholders get to vote [no SH
vote], considered moot due to 90%.
(2) Appraisal rights.
Target Subsidiary -> appraisal rights
Parent Company -> NONE.
MBCA -> "Share Exchange"
Procedure permits effect of stat
consol. A&B Exchange for C then
dissappear.
(1) Boards each propose, (2)
shareholders get to vote.
Cnsldt via Share exchange
Acquisition Methods Stock Purchase.
Direct Purcahse of Stock
Acquiring company goes directly to SH.
Open Market: Buy
Tender Offer:
through exchanges.
First, file Sched.
T0. Second, make
NOTE: After
broad offer to all
acquiring >5%, must
SHs.
submit a 13D
explaining intentions
See tender offers
of larger purchase.
Merger v.
avoid the shareholder votes or accomplish strategic
goals.
Merger/Consolidation. Acquisition
Two corporations agree to combine. 'Wolf' buys out target company.
Usually requires SH approval by at No agreement needed from target
least ONE company. company
----- -----
(1) Staturory Device for Corp (1) Wolf buys shares in open market (or prvt
Combination. negotiation); OR
OR (2) Wolf makes tender offer.
(2) sometimes Purchase/Sale of OR
Assets (3) sometimes Purchase/Sale of Assets
Triangular Merger Structures
-Effective means of preventing one party from having its SH vote or get appraisal rights.
-Effective means of insulating liability from acquirer
BEWARE OF A 20% Dilution in 'Parent' If Shares are Given as Consideration. -> If traded on
NYSE then vote will be req. (but appraisal rights are still off the table and liability is isolated)
Reverse Triangular. Acquiring corp sets up
Triangular. Acquiring corp sets up subsidiary into
subsidiary which merges into acq. corp.
which the target corp mergers.
(1) Target corporation survives, NOT acquiring
(1) Acquiring corp SH gets NO VOTE (nor
corp.
appraisal rights);
(2) Acquiring copr's SH still get no vote. (nor do
(2) Only constitutent corps get to vote -> acquiring
they have appraisal rights).
corp is not consituent to merger.
wolf exception applies
NYSE Wolf SH voting EXCEPTION: If the
acquiring corporation is listed on NYSE and the
Favored: Target company able to survive under
acquiring corp issues common voting stock which
previous structure and name, but the current
dilutes by 20% or more, then acquring
owner now has isolated the liabilities of the
shareholders DO GET TO VOTE.
target behind another veil.
Statutory Consolidation
Why Consolidate?
Del. C. -> Sep. Provision for Consolidation. -Ego: neither wants
to be seen as inferior
(1) BOTH corp's SH vote in favor of consolidation. -Creditors: may be
(2) Acquiring corp & target corp dissapear able to get around a
(3) New corp formed; (i) SH's hold stock in new corp; (ii) New merger prohibition.
corp assumes assets & liabiliites of acquiring & target corps. -Desire new articles.
(4) After new corp formed, may change name back to -State Swap: Desire
original. new state of
incorporation.
Sale of Assets - Usually will require vote.
MBA 12.02
If 'substantially all assets' are sold outside normal course of bus.,
(Purchase &) Sale of Assets -> SH of TARGET GET TO VOTE. [Same in Del. C.]
Purchase of Assets Acquiring Party (1) Not in Ordinary Course of Business: Excuse limited, basically is
Considerations. the corp a holding co or real estate developer?
-> Director Decision; NO Acq. SH VOTE. (2) Substantially All: Question of FACT.
delaware is same -80% is likely. How important were the assets sold? (ie 55% may
be the only revenue-producer and therefore qualify as "substantially
-DeFacto Merger Liability: Purcahser must all"
leave sufficient assets in the shell to cover MBCA Test: Does it leave " without significant business
liabilities or -> court will attribute all liabilities activity?"
to new corp (defacto merger) Del Test: Does the sale impact the existence and purpose of corp?
 AND CERTAIN 2) Challenges: Note, these are all essentailly breach of fiduciary duty actions. If there is
Fairness in Mergers - exclusive appraisal, directors don't need to bother with this stuff.
AMENDMENTS
Appraisal Rights & TO
Judicial Controls. ARITCLES!!!!!!! a) Direct Challenge Fairness of Price.
General: Look to asset value rather than liquidiation.
Challenging Fairness of
Merger b) Freeze Out. Maj is allowed to elminate min SH only if intrinsically fair = (1) fair deal
process + (2) fair price -Fair Deal: Full disclosure to board and SHs -Fair Price: Must get
1) Is the Appraisal Remedy Exclusive? Independent fairness opinion
In situations of appraisal exclusivity, Similar
dissenting SH have NO other options.
c) Failure to Get Fairness Opinion. BoD has obligation to evaluate fairness and decide
Delaware. Exclusive if they should recommend. B/c maj corp has control, self dealing implications in a merger
MBCA. 13.02.
UNLESS
Exclusive UNLESS
(1) Fraud; or a) Fair b) Fair Price: Double Directors in
(1) Procedural
Non-compliance w/ Deal: Price must reflect arms' lenght both corps - Extra
(2) Other Wrongdoing: Both Board bargain. Cleansing
merger statute. 3)
2(a) Breach of and SH Need LEGIT fairness evaluation. Required.
[Procedural Intrinsic
fiduciary duty had full
irregularities, no need Fairness
2(b) Self-dealing disclosure Acquiring corp
for fiduciary breach]. Test Fairness opinions helpful; but not
transactions [only if of the MUST DISCLOSE
dispositive. Must be:
un-cleansed] conflict of how much it is
(2) Fraud or material a) based on cmplte info
2(c) Less than fraud, interest actually willing to
misrepresentation b) given rsnbl timeline
but viable claim in pay for target.
c) based on fair price, not
court.
a suggested figure
MBCA 13.10(4)(ii) Class-Altering Amendment Rule
Exclusive.
4) Consider the price
Appraisers can use If an amendment would
Valuation ANY REAONSABLE fundamentally reduce the rights of a
VALUATION ie GAAP. Consider fairness of process class, then they get to vote on it
Appraisal Flow even if they otherwise would not
have voting rights.
1) Is there an appraisal remedy?
Appraisal rights if
dissent/abstain
NO APPRAISAL for See Chart.Public comapnies.
Large, Because certain transactions are fundamental to purpose of
if you must register under 1933 act OR incorporation, opposing SH should have right to appraisal of value,
2000 SH + organized market. 13.02(b)(1) subject to judicial review & escape company.

2) Were 'steps' followed? Appraisal Entitlements - MBCA Delaware.

-11.04 Merger: All dissenting SH's whose vote

was required.
a) No Favorable Votes. Must ACTUALLY vote against (ie, the acq. can in a standard merger, but a
the merger or corporate action or ABSTAIN Delaware?
reverse triangular merger would preclude)
Only Target SH
Non-Voting Class Members Get appraisal if the
b) All or Nothing Rule. (1) Must not vote ANY shares in merger would impact their rights -> because the
favor of transaction [no hedging bets on front-end]; and vote is now 'required'
(2) Must convert all shares in appraisal remedy [no
Delaware?
hedging bets on back-end] 11.05 Short Form: Dissenting TARGET SH get
appraisal rights
Only Target SH

3) Appraisal Remedy: 13.04(a). Dissenting shareholder is entitled Delaware?

12.02 Sale of Assets: Dissenting TARGET SH
to the fair value of his shares.
get appraisal rights (but see below)
No appraisal rights
Current Methodology
(a) Calculated immediately before transaction, Purchase of Assets De Facto Merger:SH of
Delaware?
(b) Customary & current valuation consecpts (GAAP) ACQUIRING corp CAN have appraisal if:
(c) No discount for minority status nor lack of marketability Docrtine
"Purchase of assets results in fundamental
Unrecognized
Old Del Block Method. -Each is given a 'weight' reconsitution of compnay"
totalling 100%, based on appraiser's feel. Adds them
up and divides by four. Usually in a tricky-dick SoA: 'Target' corp
sells 100% of assets to 'Acquring Corp'
(1) Earnings Value: a) Own revenues over years, b) in exchange for stock. -> Is really a
Revenues of similar companies; merger. Acq. SH deserve appraisal.
(2) Market Value: Of shares before transaction; Class-Altering Amdendment: If amendment to
(3) Dividend Value: Investment return value; Articles would alter rights OR CREATE Del not covered.
(4) Asset Value: a) book value? b) actual value? c) FRACTIONAL SHARES!!!!!, dissenting SH MBCA YES.
replacement value? d) going concern value? have appraisal

NOTE: Delaware now uses GAAP, but some states

have retained the blcok
 NOTE: Delaware now uses GAAP, but some states
have retained the blcok

Most defensive measures General Rule: The board may BURDEN:

Defensive are considered inherently defend against a hostile attempt, so Board has burden of proving intrinsic fairness
Measures self-dealing and therefore long as they are acting in the best
do NO benefit from the BJR. interests of the corporation. Unless, conflict is cleansed. Then Pltfif bears burden.

Defensive Techniques
Nancy Regan/ Diluting Shares Repurchase of Sale of Crown Scorched Earth Defensive White Knight
War on Drugs Shares Jewel Acquisition Long Term
Target corp issues Begin/threaten Target Corp finds Strategic Plan
JUST SAY NO a large blcok of Target corp makes Target Corp destruction of Corporation another corp to give a
shares to a person own tender offer hides/sells the corporation as it purcahses many better offer or more Postpones the
Ask shareholders who can be to buy up shares sought-after previously existed undesireable favorable terms. revlon moment.
not to vote for trusted not to sell of willing sellers. assets to another to take away the assets
transaction. them. company, makes it desired value. Favoring the Knight
BEWARE: B/c less attractive. (Note: does not i) Acquire i) Lock-Up
ALWAYS Dillutes control, corp cannot vote mean winding up) significant DEBT; Arrangement: Give the
PERMISSIBLE, but makes on these, this can White Knight the
even AFTER acquisition more backfire and give Similar; ex) Marshall's was ii) Purchase crown jewel so the
Revlon moment. difficult. a lower threshold SE instead high-end store; highly-regulated other suitor loses
to working control. changes nature hostile bidder entity; Radio interest.
Note: NYSE 20% of crown jewel wanted prestigious station Defense ii) Break-up Fee: If the
rule may be Effective to store. -> Target goes with wolf,
triggered and req. re-gain initiative Marshall's bought Similar; but
it will have to pay Gray Knight
SH vote. from tender offer up loads of focus in DA
exorbitant fee.
discount stores, is making
iii) Topping Fee: Unsolicited
no longer financials &
Delaware (Non-Public Regulated): Tender offers Surcharge to Target compmeting corp
glamourous regulation
excluding the bidder are allowed. for White Knight being makes better offer
unattracitve
Federal (Subjet to SEC): Tender offers may NOT good.
exclude the bidder.

Defensive Techniques Continued

Poison Pills Pac Man Defense Green Mail Go to Govt
Shark Golden Parachute
"Filp-In Pill" Entitles
Repellent Go to Legislature
Target Corp existing SH to acquire Target corp Target Corp pays Cleansing Defensive
distributes "rights" as additional shares of target responsds by trying the bidder to walk
Target corp Target corp lobbies Technique.
dividends. corp common stock at 1/2 to take over the away.
adopts the state legislature
mkt value if merger acquiring corp.
provisions in to stop takeover. Guarnatee execs hefty
Triggered by New occurs. Kills price & Often by
Articles which paycheck in case of
Majority SH. control of New. What if each get repurchasing shares
makes them takeover; meant to preclude
dissalowed post Excludes the new maj 51% of other? at higher price than Argue it will threaten conflict from trying to keep
unattractive for jobs.
revlon moment SH. -> MBCA state Corp bidder paid. (Note:
takeover. job.
wins if taking over a This is why suitors Go to Courts
Board can usually "Flip-over" Pill Entitles Delaware Corp. often start w/ open Litigation
ie) Staggered In theory, should allow
"disarm" a poison pill target corp SH to mkt purchase ->
board Board to use other
before redemption. acquire sahres of the Once M corp gets might get to extort. Challenge in
ie) Poison defensive devices without
acquiring corp at 1/2 control of Del. corp, anti-trust, state corp
Pills the concerns of
NO preemptive the FMV. Kills price it votes by majority Bad for exisiting SH, law, or federal
ie) Cum. Conflict-of-Interest (shifts
Pills are allowed in and dilutes control of SH consent to drives down value of securities laws
Voting burden to plitfff)
Articles. acquiring corp. approve. target corp.

Discouraged by IRS 4) Post-Revlon CL

Employing Defensive Tactics. with 50% tax. Duty is to be auctioneer and get
highest price possible.
1) Is merger 3) Unocal Allows Defense Until Revlon Moment.
2) If detrimental to SH, Only Regan Defense allowed
detrimental to
target's SH? must rely on UNOCAL now.
test. Revlon Moments Only reason to refuse is
By satisfying a) Breakup Inevitable. INADEQUATE PRICE;
the Unocal test -> If the share offers are so high as to guarantee a bidding war and otherwise need to accept the
a) Must be reasonably
the Board fractured future, then Revlon has occured b/c directors have no highest value offer.
percieved threat to
proves corporate polices & policies to defend
intrinsic MGMT.
fairness and 5) Statuory Responses to
To Satisfy: (a) Good b) Sale of Control.
shifts the Revlon
Faith belief & (b) If the Wolf is owned by single entity, then merger is effectively sale
burden of [Not made in Del. -> uncol/rev
reasonable investigation of control and the directors have no polices to defend. Para v. QVC.
proving ill-doing strong there]
into deal
to the plaintiff.
c) Abandonment of Long-Term Plan. "Other Constitutency Statutes"
b) Defensive measure If an existing merger is part of long-term strategic plan, then the corp Permits considerations beyond
By failing
must be reasonable in is not 'up for auction'. Holds even if new firm makes higher offer. cash money
Unocal ->
relation to threat posed. Key: Move must NOT be reactionary. If reactionary move abandons
FAIL.
nature of long term -> revlon. Para v. Time Anti-Takeover Statutes -> Permit
boards to greater use of
 relation to threat posed. Key: Move must NOT be reactionary. If reactionary move abandons
FAIL.
nature of long term -> revlon. Para v. Time Anti-Takeover Statutes -> Permit
boards to greater use of
defensive tactics
Best Way to Remember
https://www.youtube.com/watch?v=PGWYNgjvddc
Williams Act & Tender
Jack Sparrow Rule Offer Regulation
5% Disclosure Rule 12(a) on national
stock exchange OR
Within ten days of crossing Strict Liability for Threshold; must carefully monitor shares
12(g) Threshold.
threshold, MUST file statement 13D to ensure no problem (ie person could have 4.9% but a
Applies to public
with SEC, target corp, AND corporate buyback now made him 5%)
companies with >
competing bidders, describing 2,000 SH.
(1) Identity, (2) Intentions, (3) who is
financing Duty to Update: There is an affirmative duty to update EXCEPT FOR 14e
MATERIAL changes
Note: This applies even if you are
not necessarily planning on taking
over the company
3rd Party/ Wolf Issuer Tender Offers

The highest price paid to any tendering secutiryholder must be paid to

all tendering security holders. 14(d)(7). However, this may be Same provision; except no note about substantial
Best Price Rule
accomplished thorugh 'substantially equivalent' consideration if SH equivallence
given choice.

Tender offer must be open to ALL holders of the class of securities

Same. 13e-4(f)(8)(Iie) May NOT use an exclusionary tender
sought
All Holders Rule offer such as Unocal.
NOTE: For a non-12 corp in Del, CAN STILL use
May only exclude holders in a state where bidder is prohibitted by
exclusionary tender offers.
statute from making the offer after good faith attempt to comply.

If offer is for less than all shares of a class AND is oversubscribed, the
Pro Rata Rule bidder will take up the tendered securities on pro rata (proportion to Same.
shares tendered, not based on priority in line).

Must be at least 20 days. 14e ALL TENDER OFFERS

Same.
Duration of Offer
Changes to price or amount requested extends for at least 10 days.
14e ALL TENDER OFFERS Except for "material" here, just needs to be made in a
14e ALL TENDERS
manner reasonably calculated to infomr secuirty holders.
Other "material" changes interpreted to require 10 day extension.

Tendered securities may be withdrawn while the tender offer remains

At any time when the tender remains open
open
Withdrawal Rights
After 40 days from commencement of offer if securites have
Tendered securities may be withdrawan at ANY TIME within the first 7
not been accepted
days and any time AFTER 60 days (<7 or >60 rule

MGMT Response Sole Supply PROXY STATEMENT ANALOG.

14(e)(2)
MGMT has 10 days to respond to
tender, may:
1- Support offer & explain why
2- Oppose offer and explain why,
or
3- Take no position
14D-9
14(e)(5)
ANY PERSON commenting on a
Once a tender offer has been made, the Sec 12 Tender must file statement
bidder MAY NOT acquire shares through with the SEC.
MKT or any other means. (cannot get
risk discount) Note: Only applies to public
corporations.

No Short Sales No Tender Inside Trading

14(e)(3)
14(e)(6)
No trading is permitted on inside info of a
Tendering an unowned share is tender offer.
illegal.
Strict liability for all people doing it.

Fair Price Approach
Thwarts two-tiered front loaded
(TBoonepickens style)
transactions.
Rule: Any second-stage
transaction related to a tendder
offer must have at least the
same price as on the front-end.
Not By Default - Opt in
via Articles.
Where it exists, similar to
cummulative voting.
Specifically mentioned as
allowed, but must be
adopted in articles
Unrecognized in
Delaware
Slight majority of states
have these. LEGAL.
Extra-Territorial Statutes
UNCONSITUTIONAL
Attempt to state that a foreign
corp with more than 40% of its
assets are in another state are
subject to that state's incorp
law.
Undue interference on
interestate commerce and
the state-level nature of
corporations.
State Regulation of
Tender Offers
" Control Share" Acts Business Combination
Statute
Requires the SH to report when hits Bright line Rule
thresholds of 10%, 30%, and 50%. [Delaware's ONLY
anti-takeover law] Also in NY.
When threshold, NO VOTING POWER until
cleansed. No second-step transaction
for 3-5 years. Makes
Threshold SH must call special meeting for his acquisition much more time
voting rights. Majority of disinterested SH consuming.
must vote.
Not By Default - Opt in via
Articles. Supermajority Waiver
Where it exists, similar to Vote by 66 2/3% of
cummulative voting. Specifically DISINTERESTED
mentioned as allowed, but must be shareholders may waive.
adopted in articles
Note: Some states are OPT OUT.
Default unless.
No votes by MGMT
No votes by tender offeror/
acquiring party.
NYSE has made exception
for voting equity requirement
with this rule.
What to Look for In a 4th Gen Which Is Illegal.
Neutrality b/w MGMT & wolf
Favoring SH is okay.
Possible benefit to MINORITY SH.
They're the ones needing protecting.
Direct conflicts with Williams Law.
Cross-reference new rule with chart, those
are pre-empted
Direct conflict with INTERSTATE
COMMERCE