Final exam - mergers and acquisitions Flashcards
What is a merger?
Combination of companies in which one of the companies survives (if new corp created, called a consolidation)
Why merge?
- control supply
- improve management
- buy out competitor
- eliminate redundant costs
- economies of scale
- economics of scope
- taxes
- freeze out minority SHs
Approaches
Proxy contest
Tender offer
Stock purchase
sale of assets
merger/consolidation
Tender offer
Offer to all shareholders of a corp the opportunity to sell their shares to you for a certain price. Just want enough to become majority
- Can be conditional – need X shares to go through
- Consideration:
1. Cash – shareholders eliminated
2. Stock – in acquirer
Sale of assets
Target sells assets in exchange for money, then liquidates
DE requirements for mergers (see Farris v. Glen Alden)
- Board approves (acquirer and target)
- SH approve
- filing
- appraisal rights: SHs who oppose can cash out by having corp buy their shares at price to be resolved at judicial appraisal proceeding
- SHs must hold shares continuously through effect date and must perfect appraisal right with written notice to corporation.
- SHs must oppose and vote against merger to be entitled
- point is you don’t want shareholders to be stuck in a corporation not of their choosing
- in DE, no appraisal if consideration is stock in publicly traded company
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De facto merger doctrine
PA: Farris and Terry
DE: no de facto merger doctrine
Idea: a transaction that has the effect of a merger must receive the procedural protections of a merger.
Why do a Freeze-out Merger?
- have extra cash
- want to make the decisions and reap the rewards
- minority shareholders make things complicated
- go private to avoid regulatory costs of securities laws
Process of a freeze-out/triangular merger
Would-be acquirer/often majority SH creates and capitalizes subsidiary with consideration to be paid to target SHs. Subsidiary merges into target by submitting tender offer, hoping to force minority to give up shares. Acquirer then chooses to merge assets into target. Non-tendering shareholders are gone because the company they invested in no longer exists. Paid initial capitalization amount as liquidation payment.
In forward, subsidiary survives.
In reverse, target survives.
Hostile transactions - why would a board resist offer?
- job security
- want to pursue long-term plans
- waiting for better offer
Willams Act
If one acquires 5% of stock, one must file a second 13d disclosure statement within 10 days. Those coordinating with each other will be combined.
Anyone making tender offer must file detailed set of disclosure documents, including plans for the company
- Applies only to registered securities.
- If too many tender, acquirer must accept on pro-rata basis.
- If price raised during process, must be paid to all
- Tender offer must be open for at least 20 business days. SH who tendered may withdraw in first 15.
Two-tier tender offer
Tender offer
Freeze-out
Make the first tier more attractive than second so that shareholders have incentive to tender
ALI approach to defensive measures
Acceptable if reasonable response to the threat posed
can consider interests other than those of SHs
Unitrin and defensive measures
fine if not draconian - that is coercive (whether shareholders given strong incentive) and preclusive (whether will prevent transaction from taking place). Range of reasonableness
Poison pills generally
dormant rights distributed through “vehicle”
“stapled” to share that cannot be sold or traded.
Redeemable when certain triggering event happens, like someone gets X percent of shares, merger, etc.
Usually not good for acquirer because dilutes economic or voting interest.
Not sure what court thinks about them because acquirers avoid.
Types of poison pills
flip-over: when triggering event happens, can be converted to common stock of acquirer at a discount
flip-in: when triggering event happens, right to discounted shares in target company
Back-end plan: SHs can convert shares to package of target’s debt
voting plans: less than one vote/share if voter has many shares
Poison debt: debt securities. Forbids acquirer from burdening target with debt or mortgaging its major assets. Deters LBOs
Dead hand: Toll Brothers, court rejects pill that could be redeemed only by the directors who had been in office when issued or their approved successors. Not good. SHs wouldn’t change the board
No hand: Pill nonredeemable for 6 months after change in control of the board b/c interferes with board power.
