MERGERS A PRIMER

PRESENTED BY:

LORI ANN FOX, ESQ.

SEMINAR PREVIEW

•Mergers & Acquisitions Overview

•Merger Types

•Pre-Transaction Planning

•Post-Transaction Filing Issues

ANNOUNCED M&A: NORTH AMERICA – 1985-2014

ANNOUNCED M&A: WORLDWIDE– 1985-2014

BUSINESS DEAL VS. STATUTORY MERGER

•Corporations do business “deals” to gain market share, add products,

reduce costs, etc.

•The price is always part of the deal

•The statutory merger is not the deal

•The statutory merger is the legal device used to effectuate the deal

ACQUISITIONS DEFINED

•The act of becoming the owner of certain property

•Taking with or without consent, especially a material possession

obtained by any means

•Two types

– Share

– Asset

WHAT IS A MERGER?

A statutory device which allows the combination of two or more

business entities by the transfer of assets, liabilities and business

of all to one of them, which continues in existence, the other(s)

being swallowed up or merged into the continuing entity

“MERGERS” VS. “ACQUISITIONS”

•Terms are not interchangeable

•Mergers are a subset of acquisitions

BASIC M&A TERMINOLOGY

•Acquiring = Acquirer = Acquiror = Buyer = Continuing Entity =

Survivor

•Target = Acquired = Seller = Disappearing Entity = Merged Entity

= Non-survivor

•Constituent Entity = All

•Acquisition sub = Merger subsidiary

WHY LAWYERS LIKE STATUTORY MERGERS

•Precise way to acquire another business entity

•The results are clearly prescribed by law

• It is an old adage that mergers call for less lawyering but

more paperwork than other types of acquisition vehicles

Statutory

Merger

WHAT STATUTES PRESCRIBE

•Document contents and effects

•Post-merger status of parties

– Survivor gets all assets and liabilities

– Seller’s shareholders (or members/partners) usually receive shares

(or membership/partnership interests) in the survivor or cash

•Appraisal rights may be available to minority owners

EVEN SO, MERGERS CAN BE COMPLEX

•Laws different in every state

•Multi-state regulations and timing

issues

•Many types of document orders

•Many filings required

•Possible federal agency filings

•Unknown, unpublished requirements

of filing officers

Regulations Requirements

Laws Documents

Filings Research

TYPES OF MERGERS

POLLING QUESTION #1

In your practice, which type of merger do you handle most often?

A. General merger

B. Parent-sub merger

C. Triangular merger

D. Multi-entity merger

GENERAL MERGER

A B

GENERAL MERGER

•Target merges into acquirer

•Target’s shareholders/members/partners may receive

shares/membership interests/partnership interests in the

acquirer, cash or other property

•Most mergers occur under the “general” merger statute

•No special requirements must be met

•Corporation, LLC, LP, GP laws have general merger statutes

•Cross entity mergers allowed

APPROVAL BY CORPORATIONS

•Boards of each constituent must approve Plan

•Shareholders of merged corporation(s) must approve

•Shareholders of the survivor usually do not have to approve

– Approval required under certain circumstances

– Situations where shareholders’ interests are substantially affected

APPROVAL BY LLCS, LPS, LLPS

•LLC

– May be set forth in operating agreement

– Some states have a default rule requiring unanimous member

approval

– Some states have a default rule requiring majority approval

•LPs

– As provided in partnership agreement or default rule

•GPs, LLPs, and other entities that may be involved in merger

– Approval as provided in organizational documents and statute

PARENT-SUBSIDIARY MERGERS

•Up-stream: parent survives

•Down-stream: sub survives

•Short form mergers

– Simplified procedure

– Approval by subsidiary’s board of directors not required

– No vote required by shareholders of surviving parent or

disappearing sub

PARENT-SUB | UP-STREAM MERGER

S

P

PARENT-SUB UP-STREAM MERGER

•Statutory merger of subsidiary into its parent

•Short form procedure authorized by corporation laws

•Does parent own statutory percentage required?

•Shareholder vote unnecessary – why?

•Avoids costly proxy solicitations and meetings of publicly traded

companies

•Amendment of the parent’s formation document is restricted

•LLC/LP laws may or may not authorize short form procedure

PARENT-SUB DOWN-STREAM MERGER

S

P

PARENT-SUB DOWN-STREAM MERGER

•Parent merges into subsidiary

•Can use to change the parent’s home state

• Some corporation laws permit short form merger of parent into sub

– Parent must own a certain % of sub

– Parent’s shareholders must approve

– Amendment of the survivor’s formation document may be restricted

• If short form provision unavailable, use the general merger statute

TRIANGULAR MERGERS

• Involves three parties – acquirer, subsidiary formed by acquirer,

and target

•Only the target and subsidiary actually merge

•Statute must permit ownership interests of one constituent to

be exchanged for ownership interests of a non-constituent entity

FORWARD TRIANGULAR MERGER

T S

A A

S T

FORWARD TRIANGULAR MERGER

•Action

– Merger subsidiary created for the transaction

– Target merges into subsidiary

– Merger sub survives

– Target disappears

•Owners of Target receive ownership interests in Parent/Acquirer,

not merger sub

•Parent/Acquirer not a constituent

•Parent/Acquirer not liable for obligations & liabilities of Target

REVERSE TRIANGULAR MERGER

A

T S

A A

S T

REVERSE TRIANGULAR MERGER

•Action

– New merger sub created for this transaction

– Merger sub merges into Target

– Target survives

– Merger sub disappears

•Two exchanges take place

– Target’s owners get ownership interests in Acquirer

– Sub’s owners get ownership interests in Target

MULTI-ENTITY MERGER

A B

MULTI-ENTITY MERGERS

•Mergers between different entity types (Example: corporation

merges with LLC)

•Also referred to as cross-entity, inter-entity or inter-species

merger

•Can be used as a vehicle to change entity forms as well as a

vehicle to acquire an entity

SOME CONSIDERATIONS

•Domestic state statutes must be examined for each constituent

•Determine if statutes authorize each of the constituents to

participate

•Manner of adoption for different entities

•Execution requirements for each constituent

•Exchange of ownership interest issues will need to be addressed

in the plan

PRE-TRANSACTION PLANNING

PRE-TRANSACTION PLANNING ISSUES

•Status

•Tax

•Qualifications

•Timing

•Effective date

POTENTIAL COMPLEXITIES

•Multi-state aspects of filings and

document orders can be

overwhelming

•Multi-entity transactions are even

more complicated

•Precise timing is crucial

•Good organizational skills and

planning are your best defense

against confusion

POTENTIAL COMPLEXITIES

•Multi-state aspects of filings and document orders can be

overwhelming

•Multi-entity transactions are even more complicated

•Precise timing is crucial

•Good organizational skills and planning are your best defense

against confusion

WHERE ARE THE ENTITIES?

•Know who the parties to the transaction are

•Are they in good standing in their home states?

•Are they in good standing where they are qualified?

• If not, all delinquent reports must be filed and any fees and taxes

due must be paid

• It may take time to remedy delinquencies

GOOD STANDING STATUS

• If the entity has been administratively revoked, follow the

reinstatement procedures where available

•Reinstatement relates back, but name rights may have been lost

TAX STATUS

•Non-surviving entities need to determine if they have

outstanding taxes

•Two basic standards

– Status - many jurisdictions only require the entity’s tax status to

be good, meaning that the entity has no taxes due

– Clearance - some jurisdictions require that a formal tax clearance

be obtained from the tax department

POLLING QUESTION #2

Do you generally assume tax liability during your merger instead

of obtaining tax clearances?

A. Yes

B. No

ASSUMPTION OF TAX LIABILITY

•May avoid having to obtain tax clearance by having the survivor

assume tax liability of other constituent(s)

•Advantageous if tax clearance certificates difficult or time

consuming to obtain

•States generally permit tax assumption but may require the

assuming entity to be a domestic or qualified foreign entity

PRE-TRANSACTION PLANNING: NAME ISSUES

•Check availability of name

•Name protection

– Reservation or registration

•State name standards

•Options if name is unavailable

•Assumed/fictitious name/trade name

– Not to be confused with trademarks

NAME AVAILABILITY

•Check name availability

– Telephone

– On-line at the SOS web site

– Written request to filing office

•Even if available on the SOS records, another party may have

superior rights under federal or state trademark law

•Avoid getting a cease & desist letter from name holder with

superior rights

•Trademark searches

– Compare service marks, trademarks, trade names

– Search federal and state trademark listings, business listings,

internet search

NAME AVAILABILITY STANDARDS

•Distinguishable standard

– A name that is “distinguishable upon the records of the filing

office” from specific types of entities or all entities on record

•Deceptively similar standard

– A name that is “not deceptively similar to” or does “not have a

likelihood of confusion with” the name of specific types of entities

or all entities on record

NAME RESERVATION

•Name reservation provides short term protection for a name

filed at the central filing office

– Generally 30 to 120 days depending on state

•Do not allow the reservation period to expire before the

effective date of the transaction

•Calendar the date

NAME REGISTRATION

•Protects the legal name of an entity in a foreign jurisdiction in

which it has not yet qualified

•Usually involves a long term of protection

NAME PROTECTION - PRACTICE POINTER

•Generally, use name reservation to protect the name of an

entity not yet formed (Short term protection)

•Use name registration to protect the name of an entity that is

planning to qualify in the state at a future time (long term

protection)

DOMAIN NAMES

•What about domain names?

• In determining if a name is available on the state’s records,

states generally disregard the .com, .net

•Although search with domain name registrar may indicate name

is available, check name availability under trademark law and

on the SOS records

NAME NOT AVAILABLE

•Option 1: Obtain written consent of name holder

– Must be permitted by statute

•Option 2: Use of a conflict name

– Required in those foreign jurisdictions where the true name is

unavailable

– Generally referred to as fictitious name in statute

– Fictitious name is set forth on the qualification document

VOLUNTARY ASSUMED NAME

• In most states, entities may voluntarily use a name other than

the true name

•Easy to confuse conflict name and voluntary assumed name

•States will often use same term to refer to these two distinct

concepts

•Different states use different terms: assumed name/fictitious

name/trade name

POLLING QUESTION #3

When a business entity client will need to qualify as a result of a

merger, when do you generally file the qualification documents?

A. Before filing the merger documents

B. At the same time as the merger documents

C. After filing the merger documents

PRE-TRANSACTION QUALIFICATIONS

• If the transaction will result in an entity engaging in activities in

a state where it is not qualified, consider in advance whether

the entity will need to be qualified

•Do the activities constitute “doing business” within the meaning

of the relevant statute?

PRE-TRANSACTION QUALIFICATIONS

• In a merger, the survivor is not automatically qualified by the

merger filing in a state where it was not previously qualified

•When to qualify?

•Supporting documents may have to be dated within a certain

number of days before filing

•Each jurisdiction’s requirements vary and should be checked

PENALTIES FOR FAILURE TO QUALIFY

•Monetary penalties and fines

•Penalties may accrue to individuals acting for the entity

•Cannot institute suit in state courts

TIMING ISSUES

•Determine projected effective date

•Can use delayed effective dates

•Account for filing office backlog

•Tax considerations

•Prepare documents for filing

•Obtain supporting documents

•Expedited service availability

•Pre-clearance of documents

•Almost every state permits delayed effective dates

ABANDONMENT

•Some states allow abandonment without owner approval at any

time prior to filing

•Others allow abandonment without owner approval after filing,

but prior to effective date

PRE-TRANSACTION AUTHENTICATIONS

• International transactions

•Making a document authentic so it is legally admissible in a foreign

country

• Internal documents can be authenticated

– Power of attorney or legal transcripts, for example

•State issued documents can be authenticated

– Good standing certificate, for example

•Authenticating by apostille

– Applicable in “Hague Convention” countries

– Submit notarized document to a secretary of state and request an

apostille

– Certification makes the document valid in any Hague Convention

country without further formalities

PRE-TRANSACTION AUTHENTICATIONS

•Non-Hague Convention countries require formal authentication

– Check with embassy or consulate for precise instructions

– But generally, submit document sequentially to

• County clerk in the jurisdiction where the document was notarized if

necessary

• Secretary of State

• US Secretary of State

• Foreign consulate or embassy

PRE-TRANSACTION PLANNING: HSR FILINGS

•HSR: Hart-Scott-Rodino Act

•1976 Amendment to Clayton Antitrust Act

•Requires entities planning certain large mergers or acquisitions

to file Notification and Report Form

•Form gives details about the transaction

•Filed with Premerger Notification Office of the Federal Trade

Commission (FTC) and the Antitrust Division of the Department

of Justice (DOJ)

MORE ABOUT THE HSR ACT

•Parties must wait before consummating transaction

– Generally, 30 days

•Purpose - give agencies advance notice and an opportunity to

oppose transactions that might violate antitrust laws

•Fines imposed for failure to file

•Only need to report M & A that meets jurisdictional thresholds

•Thresholds adjusted annually

•For more specific information on Hart-Scott-Rodino please go to

the FTC’s web site at www.ftc.gov

GETTING ORGANIZED

•Review laws of constituents’ home states

– File primary merger documents here

•Review laws of states where the survivor is presently qualified

– May be required to file evidence of merger or amend

qualification here

•Review laws of states where qualifications will be needed

– Qualify the survivor here

•Review laws of states where the non-survivors are presently

qualified

– File withdrawals for the non-survivors or evidence of the merger

as applicable

GETTING ORGANIZED

•Review laws of constituents’ home states

•Review laws of states where the survivor is presently qualified

•Review laws of states where qualifications will be needed

•Review laws of states where the non-survivors are presently

qualified

PRIMARY MERGER DOCUMENTS

•The two primary documents necessary to effect a merger are

– The Plan or Agreement of Merger which contains the terms and

conditions of the merger

– The Articles of Merger or Certificate of Merger which is the

document filed that effectuates the merger on the records of

the constituents’ domestic states

• In some states, Articles or Certificate of Merger must contain

the Plan of Merger or abbreviated terms and conditions of the

merger

•Other states have notice filing requirements and do not require

the details of the agreement or terms and conditions to be put

on the public record

POST-TRANSACTION FILING ISSUES

POST-TRANSACTION FILINGS

•Make the public record reflect post transaction reality

•Foreign post-merger filings may include

– Filings to remove entity from records

– Qualifications

– Name change amendments

– Articles of Correction

FOREIGN POST-MERGER FILINGS

•File evidence of the merger or formally withdraw in states

where the nonsurvivors are qualified

•Qualify the survivor where it will transact business

•File name change amendments if necessary

•What do you file in the state where

– Both the surviving entity and non-surviving entity are qualified

– Surviving entity qualified; non-surviving entity not qualified

– Surviving entity not qualified; non-surviving entity qualified

PENALTIES FOR FAILING TO WITHDRAW

•Consequences of failure to withdraw

– Fines and penalties

– Fines may accrue to individuals acting for the entity and to

successor entities

– Continuing liability for annual reports, state tax filings and

payments and other regulations

POTENTIAL PROBLEMS

•Tax clearance may be needed

•Name conflicts

•Withdrawal may be a time consuming process

CORRECTING DOCUMENTS

•MBCA: Articles of Correction may be used to correct a

document filed by the Secretary of State if the document

– Contains an inaccuracy

– Was defectively executed, attested, sealed, verified, or

acknowledged

– Electronic transmission was defective

•Some statutes limit time for corrections

ARTICLES OF CORRECTION

•Articles of Correction may not correct or alter

– Entity names or purpose clauses

– Substantive provisions

– Class and number of authorized shares

– Names and addresses of incorporators or initial directors

•Articles are effective on effective date of the document they

correct

COMMON STATUTORY EXCLUSIONS

•Articles of Correction may not correct or alter

– Entity names or purpose clauses

– Substantive provisions

– Class and number of authorized shares

– Names and addresses of incorporators or initial directors

COMMON REASONS FOR REJECTED FILINGS

•Documents improperly executed or executed by a person not

authorized to sign for the entity

•Faxed filing illegible

•Electronic transmission defective

• Incorrect fee sent with filing

•Missing or faulty attachment

• Incorrect/outdated state-issued form

•Wrong number of required copies

SUMMARY

•Definitions

•Types of Mergers and Transactions

•Pre-Transaction Planning

•Post-Transaction Filing Issues

THANK YOU FOR ATTENDING