Dissolution Buyouts and Mergers

Question 1

Dissolution of an LLC

Answer 1

On application by or for a member or manager the Court of Chancery may decree dissolution of an LLC whenever it is not reasonably practicable to carry on the business in conformity with a LLC agreement.

Question 2

DEFAULT LLC DISSOLUTION RULE:

Answer 2

When a member of the LLC wants out, the other partner must buy out his portion of the LLC.

Question 3

LLC EXIT CLAUSES:

Answer 3

LLC exit clauses tend to be honored by courts unless they are unconscionable, or found by the court to be otherwise unenforceable.

Question 4

Problems with the Exit Clause

Answer 4

In this case the exit clause was flawed because it did not provide for an adequate tie-break provisions and the parties would both remain responsible for the mortgage on the restaurant property.

Question 5

Buyouts Below FMV

Answer 5

Majority shareholders who buy back shares from another shareholder are obligated to pay fair market value if they have breached a fiduciary duty owed to the shareholder.

Question 6

Involuntary Dissolution

Answer 6

An involuntary dissolution is an extreme remedy that will be granted only when there is strong evidence of an abuse of discretion by the majority.

Question 7

Right of First Refusal Agreement

Answer 7

An agreement that gives a shareholder the right of first refusal does not convey the right to control the sale of assets or the liquidation of the company.

Question 8

SALE v. MERGER:

Answer 8

A sale of stock and assets is not a merger, a sale can be a partial transaction divesting the entity of some of its assets. In a merger the identity of the corporation merging into the other corporation is lost.

Question 9

COME ALONG CLAUSE:

Answer 9

A come along clause states that if the majority block is going to sell its shares then it has to offer to buy the shares of the minority.

Question 10

RIGHT OF FIRST REFUSAL:

Answer 10

A right of first refusal is a contract clause that states the seller must first offer the object of the sale to a designated person at the same price they have been offered by the prospective buyer first.

Question 11

Purchasing Controlling Share of Corp at Premium Price

Answer 11

Absent bad faith such as corporate looting of assets or a conversion of a corporate opportunity, a party can purchase a controlling share of a corporation at a premium price without extending a tender offer to all shareholders.

Question 12

FREEDOM TO SELL CONTROLLING BLOCK:

Answer 12

The court realized that the rule advocated by Plaintiff would place a significant burden on parties who are simply trying to get a majority interest in a company rather than complete ownership.

Question 13

WHY PAY A PREMIUM FOR THE CONTROLLING BLOCK?:

Answer 13

There are two reasons why people would want to pay a premium for the controlling block:

(1) because they think that they can run the corporation better and make their money back in future profits; or
(2) to loot the corporation of its profits.

A majority shareholder, particularly when they also are the president and chairman of the board, who sells his shares to a third party who then obtains a controlling interest, owes the minority shareholder their share of the premium paid by the third party for the controlling interest.

Question 14

Whether the stock purchase agreement is invalid because it provided for the termination of prior board members and subsequent control of management for Plaintiff.

Answer 14

An agreement to sell the control of management along with the sale of a substantial percentage of shares is not against public policy.

Question 15

MINORITY CONTROLLING BLOCKS:

Answer 15

Since many shareholders are not interested and do not vote in corporate matters 28% could be a controlling block.

Question 16

LOMBARD TEST:

Answer 16

The party attacking the legality of the action in question should have the burden of showing that the voting block is not really a controlling interest. If it is, in fact a controlling interest it is legal.

Question 17

FRIENDLY TEST:

Answer 17

Such transactions are illegal unless the controlling block owns over 50%.

Question 18

CLARK TEST:

Answer 18

Remand to the trial court, find out if it is in fact a controlling interest.

Question 19

Mechanics of a merger - majority view

Answer 19

Shareholders and directors must vote to approve the merger.

Question 20

RIGHT TO APPRAISAL:

Answer 20

The minority who voted against the merger, but was outvoted has a right of appraisal in which their stock is appraised at fair market value immediately before the merger without taking into account any benefits of the merger and they are entitled to accept that price for their shares.

Question 21

SHORT FORM MERGER:

Answer 21

The short form merger also known as a squeeze out is initiated by a very large shareholder that has a controlling stake, usually more than 90%. It can be initiated unilaterally and the minority shareholders can be forced out, the minority being forced out is entitled to a right of appraisal.

Question 22

DE FACTO MERGERS:

Answer 22

• STOCK EXCHANGE:
  
  • Corporation A and Corporation B, A is going to be merged into B and A’s shareholders are going to get B’s stock. Upon the merger A ceases to exist and B acquires all the assets and liabilities of A.
• ASSET SALE:
  
  • The same transactions can be done with an asset sale. A sells all of its assets to B, B transfers stock to A in exchange and assumes all of A’s liabilities. B would essentially be a holding Company holding all of A’s stock, A would be liquidated and distribute the stock amongst its shareholders and A would cease to exist.

Question 23

What does it take for a De Facto Merger?

Answer 23

• A reorganization by a corporation to acquire the assets of another organization operates as a de facto merger if the nature of the corporation is significantly changed and the shareholder’s interest is significantly altered.
• REASONING: Instead of looking at just the nature of the corporate transaction, the court looked at the consequences.

Question 24

Asset Sales & Merger Statutes

Answer 24

Asset sales statutes and merger statutes are independent of each other, and a corporation complying with one or the other is complying with the law.

Question 25

Fiduciary Duty in Freeze-Out Mergers

Answer 25

• A majority shareholder owes a fiduciary duty to minority shareholders to provide all relevant information that would pertain to a proposed cash-out merger.
• The court places the same burden on majority shareholders for mergers as they would place on them for inside information. A majority shareholder can not gain in a purchase by withholding information to a party whom they owe a fiduciary duty.

Question 26

INDEPENDENT NEGOTIATION COMMITTEE:

Answer 26

When there is a conflict of interest such as in this case it is proper to appoint an independent negotiating committee, make it clear that they are not sharing proprietary information, and negotiate at arm’s length.

Question 27

Business Purpose

Answer 27

• Delaware rejects the notion that there must be a business purpose for a merger.
• Massachusetts held that there must be a legitimate business purpose for a merger, and, if there is not, the merger may be invalidated.

Question 28

Minority SH obligation to Majority SH in a merger

Answer 28

Minority shareholders owe the majority shareholders a duty of loyalty to inform them in advance of any plans for a merger or the structure of a merger.