© 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 39 Corporations – Merger, Consolidation, and Termination Chapter 39 Corporations – Merger, Consolidation, and Termination

© 2004 West Legal Studies in Business A Division of Thomson Learning 2 §1: Merger and Consolidation Corporations can grow and expand by:  Mergers.  Consolidation.  Purchase of another corporation’s assets.  Purchases of a controlling interest in another corporation. Corporations can grow and expand by:  Mergers.  Consolidation.  Purchase of another corporation’s assets.  Purchases of a controlling interest in another corporation.

© 2004 West Legal Studies in Business A Division of Thomson Learning 3 Merger Merger is the legal combination of two or more corporations after which only one corporation remains. A’s articles of incorporation are amended to include articles of merger. After merger, A continues as the surviving corporation with all of B’s rights and obligations. Merger is the legal combination of two or more corporations after which only one corporation remains. A’s articles of incorporation are amended to include articles of merger. After merger, A continues as the surviving corporation with all of B’s rights and obligations.AABBAA

© 2004 West Legal Studies in Business A Division of Thomson Learning 4 Consolidation A and B combine such that both cease to exist and a new corporation C emerges which has all the rights and obligations previously held by A and B. The articles of consolidation for C take the place of the original articles of A and B. A and B combine such that both cease to exist and a new corporation C emerges which has all the rights and obligations previously held by A and B. The articles of consolidation for C take the place of the original articles of A and B.AABBCC

© 2004 West Legal Studies in Business A Division of Thomson Learning 5 Merger and Consolidation Procedures  Board of Directors of each corporation involved must approve the merger plan.  Next shareholders of each corporation must approve.  Then, articles filed with Secretary of State who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.  Board of Directors of each corporation involved must approve the merger plan.  Next shareholders of each corporation must approve.  Then, articles filed with Secretary of State who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.

© 2004 West Legal Studies in Business A Division of Thomson Learning 6 Short-Form Mergers For “Parent-Subsidiary” Merger. No approval of shareholders needed. Parent must own at least 90% of each class of stock of the subsidiary corporation. Board of parent corporation approves. New articles filed. Copy of merger sent to each shareholder of subsidiary corporation. For “Parent-Subsidiary” Merger. No approval of shareholders needed. Parent must own at least 90% of each class of stock of the subsidiary corporation. Board of parent corporation approves. New articles filed. Copy of merger sent to each shareholder of subsidiary corporation.

© 2004 West Legal Studies in Business A Division of Thomson Learning 7 Merger and Consolidation Procedures [1] When allowed by state statute, a shareholder has the right to dissent and be “bought out” of his/her shares (shareholder’s appraisal right). In cases of: merger, consolidation, sale of most of corporation’s assets not in the ordinary course of business, adverse amendments to the articles of incorporation. Certain procedures must be followed. When allowed by state statute, a shareholder has the right to dissent and be “bought out” of his/her shares (shareholder’s appraisal right). In cases of: merger, consolidation, sale of most of corporation’s assets not in the ordinary course of business, adverse amendments to the articles of incorporation. Certain procedures must be followed.

© 2004 West Legal Studies in Business A Division of Thomson Learning 8 Appraisal Rights Dissenting shareholder gives written notice of dissent prior to vote on proposed transaction. The notice shows what dissenters stock will cost corporation if action takes place. If approved, shareholder must make a demand for payment of shares at fair market value (calculated on day prior to the date on which the vote was taken -- or court will determine). Dissenting shareholder gives written notice of dissent prior to vote on proposed transaction. The notice shows what dissenters stock will cost corporation if action takes place. If approved, shareholder must make a demand for payment of shares at fair market value (calculated on day prior to the date on which the vote was taken -- or court will determine).

© 2004 West Legal Studies in Business A Division of Thomson Learning 9 Corporation must:  Make written offer to purchase a dissenting shareholder’s stock, accompanied by current balance sheet and income statement for the corporation.  States differ as to whether dissenting shareholder loses his status as a shareholder during appraisal process. Case 39.1: Glassman v. Unocal Exploration Corp. (2001). Corporation must:  Make written offer to purchase a dissenting shareholder’s stock, accompanied by current balance sheet and income statement for the corporation.  States differ as to whether dissenting shareholder loses his status as a shareholder during appraisal process. Case 39.1: Glassman v. Unocal Exploration Corp. (2001). Appraisal Rights [2]

© 2004 West Legal Studies in Business A Division of Thomson Learning 10 §2: Purchase of Assets The acquiring corporation extends its ownership and control over the physical assets of another company. Acquiring corporation shareholders do not need to approve:  Unless acquiring corporation is paying for assets with its own stock and there is not enough stock authorized or  An acquiring corporation sells on a national exchange, is paying with its own stock, and newly issued stock = 20% or more than the outstanding shares. The acquiring corporation extends its ownership and control over the physical assets of another company. Acquiring corporation shareholders do not need to approve:  Unless acquiring corporation is paying for assets with its own stock and there is not enough stock authorized or  An acquiring corporation sells on a national exchange, is paying with its own stock, and newly issued stock = 20% or more than the outstanding shares.

© 2004 West Legal Studies in Business A Division of Thomson Learning 11 Potential Liability in Purchase of Assets Acquiring corporation is not liable for liabilities of selling corporation unless:  Acquiring corporation impliedly or expressly assumes the liabilities.  Sale amounts to what is really a merger or consolidation.  Purchaser continues the seller’s business and retains the same personnel.  Acquiring corporation is not liable for liabilities of selling corporation unless:  Acquiring corporation impliedly or expressly assumes the liabilities.  Sale amounts to what is really a merger or consolidation.  Purchaser continues the seller’s business and retains the same personnel. 

© 2004 West Legal Studies in Business A Division of Thomson Learning 12  Sale is fraudulently executed to escape liability. The selling corporation needs both board and shareholder approval.  Case 39.2: Lee Thomas Inc. v. Hallmark Cards, Inc. (2002).  Sale is fraudulently executed to escape liability. The selling corporation needs both board and shareholder approval.  Case 39.2: Lee Thomas Inc. v. Hallmark Cards, Inc. (2002). Potential Liability in Purchase of Assets [2]

© 2004 West Legal Studies in Business A Division of Thomson Learning 13 § 3: Purchase of Stock Common alternative to merger or consoli- dation is the purchase of a controlling interest (up to 51%) of a “target” corporation’s stock (called a “takeover”) giving the purchaser corporation controlling interest in the target. The aggressor deals entirely with the target’s shareholders. Common alternative to merger or consoli- dation is the purchase of a controlling interest (up to 51%) of a “target” corporation’s stock (called a “takeover”) giving the purchaser corporation controlling interest in the target. The aggressor deals entirely with the target’s shareholders.

© 2004 West Legal Studies in Business A Division of Thomson Learning 14 Tender Offers Tender Offers.  A publicly advertised offer addressed to all shareholders of the target is called a tender offer.  Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares Can be in exchange for aggressor's stock. The SEC strictly regulates tender offers. Tender Offers.  A publicly advertised offer addressed to all shareholders of the target is called a tender offer.  Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares Can be in exchange for aggressor's stock. The SEC strictly regulates tender offers.

© 2004 West Legal Studies in Business A Division of Thomson Learning 15 Tender Offer Terminology [2] TermDefinition Crown JewelManagement makes company less attractive by selling company’s most valuable asset (crown jewel). Golden ParachuteIf takeover successful, top management “bails out” of the target corporation with forced “retirement” benefits. GreenmailTo regain control, target company may pay higher-than-market price to repurchase the stock. Scorched EarthTarget company sells off assets or divisions or takes out loans to make it unattractive to hostile takeover. White KnightTarget corporation solicits merger with 3 rd party, which is a better match. 3 rd party “rescues” the target.

© 2004 West Legal Studies in Business A Division of Thomson Learning 16 Target’s Responses Directors of a corporation may consider the takeover to be friendly or unfriendly to the present management.  If directors consider it unfriendly, they may want to resist the hostile takeover.  Directors may seek an injunction against acquiring corporation on grounds that the attempted takeover violates antitrust laws.  But directors must not breach their fiduciary duty to corporation in resistance. Directors of a corporation may consider the takeover to be friendly or unfriendly to the present management.  If directors consider it unfriendly, they may want to resist the hostile takeover.  Directors may seek an injunction against acquiring corporation on grounds that the attempted takeover violates antitrust laws.  But directors must not breach their fiduciary duty to corporation in resistance.

© 2004 West Legal Studies in Business A Division of Thomson Learning 17 § 4: Termination Termination of a corporation, like a partnership, consists of two phases:  Dissolution (voluntary or involuntary); and  Liquidation. Termination of a corporation, like a partnership, consists of two phases:  Dissolution (voluntary or involuntary); and  Liquidation.

© 2004 West Legal Studies in Business A Division of Thomson Learning 18 Voluntary Dissolution Shareholders can initiate dissolution by a unanimous vote to dissolve. Or, the Board can initiate by submitting a proposal to the shareholders for a vote at the annual shareholder meeting or specially-called meeting. Shareholders can initiate dissolution by a unanimous vote to dissolve. Or, the Board can initiate by submitting a proposal to the shareholders for a vote at the annual shareholder meeting or specially-called meeting.

© 2004 West Legal Studies in Business A Division of Thomson Learning 19 Board files dated articles of dissolution -- this date is the date of dissolution. Corporation must notify its creditors and establish a date within 120 days of dissolution by which all claims are to be paid. Board files dated articles of dissolution -- this date is the date of dissolution. Corporation must notify its creditors and establish a date within 120 days of dissolution by which all claims are to be paid. Voluntary Dissolution [2]

© 2004 West Legal Studies in Business A Division of Thomson Learning 20 Shareholders can initiate dissolution proceedings if the corporation is deadlocked.  Case 39.3: Chance v. Norwalk Fast Oil Inc. (1999). Shareholders can initiate dissolution proceedings if the corporation is deadlocked.  Case 39.3: Chance v. Norwalk Fast Oil Inc. (1999). Involuntary Dissolution

© 2004 West Legal Studies in Business A Division of Thomson Learning 21 Involuntary Dissolution State can dissolve corporation if:  Fails to pay taxes.  Fails to file annual report.  Fails to designate registered agent for service.  Secured its charter through fraud.  Abused its corporate power.  Violated criminal laws.  Failed to commence business operations.  Abandoned operations before start-up. State can dissolve corporation if:  Fails to pay taxes.  Fails to file annual report.  Fails to designate registered agent for service.  Secured its charter through fraud.  Abused its corporate power.  Violated criminal laws.  Failed to commence business operations.  Abandoned operations before start-up.

© 2004 West Legal Studies in Business A Division of Thomson Learning 22 Involuntary Dissolution [2] Court can dissolve if:  Board is deadlocked and irreparable damage to corporation will ensue.  Mismanagement.  Minority shareholder is “frozen out” or oppressed. Court can dissolve if:  Board is deadlocked and irreparable damage to corporation will ensue.  Mismanagement.  Minority shareholder is “frozen out” or oppressed.

© 2004 West Legal Studies in Business A Division of Thomson Learning 23 Liquidation Voluntary Dissolution.  Board liquidates and acts as trustees of assets.  Court will appoint a receiver if: Board refuses; or Creditors want a receiver. Involuntary Dissolution.  Court appoints receiver. Voluntary Dissolution.  Board liquidates and acts as trustees of assets.  Court will appoint a receiver if: Board refuses; or Creditors want a receiver. Involuntary Dissolution.  Court appoints receiver.

© 2004 West Legal Studies in Business A Division of Thomson Learning 24 Law on the Web Statutory Requirements for Merger and Consolidation. Statutory Requirements for Merger and Consolidation Ballard Law Firm shows how to uncover company information. Ballard Law Firm shows how to uncover company information. Legal Research Exercises on the Web. Statutory Requirements for Merger and Consolidation. Statutory Requirements for Merger and Consolidation Ballard Law Firm shows how to uncover company information. Ballard Law Firm shows how to uncover company information. Legal Research Exercises on the Web.