Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 37 Mergers and Takeovers of Corporations Chapter 37 Mergers and Takeovers of Corporations

37 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Solicitation of Proxies  Corporate shareholders have the right to vote on the election of directors, mergers, and charter amendments.  They can exercise their power to vote either in person or by proxy.  Proxy Card – A written document signed by a shareholder that authorizes another person to vote the shareholder’s shares.

37 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Federal Proxy Rules  Section 14(a) – of the Securities Exchange Act of 1934 gives the SEC the authority to regulate the solicitation of proxies.  Proxy Statement – A document that fully describes: The matter for which the proxy is being solicited The matter for which the proxy is being solicited Who is soliciting the proxy Who is soliciting the proxy Any other pertinent information Any other pertinent information

37 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. Antifraud Provision  Section 14(a) of the Securities Exchange Act of 1934 prohibits misrepresentations or omissions of a material fact in proxy materials.  The SEC, U.S. Justice Department, or share- holders who are injured by the misrepresent- ation or omission may sue the wrongdoer.  The courts have implied a private cause of action under this provision.

37 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Mergers and Acquisitions  Corporations may agree to friendly acquisitions or combinations of one another. Merger Merger Consolidation Consolidation Share Exchange Share Exchange Consolidation of Assets Consolidation of Assets

37 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. Merger  Occurs when one corporation is absorbed into another corporation and ceases to exist.  The surviving corporation gains all the rights, privileges, powers, duties, obligations, and liabilities of the merged corporation.  The shareholders of the merged corporation receive stock or securities of the surviving corporation as provided in the plan of merger.

37 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. Example of a Merger += Corporation A Corporation B Corporation A

37 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. Consolidation  Occurs when two or more corporations combine to form an entirely new corporation.  The new corporation is called the consolidated corporation.  The articles of incorporation of the new corporation replace the articles of incorporation of the component corporations.

37 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Example of a Consolidation += Corporation A Corporation B Corporation C

Copyright © 2004 by Prentice-Hall. All rights reserved. Share Exchange  When one corporation acquires all the shares of another corporation.  Both corporations retain their separate legal existence.

Copyright © 2004 by Prentice-Hall. All rights reserved. Example of a Share Exchange += Corporation A Corporation B Corporation A (parent corporation) Corporation B (subsidiary corporation) A owns B

Copyright © 2004 by Prentice-Hall. All rights reserved. Required Approvals for a Merger  An ordinary merger or share exchange requires: The recommendation of the board of directors of each corporation, and The recommendation of the board of directors of each corporation, and An affirmative vote of the majority of shares of each corporation that is entitled to vote An affirmative vote of the majority of shares of each corporation that is entitled to vote

Copyright © 2004 by Prentice-Hall. All rights reserved. Short-form Merger  Merger between a parent corporation and a subsidiary corporation.  Does not require the vote of the shareholders of either corporation or the board of directors of the subsidiary corporation.  Can occur when the parent corporation owns 90 percent (or more) of the outstanding stock of the subsidiary corporation.

Copyright © 2004 by Prentice-Hall. All rights reserved. Sale or Lease of Assets  A corporation may sell, lease, or otherwise dispose of all or substantially all of its property in other than the usual and regular course of business.  Such a sale or lease transaction requires: The recommendation of the board of directors, and The recommendation of the board of directors, and An affirmative vote of the majority of the shares of the selling corporation that is entitled to vote An affirmative vote of the majority of the shares of the selling corporation that is entitled to vote

Copyright © 2004 by Prentice-Hall. All rights reserved. Dissenting Shareholder Appraisal Rights  Shareholders who object to a proposed merger, share exchange, or sale or lease of all or substantially all of the property of a corporation have a right to have their shares valued by the court and receive cash payment of this value from the corporation.

Copyright © 2004 by Prentice-Hall. All rights reserved. Tender Offer  An offer that an acquirer makes directly to a target corporation’s shareholders in an effort to acquire the target corporation.  The tender offeror’s board of directors must approve the offer. The shareholders do not have to approve. The shareholders do not have to approve.  The tendering corporation and the target corporation retain their separate legal status.

Copyright © 2004 by Prentice-Hall. All rights reserved. Illustration of a Tender Offer Tender Offeror Target Corporation Shareholders Tender offer is made to the shareholders of the target corporation. The tender offeror offers to purchase their shares in the target corporation.

Copyright © 2004 by Prentice-Hall. All rights reserved. Landmark Law: The Williams Act (1968)  An amendment to the Securities Exchange Act of  Specifically regulates all tender offers.  Establishes certain disclosure requirements and antifraud provisions.

Copyright © 2004 by Prentice-Hall. All rights reserved. Tender Offer Rules Fair Price Rule  A rule that says any increase in price paid for shares tendered must be offered to all shareholders. Even those who have previously tendered their shares. Even those who have previously tendered their shares. Fair Price Rule  A rule that says any increase in price paid for shares tendered must be offered to all shareholders. Even those who have previously tendered their shares. Even those who have previously tendered their shares. Pro Rata Rule  A rule that says shares must be purchased on a pro rata basis if too many shares are tendered. Pro Rata Rule  A rule that says shares must be purchased on a pro rata basis if too many shares are tendered.

Copyright © 2004 by Prentice-Hall. All rights reserved. Antifraud Provision  Section 14(e) of the Williams Act prohibits fraudulent, deceptive, and manipulative practices in connection with a tender offer.  Violations of this section may result in civil charges brought by the SEC or criminal charges brought by the Justice Department.  The courts have implied a private civil cause of action under Section 14(e).

Copyright © 2004 by Prentice-Hall. All rights reserved. Defensive Strategies and Tactics Against Hostile Tender Offers  Persuasion of Shareholders  Delaying Lawsuits  Selling a Crown Jewel  Adopting a Poison Pill  White Knight Merger  Pac-Man (or reverse) Tender Offer  Persuasion of Shareholders  Delaying Lawsuits  Selling a Crown Jewel  Adopting a Poison Pill  White Knight Merger  Pac-Man (or reverse) Tender Offer  Issuing Additional Stock  Creating an Employee Stock Ownership Plan (ESOP)  Flip-over and Flip-in Rights Plans  Greenmail and Standstill Agreements  Issuing Additional Stock  Creating an Employee Stock Ownership Plan (ESOP)  Flip-over and Flip-in Rights Plans  Greenmail and Standstill Agreements

Copyright © 2004 by Prentice-Hall. All rights reserved. Fiduciary Duty  The duty the directors of a corporation owe to act carefully and honestly when acting on behalf of the corporation.

Copyright © 2004 by Prentice-Hall. All rights reserved. Business Judgment Rule  A rule that protects the decisions of the board of directors, who act on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation and the shareholders.

Copyright © 2004 by Prentice-Hall. All rights reserved. Business Judgment Rule (continued)  The actions of the management of a target corporation in fighting a tender offer are judged by the business judgment rule.  The defensive measure must be reasonable in relation to the threat posed.

Copyright © 2004 by Prentice-Hall. All rights reserved. State Antitakeover Statutes  Statutes enacted by state legislatures that are aimed at protecting corporations that are either incorporated in or doing business within the state from hostile takeovers.

Copyright © 2004 by Prentice-Hall. All rights reserved. State Antitakeover Statutes (continued)  State antitakeover statutes are lawful if they: Do not conflict with the federal Williams Act, or Do not conflict with the federal Williams Act, or Do not unduly burden interstate commerce in violation of the Commerce Clause of the U.S. Constitution. Do not unduly burden interstate commerce in violation of the Commerce Clause of the U.S. Constitution.