state law considerations

STATE LAW CONSIDERATIONS

NEGOTIATION AND DOCUMENTATIONOF MERGER & ACQUISITION TRANSACTIONS

Spring Semester 2011


2

AGENDABackgroundMergersAsset AcquisitionsSale of All or Substantially All AssetsStock AcquisitionsOther Transaction StructuresCases and DoctrinesTransfers of Assets and LiabilitiesState Regulation of TakeoversPlayers and Transactions


3

BACKGROUND

Corporations are creatures of the state – only possess powers granted by state

Certificate of incorporation (COI) [MBCA – articles of incorporation] – corporation’s contract with its stockholders

Stockholders (S/H) [MBCA – shareholders] – act with respect to fundamental changes to corporation, but not directly with respect to management of corporation

Board of Directors (BOD) – representatives of s/h – manage and direct business and affairs of corporation (DGCL 141; MBCA 8.01) – fiduciary duties of care, loyalty and good faith• Business Judgment Rule – judicial deference to BOD actions –

presumption that BOD acts in best interests of corporation and its s/h absent fraud, illegality or self-dealing

Officers – generally manage day to day operations of the corporation – fiduciary duties

Corporate Formalities – statutory procedures required to validly consummate a transaction – must find statutory authority for transaction and must follow required procedures


4

MERGERS

DGCL 251 [compare MBCA 11.02, 11.04, 11.06 and 11.07]

Merge (surviving corporation) or Consolidate (resulting corporation)

MBCA – no distinction between merger and consolidation [“survivor” may be the party to merger that survives or a new entity resulting from the merger]


5

MERGERS

BOD approval [manage/direct business and affairs of corporation] by each corporation to merger or consolidation (constituent corporation [MBCA – party to a merger])


6

MERGERS

S/H approval [fundamental change] by stockholders of constituent corporations• Majority of outstanding stock (unless greater vote

required by COI)• No class voting (unless required by COI) – DGCL

251(c), 102(a)(4) and 151(a) (but contrast with DGCL 242(b)(1)) – VantagePoint Venture Partners 1996 v Examen, Inc.

• Notice at least 20 days prior to meeting (see also DGCL 222)

Small Scale Merger Exception - No s/h approval required from s/h of surviving corporation if:• No change to corporation’s COI;• No change in outstanding or treasury stock; and• No stock (or securities convertible into stock) issued or

stock issued does not exceed 20% of outstanding stock immediately prior to merger (must have unissued or treasury stock available)


7

MERGERS

Consideration• Stock or securities of surviving or

resulting corporation• Cash, property or rights• Securities of any other corporation or

entity


8

MERGERS

Agreement of Merger (or Consolidation) [MBCA – plan of merger]• Terms and conditions• Mode of effecting transaction• Statement of no change, or set forth

amendments, to surviving corporation’s COI or attach COI for resulting corporation

• Manner of converting stock into merger consideration

• Other provisionsCertificate of Merger (or Consolidation)

[MBCA – articles of merger] – summary document filed with Secretary of State


9

MERGERS

Consequences (DGCL 259 [compare MBCA 11.07]) – By operation of law:•Constituent corporations (other

than surviving corporation) cease to exist

•All rights, assets, liabilities and obligations of constituent corporations vest in and attach to surviving or resulting corporation


10

MERGERS

Short Form Merger or Parent-Sub Merger Exception (DGCL 253 [compare MBCA 11.05]) – Corporation (parent corporation) owning 90% of stock of another corporation (subsidiary) may merge subsidiary into parent (upstream merger) or merge parent into subsidiary (downstream merger)• Merely need parent BOD resolution, except that if

Subsidiary not wholly-owned by parent – resolution must state terms and conditions (including consideration to subsidiary minority s/h); appraisal rights for subsidiary minority s/h and heightened standard (entire fairness test) for parent BOD fiduciary duties

Subsidiary is surviving corporation – parent s/h approval and pro rata issuance of stock in surviving corporation to parent s/h


11

MERGERS

Short Form Merger•Entire (or Inherent) Fairness Test

If BOD (or individual directors) are on both sides of transaction, must demonstrate utmost good faith and inherent fairness of transaction

Requires both fair dealing and fair price (entire fairness) analyzed as a whole (not bifurcated analysis)

See Weinberger v UOP, Inc. (p. 159)


12

MERGERS

Appraisal Rights (DGCL 262 [compare MBCA Chapter 13]) – right to determination by court of fair market value (FMV) of stock of constituent corporation – FMV excludes value resulting from transaction or expectation of transaction• Available w/r/t any class or series of stock of

constituent corporations• Notice by corporation to s/h at least 20 days

prior to meeting (if s/h vote) or prior to or within 10 days after effective date (if no s/h vote)

• S/H make demand prior to meeting (if s/h vote) or within 20 days after notice (if no s/h vote)

• S/H not vote in favor and continuously hold stock through effective date


13

MERGERS

No Appraisal Rights – Exceptions• Market Out Exception – Stock listed on

national securities exchange or held by more than 2,000 holders

• Stock of surviving corporation if under DGCL 251(f) no approval of surviving corporation s/h required

Exception to Exceptions – appraisal rights available if s/h required to accept anything other than:• Stock of surviving or resulting corporation• Stock of any other corporation listed on

national securities exchange or held by more than 2,000 holders

• Cash in lieu of fractional shares


14

MERGERS

Merger or Consolidation with Foreign Corporation (DGCL 252)

Merger or Consolidation with Partnership (DGCL 263)

Merger or Consolidation with LLC (DGCL 264)

MBCA addresses all in 11.02


15

MERGERS

Typical Uses• Acquisition of Public Company• Acquisition of Private Company with

Numerous Stockholders


16

MERGERS

Advantages• Ability to Purchase Entire Equity of Target

without Agreement of all Stockholders• Fewer Consent and Approval Issues than

with Asset Purchase• From Seller’s Perspective, Liabilities Remain

with TargetDisadvantages

• From Buyer’s Perspective, Additional Due Diligence Responsibility Associated with Possible Liabilities of Target

• Timing for Obtaining Stockholder Approval• Dissenters Rights


17

ASSET ACQUISITIONS

No Buyer S/H Approval (no fundamental change) – DGCL 122(4) permits buyer to purchase or otherwise acquire real and personal property and DGCL 122 (13) permits buyer to assume liabilities [Compare MBCA 3.02(4) and (7)]• Buyer BOD approval depends upon materiality

of transaction and company policies No Seller S/H Approval if not sale of all or

substantially all assets (no fundamental change) – DGCL 122(4) permits corporation to sell or otherwise dispose of real and personal property [Compare MBCA 12.01 and 3.02(5)]• Seller BOD approval depends upon materiality

of transaction and company policies


18

ASSET ACQUISITIONS

Sale of All or Substantially All Assets (DGCL 271 [Compare MBCA 12.2 “leave a corporation without a significant continuing business activity” and safe harbor])• Seller BOD approval (manage/direct business and

affairs of corporation)• S/H approval (fundamental change) – except sale to

wholly-owned subsidiary Majority of outstanding stock (unless greater vote

required by COI) Notice at least 20 days prior to meeting No appraisal rights (unless required by COI)

• Consideration – money or other property, including stock or securities of another corporation Buyer issuance of stock (to extent that unissued

or treasury stock available) and debt authorized by DCGL 152, 161 and 122(13) [Compare MBCA 6.21(b) and 3.02(7)]


19

ASSET ACQUISITIONS

Consequences• Specified assets transferred to Buyer and

specified liabilities assumed by Buyer, all pursuant to instruments and documents of transfer, assignment, conveyance and assumptions

• Seller continues to exist holding transaction consideration and assets not transferred to and liabilities not assumed by Buyer

• Seller may or may not distribute transaction consideration to s/h

• Seller may or may not liquidate and dissolve pursuant to DCGL 275 [Compare MBCA 14.02]


20

ASSET ACQUISITIONS

Typical Uses•Purchase of Division•Purchase of Business having

Substantial Contingent Liabilities•Purchase of Business where

Assets are in more than One Entity


21

ASSET ACQUISITIONS

Advantages• Ability to Target Specific Assets• No Buyer Stockholder Vote• From Buyer’s Perspective, Ability to Avoid

Taking Unwanted Liabilities (but consider successor liability theories)

Disadvantages• Requirements for Consents and Approvals• Transfer and Assignment Documentation• Identification of Assets and Liabilities• From Seller’s Perspective, Retention of

Target Liabilities


22

SALE OF ALL OR SUBSTANTIALLY ALL ASSETS

Gimbel v The Signal Companies, Inc.• Sale of assets quantitatively vital to operation of

corporation and [qualitatively] is out of the ordinary and substantially affect existence and purpose of corporation

Katz v Bregman• Sale of approximately 50% or more of corporation

assets constitutes sale of “substantially all assets”????

Hollinger Inc. v Hollinger Intl., Inc.• Rejects “approximately half” test• Qualitative test addresses the rational economic

expectations of corporation’s s/h Does transaction leave s/h with an investment that is

qualitatively different than they had before the transaction (i.e., does it “strike at the heart” of corporate existence”)?


23

SALE OF ALL OR SUBSTANTIALLY ALL ASSETS

Contrast MBCA• Test

Disposition that leaves corporation without significant continuing business activity

• Safe Harbor/Bright Line Test Retention of at least 25% of total assets and

25% of either EBIT or revenues conclusively deemed retention of significant continuing business activity (MBCA 12.02(a))


24

STOCK ACQUISITIONS Agreement with S/H (not Target)

• No target BOD approval• No target s/h vote

No Buyer S/H Approval (no fundamental change) – DGCL 123 permits buyer to purchase or otherwise acquire and own securities of another corporation and DGCL 122 (10) and (11) permit buyer to participate in, manage and control another corporation [Compare MBCA 3.02(6)]• Buyer BOD approval depends upon materiality

of transaction and company policies Consideration may be anything

• Buyer issuance of stock (to extent that unissued or treasury stock available) and debt authorized by DCGL 152 , 161 and 122(13) [Compare MBCA 6.21(b) and 3.02(7)]


25

STOCK ACQUISITIONSConsequences

•Change of Control of Target – control transferred from target s/h to buyer

•Target continues to exist as a subsidiary of buyer holding its pre-transaction assets and liabilities

•Buyer insulated from target liabilities


26

STOCK ACQUISITIONS

Typical Uses•Purchase of Wholly-Owned

Subsidiary•Purchase of Closely-Held Business•Purchase of less than 100% of

Target


27

STOCK ACQUISITIONS

Advantages• Relative Ease of Execution• No Buyer Stockholder Vote• No Target Board Approval• Fewer Consent and Approval Issues than

with Asset Purchase• From Buyer’s Perspective, Liabilities Isolated

in SubsidiaryDisadvantages

• Need Agreement of all Target Stockholders• From Buyer’s Perspective, Additional Due

Diligence Responsibility Associated with Possible Liabilities of Target


28

OTHER TRANSACTION STRUCTURES Triangular (or Subsidiary) Merger – merger

between newly formed subsidiary of buyer (Newco) and target (buyer is not a constituent corporation)• Forward – Newco survives• Reverse – Target survives• Consideration – cash, property or other

rights; stock or securities of surviving corporation; or securities of another corporation

• Consequence – assets and liabilities of Target held in subsidiary of buyer


29

OTHER TRANSACTION STRUCTURESTriangular (or Subsidiary) Merger (cont.)

• Typical Uses Acquisition of Public Company Acquisition of Private Company with

Numerous Stockholders


30

OTHER TRANSACTION STRUCTURES Triangular (or Subsidiary) Merger (cont.)

• Advantages Ability to Purchase Entire Equity of Target without

Agreement of all Stockholders No Buyer Stockholder Vote Fewer Consent and Approval Issues than with

Asset Purchase From Buyer’s Perspective, Liabilities Isolated in

Subsidiary

• Disadvantages From Buyer’s Perspective, Additional Due

Diligence Responsibility Associated with Possible Liabilities of Target

Timing for Obtaining Target Stockholder Approval Target Stockholder Dissenters Rights


31

OTHER TRANSACTION STRUCTURES Two-Step Acquisition

• Stock Purchase (tender offer in public company context) – buyer purchases sufficient stock from target s/h to assure s/h approval of subsequent merger transaction – followed by

• Freeze-Out (or Squeeze-Out) Merger – second step merger of target with buyer or newco

Entire Fairness Test Must demonstrate utmost good faith and inherent

fairness of transaction Requires both fair dealing and fair price (entire

fairness) analyzed as a whole (not bifurcated analysis)


32

OTHER TRANSACTION STRUCTURESTwo-Step Acquisition (cont.)

• Typical Uses Acquisition of Public Company

(particularly unsolicited bids) Acquisition of Private Company with

Dissident Stockholders


33

OTHER TRANSACTION STRUCTURES Two-Step Acquisition (cont.)

• Advantages Ability to Purchase Entire Equity of Target without

Agreement of all Stockholders Relative Ease of Execution of First Step to Gain

Control of Target No Target Board Approval No Buyer Stockholder Vote Fewer Consent and Approval Issues than with

Asset Purchase From Buyer’s Perspective, Liabilities Isolated in

Subsidiary• Disadvantages

Time Required to Complete Both Steps Complexity Associated with Completing Two

Transactions


34

Asset Purchase

MergerBuyer

(including Target’sassets and liabilities)


35

Stock Purchase

Reverse Triangular (or Subsidiary) Merger

MBCA Mandatory Stock Exchange

Buyer

Target


36

Forward Triangular (or Subsidiary) Merger

Triangular Asset Purchase

Buyer

Newco(including Target’s

assets and liabilities)


37

CASES AND DOCTRINES De Facto Merger Doctrine – Equity principle of

substance over form• Transactions that have same substantive

effect should have same legal safeguards• Applestein v United Board & Carton

Corporation• Irving Bank Corp. v Bank of New York Co.

Doctrine of Independent Legal Significance – form over substance (no de facto merger)• Action taken under one section of DGCL is

legally independent and its validity is not dependent upon or judged against any other provision under which same result might be obtained by different means

• Hariton v Arco Electronics, Inc.• Rauch v RCA Corp.


38

CASES AND DOCTRINES

Internal Affairs Doctrine – choice of law concept• Law of state of incorporation governs

internal affairs of a corporation• VantagePoint Venture Partners 1996 v

Examen, Inc.

Contract Construction Case• Pasternak v Glazer


39

TRANSFER OF ASSETS AND LIABILITIES

Generally Transfer of Contractual Rights Successor Liability in Asset Acquisitions Liability of Seller’s S/H in Asset Acquisitions


40


Generally• Merger or Consolidation

Surviving or resulting corporation succeeds to all assets and liabilities of constituent corporations and the assets of all constituent corporations are available to satisfy creditors of all constituent corporations

• Asset Acquisition Buyer acquires only specified assets and assumes only

specified liabilities of seller• Stock Acquisition

Target assets and liabilities remain in target separate from assets and liabilities of buyer (unless, in the case of liabilities, conditions exist for piercing of corporate veil)


41


Transfer of Contractual Rights• Merger or Consolidation

Surviving or resulting corporation succeeds to all contractual rights of constituent corporations (including rights under contracts with anti-assignment clause), except that, without consent of contract counterpart, will not succeed to rights under:

Contracts with change of control clause if merger or consolidation results in a change of control of constituent corporation

Patent licenses (at least in Sixth Circuit) – PPG Industries, Inc. v. Guardian Industries

Contracts that are fully performed at time of merger or consolidation [or parties did not intend for surviving or resulting corporation to succeed to rights] – Mesa Partners v. Phillips Petroleum Co.


42


Transfer of Contractual Rights• Asset Acquisition

Buyer does not succeed to contractual rights under any contract with an anti-assignment clause, unless it obtains consent of contract counterpart

If contact is silent with respect to assignment, follow normal contract rules

Assignment of personal services contracts require consent of contract counterpart

Non-personal services contracts may be assigned without consent

• Stock Acquisition Contracts that are silent or contain anti-assignment

clause remain in effect – Branmar Theatre Co. v. Branmar, Inc.

Contracts containing change of control clauses require consent of contract counterpart to remain in effect


43


Successor Liability in Asset Acquisitions• Express Assumption• De Facto Merger• Mere Continuation• Fraudulent Purpose• Product Line Exception


44


Successor Liability in Asset Acquisitions• De Facto Merger

Continuation of enterprise – continuity of management, personnel, location, etc.

Continuity of S/H (S/H of seller become S/H of buyer) Seller ceases operations and dissolves Buyer assumes liabilities and obligations necessary for

uninterrupted operations of seller’s business

• Mere Continuation Reincarnation of seller Same elements as de facto merger, except buyer and

seller have identical S/H

• Bud Antle, Inc. v. Eastern Foods, Inc.


45


Successor Liability in Asset Acquisitions• Product Line Exception – assumption of

products liability (strict tort liability) Purchase of manufacturing business Continue to produce/sell seller’s line of products Plaintiff lacks adequate remedy Buyer knows about product risk associated with

line of products Buyer acquires goodwill associated with product

line

• Ruiz v. Blentech Corporation – Corporate law concept or tort law concept?


46


Successor Liability in Asset Acquisitions• Other Areas of Potential Successor Liability

Employment-related matters Environmental matters Certain tax liabilities Bulk sales

Requires buyer to give seller’s creditors advance notice of buyer’s purchase of seller’s stock in trade (inventory) without assumption of seller’s liabilities


47


Liability of Seller’s S/H in Asset Acquisitions• No change of position vis-à-vis seller’s liability if

seller continues to exist (unless conditions exist for piercing of corporate veil)

• If seller dissolved and makes distributions in compliance with DGCL 281 (distribution provisions) S/H liability limited to : Lesser of (i) distribution received by S/H and (ii) S/H pro

rata share of claim; and Claims brought within three years after dissolution, if

seller elects and complies with DGCL 280 (notice to claimants provisions)

Written notice to persons with known claims Published notice Petition court to determine amount and security sufficient for

(i) pending lawsuits, (ii) contingent or conditional contractual claims and (iii) unknown claims


48

STATE REGULATION OF TAKEOVERS

First Generation – Disclosure and Fairness Statutes• Example – Illinois Business Take-Over Act

Takeover offer must be registered State Registered 20 days after filing with State unless

hearing initiated by State or requested by target State may deny registration if State determines

(a) registration does not provide full and fair disclosure or (b) or the offer is inequitable

• Held Invalid under the Commerce Clause (imposes a substantial burden on interstate commerce that outweighs local benefits) – Edgar v. MITE Corp. (1982)


49


Control Share Statutes• Prohibit person acquiring “control shares”

without the prior approval of a target’s BOD from voting such shares unless the holders of a majority of the “disinterested shares” agree to restore the vote of the control shares

• Upheld in CTS Corp. v. Dynamics Corp. of America (1987)

Fair or Best Price Statutes• Requires bidder not approved by target’s

BOD to pay all target S/H the best price paid to any target S/H


50


Business Combination Statutes• Prohibits “business combination” with an

“interested stockholder” for a specified period of time unless: Business combination approved by BOD in place

before S/H became an interested stockholder; or At time S/H became an interested stockholder,

S/H acquired at least a specified (usually very high) percentage of target’s voting stock; or

Business combination approved by both target’s BOD and by the holders (other than the interested stockholder) of a supermajority of target’s voting stock

• Example – DGCL 203


51

Questions

state law considerations

Documents