Chapter 36 Corporations– Merger, Consolidation & Termination

§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.

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.AABBAA

Consolidation Two or more corporations combine such that both cease to exist and a new corporation emerges which has all the rights and obligations previously held by A and B. The articles of consolidation take the place of the original articles of A and B.AABBCC

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 and who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.

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.

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.

Merger and Consolidation Procedures [2] Dissenting shareholder must give written notice of dissent prior to vote on proposed transaction. The notice shows what dissenters 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).

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. Merger and Consolidation Procedures [3]

§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.

Purchase of Assets: Liabilities 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. Sale is fraudulently executed to escape liability. The selling corporation needs both board and shareholder approval.

§ 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.

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. Sec strictly regulates tender offers.

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.

LBO’s [3] Leveraged Buyouts = “Go private.” The management of a corporation, or any group (usually including management), purchases all the outstanding corporate stock held by the public and gains control over the corporation. The group finances the purchase by borrowing the money and leveraging the assets of the corporation.

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.

§ 4: Termination Termination of a corporation, like a partnership, consists of two phases: Dissolution (voluntary or involuntary); and Liquidation.

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.

Voluntary Dissolution [2] 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.

Involuntary Dissolution Secretary of State or Attorney General can dissolve if Corporation: 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.

Involuntary Dissolution [2] Close corporations: May be able to be dissolved by one shareholder on the happening of a certain event. Gives the same power to a shareholder to dissolve as a partner has for a partnership.

Involuntary Dissolution [3] Court can dissolve if: Board is deadlocked and irreparable damage to corporation will ensue. Mismanagement. Minority shareholder is “frozen out” or oppressed.

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.

Case 36.1: Glassman v. Unocal (Appraisal Rights) FACTS: Unocal is an earth resources company primarily engaged in the exploration for and production of crude oil and natural gas. Unocal owned approximately 96 percent of the stock of Unocal Exploration Corporation (UXC), an oil and gas company operating in the Gulf of Mexico. The boards of Unocal UXC decided to merge. The UXC committee agreed to a merger exchange ratio of about half a share of Unocal stock for each UXC share. Glassman sued Unocal alleging a breach of fiduciary duty of “entire fairness and full disclosure.”

HELD: EXCLUSIVE REMEDY IN SHORT- FORM MERGER IS APPRAISAL RIGHT. In a short-form merger, there is no agreement of merger negotiated by two companies; there is only a unilateral act—a decision by the parent company that its 90% owned subsidiary shall no longer exist as a separate entity. The minority stockholders receive no advance notice of the merger; their directors do not consider or approve it; and there is no vote. Those who object are given the right to obtain fair value for their shares through appraisal. Case 36.1: Glassman v. Unocal (Appraisal Rights)

Case 36.2: Eagle Pacific v. Christensen (Purchase of Assets) FACTS: Christensen Motor Yacht Corporation (CMYC) was organized to build yachts. Eagle Pacific Insurance Company issued workers’ compensation policies to CMYC, but canceled them when CMYC failed to pay the premiums. David Christensen, the chief executive officer and sole shareholder of CMYC, created a new corporation, Christensen Shipyards, Ltd. (CSL). CMYC transferred its employees, facilities, and contracts to CSL. Eagle sued CMYC to collect the unpaid premiums and won.

HELD: FOR EAGLE. Christensen testified that he had effected the transfer between CMYC and CSL to avoid creditors and “save the business.” Because the assets were transferred to CSL to avoid creditors, the transaction was fraudulent. “The fact that the transaction was designed to ‘save the business’ does not defeat imposition of successor liability.” Case 36.2: Eagle Pacific v. Christensen (Purchase of Assets)

Case 36.3: Chance v. Norwalk Fast Oil (Involuntary Dissolution) FACTS: Chance and Kosminoff each owned 50 percent of the voting rights of Norwalk Fast Oil, Inc. A shareholders’ agreement provided that any stalemate between them would be resolved by “each selecting the same third person” whose decision on the matter would be binding. The corporation became deadlocked and Chance sued for dissolution. The court ordered dissolution and defense appealed.

HELD: AFFIRMED. Norwalk could not function with control equally divided among shareholders who could not agree on a board of directors, could not hold annual meetings, were involved in litigation against each other, and were not on speaking terms. Consequently, there has not been and cannot be any deliberative control of the company by a board of directors. The corporation is a mere shell inhabited by a business. Case 36.3: Chance v. Norwalk Fast Oil (Involuntary Dissolution)