Chapter 9 Corporate Mergers and Divisions Section One: Corporate Merger Two Forms: closely-related Concepts Consolidation: two or more existing corporations combine into a new corporation and the existing corporations dissolve. Merger: two or more existing corporations combine into one of them, and the rest disappear. Now consolidation is of diminishing importance in corporate practice. Reason: A creates a shell subsidiary, then A 、 B and C enter into a tripartite agreement to merger into the shell subsidiary.

The Forms of Merger in China Article 173 Mergers of companies may take the form of mergers by absorption or mergers by new establishment. Mergers by absorption shall mean that one company admits one or more other companies into its own company, whereby the admitting company survives and the admitted company or companies are dissolved. Mergers by new establishment shall mean that two or more companies merge to establish a new company, whereby each party to the merger is dissolved.

Statutory Protections in Merger The mergers carry with them three layers of protection:  Board initiation and approval (and the fiduciary protection that entails)  Shareholder approval (and disclosure rights under fiduciary rules and securities law)  appraisal remedies (for shareholders in certain mergers)  Disclosure rights for creditors

Procedure of Corporate Merger 1. Board Initiation Article 47 The board of directors shall be accountable to the shareholders’ meeting and shall exercise the following duties and powers: (7) formulate the plan for merger, division, dissolution or change of company structure; The merger plan outlines the terms and conditions of the merger, and the consideration that shareholders of the acquired corporation will receive.

Board Initiation The Duties during the Board initiation Process  Fiduciary Duties: If the merger is with a controlling shareholder (parent corporation) or otherwise involves a conflict of interest, the merger is subject to review as a self-dealing transaction.  Disclosure Duties: If the merger involves a issuance of securities as consideration, the rules of disclosure will apply.

Procedure of Corporate Merger 2. Shareholders’ approval After board adoption, the merger plan must generally be submitted to the shareholders of each corporation for their separate approval. Q1: Shall the approval be made by unanimous consent? Q2: Shall the approval be made by all voting classes ?

Shareholders’ Approval Generally, no unanimous consent is required, and dissenting shareholders are bound by the will of the majority. In US Originally, most statutes required two-thirds approval of all outstanding shares to approve. Now most statutes require only a majority of all outstanding voting shares. In China Article 44 Resolutions passed by a shareholders’ meeting on …… merger, division, dissolution shall be passed by shareholders holding two-thirds or more of the voting rights. Article 104 Resolutions of a shareholders’ general meeting on …… merger, division, dissolution shall be passed by two- thirds majority of votes cast by shareholders present at the meeting.

Shareholders’ Approval In US If a corporation has more than one class of voting stock outstanding, many statutes require separate approval by each voting class. MBCA §11.03(e) A few statutes even require approval by each voting and nonvoting class, regardless of the merger’s effect. However, Delaware requires approval only by all outstanding voting shares. In China Article 104 Shareholders attending a shareholders’ general meeting shall exercise one vote per share. Company shares held by the company shall not carry voting rights.

Shareholders’ Approval Approval by shareholders of the acquired corporation is always required, but it is not the case for acquiring company. When a big firm absorbs a much smaller company, the effect on the acquiring company may be minimal, not justifying the expense and trouble of shareholder approval. Most statutes exempt the acquiring corporation from obtaining shareholder approval in a whale-minnow merger where— The articles of the surviving corporation are unchanged; The acquiring corporation’s shareholders continue to hold the same number of voting shares as before the merger, etc. In China, both shareholders’ approval are required.

Appraisal Remedies for Shareholders Please see the previous section. Article 75, 143 (5)

Disclosure rights for creditors Article 174  The parties to a merger shall enter into a merger agreement for a company merger and prepare a balance sheet and a list of assets.  The company shall notify its creditors within ten days from the date of the resolution on the merger and publish an announcement on the newspapers within 30 days.  The creditors may demand, within 30 days from receipt of the notice (or within 45 days for those creditors who did not receive the notice), that the company settles the debts or provide the corresponding guarantee.

Debt Assumption after Merger Article 175 The surviving company or the newly established company of a merger will assume the claims and debts of the parties to the merger.

Corporate Division Board Initiation Shareholders Approval Assets Division (a balance sheet and a list of assets) Notification & Announcement Debt Assumption

Corporate Division Article 176 In the event of a division, the assets of the company shall be divided accordingly. A company which proposes a division shall prepare a balance sheet and a list of assets. The company shall notify their creditors within ten days from the date of resolution on the division and publish an announcement on the newspapers within 30 days. Article 177 The surviving company of a division shall bear joint liability for the debts of a company prior to its division, unless the company prior to the division and its creditors have entered into an agreement in writing on debt settlement.