Mergers and Acquisitions Flashcards
Statutory acquisition
mergers and a sale of assets
NonStatutory acquisition
tender offer, open market purchase, proxy contest
Tender Offer
public offer made to all shareholders of a target corporation in which the bidder offers to purchase (at a premium) shares in the target company [hostile acquisition]
Market for Corporate Control
Market for corporation acquisitions ideology aligns incentives of the board with the incentives of the shareholders. You generally become an appealing target when the value of the stock does not represent the potential.
Requirements for Sale of All or Substantial Assets
Requires approval of sale of all or substantially all assets by BoD & majority of outstanding shares by shareholders of selling corp.
o Acquirer’s vote not needed b/c purchase of assets is ordinary biz per §141.
– No shareholder appraisal rights
Gimbel Test
“All or substantially all” requires examining if assets are
(1) quantitatively vital to corp. and
(2) qualitatively the sale would substantially affect corp’s existence or purpose (as acts not AoI) and the transaction is unusual.
(In a gray area, courts defer to requiring a shareholder vote)
Gimbel v. Signal
Signal’s shareholders challenge deal selling Signal Oil, which was approved by BoD but not shareholders, arguing sale is “substantially all assets.” Deal was only 26% assets, 41% net worth, and 15% Signal’s revenues. Signal became a conglomerate, NO relevance that it started out in Oil biz. HELD: S/h approval of Signal Oil sale not req’d b/c not substantial.
Equal Dignity Rule (Delaware)
Courts will respect the legal framing that parties put in place for their deal.
Hariton v. Arco Electric
Deal structured as sale of assets. Loral would acquire all of Arco’s assets for shares of Loral; Arco then dissolved under §275. Challenged as de facto merger which would have given Arco shareholders appraisal rights. HELD: Equal dignity rule applies. De facto merger is not a thing in Delaware.
Merger v. Consolidation
Consolidation forms a new, third entity.
Approval of Mergers
- Both BoDs of target & acquirer must approve. DGCL §251(b)
- Both majority of shareholders of target & acquirer must approve. §251(c) Except…
o Where acquirer’s AoI is unchanged AND cash only or stock of less than 20% of issued shares is transferred, no need for s/h vote by acquirer.
o Freeze-out merger (DGCL §253): Merger where acquirer already owns 90%+ of target’s outstanding shares, only acquirer’s BoD but not shareholders must vote.
o Target shareholders must always vote.
Appraisal Rights
Shareholders of the acquired corporation have the right to challenge the fair value of the transaction.
Market Out Exception
No appraisal rights if sale of assets or if shares are publicly traded before and after or firm has at least 2,000 shareholders.
Triangular Merger
Creation of special purpose vehicle to complete acquisition
Benefits of Triangular Mergers
Special purpose vehicles have debt financing benefits & decision-making process benefits b/c no acquiring shareholders to approve of transaction.
One-tiered tender offer
one step, one offer, one price.
Two-tiered tender offer
Step 1 tender offer. Step 2 is freeze-out merger of minority shareholders. First step is often higher price (so coercive).
Often leads to a takeover.
Safe Harbor for Board/Officer Transaction to have BJR
(1) Transaction approved by informed vote of independent committee or independent and informed directors
OR
(2) Approved by informed, majority vote of independent shareholders.
Safe Harbor for Controlling Shareholder Transaction to have BJR
Ab initio…
(1) Transaction approved by informed vote of independent committee w/ full authority to decide
AND
(2) Approved by informed vote of disinterested shareholders.
How can shareholders defeat cleansing mechanism?
Show that (1) voters were not independent or (2) lacked material info.
If fair dealing is present
burden shifts to Plaintiff to show lack of fairness, otherwise BJR applies.
Weinberger v. UOP
Signal already owned controlling interest of UoP as majority shareholder w/ majority control of UoP BoD. Two conflicted BoD members ran feasibility study at $24/sh, Signal later bought at $21/sh w/o informing UoP of feasibility study. Deal went through w/ UoP BoD and s/h vote. HELD: BoD breached duty of loyalty to minority shareholders b/c fair dealing requires complete candor. Material info (incl. initial appraisal at $24/sh) withheld from UoP BoD & s/hs.
o KEY DISTINCTION HERE: There is a burden shifting framework when controlling shareholders are involved. Burden of proof d/n shift here b/c UoP s/h and BoD could not have had informed vote if they were unaware of study.
Kahn v. M&F Worldwide
M&F controlled 43% of MFW and wanted to acquire rest. When controlling s/h desires merger, BJR applies as standard of review only if ab initio:
(1) Merger is conditioned on approval by both special committee and majority of minority stockholders;
(2) Special committee is independent;
(3) Special committee can freely select its own advisors & say no definitively;
(4) Special committee meets its duty of care in negotiating a fair price;
(5) Vote of minority is informed; AND
(6) No coercion of the minority.
Corwin v. KKR Financial Holdings
expands MFW framework to ALL corporate transactions. If BoD structure deal to ab initio be conditioned on independent committee or majority of disinterested directors & disinterested shareholders, BJR applies. If BoD structure deal for only one, then entire fairness.
Shark Repellant
Provisions in AoI/bylaws to make corp less appealing (cargo pants)
o Ex: Staggered board; Director removal only for cause; supermajority vote reqs.; fair price provisions for freeze out mergers; redemption provisions
Poison Pill
Shareholder rights plans which are structured to dilute existing stake of acquirer or make it more costly b/c of expanded liability
Unocal v. Mesa Petroleum
Mesa owned 13% of Unocal, made a two-tiered, front-end loaded tender offer w/ junk bonds on back end. BoD launched own self-tender offer financed by debt (takeover defense) announcing Mesa excluded from offer. HELD: Unocal’s takeover defense was subject to BJR.
Unocal Test
When BoD adopts takeover defenses, the action is subject to a Court’s enhanced scrutiny to see if BJR is appropriate standard of review. For BJR to apply, BoD must prove:
(1) reasonable threat to corp. purpose and effectiveness, and
(2) the response is reasonable in the context of the threat.
Moran v. Household Int’l
Applies Unocal to poison pill adoption where no immediate takeover threat is present. HELD: Action to stave off generalized coercive takeovers is protected under Unocal.
Revlon v. MFA
Pantry Pride (owned by MFA) wanted to acq. Revlon, made hostile tender offer as Revlon adopted share buyback and “poison pill”. Revlon also sought “white knight” in Forstmann. Revlon BoD ultimately agreed to deal w/ Forstmann incl. asset lock-up below market price, no-shop clause, removal of s/h rights and notes covenant, and termination fee. PP sued to enjoin.
1. After applying Unocal, BJR applied to poison pill, stock buyback and exchange offer for subordinated notes
2. Lock up provision w/ Forstmann yielded enhanced Unocal scrutiny (aka Revlon duties) b/c it had effect of ending the auction early
Takeover defense =
Unocal Territory
Revlon Standard
Once sale of corp. is inevitable, BoD’s fiduciary duty is to maximize price. Revlon is triggered in 3 circumstances:
(1) Ab initio, BoD places corp. for sale or seeks to break-up corp.
(2) BoD adopts a selling / break-up mode during negotiation w/ poss. parties.
(3) Transaction results in change of corp. control or sale.
Paramount v. Time Inc.
Subsidiary merging w/ Warner so that only Warner s/hs vote. Time BoD adopts takeover defenses incl. automatic share exchange agreement (lock-up), no shop clause, confidence commitment letters that banks w/n provide 3d party financing. Paramount made offers which Time rejected and sued to apply Revlon.
HELD: Time’s all cash transaction with Warner d/n amount to sale or abandonment of corp. strategy so Revlon not triggered.
* BoD found Paramount’s offer threatened corp’s survival and culture, so Ct applied Unocal and BJR to adopted takeover defenses.
* Found Time was not for sale. Exchange of one publicly traded co. w/ no controlling shareholder for another w/ no controlling shareholder is not a change in control.
* Thus, b/c not for sale, lock-up provision only subject to Unocal.
When does enhanced scrutiny apply? When the transaction…
(a) threatens diminution of current shareholders’ voting power;
(b) sells an asset that belongs to public s/hs & may never be publicly available again;
(c) traditional concern of Delaware courts for actions that impair s/h voting rights.
Enhanced Scrutiny Test
Judicial determination of…
(1) Adequacy of directors’ decision-making process &
(2) Reasonableness of directors’ action considering circumstances then existing.
Transaction involving change of control
Triggers Revlon
Paramount v. QVC
Paramount seeks friendly takeover of Viacom, which is controlled ~80% by Mr. Redstone. Paramount BoD approves deal and adopts takeover defenses: no-shop provision, $100M termination fee, and lock-up option of 19.9% of Paramount’s common stock. HELD: Transaction fails to prove directors acted to meet their Revlon duties. The takeover defenses the Board adopted left them without ability to negotiate in good faith to maximize shareholder value.
