Merger: A contractual and statutory
process by which one corporation (the surviving corporation) acquires
all of the assets and liabilities of another corporation (the merged
corporation), causing the merged corporation to become defunct.
As part of the merger process, the shareholders of the
merged corporation receive
(i)
payment
for their shares and/or
(ii)
shares in the surviving corporation.
Conceptually,
it looks like this: A +B= A (where A is the surviving corporation and B
was the merged corporation.)
Consolidation: A contractual and statutory
process by which
( 1 ) two or more corporations jointly become a completely new
corporation (the successor corporation),
(2) the original corporations cease to exist and to do business,
and
( 3) the
successor corporation acquires all of the assets and liabilities of the
original (now defunct) corporations.
Conceptually,
it looks like A + B = C (here, distinct companies A and B
consolidate into a new company, C)
Any merger or consolidation is governed by the laws of one
(or more) of the states, each of which sets
forth its own procedural requirements. However , in
general:
( 1 ) The boards of directors of each
(original) corporation involved in the proposed transaction must approve the merger or consolidation plan;
(2) The shareholders
of each (original) corporation involved in the
proposed transaction must, thereafter, approve
the merger or consolidation plan by vote at a called or scheduled shareholder's
meeting;
(3) The
approved plan must be filed with the appropriate
state official(s); and
(4) Once all
state-law formalities have been satisfied, the state will issue, as
appropriate, a certificate of
merger to the surviving corporation or a certificate of consolidation to
the successor corporation.
While it
sounds simple, this could take months to accomplish.
Short-Form
Merger: A
merger between a parent and a subsidiary (at least 90%
owned by the parent) which can be accomplished without shareholder
approval. Why? In essence, the sub is already the parent
anyway due to the very high ownership percentage (at least 90%), so why cause
any more expense and hassle?
SHAREHOLDERS'
RIGHTS
While the
day-to-day operations of a corporation, and even the policies governing its
ongoing operations, are generally left to the corporation’s officers and
directors, any "extra-ordinary" matter -- such as a merger or
consolidation -- must be approved by the corporation's shareholders.
If the
necessary majority of the corporation's shareholders approve a merger or
consolidation, it will go forward, and the shareholders will be compensated.
However no shareholder who votes against the transaction is required to accept
shares in the surviving or successor corporation. Instead, he or she may
exercise appraisal rights.
Appraisal Right: The right, created by state law, of
a dissenting shareholder who objects to an extraordinary transaction (such as a
merger or consolidation):
( i) to have his
or her shares of the pre-merger or preconsolidation
corporation appraised (valued), and
(ii) to be paid the fair
market value of his or her shares by the pre-merger or pre-consolidation
corporation.
You can
imagine how this might mess things up!
When a
corporation acquires all or substantially all of the assets
(as opposed to stock)
of another corporation by direct purchase, the purchasing (or acquiring) corporation
simply extends its ownership and control over the additional assets.
The acquiring corporation does NOT need
shareholder approval unless the purchase is to be paid for with stock
and the acquiring corporation must issue additional shares to make the
purchase, in which case its shareholders must approve the additional shares.
Generally,
the acquiring corporation only purchases the assets, not the
liabilities, of the other corporation. However, there are
exceptions when:
(i) the acquiring corporation impliedly or
expressly assumes the seller's liabilities;
(ii) the sale is a defacto
(i.e., it amounts to what is
in fact is a) merger
or consolidation;
(iii)
the
acquiring corporation continues the seller's business and retains the same
personnel; or
(iv) the sale is fraudulently executed in
an effort to avoid liability.
If any of
the above events occurs, the acquiring company is deemed (considered) to have
acquired both assets and liabilities of the company.
Many entities prefer to acquire “only the
assets” for the liability issue, but this method also it allows them to “write
up” the assets so they can be depreciated at a higher value.
Stock Purchase:
The purchase of a sufficient number of voting shares of a corporation's stock,
enabling the acquiring corporation to exercise control over the target
corporation.
A stock
purchase is generally facilitated by a tender offer to the target
corporation's shareholders. The tender
offer is publicly advertised, available to all shareholders, and offers to pay
a higher-than-market price (premium) for shares of the target corporation.
Exchange Tender Offer: An offer to give (exchange) shares in the acquiring corporation in exchange for shares in the
target corporation.
Cash
Tender Offer:
Duh! An offer to pay cash in exchange for shares of the target corporation.
A tender offer may be conditioned on
receiving a specified number of outstanding shares in the target corporation by
a specified date.
The terms
and duration of, and the circumstances underlying, a tender offer are strictly
regulated by federal securities laws. In addition, most states impose
additional regulations on tender offers.
MERGER & CONSOLIDATION
Methodology/Defenses
Beachhead Acquisition: An initial block of shares of a
takeover target sufficient to enable the purchaser to launch a proxy fight.
Proxy Fight: An attempt by a purchaser to
acquire sufficient shares and voting commitments to take control of the
takeover target. For example, the recent
Compaq/HP duel.
Leveraged Buy-Out (LBO): The purchase of all
publicly- held shares of a takeover target by its management or some other
"inside" group, usually through undertaking substantial debt (hence,
the "leverage") in order to take the company "private" and
avoid a hostile takeover by an outsider.
Unfortunately, this usually hurts the company by the huge debt load and
possibly poor quality of debt (junk bonds, etc.)
Takeover Defenses include various measures included
in a corporation's articles and/or by-laws that automatically take effect in
the event of a proxy fight or unfriendly takeover attempt in order to make the
corporation a substantially less attractive target for the purchaser (e.g.,
"golden parachutes,- usually huge buyout
costs on executives being ousted [notice its not for everyone, only the big fat
cats]" "poison pills”-usually allowing
existing shareholders to buy company stock very cheap, which vastly increases
the number of shares outstanding, making the buyout much more expensive), as
well as conscious efforts of management in response to a particular situation
(e.g., "crown jewels”, - where the company
sells its main assets to someone else) "white knights"-
where they appeal to a more friendly company to take them over). In general, these are very expensive or
hassle filled events that would cause a potential acquirer to think twice about
continuing their efforts to acquire the company. The text has many other examples.
Dissolution: The formal disbanding of a
corporation, also known as the legal death of a company, which may occur by
(1) an act of the legislature in the state of incorporation,
( 2) voluntary
approval by the corporation's shareholders upon recommendation by the
directors,
(3) unanimous action by all shareholders
(without director involvement),
(4) expiration of the time period set forth in the certificate
of incorporation, or
(5) court order.
Liquidation: The process by which corporate
assets are converted into cash and distributed among creditors and shareholders
according to specific rules of preference.
For example, the “secured” assets are sold and the secured creditor is
paid first, etc.