Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 28 Corporate Mergers and Acquisitions

28 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Introduction fundamental changes During the course of its existence, a corporation may go through certain fundamental changes A corporation must seek shareholder approval for many changes This requires the solicitation of votes or proxies from shareholders

28 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Proxy Solicitation Corporate shareholders have the right to vote on the election of directors, mergers, and charter amendments proxy They can exercise their power to vote either in person or by proxy Proxy Card Proxy Card – A written document signed by a shareholder that authorizes another person to vote the shareholder’s shares

28 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Federal Proxy Rules Section 14(a) Section 14(a) – of the Securities Exchange Act of 1934 gives the SEC the authority to regulate the solicitation of proxies Proxy Statement Proxy Statement – A document that fully describes: The matter for which the proxy is being solicited Who is soliciting the proxy Any other pertinent information

28 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Antifraud Provision Section 14(a) Section 14(a) of the Securities Exchange Act of 1934 prohibits misrepresentations or omissions of a material fact in proxy materials The SEC, U.S. Justice Department, or share-holders who are injured by the misrepresent-ation or omission may sue the wrongdoer The courts have implied a private cause of action under this provision

28 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Proxy Contents incumbent directors Shareholders sometimes oppose actions taken by the incumbent directors and management insurgent shareholders proxy contest The insurgent shareholders may challenge the incumbent management in a proxy contest Both sides solicit proxies from the other shareholders The side that receives the greatest number of votes wins the proxy contest

28 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Shareholder Resolution Resolution submitted by a shareholder to other shareholders Shareholder must meet certain requirements of the Securities Exchange Act of 1934 and SEC rules adopted thereunder The SEC determines if a shareholder proposal qualifies to be submitted to other shareholders for vote

28 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Mergers and Acquisitions friendly Corporations may agree to friendly acquisitions or combinations of one another: Merger Consolidation Share Exchange Sale of Assets

28 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Merger Occurs when one corporation is absorbed into another corporation and ceases to exist surviving corporation merged corporation The surviving corporation gains all the rights, privileges, powers, duties, obligations, and liabilities of the merged corporation The shareholders of the merged corporation receive stock or securities of the surviving corporation as provided in the plan of merger Occurs when one corporation is absorbed into another corporation and ceases to exist surviving corporation merged corporation The surviving corporation gains all the rights, privileges, powers, duties, obligations, and liabilities of the merged corporation The shareholders of the merged corporation receive stock or securities of the surviving corporation as provided in the plan of merger

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Example of a Merger += Corporation A Corporation B Corporation A

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Consolidation entirely new corporation Occurs when two or more corporations combine to form an entirely new corporation consolidated corporation The new corporation is called the consolidated corporation The articles of incorporation of the new corporation replace the articles of incorporation of the component corporations entirely new corporation Occurs when two or more corporations combine to form an entirely new corporation consolidated corporation The new corporation is called the consolidated corporation The articles of incorporation of the new corporation replace the articles of incorporation of the component corporations

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Example of a Consolidation += Corporation A Corporation B Corporation C

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Share Exchange When one corporation acquires all the shares of another corporation Both corporations retain their separate legal existence parent corporation subsidiary corporation After the exchange, one corporation ( parent corporation ) owns all of the shares of the other corporation ( subsidiary corporation ) Often used to create holding companies When one corporation acquires all the shares of another corporation Both corporations retain their separate legal existence parent corporation subsidiary corporation After the exchange, one corporation ( parent corporation ) owns all of the shares of the other corporation ( subsidiary corporation ) Often used to create holding companies

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Example of a Share Exchange += Corporation A Corporation B Corporation A (parent corporation) Corporation B (subsidiary corporation) A owns B

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Required Approvals for a Merger An ordinary merger or share exchange requires: 1.The recommendation of the board of directors of each corporation; and 2.An affirmative vote of the majority of shares of each corporation that is entitled to vote

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Short-form Merger Merger between a parent corporation and a subsidiary corporation Does not require the vote of the shareholders of either corporation or the board of directors of the subsidiary corporation Can occur when the parent corporation owns 90 percent (or more) of the outstanding stock of the subsidiary corporation Merger between a parent corporation and a subsidiary corporation Does not require the vote of the shareholders of either corporation or the board of directors of the subsidiary corporation Can occur when the parent corporation owns 90 percent (or more) of the outstanding stock of the subsidiary corporation

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Sale or Lease of Assets A corporation may sell, lease, or otherwise dispose of all or substantially all of its property in other than the usual and regular course of business Such a sale or lease transaction requires: The recommendation of the board of directors, and An affirmative vote of the majority of the shares of the selling corporation that is entitled to vote

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Dissenting Shareholder Appraisal Rights Shareholders who object to a proposed merger, share exchange, or sale or lease of all or substantially all of the property of a corporation have a right to have their shares valued by the court and receive cash payment of this value from the corporation “fair value” The court must determine the “fair value” of the shares of the dissenting shareholders

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Tender Offer An offer that an acquirer makes directly to a target corporation’s shareholders in an effort to acquire the target corporation The tender offeror’s board of directors must approve the offer The shareholders do not have to approve The tendering corporation and the target corporation retain their separate legal status

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Illustration of a Tender Offer Tender Offeror Target Corporation Shareholders Tender offer is made to the shareholders of the target corporation. The tender offeror offers to purchase their shares in the target corporation.

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Landmark Law: The Williams Act (1968) An amendment to the Securities Exchange Act of 1934 Specifically regulates all tender offers disclosure requirementsantifraud provisions Establishes certain disclosure requirements and antifraud provisions

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Tender Offer Rules Fair Price Rule A rule that says any increase in price paid for shares tendered must be offered to all shareholders Even those who have previously tendered their shares Fair Price Rule A rule that says any increase in price paid for shares tendered must be offered to all shareholders Even those who have previously tendered their shares Pro Rata Rule A rule that says shares must be purchased on a pro rata basis if too many shares are tendered Pro Rata Rule A rule that says shares must be purchased on a pro rata basis if too many shares are tendered

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Tender Offers: Antifraud Provision Section 14(e) of the Williams Act Section 14(e) of the Williams Act prohibits fraudulent, deceptive, and manipulative practices in connection with a tender offer Violations of this section may result in civil charges brought by the SEC or criminal charges brought by the Justice Department The courts have implied a private civil cause of action under Section 14(e)

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defensive Strategies and Tactics Against Hostile Tender Offers Persuasion of Shareholders Delaying Lawsuits Selling a Crown Jewel Adopting a Poison Pill White Knight Merger Pac-Man (or reverse) Tender Offer Persuasion of Shareholders Delaying Lawsuits Selling a Crown Jewel Adopting a Poison Pill White Knight Merger Pac-Man (or reverse) Tender Offer Issuing Additional Stock Creating an Employee Stock Ownership Plan (ESOP) Flip-over and Flip-in Rights Plans Greenmail and Standstill Agreements Issuing Additional Stock Creating an Employee Stock Ownership Plan (ESOP) Flip-over and Flip-in Rights Plans Greenmail and Standstill Agreements

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Fiduciary Duty fiduciary duty The members of the board of directors of a corporation owe a fiduciary duty to the corporation and its shareholders This duty requires the directors of a corporation to act carefully and honestly when acting on behalf of the corporation This duty is truly tested when a tender offer is made for the stock of the company

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Business Judgment Rule A rule that protects the decisions of the board of directors, who act on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation and the shareholders context of a tender offer In the context of a tender offer, the defensive measures chosen by the board must be reasonable in relation to the threat posed A rule that protects the decisions of the board of directors, who act on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation and the shareholders context of a tender offer In the context of a tender offer, the defensive measures chosen by the board must be reasonable in relation to the threat posed

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. State Antitakeover Statutes Statutes enacted by state legislatures that are aimed at protecting corporations that are either incorporated in or doing business within the state from hostile takeovers Many of these statutes have been challenged as unconstitutional because they violate the Williams Act and the Commerce and Supremacy clauses of the U.S. Constitution