1. Corporations: Mergers, Consolidations, Terminations
Chapter 40
Chapter 40: Corporations: Mergers, Consolidations, Terminations
Corporations: Mergers, Consolidations, Terminations
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2. Overview LO40-1: What are mergers and consolidations?
LO40-2: What are the procedures for mergers and consolidations?
LO40-3: What are asset purchases?
LO40-4: What are stock purchases?
LO40-5: What is a takeover?
LO40-6: In what ways could the termination of mergers and consolidations occur?

3. Chapter 40 Hypothetical Case 1
As this chapter indicates, hostile takeovers are corporate takeovers to which the management of the target corporation objects. When a hostile takeover succeeds, the target corporation's management frequently compares the transition to a full-scale invasion characterized by layoffs and dramatic changes in company policy.
Is a hostile takeover an ethical business practice?
Chapter 40 Hypothetical Case 1: As this chapter indicates, hostile takeovers are corporate takeovers to which the management of the target corporation objects. When a hostile takeover succeeds, the target corporation's management frequently compares the transition to a full-scale invasion characterized by layoffs and dramatic changes in company policy.
Is a hostile takeover an ethical business practice?
[Instructor: See The Nature of Takeovers in Chapter 40]

4. Chapter 40 Hypothetical Case 2
Minisoft Corporation and Pear, Inc. are the two largest computer companies in the United States. Pending Department of Justice antitrust review, the two corporations plan to merge, renaming their company Mini-Pear, Inc. As an integral part of the merger, existing shareholders of Minisoft Corporation and Pear, Inc. will be offered an even stock swap. Per the terms of the proposed trade, current shareholders of Minisoft Corporation and Pear, Inc. will exchange each share of their company's stock for one share of Mini-Pear, Inc. stock. A few shareholders of both Minisoft Corporation and Pear, Inc. do not approve of the terms of the proposed merger, nor do they approve of the merger itself. The vast majority of shareholders of companies approve of the merger.
What rights do these shareholders have, either in terms of blocking the merger or in terms of estimating the fair value of their existing shares?
Chapter 40 Hypothetical Case 2: Minisoft Corporation and Pear, Inc. are the two largest computer companies in the United States. Pending Department of Justice antitrust review, the two corporations plan to merge, renaming their company Mini-Pear, Inc. As an integral part of the merger, existing shareholders of Minisoft Corporation and Pear, Inc. will be offered an even stock swap. Per the terms of the proposed trade, current shareholders of Minisoft Corporation and Pear, Inc. will exchange each share of their company's stock for one share of Mini-Pear, Inc. stock. A few shareholders of both Minisoft Corporation and Pear, Inc. do not approve of the terms of the proposed merger, nor do they approve of the merger itself. The vast majority of shareholders of companies approve of the merger.
What rights do these shareholders have, either in terms of blocking the merger or in terms of estimating the fair value of their existing shares?
[Instructor: See Procedures for Mergers and Consolidations in Chapter 40]

5. What Are Mergers and Consolidations?
Merger: Legal contract combining two or more corporations such that only one of the corporations continues to exist; in essence, one corporation absorbs another corporation
Consolidation: Legal contract combining two or more corporations, resulting in an entirely new corporation; in consolidation, neither of the original corporations continues to exist
A merger is a legal contract combining two or more corporations, such that only one of the corporations continues to exist. In essence, by way of a merger, one corporation absorbs another corporation. A consolidation is a legal contract combining two or more corporations, resulting in an entirely new corporation. In consolidation, neither of the original corporations continues to exist.

6. Procedures for Mergers and Consolidations
Boards of directors of all involved corporations must approve the plan
Shareholders must approve the plan through a vote at a shareholder meeting
The corporations must submit their plan to the secretary of state
The state must review the plan and, if it satisfies legal requirements, grant an approval certificate
In order to validate a proposed corporate merger or consolidation, boards of directors of all involved corporations must first approve the plan, and shareholders must approve the plan through a vote at a shareholder meeting. The corporations involved must then submit their plan to the secretary of state; the state must review the plan and, if it satisfies legal requirements, grant an approval certificate.

7. Terminology and Rights Regarding Mergers and Consolidations
Rights of shareholders: Shareholders vote only on exceptional matters regarding the corporation
Short-form merger (parent-subsidiary merger): Parent corporation merges with a subsidiary corporation; does not require shareholder approval
Appraisal right: Shareholder's right to have his/her shares appraised, and to receive monetary compensation for their value
Terminology and rights involving mergers and consolidations include the rights of shareholders to vote on exceptional matters regarding the corporation, including mergers, consolidations, changes in partners, sales or leases of the corporation, and exchanges of assets. A short-form merger, also known as a parent-subsidiary merger, occurs when a parent corporation merges with a subsidiary corporation. A short-form merger does not require shareholder approval. The shareholder appraisal right represents a shareholder's right to have his or her shares appraised and to receive monetary compensation for their value.

8. Purchase of Assets and Stock
Purchase of assets: One corporation can extend its business operations by purchasing the assets of another company
Corporate assets: All intangible items (corporate goodwill, company name, company logo, etc.) and tangible items (buildings, property, etc.) owned by the corporation
Note: Generally, corporation that purchases assets of another corporation does not acquire its liabilities
Purchase of stock: An acquiring corporation can take control of another corporation by purchasing a substantial amount of its voting stock
A corporation can extend its business operations by purchasing the assets of another company. Corporate assets include all intangible items, such as corporate goodwill, the company name, and the company logo, and tangible items, such as buildings and property owned by the corporation. Generally, a corporation that purchases the assets of another corporation does not acquire its liabilities. An acquiring corporation can take control of another corporation by purchasing a substantial amount of its voting stock.

9. Types of Takeovers
Hostile takeover: A takeover to which management of the target corporation objects
Tender offer: Aggressor (acquiring corporation) offers target shareholders a price above current market value of their stock
Exchange offer: Aggressor offers to exchange target shareholders' current stock for stock in aggressor's corporation
Cash tender offer: Aggressor offers target shareholders cash for their stock
Beachhead acquisition: Aggressor gradually accumulates target company's shares
A hostile takeover is a takeover objected to by management of the target corporation.
Other types of takeovers include tender offers, exchange offers, cash tender offers, and beachhead acquisitions. A tender offer occurs when the aggressor (the acquiring corporation) offers target shareholders a price above the current market value of their stock. An exchange offer occurs when an aggressor offers to exchange the target shareholders' current stock for stock in the aggressor's corporation. A cash tender offer occurs when an aggressor offers the target shareholders cash for their stock. Finally, a beachhead acquisition occurs when an aggressor gradually accumulates the target company's shares.

10. Responses to Takeovers
Self-tender offer: Response to corporate takeover attempt in which target corporation offers to buy its shareholders' stock; if shareholders accept offer, target corporation maintains control of business
Leveraged buyout: Occurs when group within a corporation (usually management) buys all outstanding corporate stock held by the public; group gains control over corporate operations by going private (i.e., becoming a privately held corporation)
A self-tender offer is a response to a hostile takeover attempt in which the target corporation offers to buy its shareholders' stock. If the shareholders accept the offer, the target corporation maintains control of the business. A leveraged buyout occurs when a group within a corporation, usually management, buys all outstanding corporate stock held by the public. The group gains control over corporate operations by going private (in other words, by becoming a privately held corporation).

11. Termination of Mergers and Acquisitions
Dissolution: Legal termination of corporation
Two types: Voluntary and involuntary
Liquidation: Process by which trustee converts corporation's assets into cash, and distributes them among corporation's creditors and shareholders
The legal death of a corporation occurs in two phases. First is dissolution, which is the legal termination of the corporation; there are two types—voluntary and involuntary. Second is liquidation, the process by which a trustee converts the corporation's assets into cash and distributes them among the corporation's creditors and shareholders.

12. Voluntary versus Involuntary Dissolution
Voluntary dissolution: Occurs when directors or shareholders initiate the dissolution process
Involuntary dissolution: State government forces the corporation to close
Voluntary dissolution occurs when corporate directors or shareholders initiate the dissolution process, while involuntary dissolution occurs when the state government forces the corporation to close.

13. Reasons for State-Initiated Involuntary Dissolution
Corporation failed to pay taxes within 60 days of due date
Corporation failed to submit its annual report to secretary of state with 60 days of due date
Corporation did not have a registered agent or office in the state for 60 days or more
Corporation failed to notify secretary of state within 60 days that its registered agent/registered office had changed
Corporation's duration (as specified in its articles of incorporation) has expired
Reasons for involuntary, or state government-initiated, dissolution of the corporation include the corporation's failure to pay taxes within 60 days of the due date, the corporation's failure to submit its annual report to the secretary of state with 60 days of its due date, the corporation did not have a registered agent or office in the state for 60 days or more, the corporation failed to notify the secretary of state within 60 days that its registered agent or registered office had changed, and the corporation's duration, as specified in its articles of incorporation, has expired.

14. Reasons for Court-Ordered Involuntary Dissolution
Corporation obtained its articles of incorporation fraudulently
Corporate directors have abused their power
Corporation is insolvent
Reasons for court-ordered involuntary dissolution of a corporation include situations when the corporation has obtained its articles of incorporation fraudulently, corporate directors have abused their power, and the corporation is insolvent.

15. Life Stages of a Corporation
Incorporation: Company becomes incorporated when articles of incorporation signed
Corporation conducts business: Directors and officers oversee business, as shareholders ensure company's stock has value
Dissolution: Corporation legally terminated, either voluntarily or involuntarily
Liquidation: Directors convert corporate assets into cash and distribute them among corporation's creditors and shareholders
There are four distinct stages spanning the life of a corporation. During incorporation, the company becomes incorporated when its articles of incorporation are signed. Next, the corporation conducts business, during which time the directors and officers oversee the business, while the shareholders ensure that the company's stock has value. During dissolution, the corporation is legally terminated, either voluntarily or involuntarily. Finally, during liquidation, the directors convert the corporation's assets into cash and distribute them among the corporation's creditors and shareholders.

16. Chapter 40 Hypothetical Case 3
Several circumstances can trigger a state government's right to involuntarily dissolve a corporation headquartered in its state, including: (1) the corporation fails to pay taxes within 60 days of the government-imposed deadline; (2) the corporation fails to submit its annual report to the secretary of state within 60 days of the report's due date; (3) the corporation does not have a registered agent or office in the state for 60 days or more; (4) the corporation fails to notify the secretary of state within 60 days that its registered agent and/or registered office has changed; or (5) the corporation's duration, as specified in its articles of incorporation, has expired.
Arguably, many of the described triggering events are technicalities, and inquiring minds might wonder why a state government would make such a drastic decision to revoke a corporate charter, especially when it would jeopardize the livelihood of corporate employees, as well as future corporate tax payments to the state. The absence of those corporate tax dollars could jeopardize government social programs, which could negatively affect scores of citizens who need access to those programs.
In light of the potential negative impact on the community, how readily should a state government use its involuntary corporate dissolution right?
Chapter 40 Hypothetical Case 3: Several circumstances can trigger a state government's right to involuntarily dissolve a corporation headquartered in its state, including: (1) the corporation fails to pay taxes within 60 days of the government-imposed deadline; (2) the corporation fails to submit its annual report to the secretary of state within 60 days of the report's due date; (3) the corporation does not have a registered agent or office in the state for 60 days or more; (4) the corporation fails to notify the secretary of state within 60 days that its registered agent and/or registered office has changed; or (5) the corporation's duration, as specified in its articles of incorporation, has expired.
Arguably, many of the described triggering events are technicalities, and inquiring minds might wonder why a state government would make such a drastic decision to revoke a corporate charter, especially when it would jeopardize the livelihood of corporate employees, as well as future corporate tax payments to the state. The absence of those corporate tax dollars could jeopardize government social programs, which could negatively affect scores of citizens who need access to those programs.
In light of the potential negative impact on the community, how readily should a state government use its involuntary corporate dissolution right?
[Instructor: See Response to Termination in Chapter 40]

17. Chapter 40 Hypothetical Case 4
Clothing manufacturer Wooltek has coveted textile manufacturer Veltron since it developed a new miracle fiber, FabriSense. The new fiber, and the fabric made from it, has amazing properties, including being completely water-resistant, never wrinkling or bagging, and resisting virtually all stains.
Wooltek decides to take over Veltron, a publicly traded company. It begins by purchasing a large number of Veltron shares over the course of a three-month period.
Which type of takeover is Wooltek attempting: tender offer, exchange offer, cash tender offer, beachhead acquisition, or hostile takeover? What is Wooltek's next likely move in the takeover process?
Chapter 40 Hypothetical Case 4: Clothing manufacturer Wooltek has coveted textile manufacturer Veltron since it developed a new miracle fiber, FabriSense. The new fiber, and the fabric made from it, has amazing properties, including being completely water-resistant, never wrinkling or bagging, and resisting virtually all stains.
Wooltek decides to take over Veltron, a publicly traded company. It begins by purchasing a large number of Veltron shares over the course of a three-month period.
Which type of takeover is Wooltek attempting: tender offer, exchange offer, cash tender offer, beachhead acquisition, or hostile takeover? What is Wooltek's next likely move in the takeover process?
[Instructor: See The Nature of Takeovers in Chapter 40]