CHAPTER 12 MERGERS, ACQUISITIONS, AND OTHER CHANGES TO THE CORPORATE STRUCTURE © 2013 Delmar Cengage Learning

Statutory Mergers and Share Exchanges A merger is a combination of two or more corporations whereby one merging corporation merges into a surviving corporation, with the result being one surviving corporation. Shareholders of the merging corporation receive shares of the surviving corporation in exchange for their shares and they become shareholders of the surviving corporation. All liabilities of both the merging and the surviving corporations become the responsibility of the surviving corporation. Statutory mergers and share exchanges may be between corporations or corporations and noncorporate entities. When a subsidiary corporation merges into its parent corporation, it is referred to as an upstream merger. When a parent corporation merges into a subsidiary corporation, it is referred to as a downstream merger. © 2013 Delmar Cengage Learning

Statutory Mergers and Share Exchanges Triangle mergers involve 3 corporations: parent, subsidiary, and target corporation, which is merged into the subsidiary. A reverse triangle merger involves 3 corporations: parent, target, and subsidiary corporation that is merged into the target. In a share exchange, the acquiring corporation acquires all of the outstanding shares of the target corporation by an exchange that is compulsory on the shareholders of the target corporation. With a share exchange, both the acquiring corporation and the target corporation survive, with the target corporation becoming the subsidiary of the acquiring corporation. A consolidation involves the merger of two or more corporations into a newly formed corporation with neither of the merging corporations surviving. © 2013 Delmar Cengage Learning

Laws Governing Mergers and Share Exchanges Mergers and share exchanges may be subject to both state and federal law. All parties to a merger or share exchange are subject to the laws of their state of domicile. The parties to a merger or share exchange may also be subject to federal securities laws and antitrust laws. The FTC is responsible for overseeing mergers and acquisitions to ensure they comply with antitrust laws. The primary antitrust laws are: The Sherman Act, passed in 1890 The Clayton Act, passed in 1914 The Hart-Scott-Rodino Antitrust Improvements Act of 1976. © 2013 Delmar Cengage Learning

Planning the Statutory Merger or Share Exchange Successful negotiations often lead to a letter of intent that sets forth the preliminary understanding of all parties. The basics of the proposed transaction A deadline for entering a formal agreement Procedures concerning the due diligence process A statement concerning confidentiality of the parties involved The plan of merger sets forth the agreement between the proposed merging and surviving corporations. The plan of exchange sets forth the agreement for the share exchange between the proposed subsidiary and parent corporations. © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Board of Director and Shareholder Approval of the Merger or Share Exchange Mergers and share exchanges require the approval of the board of directors and the shareholders. After board recommendation, the shareholders are entitled to vote on the plan of merger or plan of share exchange. Mergers and share exchanges may be subject to class voting and special voting requirements under state statutes. Shareholder approval of the surviving corporation is not always required. Shareholder approval is not always required for upstream mergers. Shareholders entitled to vote on a merger or plan of exchange may have the right to dissent and obtain payment of the fair value of their shares from the corporation. State statutes usually include very specific requirements that must be met by dissenting shareholders. © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Articles of Merger The articles of share exchange must set forth the information required by state statutes, which include: The names of the parties to the share exchange The terms and conditions of the share exchange The manner and basis of the share exchange A statement concerning the shareholder approval of the plan of exchange A copy of any amendments to articles of incorporation that may be required under the plan of exchange © 2013 Delmar Cengage Learning

Articles of Share Exchange The articles of merger must include the information required by state statutes, which include: The names of all parties to the merger Any amendments to the articles of incorporation or new articles of incorporation of the surviving corporation A statement concerning the shareholder approval of the merger A statement indicating that a foreign corporation involved in the merger has approved the merger pursuant to the laws of its state of domicile © 2013 Delmar Cengage Learning

Due Diligence and Closing Matters Due diligence reviews are typically completed with the aid of a checklist that is prepared based on the plan of merger or share exchange. Due diligence work involves a thorough review of the plan of merger or share exchange, all supporting documents and, at times, on- site inspections. The closing is usually conducted using a checklist that has been reviewed by all parties prior to the closing. There are typically several postclosing matters to attend to, including documents to be filed at the state and possibly federal level, after a merger or share exchange transaction has been closed. © 2013 Delmar Cengage Learning

Asset and Stock Acquisitions Asset acquisitions Acquiring corporation buys all assets of the target corporation. Target corporation is dissolved. Acquiring corporation is not to be held liable for liabilities and obligations of the target corporation not specifically assumed. Stock acquisitions Acquiring corporation purchases all, or substantially all, of the stock of the target corporation. The acquiring corporation owns the target corporation. As the owner of the target corporation, the acquiring corporation will be responsible for all of its liabilities and obligations. © 2013 Delmar Cengage Learning

Asset and Stock Acquisitions HOSTILE TAKEOVERS AND DE FACTO MERGERS Hostile takeovers occur when one corporation attempts to purchase or take over a target corporation against the wishes of the board of directors and management of the target corporation. A de facto merger occurs when the courts consider a transaction between two or more corporations to be a merger, even if the parties have intended the transaction to be merely an asset purchase. © 2013 Delmar Cengage Learning

Asset and Stock Acquisition Procedures ASSET AND STOCK ACQUISITION PROCESS Negotiations and letter of intent Asset/stock purchase agreement Due diligence and preclosing matters Closing the asset or stock acquisition transaction Postclosing follow-up © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Entity Conversions DOMESTICATION Procedure to change a corporation’s state of domicile CONVERSION Convert a corporation to a noncorporate entity or convert a noncorporate entity to a corporation © 2013 Delmar Cengage Learning

Amendments to Articles of Incorporation When information in the articles of incorporation changes, the articles should be amended as provided in the statutes of the corporation’s state of domicile. Most amendments to articles of incorporation require the approval of the board of directors and shareholders. Shareholders can dissent and be paid fair value of their shares by the corporation if articles of incorporation are amended in a manner that adversely affects them. Articles of amendment must be prepared pursuant to state statutes and filed with the secretary of state in the same manner the articles of incorporation were filed. A corporation may restate its articles of incorporation to incorporate several amendments. © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning The Paralegal’s Role Assist in preparing letter of intent, agreement for merger, share exchange, stock purchase, or asset purchase Assist in complying with federal antitrust laws Review agreement; prepare closing checklist Prepare supplementary documents Collect documents from the client for review by opposing counsel; review documents supplied by other party Prepare plan of merger and articles of merger or plan of exchange and articles of exchange © 2013 Delmar Cengage Learning

The Paralegal’s Role (Continued) Prepare necessary corporate resolutions Prepare articles of amendment to articles of incorporation Prepare consents to assignment of leases and other contracts Prepare new stock certificates Prepare documents transferring assets Assemble all documents for closing and attend the closing and assist with postclosing filings © 2013 Delmar Cengage Learning