Corporations (Changes in Corporate Structure) Flashcards
Corporations (Changes in Corporate Structure)
Fundamental Changes in Corporate Structure
- Certain Amendments to the Articles of Incorporation
- Certain Mergers
- Consolidations
- Sale of All or Substantially All Assets Outside the Ordinary Course of Business
- Dissolution/Liquidation
- Termination
Corporations (Changes in Corporate Structure)
Common Corporate Combinations
- Merger/Consolidation
- Stock for Assets
- Stock for Stock
- Spinoff Transaction
- Stock Acquisition
Corporations (Changes in Corporate Structure)
Common Corporate Combinations:
Stock for Assets
The acquirer purchases all or substantially all of the target’s assets with the acquirer’s stock as consideration to the target’s shareholders
- All or Substantially All of Target’s Assets –> Acquirer
- Acquirer Stock –> Consideration to Target Shareholders
- Target –> Continues to Exist with all Liabilities
Corporations (Changes in Corporate Structure)
Common Corporate Combinations:
Stock for Stock
The acquirer purchases all of the target’s stock with the acquirer’s stock as consideration to the target’s shareholders
The target becomes the acquirer’s subsidiary
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1. Target Stock –> Acquirer
2. Acquirer’s Stock –> Consideration to Target Shareholders
3. Target –> Acquirer’s Subsidiary
Corporations (Changes in Corporate Structure)
Common Corporate Combinations:
Spinoff Transactions (Division)
The parent spins off certain assets into a new subsidiary in which the parent owns 100% of the subsidiary’s stock
The parent stockholders do not surrender any stock, they receive equivalent shares in the new subsidiary to compensate for the loss of equity in the parent stock
Corporations (Changes in Corporate Structure)
Common Purposes for Corporate Combinations
- Corporation wants to acquire special process or tech owned by another corporation
- Corporation wants to diversify and expand its product line
- Corporation wants to get rid of competitor
- Corporation wants to sell line of business (or other assets) to raise cash
Corporations (Changes in Corporate Structure)
Constituent Corporations
Corporations involved in corporate combinations
NOTE: does not include parent corporations when the subsidiary is merging
Corporations (Changes in Corporate Structure)
Structuring Considerations
- Tax Considerations
- Liability Considerations
Corporations (Changes in Corporate Structure)
Restructuring Considerations:
Tax Considerations
Nomenclature (Tax “Reorganization”) –> De Facto Merger –> No Gain Recognition
Solely Cash Consideration –> Recognize Gains
Solely Stock Consideration –> No Gain Recognition
Mixed Consideration –> May have to Recognize Boot
Corporations (Changes in Corporate Structure)
Structuring Considerations:
Liability Considerations
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Mergers
a. Known Liabilities
b. Contingent Liabilities
c. Unknown Liabilities –> Use Escrow to protect - Stock Purchase Transactions
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Asset Purchase Transactions
a. Strict Successor Liability
b. Express Assumption
c. Deemed Assumption (De Facto Merger & Product Line Exceptions)
Corporations (Changes in Corporate Structure)
Structuring Considerations:
Liability Considerations
Asset Purchase Transactions
Under most state laws and common law principles, a corporation that purchases the assets of another company is not liable for the seller’s liabilities unless the purchaser expressly or impliedly assumed the seller’s liability
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Factors to Consider
1. Whether buyer expressly or impliedly agreed to liability
2. Whether the transaction amounts to a de facto consolidation/merger
3. Whether the buyer corporation is **merely a continuation **of the seller corporation, or
4. Whether the transaction was entered into fraudulently for the purpose of avoiding liability
Corporations (Changes in Corporate Structure)
Product Line Exception
A successor corporation that manufactures the same line of products as its predecessor may be held liable for injuries caused by products manufactured by the predecessor corporation
Corporations (Changes in Corporate Structure)
De Facto Merger Doctrine
The purchase of assets from another company may be considered a de facto merger when there is:
- Continuity of Ownership
- Assumption of the Successor Corporation of the liabilities ordinarily necessary to continue the acquired business
- Continuity of management, personnel, physical location, assets, and general business operation
Corporations (Changes in Corporate Structure)
Leveraged Buyouts
Where a corporation goes private by purchasing all of its publicly held shares
Often the corporation will borrow money to fund the buyout.
Corporations (Changes in Corporate Structure)
Domestication
Reasons & Requirements
Where a corporation changes its state of incorporation.
Domestication has no effect on the corporation’s debts, assets, or liabilities
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Common Reasons for Domestication
- Preparing for an IPO
- Escaping unfavorable regulations (generally tax & labor)
Requirements
- Board Approval
- Shareholder Approval
- Certain Filing Requirements in relevant states
Corporations (Changes in Corporate Structure)
Entity Conversion:
Requirements & Liability Concerns
Where a corporation converts to a different type of business entity
Requirements
- Board Approval
- Shareholder Approval
- Certain Filing Requirements in relevant states
Liability Concerns
Because some former shareholders may now face personal liability (if changing to a Partnership), each person who would be subject to such personal liability must sign a separate written consent
Corporations (Changes in Corporate Structure)
Dissolution
Types of Dissolutions
- Voluntary
- Administrative
- Involuntary/Judicial
Corporations (Changes in Corporate Structure)
Dissolution:
Voluntary Dissolution
(1) Initiation by
a. Board or
b. Shareholders
(2) Shareholder Approval
Initiation Rights: Usually initiated by the board, but may be initiated by shareholders
Shareholder Approval Requirements: A decision to voluntarily dissolve must be approved by shareholders
Corporations (Changes in Corporate Structure)
Dissolution:
Administrative Dissolution
An administrative dissolution is generally the result of technical/administrative defaults, such as:
- Failure to pay taxes or file annual reports
- Failure to have a registered agent or notify the state of a change
- Continuing to operate after the corporation’s duration has expired
Reinstatement
Most states allow corporations to apply for reinstatement within a certain period of time.
The corporation must cure the default.
Reinstatement is retroactive, meaning one the default is cured the company continues as if it never dissolved.
Corporations (Changes in Corporate Structure)
Dissolution:
Involuntary/Judicial Dissolution
A corporation can be forced to dissolve by the state, unsatisfied creditors, or by its shareholders
Corporations (Changes in Corporate Structure)
Dissolution:
Involuntary/Judicial Dissolution
by the State
The state is the “creator” of the corporation and therefore it can dissolve the corporation for reasons such as:
- Procuring the articles of incorporation through fraud,
- Exceeding/abusing its granted authority,
- Doing something illegal
Corporations (Changes in Corporate Structure)
Dissolution:
Involuntary/Judicial Dissolution
By a Creditor
A creditor may bring an action for dissolution if:
- The creditor is can establish that the corporation is insolvent, and
- Either:
a. The creditor has received a judgment against the corporation for the claim, or
b. The corporation has acknowledged in writing that the claim is owed.
During liquidation, the expenses of liquidation are paid first, then the creditors, then the shareholders
Corporations (Changes in Corporate Structure)
Dissolution:
When can a Shareholder cause Involuntary/Judicial Dissolution
Only the MBCA and some states allow shareholder judicial dissolution in close corporations (but not for oppression or fraud) or in situations where the board or shareholders are deadlocked.
Corporations (Changes in Corporate Structure)
Liquidation:
General Activities
The process of wrapping up the business affairs of the corporation
- Collecting Assets
- Disposing of Properties that will not be distributed to shareholders
- Discharging liabilities or making provisions for discharging liabilities, and
- Distributing the remaining property to the shareholders according to their respective interests
Corporations (Changes in Corporate Structure)
Liquidation:
Non-Judicial
Occurs when dissolution is voluntary or administrative
The corporate officers and directors liquidate the corporation by:
- Completing Contracts
- Notifying Creditors to Submit Claims
- Collecting Assets
Corporations (Changes in Corporate Structure)
Liquidation:
Judicial
Usually only when dissolution is involuntary/judicial, but a voluntarily or administratively dissolved corporation may request judicial supervision of liquidation when appropriate.
The court may appoint a receiver to receive and distribute the corporation’s assets
Corporations (Changes in Corporate Structure)
Liquidation:
Claims Against the Corporation
Known Claims
Claims, debts, and obligations the corporation knows about and must provide notice to creditors to submit their claims during liquidation
.
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Unknown Claims
Claims that have not yet matured or been made against the corporation
The corporation may place a notice of dissolution in a newspaper of general circulation stating that the claim will be barred unless it is brought within 3 years of the publication.
Companies may provide for unknown claims by purchasing insurance or setting aside a portion of assets in escrow
Assets Distributed Before Claim Made –> Shareholder may be liable, but only to the extent to which corporate assets were distributed to them
Corporation Dissolved Due to Merger/Consolidation –> Creditors may enforce a claim against the surviving corporation
Corporations (Changes in Corporate Structure)
Liquidation:
Distribution to Shareholders
Occurs after all debts discharged and any expenses of liquidation paid
Liquidation distributions are determined in accordance with shareholders’ ownership interest (residual interest)
Shareholders may receive cash or assets
Corporations (Changes in Corporate Structure)
Mergers:
Types of Mergers
- Direct Merger
- Upstream and Downstream Mergers
- Forward Triangular Merger
- Reverse Triangular Merger
Corporations (Changes in Corporate Structure)
Mergers:
Direct Mergers
The target merges into and with the bidder
.
1. Target’s Assets & Liability –> Bidder
2. Target’s Outstanding Shares –> Converted (Bidder Stock or other Consideration)
3. Target –> Ceases to Exist
.
Constituents = Bidder & Target
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Bidder = Survivor
Target = Extinguished Corporation
NOTE: Direct Mergers are more dangerous because of assumed liabilities
Corporations (Changes in Corporate Structure)
Mergers:
Forward Triangle/Subsidiary Merger
The target merges into and with the subsidiary-bidder, with the subsidiary-bidder as the survivor
- Target’s Assets & Liability –> Subsidiary
- Target’s Outstanding Shares –> Converted (Parent-Bidder Stock or other Consideration)
- Target –> Ceases to Exist
Constituents = Subsidiary-Bidder & Target
Subsidiary-Bidder = Survivor
Target = Extinguished Corporation
Parent-Bidder = Parent
Corporations (Changes in Corporate Structure)
Mergers:
Reverse Triangle/Subsidiary Merger
The subsidiary-bidder is merged into and with the target and the target is the survivor
The target becomes the subsidiary of the parent-bidder
- Subsidiary’s Assets & Liability –> Target
- Target’s Outstanding Shares –> Converted (Parent-Bidder Stock or other Consideration)
- Subsidiary’s Shares –> Converted (Target Common Stock)
- Subsidiary –> Ceases to Exist
Constituents = Subsidiary & Target
Target = Survivor (now Subsidiary)
Subsidiary-Bidder = Extinguished Corporation
Parent-Bidder = Parent
Corporations (Changes in Corporate Structure)
Mergers:
Short-Form, Upstream, & Downstream Mergers
Mergers between parent corporations and their subsidiaries
.
Short-Form Mergers
If the parent owns more than 90% of the subsidiary stock, the MBCA and most states allow the merger to take place without shareholder approval from either the parent corporation or the subsidiary. MBCA § 11.05
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Upstream Merger
Where the subsidiary merges into the parent and the parent is the survivor
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Downstream Merger
Where the parent merges into the subsidiary and the subsidiary is the survivor
Corporations (Changes in Corporate Structure)
Mergers:
Key Events & Procedures
- Constituent Corporation Discussions/Exploration
- Letter of Intent/MOU/Term Sheet
- Drafting the Plan of Merger
- Director Approval
- Shareholder Approval (& Exceptions)
Corporations (Changes in Corporate Structure)
Mergers:
Shareholder Approval Exceptions
- Short-Form Merger
- Small-Scale Merger
- Certain Triangular Mergers (that do not impact shareholder’s equity)
Short-Form Merger
If the parent owns more than 90% of the subsidiary stock, the merger may occur without shareholder approval
Small-Scale Mergers
If less than 20% of the survivor’s outstanding shares are transferred to extinguished shareholders, the merger may occur** without surviving shareholder approval**
If more than 20% –>Parent shareholders get a vote
Corporations (Changes in Corporate Structure)
Mergers:
Dissenter’s Right of Appraisal
Procedural Requirements & Exception
Shareholders opposed to a merger may have the right to be bought out (at FMV), following strict procedural rules
Procedural Requirements
- Shareholder must deliver written notice of intent
- Notice is delivered to the corporation before the vote
- Shareholder does not vote
- Within 10 days, the corporation must deliver written appraisal notice to any dissenting shareholder
- Shareholder must return the form (Not less than 40 days, not more than 60 days)
- Corporation estimates FMV
- Corporation **buys out **shareholder for equal or more than FMV
“Market Out” Exception
Many states do not allow appraisal rights if:
- The shares are listed nationally, or
- There are more than 2000 Shareholders
Corporations (Changes in Corporate Structure)
Hostile Takeovers
Combinations that are not consented to by the **target’s management **
The aggressor/bidder goes over the head of the target’s management and courts stockholders directly
Primary Methods of Hostile Takeovers
- Tender Offer
- Proxy Fight
Corporations (Changes in Corporate Structure)
Hostile Takeovers:
Tender Offer
Process & Regulations
A broad solicitation by a company or a third party offer to purchase a substantial percentage of a company’s shares or units for a limited period of time at a fixed price.
.
Toehold Positioning
Gaining an equity position in order to advance the takeover and to exercise shareholder rights (information & access)
Purchasing a 4.9% of a target’s outstanding shares, avoiding required SEC disclosures and filings.
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Regulations
1. § 13(d) of the 1934 Act –> Regulating the reporting of stock acquisitions over 5%
2. § 14(d) of the 1934 Act –> Regulating the making of tender offers
3. The Williams Act –> Requires certain disclosures by both the aggressor and target
a. Refines §§ 13 & 4 for § 12 Reporting Companies
b. Prevents Fraud
c. Protects Shareholder
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All Holders Rule
An issuer tender offer must be open to all security holders
Corporations (Changes in Corporate Structure)
Hostile Takeovers:
Tender Offer
Announcement & “Put into Play”
The announcement of a tender offer is usually done by advertisement or press release
Usually includes:
- Limited need (How much stock we need)
- Limited price (at this price)
- Limited time (for this amount of time)
Once the announcement is made, the target is **“put into play” **–> possible Risk Arbitrage (aka speculators/”arbs” buying the target stock)
Corporations (Changes in Corporate Structure)
Hostile Takeovers:
Proxy Battles
An alternative to a tender offer
The bidder/acquirer tries to take over the target’s board of directors, generally by soliciting shareholders with new director proposals
Corporations (Changes in Corporate Structure)
Hostile Takeovers:
Proactive & Retroactive Defensive Strategies
Proactive Defensive Strategies
1. Staggered Board
2. Super-majority Vote Requirement
3. Golden Parachute Payments
4. Poison Pills
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Reactive Defensive Strategies
1. White Knight
2. Pac-Man
3. Jonestown
4. Self-Tender
5. Crown Jewel
Corporations (Changes in Corporate Structure)
Hostile Takeovers:
Enhanced Scrutiny of Defensive Measures
Delaware courts have developed an enhanced scrutiny standard of review for defensive measures implemented in response to a potential hostile takeover
All Holders Rule
Unocal Test
Corporations (Changes in Corporate Structure)
Hostile Takeovers:
Unocal Test for Director Defense Strategies
- Board must have reasonable grounds to believe the tender offer presents a danger to the company, based on:
a. Good Faith
b. Reasonable Investigation
c. Independent Directors - The Board’s response must be reasonable
a. Proportional to the threat
b. Not coercive or preclusive
Satisfied –> Business Judgment Rule Applies
Not Satisfied –> Breach of Revlon Duties
Corporations (Changes in Corporate Structure)
Hostile Takeovers:
Impact on Director’s Fiduciary Duties
Once a hostile takeover becomes inevitable, the board’s duty shifts from protecting shareholders to maximizing sale price of stock (Revlon Duties)
Revlon duties are more stringent than the business judgment rule
