MNA execution and defense Flashcards
Q: What are the structural outcomes of acquisitions?
A:
Statutory Merger: The target is absorbed into the buyer (A + B = A).
Statutory Consolidation: The buyer and target form a new entity (A + B = C).
Subsidiary: The target becomes a subsidiary under the buyer.
Asset Purchase: Selected target assets are transferred to the buyer.
Going Private: The target becomes private via an LBO or MBO.
Q: What are the key methods for initiating acquisitions under “Hostile”?
A:
Proxy Fight: Gaining control of the target’s board by influencing shareholder votes.
Acquire Target Stock: Directly purchasing the target’s shares in the open market or via a tender offer.
Q: What are the key methods for initiating acquisitions under “Friendly”?
A:
Agree with Target BoD: Collaborative agreement with the target’s board.
Bear Hug: Direct offer to the board with public pressure.
Q: What are the two primary duties of the board in general (not just during M&A)?
A:
Advisory Function:
Consult with management on strategic and operational directions.
Ensure management decisions balance risk and reward.
Oversight Function:
Monitor management to ensure it acts in the interest of shareholders (or stakeholders).
Responsibilities include hiring and firing the CEO, evaluating management performance, awarding compensation, and ensuring compliance with legal and regulatory standards.
May rely on external counsel for these activities.
Q: What are the legal obligations of directors under fiduciary duty?
A:
Directors have a fiduciary duty to act in the best interest of the corporation, which includes:
1. Duty of Care:
- Decisions must be made with due deliberation, considering all available information (business judgment rule).
- Directors can rely on information presented to them unless there are clear red flags.
-
Duty of Loyalty:
- Directors must avoid conflicts of interest and remain loyal to the company.
-
Duty of Candor:
- Management and the board must disclose all relevant information to shareholders, particularly for valuing the company.
Q: What are the key tensions in creating an effective board?
A:
Independence vs Expertise:
Independent directors may lack insider knowledge, leading to an “information gap.”
Independence allows unbiased judgment but may compromise effectiveness if decisions are based on inferior information.
An independent chairman can limit bias but may duplicate leadership roles with the CEO, causing inefficiencies.
True vs Formal Independence:
True independence ensures unbiased decisions, while formal independence may meet technical criteria but still allow indirect influence.
Continuity vs Entrenchment:
Continuity helps with governance and stability, but excessive continuity risks entrenchment, shielding the board from shareholder influence.
Board Size:
Large boards bring diverse expertise but can be inefficient in decision-making.
Small boards are more agile but may lack sufficient skills and perspectives.
main document sent during an mna
1) Confidentiality Agreement
2) Term sheet (before major leagal fees)
includes no-shop agreement that prevents the target from shopping around for an alternative buyer and a standstill agreement that prevents the bidder from buying target share in the market (to keep things friendly)
3)Letter of Intent (LOI)
– Preliminary merger agreement that already outlines major areas of
agreement between buyer & target.
– Usually contains already a number of features. Common examples:
▪ No-shop agreement: prevents the target for looking for alternative bidders.
▪ Breakup / Termination fees: Fees to be paid to either buyer or seller
(depending who breaks up the deal) to compensate for e.g., consulting / legal /
advisory expenses incurred. On average: 3% of purchase price. More often on
target who can have a stronger incentive to walk away if e.g., another buyer
appears.
▪ Stock lockup: buyer gets to buy target stock at the bidder’s offer in case a
competing bid is accepted by the target → bidder generates profit.
– Closing conditions: pending successful due diligence, all necessary
approvals by shareholders / regulators /….
– Governing document to be used for e.g., securing financing sources for the
buyer.
what is discuss in a LOI
acquisition price, deal structure, due dilligence, and financing plans (for creditors)
What are the uses and pros and cons of an asset purchase in M&A?
A:
Use:
Practical when the buyer is only interested in selected assets or business divisions.
Only selected (or no) liabilities are assumed.
Remaining parts of the target are typically liquidated, and proceeds are distributed to shareholders.
Pros:
Eliminates minority shareholder issues since only assets are purchased.
Allows asset write-ups (e.g., increased depreciation on acquired assets).
Cons:
Net Operating Losses (NOLs) or tax credits are usually lost.
Some assets (e.g., licenses or patents) may require additional approval for transfer.
Subject to “Trust Fund Doctrine,” restricting how proceeds are distributed after servicing senior claims.
Q: What are the use, pros, and cons of a statutory merger/consolidation?
A:
Use:
Combines assets and liabilities (in a merger or consolidation) into one entity.
Automatically transfers assets and liabilities without renegotiating individual contracts, though some vendor or license agreements may need approval.
Pros:
Efficiency: Simplifies asset and liability transfers without separate agreements.
Comprehensive: Assumes all assets and liabilities (known and unknown).
Streamlined Approval: Requires BoD and target shareholder approval; buyer shareholders only approve if share issuance exceeds 20%.
Cons:
Q: What are the use, pros, and cons of a proxy fight in M&A?
A:
Use:
A proxy fight is used to change the target company’s board of directors.
It involves replacing directors opposing the merger with “friendly” directors who support the bidder’s proposal.
Often associated with activist investors aiming to influence governance via director elections.
Pros:
Provides a pathway for bidders to influence the target board without requiring direct negotiation.
Allows activist investors to gain board representation in 45% of cases when successful.
Cons:
Time-Consuming and Costly: The average cost ranges from $12–$15 million, which is significant given the typical hedge fund’s AUM (<$100 million).
Uncertain Outcome: Success is not guaranteed, and only a portion of proxy fights lead to desired board changes.
Rarely used in M&A due to its difficulty and financial burden.
Q: Why is it difficult and costly to initiate change on a company’s board?
A:
Entrenched Board and Management: Defensive strategies like poison pills and staggered terms protect current directors.
High Costs: Proxy fights cost $12–$15 million on average, making them prohibitive for smaller activist investors.
Uncertain Success: Activists win board representation in only 45% of cases, making the outcome risky.
Shareholder Apathy: Many shareholders are passive, requiring significant effort and expense to gain their support.
Legal and Regulatory Hurdles: Laws and corporate governance rules favor existing boards, complicating the process.
Reputation Risks: Public challenges can harm relationships with shareholders and damage the activist’s reputation.
Q: Why have a staggered board? Is it good or bad for governance?
A:
What is a staggered board?
A staggered board (or classified board) is where directors serve multi-year terms (typically 3 years), and only one-third of the board is up for re-election each year.
Why have it?
Protection Against Hostile Takeovers: Prevents acquirers from quickly replacing the entire board.
Continuity and Stability: Ensures governance stability and retains institutional knowledge.
Is it good for governance?
Pros:
Protects against short-term pressures and hostile takeovers.
Ensures stability for long-term decision-making.
Cons:
Reduces shareholder control over governance.
Can entrench management and directors, reducing accountability.
Q: Which voting mechanism is the friendliest to shareholder participation and minority shareholders?
.
plurality Vote:
The director with the most votes wins, regardless of whether they receive a majority.
Impact: Not minority-friendly; majority shareholders dominate.
Majority Vote:
A director must win more than 50% of the votes to be elected.
Impact: Slightly better but still favors majority shareholders.
Cumulative Voting:
Shareholders can concentrate their votes on one or a few directors (e.g., 100 shares = 500 votes for one director in a 5-member board election).
Impact: Most minority-friendly; enables concentrated voting power to secure board representation
What are the pros and cons of proxy access?
Pros:
Increased Minority Participation:
Proxy access allows minority shareholders to nominate directors, giving them a voice in board elections.
Shareholders owning at least 3% of voting securities for 3 years (as per the “3/3/25 Rule”) can nominate up to 25% of the board.
Improved Accountability:
Enables shareholders to hold the board and management accountable by nominating candidates who align with their interests.
Encourages better corporate governance practices.
Cons:
Risk of Hostile Actions:
Proxy access can be exploited by activist shareholders for personal or short-term goals, potentially disrupting corporate stability.
Disproportionate Representation:
May lead to overrepresentation of minority shareholders, which could conflict with the broader interests of the company or majority shareholders.
