Corporate Formalities Flashcards
What section of Deleware Code governs mergers of domestic corporations?
§251
What types of consideration may be used under §251?
- Cash
- Bidders stock
- Bidder’s debentures or other debt instruments
Who must approve a §251 merger?
- Board of each constituent corporation must approve the merger
- In general, the shareholders must approve the merger.
Exceptions to required ****shareholder approval - §251(c) **with respect to surviving corporation
§251(c) = Absolute majority (but Certificate of Inc. may require a higher percentage of approval)
Exceptions to required shareholder approval - §251(f) with respect to _surviving _corporation
- o Do not exceed 20% of common stock immediately before effective date of merger.
- o “fully diluted basis”
- Pre-dilution Basis = 10 shares
- Fully diluted basis = 11 shares
- Means whether or not you get shares before or after you calculate how many shares will be issued to you. 10% of 100 shares = 10… but then 110 shares exist. So 10% of 110 shares = 11 fully diluted.
How to approach a §251 problem?
- Need Board Approval?
- Yes
-
Exception?
- Yes IF it is short form under §253
- Short Form = own > 90%
- Yes IF it is short form under §253
- Shareholder Approval?
- Generally, Yes – from both companies.
-
Exception?
-
§251(f) - Surviving company do not need the approval from their shareholders when:
- So long as:
- Stock IS NOT changed
- Documents are changed
- and Not > 20% of stock issued
- Target needs to be a surviving company (inversion)
- Bidder -> If < 20% issued, then shareholder **DO NOT **need to vote.
- So long as:
-
§251(f) - Surviving company do not need the approval from their shareholders when:
- Appraisal Rights?
- Yes. Both companies
Abandonment of Merger
- Board may abandon the merger, even after shareholder approval, as long as the Agreement expressly reserves that power to the board (shareholders do not have to approve abandonment)
- But abandonment decision must be fully consistent with the board’s fiduciary duties
Amendment of Merger Agreement
- Prior to filing of Merger Agreement with the Secretary of State, the board may amend the agreement, as long as the agreement reserves that power to the board
- Post-shareholder-approval amendments may NOT change the following:
- Consideration to be received in the merger
- Any terms in the Certificate of Incorporation of the surviving corporation
- Any change adversely affecting a class or series of stock of a constituent corporation
Dissenters’ Rights of Appraisal – § 262 governs - **The Right of Appraisal Relates Specifically to **
- Mergers
- NOT a sale of assets
- NOT an amendment to the Certificate of Incorporation
Market out exception – § 262(b)(1)
- Shares listed on a national exchange or traded on NASDAQ have no right of appraisal, or
- Shares held widely enough to enjoy a liquid and substantial trading market also have no statutory appraisal rights
The Exception to the Exception – § 262(b)(2)
- Any “forced consideration” other than stock will restore a dissenter’s appraisal rights
- Bonds
- Debentures
- Cash (other than cash in lieu of fractional shares)
- Property
- NOTE: The following STOCK consideration will prevent operation of the “exception to the exception”
- Stock of the surviving corporation OR stock of some other corporation that is publicly traded
Short Form Mergers – § 253 governs
- (merging of 90% subsidiary with parent corporation)
- Shareholders of parent corporation do not need to vote
- Shareholders of subsidiary corporation do not need to vote but may have appraisal right under 253(b)(3)
- Under the “entire fairness” standard, the parent company must deal fairly with minority shareholders of the subsidiary corporation. See Weinberger v. UOP, Inc.
Asset Acquisitions – § 271 governs
- Transactions qualifying as the sale of all or substantially all assets constitute “fundamental changes”
- § 271(a) – board of Target must approve the transaction because it is a fundamental change
- Sale must be expedient and in the best interests of the corporation
- § 271(a) – shareholders of Target must approve the transaction
- Target shareholders have no appraisal rights because it is not a merger
-
Target’s options:
- Hold the consideration received
- Distribute the proceeds to the shareholders (extraordinary dividend)
- Distribute the proceeds to the shareholders in dissolution
- Complete liquidation often occurs after an asset sale
- State/Federal proxy rules may come into play to require disclosure of post-sale intent
-
Successor liability
- Bidder succeeds to assets and liabilities expressly or impliedly assumed
- Target’s creditors must generally look to Target for satisfaction of relevant obligations
- De facto merger doctrine may intervene to prevent opportunistic activities detrimental to Target’s creditors
Stock Acquisitions - Overview
- Bidder negotiates directly with Target shareholders
- Cash consideration
- Stock consideration (“stock exchange offer”)
- If cash is used as consideration:
- Bidder’s board will be given deference under business judgment rule
- Shareholders of bidder do not have to approve the transaction (not a fundamental change)
- If stock is issued as consideration:
- Under DL law the shareholders will have the right to vote if they are diluted more than 20%
- Bidder (as new controlling shareholder) will replace Target board with its designees
- Agency cost problem (separation of ownership and management) featured prominently here
- Many laws governing these transactions arose as responses to the agency cost problem
- Benefit to Bidder?
- Limits risk because Target will exist as separate entity and Bidder is sole shareholder (creditors of Target cannot go after Bidder unless they can pierce the corporate veil)
Why Use Triangular Mergers?
- Bidder’s assets are protected from the claims of Target’s creditors (which may only proceed against Target’s assets)
- Bidder does not need to obtain approval of its shareholders
- Dissenting Bidder shareholders have no appraisal rights