Chapter Twelve Changes in the Corporate Structure and Corporate Combinations

Corporate Combinations Merger: Merger: combination of two of more corporations into one corporate entity Consolidations: Consolidations: combination of two or more corporations into one new entity

Takeover Defenses  Staggered Boards. It might take an aggressor several years to obtain control of a board of directors that is staggered (meaning one whose directors stand for election at different times).  Golden Parachutes. The corporation may grant senior managers golden parachutes requiring that these individuals, if ousted, be compensated in some extraordinary amount. The golden parachutes may make a takeover prohibitively expensive for an aggressor.  Poison Pills. A poison pill (or shareholder rights plan) is triggered by a tender offer. Once the tender offer is announced, shareholders are automatically given certain rights, such as increased voting rights or rights to acquire additional shares of the target at bargain prices. These rights make acquisition of control by a bidder far more difficult and may be extremely costly. Slide 1 of 2

Takeover Defenses  Crown Jewel Defense. The target may begin selling off its most valuable assets to make itself less attractive to the bidder. This is the crown jewel defense. Of course, the risk is that if the bidder abandons its takeover plan, the target may be left so weakened that it must dissolve.  Suicide Pacts. The managers of the target may enter into a suicide pact (sometimes called a ‘‘people pill’’) whereby they agree that if any of them are fired after a takeover, they will all resign. Such an en masse walkout leaves the aggressor without any stability or continuity in management. Slide 2 of 2

Domestication  Domestication: the changing of a corporation’s state of incorporation  Plan of domestication: the plan that provides the terms and conditions of a corporation’s change of its state of incorporation  Articles of domestication: the document filed with the state to effect a change of a corporation’s state of incorporation

Entity Conversion  Entity conversion: a business’s change of its structure, for example, converting from a corporation to an LLC  Plan of entity conversion: the plan that provides the terms and conditions of a business’s change in its structure  Articles of entity conversion: the document filed with the state to effect a change in a business’s structure

Key Features of Corporate Changes and Combinations Slide 1 of 8  Significant changes to a corporation typically require shareholder approval.  A corporation may amend its articles at any time by resolution by the directors followed by shareholder approval. Articles of amendment must be filed with the state agency.  A corporation may restate its articles to create one composite document superseding prior amendments; shareholder approval is unnecessary because nothing new is being added to the articles.

Key Features of Corporate Changes and Combinations Slide 2 of 8  Amending corporate bylaws is typically handled by directors without shareholder approval inasmuch as the bylaws regulate only the internal affairs of the corporation.  A merger is the combination of two or more corporations into one corporate entity. The survivor succeeds to all of the business, debts, liabilities, and assets of the extinguished corporation. Shareholders of both corporations must approve the transaction.

Key Features of Corporate Changes and Combinations Slide 3 of 8  Shareholders who dissent from a merger or consolidation have the right to have their shares appraised and purchased from them at fair value.  In a share exchange, the target’s shareholders exchange their shares for cash or shares in the acquiring corporation.  As an alternative to merger, one corporation can purchase all of substantially all of another’s assets. Liabilities are generally not purchased.

Key Features of Corporate Changes and Combinations Slide 4 of 8  One corporation can purchase a majority or all of another corporation’s stock as a means of gaining control of a corporation. If the acquisition is consensual, all directors and the seller’s shareholders will vote. In a hostile acquisition or takeover, the bidder bypasses the target’s management and appeals directly to the shareholders.  Some takeovers are regulated by federal law.

Key Features of Corporate Changes and Combinations Slide 5 of 8  Corporations may implement a variety of measures to ward off a takeover.  A corporation may change its state of incorporation (domestication) or may convert its business structure to an unincorporated form (such as to an LLC).