Intro to Friendly M&A Transactions

Question 1

Three ways a corporation can acquire another?

Answer 1

1. Statutory merger
2. Stock acquisition
3. Asset acquisition

Question 2

What is a statutory merger?

Answer 2

Transaction in which two corporations are combined into one corporation

Question 3

What happens in a statutory merger?

Answer 3

By operation of law, all of the assets and liabilities of the target corp are transferred to the acquiring corp and the target corp disappears

Question 4

What are the types of statutory mergers?

Answer 4

Stock for stock merger: 1) shareholders are given stock in the acquiring corp as consideration & 2) does not need to be 1:1 ratio

Cash merger: 1) shareholders are given cash as consideration; 2) used when acquiring corp d/n want target corp shareholders to have a say in the merger

Question 5

What are the DGCL requirements for the merger under §§ 251 and 253?

Answer 5

1. Plan of merger between the constituent corps
2. Board of each constituent corp must approve
3. Shareholders of each constituent corp must approve (with exceptions)
4. Plan of merger must be submitted to Sec’y of State

Question 6

Where is the statutory authority for board approval under the DGCL?

Answer 6

§ 251(b) - “board of directors of each corporation which desire to merger . . . shall adopt a resolution approving an agreement of merger . . . and declaring its advisability”

Question 7

Where is the statutory authority for shareholder approval under the DGCL?

Answer 7

§ 251(c) - “The agreement required by subsection (b) of this section shall be submitted to the stockholders of each shareholder corporation …”

Question 8

What are the exceptions to shareholder approval?

Answer 8

De Minimus Exception - § 251(f) and Short Form Merger Exception - § 253(a)

Question 9

What is the De Minimus Exception to shareholder approval of mergers?

Answer 9

1. Merger agreement d/n amend the acquiring corp’s C/I
2. The rights of the acquiring corp’s stock are identical before and after the merger AND
3. Either the merger consideration is cash or stock that doesn’t dilute acquiring corp’s shareholders by more than 20%

Question 10

What is the Short Form Merger Exception?

Answer 10

Any corp owning at least 90% of another corp’s stock can merge the target corp into itself with: 1) only the acquiring corp board’s approval; and 2) no approval necessary by either corp’s shareholders

Question 11

What are appraisal rights?

Answer 11

Shareholders of either target or acquiring corporation that dissent (vote against the merger) are allowed to go to the Chancery Court and order the corporation to pay them the fair value of the stock

Question 12

What is the policy justification for appraisal rights?

Answer 12

If there were no appraisal rights, shareholders would be stuck with either: 1) just merger consideration value, which could be unfair or 2) stock in the corporation shareholders don’t want

Question 13

Why don’t shareholders seek appraisals very often?

Answer 13

1. Shareholder has to pay for experts to determine and provide evidence of stock’s fair value – costly!
2. Evidence of fair value may be difficult to obtain
3. Only worth fighting about to a shareholder with lots of stock

Question 14

Who is entitled to appraisal rights?

Answer 14

1. Generally, appraisal rights follow voting rights - DGCL § 262(a)
2. Available for shares of any class of stock in a constituent corporation in long-form merger under § 251
3. Shareholders of the target corporation in a short-form merger (because they’re in a vulnerable position)

Question 15

What is the “market-out exception”?

Answer 15

No appraisal rights for shareholders if stock is listed on a national securities exchange or if there are more than 2,000 shareholders of record

Question 16

What is the exception to the “market out exception”

Answer 16

Appraisal rights are restored to the shareholders of the target corp if the merger consideration is cash

Question 17

What is the De Minimus exception to appraisal rights?

Answer 17

No appraisal rights for any shares of stock of the corp surviving a merger if the merger did not surviving corp’s shareholders to vote

Question 18

What are the four methods of contracting around appraisal?

Answer 18

1. Stock purpose
2. Asset acquisition
3. Triangular merger
4. De facto merger doctrine

Question 19

What happens in a stock purchase?

Answer 19

1. Acquiring corp goes directly to target corp’s shareholders and purchases their stock for cash
2. Acquiring corp becomes a majority stockholder of the target corp and sets up a parent/sub relationship

Question 20

What are the three methods for acquiring stock?

Answer 20

1. Privately negotiated transaction
2. Open market purchase on the exchange
3. Tender offer - public offer to purchase a set number of shares for a set price

Question 21

Four ways a stock purchase is different from a statutory merger?

Answer 21

1. Target corp still exists
2. Acquiring corp doesn’t own target corp’s assets or liabilities
3. No requirements for approval by boards or shareholders
4. No appraisal rights because shareholders have the option to sell and no voting rights

Question 22

What happens in an asset acquisition?

Answer 22

1. Acquiring corp pays cash consideration for target corp’s assets
2. Target corp still exists, keeps their liabilities and cash

Question 23

What are the voting rights in an asset acquisition?

Answer 23

If the target corp is selling all or substantially all of its assets, the target board must approve and target shareholders get voting rights

Question 24

What are the two tests to determine if shareholders get voting rights in an asset acquisition?

Answer 24

1. Quantitative test - not adopted
2. Qualitative test (Gimmel) - whether the sale is out of the ordinary and substantially affects the existence and purpose of the corporation

Question 25

Does Delaware provide appraisal rights in an asset acquisition?

Answer 25

NO!

Question 26

What is a triangular merger and how does it work?

Answer 26

1. Merger between a newly-formed wholly owned subsidiary of a corp and the target corp
2. A wants to acquire T, so forms new T and merges new T with old T
3. T no longer exists following the merger

Question 27

Why use a triangular merger?

Answer 27

To deprive A corp’s shareholders of both voting and appraisal rights

Question 28

What is the de facto merger doctrine?

Answer 28

If the method of acquisition has the same effects as a merger, courts will step in and grant appraisal rights to shareholders of constituent corporations

Question 29

What doctrine does DE use instead of the de facto merger doctrine?

Answer 29

Doctrine of Independent Legal Significance: if legislature provides for two methods of acquisition, each should be respected. Courts won’t overrule DE statute, but will give each provision effect.

Question 30

What is the Weinberger Approach to fiduciary duties in a parent-subsidiary merger?

Answer 30

1. Apply the entire fairness test (applies to fiduciary relationships in self-dealing transactions—because it is as if the majority shareholder is on both sides of the transaction)
2. The controlling shareholder of a corporation owes fiduciary duties to the minority shareholders of a corporation

Question 31

What is the “entire fairness” analysis under Weinberger?

Answer 31

1. Fiduciary has the burden of showing the transaction is entirely fair
2. Fiduciary can shift the burden back to the plaintiff by showing the presence of a majority of the minority provision (has to be effective!) or an independent negotiating committee (also has to be effective!)

Question 32

What are the Weinberger factors for determining fair dealing?

Answer 32

1. The timing of the transaction
2. How the transaction was initiated (parent v. sub)
3. How the transaction was structure and negotiated
4. How the transaction was disclosed to the directors
5. How the approval of directors and stockholders were obtained
6. Candor