M&a Tender Offers & Hostile Transactions For Bus. Orgs

Mergers & Acquisitions
Structures Voting & Appraisal Rights Fairness & Other Challenges Tender Offers Hostile Transactions
Defensive acts Directors Duties
M & A Structures Overview
Three Basic Structures

Asset Acquisition Merger
Stock Transaction
Asset Transactions
1 of 5
Traditional Form of Asset Purchase: Sale of Substantially All of Target Co. Assets for Cash Followed by Dissolution of Target Co.
BEFORE Transaction Board of Directors T Co. Shareholders
B Co. Shareholders
Target Co. Assets & Liabilities
Bidder Co. Assets & Liabilities
Board of Directors
2 of 5
Traditional Form of Asset Purchase: Sale of Substantially All of Target Co. Assets for Cash Followed by Dissolution of Target Co. (Cont.)
FIRST Step: Sale of Target Co. Assets to Bidder Co.
T Co. Shareholders
B Co. Shareholders
Target Co.
Substantially All of T Co. Assets Cash (plus assumption of T Co. liabilities as agreed to by parties)
Bidder Co.
3 of 5
AFTER Sale of Substantially All of Target Co. Assets
Board of Directors
Old T Co. Shareholders
Old B Co. Shareholders
Target Co. Remaining Liabilities plus Cash
Bidder Co. Old B. Co. Assets & Liabilities plus T Co. Assets and Any Assumed T Co. Liabilities
4 of 5
SECOND Step: Dissolution of Target Co.
T Co. Shareholders [T Co. stock is cancelled (by operation of law) & T Co. dissolves (to be extinguished by operation of law)] Cash
Board of Directors
B Co. Shareholders
Target Co. Remaining Liabilities plus Cash (proceeds from sale of assets
Bidder Co. B Co. Assets & Liabilities -plus All of T Co. Assets (& any assumed T Co. Liabilities
5 of 5
AFTER Second Step Dissolution
B Co. Shareholders
[T Co. is extinguished; old T Co. shareholders have been cashed out following orderly liquidation of Target Co.]
Bidder Co. B Co. Assets & Liabilities plus All of T Co. Assets (& any assumed T Co. Liabilities
Cash Merger
1 of 3
Stock for Cash Merger (Cash Out Merger)

BEFORE Transaction Board of Directors Shareholders
B Co. Shareholders
Board of Directors
2 of 3
Stock for Cash Merger (Cash Out Merger) (Cont.)

The Transaction T Co. Shareholders
Cash
B Co. Shareholders
T Co. Assets & Liabilities
[Bidder Co. is surviving corporation]
[Target Co. disappears extinguished by operation of law]
3 of 3
Stock for Cash Merger (Cash Out Merger) (Cont.)

AFTER Transaction
[Target Co. shareholders hold cash no stock]
Bidder Co. Old B Co. Assets & Liabilities plus old T Co. Assets & Liabilities
Stock Transaction
1 of 3
Traditional Form of Stock Purchase for Cash

Board of Directors
B Co. Shareholders
2 of 3
Traditional Form of Stock Purchase for Cash (Cont.)

Cash
B Co. Shareholders
* (100%) T Co. Stock
*It is possible (but in certain situations not likely) that all (100%) of Target Co. stock is exchanged for cash in this transaction.
3 of 3

AFTER Transaction
[Old Target Co. shareholders hold cash no stock]
Bidder Co. Old B Co. Assets & Liabilities

100%
Target Co. Old T Co. Assets & Liabilities
Triangular Mergers
Relatively recent development as an alternative to Asset transaction

Stock acquisition Direct merger
Strengths/Weaknesses of Each
Asset Transactions
Messy and can be mechanically difficult/expensive Some contracts cannot be assigned Not favored by Ts
Tax and liability issues
Permits B to assume specified liabilities only
Stock Acquisition
Ease of execution Fewer corporate formalities
Strengths/Weaknesses (Contd)
No third party consents required (generally) Ts liabilities remain & T is subsidiary of B
Some separation from B, but not as distant as asset transaction
Direct Merger
Shareholder approval required for both T & B
Adds to transaction costs
B inherits Ts liabilities (like it or not) T disappears

May be business reasons to keep it alive Certain contracts could be affected (terminated)
Triangular merger is attempt to meld the advantages and eliminate the disadvantages of traditional acquisition techniques
Easier execution (compared to asset transaction and direct merger)
No B shareholder approval required (generally) No need to transfer assets (consent and expense)
Certainty of execution (compared to stock transaction)

No holdout T shareholders
Protection against transferee liability (compared to direct merger)

T ends up as subsidiary of B (like stock transaction) Can avoid certain restrictions on assignment of T contracts
Diagram 9
Forward Triangular Merger
1 of 3
Forward Triangular Merger (Using Cash as Merger Consideration)

BEFORE Transaction Board of Directors Board of Directors T Co. Shareholders

100%
B Co. Shareholders
[Bidder Co. incorporates subsidiary (New Co.) and receives all of New Co.s stock in exchange for cash to be used as merger consideration]
New Co. (merger consideration = Cash
2 of 3
Forward Triangular Merger (Using Cash as Merger Consideration) (Cont.)

The Transaction (Target Co. Merges into New Co.)
Old T Co. Shareholders [T Co. shares are cancelled]
Cash
[Target Co. disappears extinguished by operation of law] T Co. Assets & Liabilities

100%
New Co. [Cash]
[New Co. is surviving corporation by operation of law]
3 of 3
Forward Triangular Merger (Using Cash as Merger Consideration) (Cont.)

AFTER Transaction Is Consummated
Bidder Co. Old B. Co. Assets & Liabilities

100%
New Co.* Old T. Co. Assets & Liabilities

to Target Co.
[Old T Co. shareholders have been cashed out hold no stock]
*New Co. will usually undertake the transaction costs associated with changing name
Diagram 11
Reverse Triangular Merger
1 of 3
Reverse Triangular Merger (Using Cash as Merger Consideration)

BEFORE Transaction Board of Directors Board of Directors T Co. Shareholders

100%
B Co. Shareholders
[Bidder Co. incorporates subsidiary (New Co.) and receives all of the New Co.s stock in exchange for cash to be used as merger consideration]
New Co. (merger consideration = Cash
2 of 3
Reverse Triangular Merger (Using Cash as Merger Consideration) (Cont.)

In the Transaction
Old T Co. Shareholders [T Co. shares are cancelled by operation of law]
Cash

100%
[New Co. stock is converted into shares of T Co. stock by operation of law. B Co. thereby holds 100% of T Co. stock]
New Co. [Cash]
[New Co. disappears. New Co. stock is converted into T Co. shares by operation of law]
3 of 3
Reverse Triangular Merger (Using Cash as Merger Consideration) (Cont.)

AFTER the Transaction Board of Directors Old B Co. Shareholders
Bidder Co. Old B. Co. Assets & Liabilities

100%
Target Co. Old T. Co. Assets & Liabilities
Certain Considerations Affecting Choice of Structure
Two Propositions:
Most transactions are structured so that Target (or its assets) ends up as (or in) a Bidder subsidiary All basic structures are designed (or can be manipulated or combined) to achieve that result
What, then, determines structure?
Certain matters to consider:

Federal income taxation Impact on contracts and licenses Structure of Target Transferee/ successor liability ERISA and other employee issues State and local taxation
General Rule: Federal Income Taxes

Bidders want to buy assets Targets want to sell stock
Contracts and Licenses

Most governmental licenses are not assignable or transferable Many licenses of IP, contracts and leases are not assignable without third party consent
General Rules:
If contract or lease is silent on subject, it can be assigned without consent
Exception: certain IP licenses
A merger is not an assignment or transfer of a contract

Transfer occurs by operation of law
Again, IP can be an issue
The transfer of Targets stock does not assign its contracts
Transferee/Successor Liability General Rules

In asset transaction, Bidder only assumes those liabilities of Target it agrees to assume In stock transaction, Targets liabilities remain in Target, but are not direct obligations of Bidder In merger, Targets liabilities are combined with those of the surviving corporation
Exceptions to General Rules in Asset Transactions

De facto merger doctrine Continuity of business enterprise CERCLA & other environmental laws ERISA and other employee claims
Asset Transactions
Some asset transactions are part of the ordinary course of business; others constitute fundamental change, so that shareholders (of at least T) should
Get to vote, and

Get appraisal rights (maybe)
Examine how MBCA separates ordinary and extraordinary transactions and grants or withholds voting and appraisal rights
Preliminary Question: Is this an asset transaction?
Parent Corporations (Parent) sale for cash of all the capital stock in a wholly-owned Subsidiary to a single Purchaser (another corporation)
Parent is a $2Billion global manufacturer of industrial products used in the automotive, appliance and other businesses Parent conducts business through four subsidiaries, each roughly containing the operations of the different lines of business in which Parent operates Parent has determined to exit one such business that conducted by Subsidiary by selling the Subsidiary stock it owns (all) to a strategic buyer (hopefully) or a financial buyer in a controlled auction Subsidiarys operations represent about 10% of Parents consolidated assets, 20% of its consolidated revenues and 45% of its consolidated income before taxes The transaction, as structured, will look like Diag. 6
1 of 3
Traditional Form of Stock Purchase for Cash

Board of Directors
B Co. Shareholders
2 of 3

Cash
B Co. Shareholders
* (100%) T Co. Stock
*It is possible (but in certain situations not likely) that all (100%) of Target Co. stock is exchanged for cash in this transaction.
3 of 3

AFTER Transaction
[Old Target Co. shareholders hold cash no stock]

100%
MBCA
Basic proposition: Board has complete authority to manage the business and affairs of a corporation without the need for specific shareholder approval. MBCA 501
Includes the power to buy and sell assets. MBCA 261(f) & (g)
MBCA 751 & 753

MBCA 751 authorizes Board without shareholder approval to
Sell any or ALL the corporations assets in the usual and regular course of business.
Portfolio companies Investment companies Real estate development companies
Mortgage or pledge the corporations assets as part of financing transactions Transfer assets to wholly-owned subsidiaries
MBCA 751 & 753

Other dispositions which leave the corporation without a significant continuing business activity require shareholder approval. MBCA 753
Putting MBCA 751 & 753 together: Shareholder approval is required for the sale of all or substantially all of assets not in the usual and regular course of business IF the sale would leave the corporation without a significant continuing business activity.
MBCA 753 Safe Harbor

significant continuing business activity
If retained business represents
At least 25% of total assets at end of most recent fiscal year AND At least 25% of either pre-tax income from continuing operations or revenues from continuing operations for the most recent fiscal year, then Retained business is significant
Significant Continuing Business Activity Issue: A Planners Problem

If the transaction falls outside the 753 safe harbor, does the transfer constitute substantially all of the assets of the transferring corporation?
If transaction planner makes the wrong call, consequences could be costly and severe
Shareholder voting requirement is mandatory (may not be waived) There might be dissenters rights
Gimbel v. Signal Companies, Inc.
p. 656
Plaintiff/Shareholder Board
Signal Parent
100% Stock Signal Oil $480 million
Burmah
100%
Signal Oil Subsidiary
Substantially All Test (From Gimbel)

If the sale is of assets quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation, then it is beyond the power of the board of directors.
To paraphrase, if the sale
Involves assets both qualitatively and quantitatively vital to the corporation, and The transaction is outside the corporations regular course of business, then Shareholder approval is required
Problem 1
Sales of Assets for Cash
Facts
T is bicycle store; 20 years in business Shareholdings: 1/3 each by Lance (founder), Abe & Biff (Lances sons) T will transfer all assets & certain liabilities to B (also closely-held) for cash T will liquidate and dissolve (distribute net assets to shareholders)
What action required by T & B Boards?

T
Board approval required. MBCA 753(2) & (3)
B
Board approval might (or might not) be required. See MBCA 261(h)
Do the T or B shareholders get to vote?

T
Yes. Why?
Sale is of all assets, so MBCA 753(4) & (5)
B
No. Why not?
B is buying not selling - assets
Do the T or B shareholders get appraisal rights?

T
Yes. Why? MBCA 762(1)(c): Appraisal rights given to shareholders entitled to vote on the transaction
B
No. Why not? Bs shareholders are not entitled to vote on the transaction
Corporate Requirements
Direct Mergers Under MBCA
Stock-for-Stock Merger Under MBCA
1 of 3
Traditional Form of Stock for Stock Direct (Statutory) Merger

BEFORE Transaction Board of Directors Shareholders
B Co. Shareholders
Board of Directors
2 of 3
Traditional Form of Stock for Stock Direct (Statutory) Merger (Cont.)

The Transaction
T Co. Shareholders [T Co. shares are cancelled by operation of law] Bidder Co. Shareholders
B Co. Shares
Target Co.
T. Co. Assets & Liabilities
(by operation of law) [Target Co. disappears by operation of law]
Bidder Co.
[Bidder Co. is surviving corporation by operation of law]
3 of 3
Traditional Form of Stock for Stock Direct (Statutory) Merger (Cont.)

AFTER Transaction
Bidder Co. Old B Co. Assets & Liabilities plus old T Co. Assets & Liabilities
Shareholders (consisting of Bidder Co.s old shareholders plus old T Co. shareholders)
Problem Two Facts

T and B are both closely-held corporations T merges into B T and B have 1 class of stock outstanding (common stock) T has 100 shares outstanding, and B has 10,000 shares outstanding, before the merger Merger consideration: 5,000 shares of Bs stock
Question 1.
Which corporation survives the merger?

B
Which corporation disappears?

T
Question 2.
Do you have to specify which corporation will disappear?
Yes
MBCA 701(2)(a)
Question 3.
What action is required by Boards of T and B?
T: Plan of merger must be adopted (approved) by Board MBCA 701(2) Note use of shall B: Same result. Why? It is proposing to participate in a merger (constituent corporation) MBCA 701(2)
Question 4.
What if B is but T is not incorporated under MBCA? Can B merge with a foreign corporation? Yes. MBCA 735 Whose law controls in merger with foreign corporation or eligible entity?
Both domestic and foreign law
Question 5.
Do shareholders of T get to vote?
Yes.
MBCA 703a(2)(d)
What is impact of MBCA 703a(2)(e)? (Except as provided in section 754.)

Provision does not apply, since T will not survive the merger
Question 6.
Do shareholders of B get to vote?
Yes, but 703a(1) provides right of B shareholders to vote
But 703a(2)(e) might take voting rights away

703a(2)(e) asks four questions:
Is it the surviving corporation Will its Articles of Incorporation be changed? Will rights of holders of pre-merger shares, or the number of shares held by such holders, be changed? Is vote required under MBCA 754?
Question 7
Do the T shareholders get the right to dissent?
If T is not the surviving corporation, then T shareholders get the right to dissent. 762(1)(a)
Unless the market out exception applies
Do the B shareholders get the right to dissent?

Since B is the surviving corporation, its shareholders dont get to vote; no right to dissent if there is no right to vote. 762(1)(a)
If Bs shareholders can vote, market out exception might take away right to dissent
Appraisal Rights
Introduction Why are there appraisal rights?

Historically, shareholders had veto rights on mergers Corporate law restrictions on permissible merger consideration
Often, stock only was permitted
Corporate statutes amended to allow majority approval for mergers Result: A minority shareholder could be forced into becoming an investor in an enterprise not of his/her choosing
Four issues raised by appraisal rights

When are they available? How are they perfected? How are dissenters shares valued? Is the appraisal remedy exclusive?
Actions that trigger Appraisal/Dissenter Rights

A plan of merger to which the corporation is a party if approval by the shareholders of that corporation is required
Typically a vote by shareholders of T
A sale or exchange of all or substantially all of the corporations asset NOT in the usual course of business if approval of the shareholders is required
Again, typically a vote by the shareholders of T
Actions that trigger Appraisal/Dissenter Rights

An upside-down transaction covered by 754 Action taken pursuant to a shareholder vote where the right to dissent is given by an articles or bylaw provision or by resolution of the Board
Situations When Dissenter/Appraisal Rights are Taken Away (The Market Out Exception)
If a shareholder is entitled to vote on the asset or merger transaction, but the shares he/she will give up (exchange) in the transaction are listed and traded on NYSE or NASDAQ, then there is no right to dissent. 762(2)(a)
Can receive fair value by exiting via the stock market if he/she doesnt like the deal
The Market Out Exception to Dissenter/Appraisal Rights

If a shareholder is entitled to vote on the asset or merger transaction, and the consideration he/she will receive consists of cash, shares listed and traded on NYSE or NASDAQ, or a combination, then there is no right to dissent. 762(2)(b) & (c)
Receives fair value from cash or shares that are readily tradeable, post-deal
Perfecting Appraisal Rights (a general description)

Contemporaneous ownership required Dissenter gives notice of intent to dissent prior to vote Dissenter must vote against (or at least not vote for) the proposed merger Corporation gives notice to dissenters of approved transaction Corporation makes offer to pay (pays) fair value of dissenters shares Failing agreement, appraisal proceeding is commenced to determine fair value
Valuation & Exclusivity: Two Cases

Weinberger v. UOP, Inc. Rabkin v. Philip A. Hunt Chemical Corp.
Weinberger v. UOP, Inc.

Two step Transaction Diagram 12 After Stock Purchase Step One
Walkup/Board Chairman Arledge V.P. Chitiea CFO Shumway/CEO
Signal
Arms CLO Crawford/UOPs CEO
Arledge 50.5% Public Minority Interest Signal Nominees 49.5% 6 Shumway Crawford Walkup Chitiea
UOP
Lehman Bros. Financial advisor _______________ Glanville (partner)
13 Directors
Independent/Outside Directors
Crawford CEO & longtime Signal employee
Glanville (?)
Second Step Cash-Out merger See Diagram 12
1 of 8
TWO STEP TRANSACTION: Stock Purchase Followed by Squeeze Out (Cash Out) Merger (Using Forward Triangular Merger)
STEP ONE: Stock Purchase BEFORE Stock Purchase Board of Directors T Co. Shareholders B Co. Shareholders
T. Co. Stock
[Cash tender offer for (at least) 51% of T Co. Stock]
2 of 8
TWO STEP TRANSACTION: Stock Purchase Followed by Squeeze Out (Cash Out) Merger (Using Forward Triangular Merger) (Cont.)
AFTER Stock Purchase Board of Directors Old B Co. Shareholders

51%
49%
[The other 51% of the T Co. shareholders have been cashed out hold no stock]
3 of 8
Board of Directors
STEP TWO: Squeeze-Out (Cash-Out) Merger (Using Forward Triangular Merger) BEFORE Transaction

51% 100%
[B. Co. incorporates subsidiary (New Co.) & receives all of New Co.s stock in exchange for cash to be used as merger consideration]

49%
New Co. (merger consideration = cash)
4 of 8
In the Transaction Board of Directors Old B Co. Shareholders

51% 100% T Co. Assets & Liabilities (by operation of law) 49% Cash
[New Co. is surviving corporation by operation of law]
New Co. [cash]
5 of 8
AFTER the Squeeze Out Merger (Using Forward Triangular Merger) Board of Directors Old B Co. Shareholders

100%
New Co. Old T. Co. Assets & Liabilities
An important case on several issues:

In a squeeze out merger, is appraisal the exclusive remedy?
No. If participants stand on both sides of a transaction then they have the burden of establishing its entire fairness.
What is fairness in the squeeze out context?

The concept of fairness has two aspects: fair dealing and fair price. Unfairness can be shown by specific acts of fraud, misrepresentation, or other items of misconduct.
How is fair value determined?

Court must address all relevant factors
But, inquiry must exclude speculative elements of value such as those resulting from the use of pro forma data and projections of a speculative variety.
Rabkin v. Philip A. Hunt Chemical Corp.

Before Cash-Out Merger Turner and Newall Inc.
64% Rabkin Minority shareholder
Hunt Corp.
64% Hunt stock $25 per share
Public minority interest
Olin Corp.
Johnstone Director Berry Director Morgan Lewis Financial Advisor Merrill Lynch Financial Advisor 36% Public minority interest
Olin Corp.
64%
Henske CEO
Berry Director Henske Director Johnstone Director
Hunt Corp.
Hunt Special Committee 4 Independent (non-Olin) Directors

AFTER CASH OUT MERGER
Olin Corp. [Former 36% minority interest is left holding cash to invest elsewhere.]
100%
Hunt Corp.

March 1, 1983
Olin (Bidder) buys 64% stake in Hunt Chemical Corp. (Target) from Hunts controlling shareholder for $25 per share The Stock Purchase Agreement included the one year commitment Thereby obligating Olin to pay $25 per share if Hunt acquired minority interest within one year.
July 5, 1984
Hunt merged into Olin pursuant to merger agreement that was recommended by Hunts Board and submitted for approval by Hunts shareholders
As required by Delaware 251 and 252 Hunt is Delaware corporation Olin is Virginia corporation
No requirement of approval by majority of (disinterested) minority shareholders Proxy statement indicated that Olin planned to vote its 64% stake in favor of the merger Hunts minority shareholders received $20 per share
Is pursuing an appraisal remedy the exclusive remedy in a squeeze out merger?

No.
Instead, dissenter can pursue a remedy based on the fair dealing component of Weinberger Transaction can be unfair if it springs from a breach of fiduciary duty
Which court equates with the majority (Olin) treating the minority (remaining Hunt shareholders) inequitably by manipulating the timing of the transaction
Not an answer that what Olin did was legal

inequitable conduct will not be protected merely because it is legal.
Should a minority discount be applied in an appraisal proceeding?

No.
Purpose of appraisal proceeding is to value corporation as a going concern
Each share gets a prorata share of the value.
Successor Liability in Asset Transactions
Two-step Asset Transaction Revisited
1 of 5
Traditional Form of Asset Purchase: Sale of Substantially All of Target Co. Assets for Cash Followed by Dissolution of Target Co.
B Co. Shareholders
Board of Directors
2 of 5
FIRST Step: Sale of Target Co. Assets to Bidder Co.
T Co. Shareholders
B Co. Shareholders
Target Co.
Substantially All of T Co. Assets Cash (plus assumption of T Co. liabilities as agreed to by parties)
Bidder Co.
3 of 5
AFTER Sale of Substantially All of Target Co. Assets
Board of Directors
Target Co. Remaining Liabilities plus Cash
Bidder Co. Old B. Co. Assets & Liabilities plus T Co. Assets and Any Assumed T Co. Liabilities
4 of 5
SECOND Step: Dissolution of Target Co.
T Co. Shareholders [T Co. stock is cancelled (by operation of law) & T Co. dissolves (to be extinguished by operation of law)] Cash
Board of Directors
B Co. Shareholders
Target Co. Remaining Liabilities plus Cash (proceeds from sale of assets)
Bidder Co. B Co. Assets & Liabilities -plus All of T Co. Assets (& any assumed T Co. Liabilities)
5 of 5
AFTER Second Step Dissolution
B Co. Shareholders
[T Co. is extinguished; old T Co. shareholders have been cashed out following orderly liquidation of Target Co.]
Bidder Co. B Co. Assets & Liabilities plus All of T Co. Assets (& any assumed T Co. Liabilities

Creditors of T (contract & tort) have two opportunities to collect what they are owed:
As part of the dissolution process If T fails to pay or provide for all of retained liabilities but distributes some or all of the acquisition consideration to T shareholders
Directors can be liable to creditors Shareholders might have to return distribution received

But what if all of Ts liabilities are not known, or have not matured, at the time of dissolution?
Liquidation and dissolution were done properly, but liability surfaces much later
After assets are distributed and shareholders have scattered
The problem of the long-tail tort claim
Successor Liability: Asset Transactions

General rule: B does not assume liabilities (contract or tort) of T, except when:
B expressly or impliedly assumes liabilities Transaction is deemed to be de facto merger Transaction is fraudulent to creditors B is mere continuation of T B continues to produce the same products using the assets acquired from T
The product line exception
Continuity of Enterprise (The Michigan Exception)

Factors considered in imposing successor liability
Continuity of management, personnel, location and general operations of predecessor corporation Predecessor ceases operations, liquidates and dissolves as soon as practicable following transfer of assets Purchaser assumes assets used in normal operations of predecessor Purchaser holds itself out as effective continuation of predecessor
Not all factors are present in all situations in which doctrine applied Doctrine may be limited to products liability situations when
Product was manufactured prior to purchasers acquisition of business, And injury occurred after the transaction
Successor Liability: Asset Transactions

In addition, under certain circumstances, certain liabilities can follow the business sold, even in an asset transaction:
Employee pension obligations Certain environmental liabilities Certain tax obligations
Tender Offers and Takeovers
Tender Offer
Covers many transactions:
Repurchase programs Going private transactions Acquisitions
Tender Offers & Acquisitions

Possible acquisition methods:
Merger Asset acquisition Purchase of shares
Tender Offers & Acquisitions

Possible acquisition methods:
Merger Asset acquisition Purchase of shares
Mergers
Bs and Ts Boards enter into Plan of Merger Bs and Ts Board submit Plan for shareholder approval Shareholders vote on Plan Merger is completed
Asset Acquisition
Bs and Ts Boards agree on Purchase Agreement Ts Board submits transaction for shareholder approval Shareholders vote on transaction Sale of assets is completed
Share Purchase
B and Ts shareholders enter into Purchase Agreement Sale is completed
1 of 3
Stock for Stock Acquisition (Stock Exchange Offer)

B Co. Shareholders
Board of Directors
2 of 3
Stock for Stock Acquisition (Stock Exchange Offer) (Cont.)

B Co. Stock * T Co. Stock
B Co. Shareholders
*This assumes that all (100%) of Target Co. shareholders accept the offer and exchange their T Co. shares for B Co. stock.
3 of 3
Stock for Stock Acquisition (Stock Exchange Offer) (Cont.)

AFTER Transaction
[Bidder Co. = Parent Corp.]

100%
Old B Co. Shareholders plus old T Co. Shareholders
[Target Co. = wholly owned subsidiary]
Share Purchase & Public T

Conventional share purchase transaction doesnt work. Why?
Impracticability of negotiating individual contracts with each shareholder
Tender Offer Elements

Who is the bidder? What is the price? Is it negotiable? How long do I have to decide? Any conditions to the offer? What happens if the offer is oversubscribed?
Why are tender offers regulated, anyway?
Coercion
Shareholders have only limited time to respond. Shareholders have only limited information Shareholders lack bargaining power
Federal Regulation of Tender Offers

Disclosure Rules Substantive Rules
Disclosure
Section 13(d)
Person or group acquiring 5% or more of registered voting securities must disclose:
identity size of holdings source of funds arrangements purpose of acquisition
Filing required: Schedule 13D
Disclosure (Contd)
Section 14(d)
Bidder must file disclosure document (Rule 14d-1)
Schedule TO includes terms & conditions of offer
T must disclose its position and recommendation w/i 10 days (Rule 14e-2; 14d-9)
Substantive Rules
Sources: Section 14(d) & (e)
14(d): applies to tender offers for shares registered under Section 12 (shares of public companies) 14(e): applies to all tender offers
Substantive Rules (Contd)

Timing: Open for 20 business days; additional 10 days for certain amendments. Rule 14e-1 Withdrawal Rights: Anytime until purchased. Rule 14d-7 Proration: Applies throughout tender. Rule 14d-8

Best Price Rule: Section 14d-7
each seller entitled to best price paid to any other seller during tender
All Holders Rule: Rule 14d-10

offer must be available to all holders of the same class.

Purchasing Away From Tender: Rule 14e-5
Bidder cannot purchase (or arrange to purchase) shares
except pursuant to the tender so long as tender offer is in effect
The Target Strikes Back

State law applies (generally) Focus: Actions of the Board
Entrenchment, or Protector of/negotiator for shareholders
Types of Defenses
Statutory Structural Contractual
Statutory
Business Combination statutes Control Share Acquisition Statutes
Structural
Staggered Board Advance Notice Bylaws Non-Voting (or low voting) Stock
Contractual
Stock Lockups
White Knight transactions ESOPs
Asset Lockups
Crown Jewel options
Shareholder Rights Plans

Poison Pill
Role of the Board

the board of directors is the defender of the metaphorical corporate bastion and the protector of the corporations shareholders. Unitrin
Focus on Fiduciary Duty

Duty of Loyalty Duty of Care
Business Judgment Rule

Acts to protect Board decisions from second guessing
Does it apply when the corporate bastion is under attack?
Unocal v. Mesa Petroleum

Boards tactics in opposing a hostile transaction must be reasonable in relation to the threat posed.
Revlon
If sale of the company is inevitable, the Boards role changes to that of a fair auctioneer.
Paramount v. Time
Perceived threat need not be great. Target should be able to just say no. Merger of two public companies is not a sale triggering Revlon duties.
Paramount v. QVC Network

Merger involving a public corporation dominated by one shareholder is a sale of control, triggering Revlon.
Unitrin v. American General

Court should intervene only if defensive measure is draconian
either preclusive or coercive
Tender Offers & Privately-Held Companies

Common Factual Situation
Mature, family-held or closely-held business Founders have died/retired; stock passes to new generation Employee stockholders have died/retired; stock passes to new generation No market for shares
Result:
Company shares now in hands of persons without direct involvement with company
Fewer than 500, so no 12(g) registration.
Some shareholders desire to sell

BUT no market on which to sell
Company as Market
Two approaches: 1. Company/officers/directors stand ready to negotiate purchases with individual shareholders Raises many concerns 2. Company offers to redeem from all shareholders at a fixed price for a limited time
Is It a Tender Offer?
Tender Offer is not defined
By statute By rule
Wellman v. Dickinson Factors

1.Widespread solicitation of shareholders 2. Solicitation of substantial percentage of shares 3. Offer is a premium to market 4. Fixed terms; not negotiable 5. Offer expires on fixed date 6. Offer subject to minimum or maximum number of shares
Wellman v. Dickinson Factors

7. Shareholders are under pressure to tender 8. Bidder makes public announcement of intent to purchase Not all factors need to present
Is it a Regulated Tender Offer?

Sections 13(d), 13(e), 14(d), 14(e) & 14(f) apply to companies whose shares are: 1. registered under Section 13(b), or 2. registered under Section 12(g) So-called public companies
Certain 34 Act Provisions Apply to ALL Tender Offers

Section 10(b) & Rule 10b-5
apply to purchase as well as sale of any security, whether or not registered
Section 14(e)
applies to ANY tender offer SEC empowered to adopt Rules to prevent fraud & manipulation in tender offers
Provisions Which Apply to ALL Tender Offers

Rule 14e-1
Offer must be open for 20 business days
Rule 14e-2
Company must take a position, or state that it is unable to
Rule 14e-3
Prohibits acquiring shares subject to tender offer with material, undisclosed information

M&a Tender Offers & Hostile Transactions For Bus. Orgs

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M&a Tender Offers & Hostile Transactions For Bus. Orgs

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Mergers & Acquisitions

M & A Structures Overview

Three Basic Structures

Target Co. Assets & Liabilities

Bidder Co. Assets & Liabilities

Old T Co. Shareholders

Old B Co. Shareholders

Target Co. Remaining Liabilities plus Cash

Stock for Cash Merger (Cash Out Merger)

Target Co. Assets & Liabilities

Bidder Co. Assets & Liabilities

Stock for Cash Merger (Cash Out Merger) (Cont.)

Target Co. Assets & Liabilities

T Co. Assets & Liabilities

Bidder Co. Assets & Liabilities

[Bidder Co. is surviving corporation]

[Target Co. disappears extinguished by operation of law]

Stock for Cash Merger (Cash Out Merger) (Cont.)

Old B Co. Shareholders

[Target Co. shareholders hold cash no stock]

Traditional Form of Stock Purchase for Cash

Target Co. Assets & Liabilities

Bidder Co. Assets & Liabilities

Traditional Form of Stock Purchase for Cash (Cont.)

* (100%) T Co. Stock

Target Co. Assets & Liabilities

Bidder Co. Assets & Liabilities

Traditional Form of Stock Purchase for Cash (Cont.)

Bidder Co. Old B Co. Assets & Liabilities

Old B Co. Shareholders

Target Co. Old T Co. Assets & Liabilities

Relatively recent development as an alternative to Asset transaction

Permits B to assume specified liabilities only

B inherits Ts liabilities (like it or not) T disappears

Certainty of execution (compared to stock transaction)

Protection against transferee liability (compared to direct merger)

Forward Triangular Merger

Forward Triangular Merger (Using Cash as Merger Consideration)

Target Co. Assets & Liabilities

Bidder Co. Assets & Liabilities

New Co. (merger consideration = Cash

Forward Triangular Merger (Using Cash as Merger Consideration) (Cont.)

Target Co. Assets & Liabilities

Old T Co. Shareholders [T Co. shares are cancelled]

Bidder Co. Assets & Liabilities

Old B Co. Shareholders

New Co. [Cash]

[New Co. is surviving corporation by operation of law]

Forward Triangular Merger (Using Cash as Merger Consideration) (Cont.)

Bidder Co. Old B. Co. Assets & Liabilities

Old B Co. Shareholders

New Co.* Old T. Co. Assets & Liabilities

[Old T Co. shareholders have been cashed out hold no stock]

Reverse Triangular Merger

Reverse Triangular Merger (Using Cash as Merger Consideration)

Target Co. Assets & Liabilities

Bidder Co. Assets & Liabilities

New Co. (merger consideration = Cash

Reverse Triangular Merger (Using Cash as Merger Consideration) (Cont.)

Target Co. Assets & Liabilities

Old T Co. Shareholders [T Co. shares are cancelled by operation of law]

Bidder Co. Assets & Liabilities

Old B Co. Shareholders