Mergers under Delaware Law

Question 1

Mergers under Delaware Law: Board Approval

Answer 1

• Board Approval: Always need Bidder’s board & almost always need Target’s board
  
  • §251 – authorizes the merger of any 2 domestic corporations
    
    • Merger must be approved by both boards
  • §252 – authorizes the merger of a domestic corporation with a foreign corporation
    
    • either can be surviving entity
• Exception: subsidiary merger under §253

Question 2

Mergers under Delaware Law - Shareholder Approval

Answer 2

• Shareholder Approval: Almost always need
  
  • §251 – Generally, merger must be approved by shareholders
  • §251(c) – only an absolute majority (>50%) of outstanding common stock shareholders must approve (not just the shareholders present at meeting!)
    
    • supermajority provision can be included in certificate of incorporation
  • Exception #1:
    
    • ​§251(f) – Don’t need Bidder’s (the surviving corporation) shareholder vote if:
      
      • 1. Doesn’t amend certificate of incorporation AND
      • 2. Doesn’t change nature of bidder’s stock AND
      • 3. Don’t send out more than 20% of Bidder’s stock
  • Exception #2:
    
    • ​subsidiary merger under §253

Question 3

Mergers under Delaware Law** - Subsidiary Merger (Short Form Merger)**

Answer 3

• Only need approval from Bidder’s Board when Bidder owns at least 90% of each class of Target shares
• Shareholders of parent corporation do not need to vote
• Shareholders of subsidiary corporation do not need to vote but may have appraisal right under 253(b)(3)
• Under the “entire fairness” standard, the parent company must deal fairly with minority shareholders of the subsidiary corporation. See Weinberger v. UOP, Inc.

Question 4

Mergers under Delaware Law - Dissenter’s Right of Appraisal

Answer 4

Appraisal rights §262

• Shareholders don’t like b/c difficult, expensive, and risky
• Right is “entirely a creature of statute” Kaye v. Pantone, Inc.
• Procedures must be followed
  
  • 1. Must object by notifying company before vote
  • 2. At the time of shareholder meeting must abstain or vote against merger
  • 3. Must continue to hold stock through effective date
• Valuation issues
• Exclusivity of the appraisal remedy (remedy only to objecting shareholder?)

Question 5

Mergers under Delaware Law - EXCEPTIONS to Appraisal Rights

Answer 5

• §262(b)(1) – no appraisal for shares on national exchanges (already liquid)
  
  • Delaware’s “Market Out Exception”:
• §262(b)(1) – no vote under §251(f) ® no appraisal for Bidder shares
• Exception to the Market Out Exception
  
  • §262(b)(2) – Any “forced consideration” other than stock will restore a dissenter’s appraisal rights (Bonds, Debentures, Cash (other than cash in lieu of fractional shares))

Question 6

Asset Sale?

Answer 6

• If a company is selling all or substantially all of its assets it is a fundamental change and triggers the formalities of §271
  
  • Substantially all vs. less than substantially all is difficult to ascertain

Question 7

Asset Sale - Board Approval

Answer 7

• Target Board must approve if all or substantially all
  
  • Usually @ Board mtg but can approve to sell without a meeting if all directors consent in writing
• Bidder Board
  
  • If stock is involved ® Bidder’s board is involved
  • If it is cash and relatively small transaction ® Bidder’s board not involved

Question 8

Asset Sale - Shareholder Approval

Answer 8

• for sale of all or substantially all assets
• Target Shareholders - §271(a) approval by majority of Target’s shareholders
  
  • Need 20 days notice
• Bidder’s shareholder
  
  • No approval needed unless NYSE 312 applies
  • 0 appraisal rights for asset deal even when NYSE 312 applies

Question 9

Asset Sale - Appraisal Rights

Answer 9

Never exist for asset deal

Question 10

Stock Purchases?

Answer 10

• simplest form of merger
• Buying shares from Target’s shareholders
• Bidder (as new controlling shareholder) will replace Target board with its designees
• Limits Bidders’ risk because Target will exist as separate entity and Bidder is sole shareholder (creditors of Target cannot go after Bidder unless they can pierce the corporate veil)

Question 11

Stock Purchase - Board Approval

Answer 11

• NO Target Board - directly with Target’s shareholders
• Bidder Board
  
  • If Bidder’s stock is involved ® Bidder’s board is involved (“stock exchange offer”)
  • If it is cash and relatively small transaction ® Bidder’s board not involved
    
    • Bidder’s board will be given deference under business judgment rule

Question 12

Stock Purchases - Shareholder Approval

Answer 12

• Target Shareholders ® must send in shares to effectuate transaction
• Bidder’s shareholder ® only involved if consideration is Bidder’s stock then must look to see if NYSE 312 or §251 is required
  
  • If Bidder shareholder doesn’t like deal:
    
    1. Vote out board
    2. Sell stock
    3. Sue to enjoin sale