DE LA SALLE UNIVERSITY
College of Law MERGERS & ACQUISITIONS ATTY. ANTHONY B. PERALTA Class: Attendance is mandatory and I expect you to be prepared to contribute to every class discussion. Absence from 25% of classes or more will bar a student from taking the final exam. Expect to be called at random. 40% of the grade is based on a 2-hour final exam. 30% of the grade is based on participation in class and the remaining 30% is based on quizzes/short writing assignments.
Course Code Type of Course Credit Total Hours Term/Time/Room
I. Course Description
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iNTROM&A ElectiveCourse 2 units 28 hours Second Trimester 2012-2013
The Philippines has come of age as a vibrant marketplace for merger and acquisition deals (M&A) as well as capital-raising activities. The recent acquisition by San Miguel Corporation of a substantial stake in PAL; the merger of PLDT and DIGITEL; and the pending acquisition of GMA Network, Inc. by the Beneficial Trust Fund of PLDT for P52.5B clearly show the resurgence of M&A activity. M&A activity is at breakneck pace spurred in large part by the influx of capital into strategic industries like telecommunications, air transportation, banking and cyberspace. This course seeks to examine the rationale, applicable laws, jurisprudence and actual case studies relative to M&Atransactions. It also dissects the multiple role of the lawyer in structuring the deal, due diligence, negotiation, documentation and risk reduction. Class 1 INTRODUCTION A. Motivations for Mergers and Acquisitions 1. Exogenous and Endogenous factors Affecting, Motivating and Dissuading Acquisitions o A division of a company might no longer fit into larger corp.’s plans, so corp. sells division o Infighting between owners of corp. Sell and split proceeds o Better management o Need for funding o Market share o New Technology o Industry-specific conditions o synergies o Economies of scale/scope Examples of the largest and recent mergers:
Acquiring Company Sprint Citicorp
Target MCI WorldCom, Nextel Travelers
Year 1998 1998
Price $79 billion, $46 billion $73 billion 1
Exxon SBC Total Mercedes Benz AOL Oracle Bank of America
Mobil Ameritech Elf Aquitaine Chrysler Time Warner PeopleSoft Nations Bank, Merrill Lynch
1998 1998 1999 1998 2000 2003 2008
$78 billion $63 billion $54 billion $31 billion $156 billion $10 billion $61 billion, $50 billion
Periods of U.S. mergers: 1887-1904 (“Age of Monopoly”): Due to huge changes in technology (railroad transportation, manufacturing, and communications). o Production capacity was concentrated in relatively few hands. For example, 25 companies had 80% of market share, in certain industries. o This was epitomized by Standard Oil, which initially co-opted 20 Cleveland-area firms and eventually owned 90% of American petroleum refinery. These led to huge economies of scale, which reduced costs, as well as vertical integration, which reduced gave it leverage vis-à-vis suppliers. 1916-1929 (“Age of Oligopoly”): Due to the stock market boom of the 1920s, mergers continued. o Companies – particularly utilities (gas and electricity), manufacturing and minerals – were joined under massive holding companies. o But because companies leveraged too highly on small amounts of equity, the system collapsed under its own weight with the Great Depression. Merger activity is obviously slowed down. 1960s (“Age of Conglomerates”): In 1950, antitrust laws were strengthened against horizontal and vertical mergers, and enforced more vigorously. However, due to the stock boom of the 1960s, merger activity is at its highest. o The new fad is conglomerates, which are companies whose businesses have no particular relationship to each other (e.g. GE, ITT). The resulting focus was on diversification, rather than consolidation and economies of scale. o Conglomerates were partly a response to the antitrust laws, since the traditional view is that only “competing” firms cannot merge. o Companies financed these mergers by, e.g., issuing preferred stocks and taking on debt to buy out a target company’s shareholders. o Professor thinks conglomerates do not make sense, because a manager cannot possibly run multiple businesses efficiently. This was the main thinking of what one Yale professor called the “M Form”, where the company management was decentralized and one person headed a division. This was the opposite of the centralized “U Form”. The M model, of course, was shown to fail when the conglomerates began to collapse in the 1970s. And when the economy went south, the conglomerate started to sell the pieces off. This is known as divestiture that is, when the parent spins off a subsidiary and sells it. o Most of these traditional mergers are financed in stock-for-stock deals, that is, an exchange of new (merged) stocks for the old (individual parts) ones.
1980s (“Age of Takeovers and Debt”): Unlike the merger mania of before, this one began in spite of a depressed stock market (i.e. stocks are selling less than their fair market value). But when Volker liberalized monetary policy, the stock market bounced again. So like the mergers of before, the thinking was that “if we don’t make that XYZ acquisition soon, it will cost us more because of rising stock prices. The professor also thinks that this was because companies were undergoing a financial restructuring. o Hostile tender bids (known as hostile takeovers). 2
The word tender comes from British English. Historically, a majority of a target’s shareholders would be offered to sell their shares on a first-come, first-serve basis, at a good price (usually at a premium over the market price). Once the acquiring company had a majority of the tenders (and thus control), the other shareholders would simply be ignored, since the buyout was effectively complete. A tender bid is usually considered effective only if a minimum percentage of the shares is actually purchased at the stated price Wall Street investment houses traditionally saw hostile bidding as unrespectable. In fact, hostile bidders were referred derisively as “green mailers”. However, in 1974, Morgan Stanley broke ranks and advised on the takeover of International Nickel. After that, every investment house joined the merger fray to provide the necessary financing for mergers. Today, hostile bids may be desirable if 1) the company has confidential corporate secrets that would be compromised if revealed to the public at large or 2) the target company has a dysfunctional shareholder organization, so it would be difficult to bring them all together in a single room (“high transaction costs”)
Leveraged Buyouts (LBOs). A host of new financing devices were created. A new menu of financial devices (e.g. Michael Milken’s “junk bonds”) gives a new push to the idea of a “leveraged buyout” (LBO). LBOs enabled even the smallest group of companies (e.g. T. Boone Pickens “the greenmailer” of MESA, a small Texas oil owner) to launch credible hostile bids against huge companies (like Gulf, Phillips and Texaco). Companies like Getty Oil, TWA, and Federated Stores are acquired. The buyers took the conglomerates, and sold them off piecemeal, earning them huge returns on their investments. Merger activity is particularly concentrated in the petroleum, mining, food service (e.g. Safeway), insurance and banking industries.
Hostile Bids Less Common Today. Hostile tender offers are a lot less common today. In 1988, there were 217 hostile bids. In 1998, there were 22. In 2002, there were only 5 known. In other words, the vast majority of mergers today occur as a result of negotiated talks. Initially, hostile bidders enjoyed the protection of the “business judgment rule”. But in the 1980s, Delaware’s courts changed their attitude, and became increasingly intrusive. The legal effect was to excise hostile takeovers from the deferential umbrella of the business judgment rule. This was motivated, in part, by a suspicion that directors were acting to feather their own nests, thus requiring greater scrutiny from the courts. Generally, today only half of hostile bids actually succeed. And although they offers have the advantage of being a quick and certain way to do a merger, hostile bids can also be risky. Why? 1. Hostile bids are a rather impolite way of doing business. They have been replaced by voluntary negotiations between parties. 2. A hostile takeover can trigger the poison pill defense by the target, which Delaware court decisions have tended to agree with 3. Regulations, such as the SEC’s “best price rule”, discourage hostile tender offers. Directors have a duty to maximize shareholder wealth, so they may reject a good hostile bid if something better comes along from yet another company. 4. Companies have protected themselves against hostile bids in various ways.
a. Poison Pills = Dilution. The target’s board will issue new stocks at a bargain price, but allowing shareholders to exercise them only when the bidder has almost gained full control of the target. This has the effect of diluting the value of the bidder’s shares! b. Amend the Voting Rules. The target’s management can amend the Articles of Incorporation, and change the voting rules so that the bidder must pay the offered tender bid. This prevents the bidder from gaining control at less than that price. Leveraged Buyouts (LBOs) Today. A leveraged buyout means that the acquiring company uses debt to purchase a target company. The debt could take the form of loans secured against property, or “junk bonds” borrowed in the public market. For this reason, LBOs worked best when the company had stable sufficient assets to pledge as security against the loans. Large institutional investors, lured by the promise that they would earn higher returns after the new buyers take over, acted as a middleman in the financing. This is because banks are forbidden to lend for a target’s stock-purchase. Most institutional investors don’t get involved in the corporate governance. Instead, they rely on outside consultants (e.g. Risk Metrics), which give advice on the managing a new company. LBO financing is higher-risk (and carries a higher interest rate) than traditional corporate debt. “Junk bond” financing died in the late 1980s, when Michael Milken was prosecuted for securities fraud. Debt financing reemerged in the late 1990s. Today, the companies that find and put this money together (e.g. Bain Capital, KKR, Blackstone) are known as private equityfirms, but they do the same thing that Drexel, Burnham & Lambert did. Leveraged buyouts (LBOs) are still common. In 2005, there were 845 such leveraged buyouts (worth $200 billion). Other recent examples include: Acquiring Company KKR Bain Capital Blackstone Pacific Group Target Energy Future Holdings Co. HCA Hilton Hotels Harrah’s Casinos Year 2007 2006 2007 Price
Assignment: Form a group of 3 and prepare a case study of any of the reported M&A Deals mentioned above and should include a fact summary, motivation for the deal, and an analysis of why the deal succeeded or failed. This will be due on 21 September 2012.
B. Law on Mergers & Acquisitions § 76-80, Corporation Code Rules on Liability of Succession in Corporate Acquisitions and Transfers Edward J. Nell v. Pacific Farms 15 SCRA 415 (1965) PHB v. Andrada Electric & Engineering Co. 381 SCRA 244 (2002) McLeod v. NLRC 512 SCRA 222 (2007) C. Sale of Substantially All Assets Stiles v. Aluminum Products, Inc. 338 Ill. App. 48, 86 N. E. 2d 887 Gimbel v. Signal Companies, Inc. 316 A. 2d 599 Bulk Sales Law (Act No. 3952 (as amended by R.A. No. 111) People v. Wong, 50 O.G. 4867
Special Rule in Corporate Dissolution Gonzales v. Sugar Regulatory Administration 174 SCRA 377 (1989) D. Business Enterprise Transfers Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968) Tayag v. Benguet Consolidated, Inc. 26 SCRA 242 (1968) Ang Pue & Co. v. Sec. of Commerce, 5 SCRA 645 (1962) Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila 6 SCRA 373 (1962) Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp. 498 SCRA 400 (2006) Rivera v. Litam and Co., Inc. 4 SCRA 1072 (1962) Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567 (1997) E. The Effect of Transactions on Debt Obligations, Real and Intellectual Property Rights, and Other contract Rights a. The Basic Distinctions i. Statutory Mergers PPG Industries v. Guardian Industries Corp.62 L. Ed. 2d 187 (1979) Mesa Partners v. Phillips Petroleum Co.488 A. 2d 107 ii. Asset Acquisitions Bud Antle, Inc. v. Eastern Foods, Inc. 758 F. 2d 1451 iii. Stock Acquisitions Branmar Theatre Co. v. Branmar, Inc. 264 A. 2d 526 b. Liability of Transferee for the Debts of the Transferor A.D. Santos v. Vazquez 22 SCRA 1158 (1968) Buan v. Alcantara 127 SCRA 834 (1984) Quimson v. Alaminos Cooperative Marketing Association Inc. 73 Phil. 342 (1941) Detective & Protective Bureau, Inc. v. United Employees’ Welfare Association 98 Phil. 582 (1956)
Class 3 MERGERS AND CONSOLIDATIONS 1. Power to Merge or Consolidate Sec. 76, Corporation Code a. PNB v. Andrada Electric & Engineering Co. 381 SCRA 244 (2002) 2. Comparison of Merger and Consolidation Sec. 80, Corporation Code Definition of Merger/Consolidation a. McLeod v. NLRC512 SCRA 222 (2007) b. Sarona v. NLRC G.R. No. 185280 (January 18, 2012) 3. Procedures in Merger and Consolidation a. Plan of Merger or Consolidation i. Sec. 76, Corporation Code ii. Effect of Non-compliance with procedure under Title IX , Corporation Code 1. PNB v. Andrada Electric & Engineering Co. 381 SCRA 244 (2002) b. Stockholders’ or Members’ Approval i. Sec. 77, Corporation Code ii. Shidler v. All American Life & Financial Corp. 298 N.W. 2d 318 (0-46) c. Right of Appraisal of Dissenting Stockholders i. SEC Opinions dated 4 August 1998; 10 September 1993; 25 March 1981
ii. Beerly v. Department of the Treasury89 L. Ed. 2d 301 (1986) (O-60) iii. Weinberger v. UOP, Inc.457 A.2d 701 iv. In Re Valuation of Common Stock of Libby, McNeill & Libby 406 A. 2d 54 d. Amendment of Plan of Merger or Consolidation i. Sec. 77, Corporation Code e. Articles of Merger or Consolidation i. Sec. 78, Corporation Code f. Requirements on Submission of Financial Statements i. Sec. 78, Corporation Code ii. SEC opinion dated 15 Nov. 2002 (Opinion No. 14, Series of 2002)
g. Approval by the SEC i. Sec. 79, Corporation Code ii. Associated Bank v. Court of Appeals291 SCRA 511 (1998) iii. Poliand Industrial Ltd. v. NDC, 467 SCRA 500 (2005) iv. SEC Opinion No. 04-36, addressed to SGV & Co. 4. Effects of Merger or Consolidation a. Sec. 80, Corporation Code b. McLeod v. NLRC512 SCRA 222 (2007)(General rule on liabilities) c. Poliand Industrial Ltd. v. NLRC467 SCRA 500 (2005)(Rule on effectivity of merger) d. Babst v. court of Appeals 350 SCRA 341 (2001) (right to file collection suit) e. Associated Bank Court of Appeals 291 SCRA 511 (1998) 5. Salient Advantages of Merger and Consolidation a. Tax wise, Sec. 40(C)(2) (a), 1997 NIRC (Non-recognition of gain or loss) b. BOI Incentives, NOLCO does not apply i. PICOP v. Court of Appeals 250 SCRA 243 (1995) 6. De Facto Mergers or Consolidations a. Recognition of De Facto Mergers i. Reyes v. Blouse 91 Phil. 305 (1952) b. De Facto Merger under the Corporation Code i. Assets for Stocks Swap c. Section 40 and 42, Corporation Code d. Spinoffs i. Division is assigned to a new corporation ii. Section 40, Corporation Code Class 4 1. QUIZ 2. Effect of M&A transactions on Employees a. Assets-Only Transactions i. Sundowner Development Corporation v. Drilon 180 SCRA 14 (1989) ii. Yu v. NLRC245 SCRA 134 (1995) iii. MDII Supervisors and Confidential Employees Association v. Presidential Assistant on Legal Affairs 79 SCRA 40 (1977) b. Business Enterprise Transactions i. Sunio v. NLRC 127 SCRA 390 (1984) ii. Central Azucarera de Danao v. Court of Appeals 137 SCRA 295 (1985) iii. San Felipe Neri School of Mandaluyong, Inc. v. NLRC 201 SCRA 478 (1991) iv. Pittsburgh and Lake Erie R.R. Co. v. Railway Labor Executives’ Association,
109 S.Ct. 2584, 105 L. Ed. 2d 415 (O-224) v. Air Line Pilots Association International v. UAL Corporation, International Association of Machinists & Aerospace Workers 874 F.2d 439 vi. Air Line Pilots Association International v. UAL Corporation, International Association of Machinists & Aerospace Workers 897 F.2d 1394 vii. Employees Have No Equity Claims on the Business Enterprise Barayoga v. Asset Privatization Trust 473 SCRA 690 (2005) viii. The Need for a Clear “Break” in Operations 1. Pepsi Cola Bottling Co. v. NLRC 210 SCRA 277 (1992) 2. Corral v. NLRC, 258 SCRA 704 (1996) 3. Avon Dale Garments, Inc. v. NLRC 246 SCRA 733 (1995) Equity Transactions 1. DBP v. Court of Appeals 179 SCRA 218 (1989) 2. Manlimos v. NLRC 242 SCRA 145 (1995) 3. Robledo v. NLRC 238 SCRA 52 (1994) Mergers and Consolidations 1. Sec. 80, Corporation Code (Mandatory Assumption of Liabilities) 2. National Union Bank Employees v. Lazaro 156 SCRA 123 (1988) 3. Filipinas Port Services, Inc. v. NLRC 177 SCRA 203 (1989) 4. Filipinas Port Services, Inc. v. NLRC 200 SCRA 773 (1991) 5. First General Marketing Corporation v. NLRC 223 SCRA 337 (1993) Spin-off 1. San Miguel Corporation Employees Union-PTGWO v. Sec. Nieves Confessor 262 SCRA 81 (1996)
Class 5 1. Surviving Corporation and Acquisition Lender Liability a. Liability of the Buyer in Asset Acquisition i. Basic Standards: Keller vs. Clark Equipment Co. 715F.2d 1280 (1983) ii. Product Liability Claims: Niccum v. Hydra Tool Corporation 438 N.W. 2d 96 (1987) iii. Environmental Law Claims: Dept. of Transportation v. PSC Resources, Inc. 419 A.2d. 1151 (1980) Smith Land & Improvement Corp. v. Celotex Corp. 102 L.Ed. 2d 969 (1989) 2. Parent Liability for Claims Against a Subsidiary U.S. v. Kayser-Roth Corp.910 F.2d 24 (1990) U.S. v. Kayser-Roth Corp. 724 F. Supp. 15 (1989) Schmoll v. Acands, Inc. 703 F. Supp. 868 (1988) 3. Lender Liability In Re: Bergsoe Metal Corporation 910 F.2d 668 (1990) Class 6 4. Stock Acquisitions Rondeau v. Mosine Paper Corp. 45 L. Ed. 2d 12 (1975) Chromalloy American Corp. v. Sun Chemical Corp. 611
F. 2d. 240 (1979) Dan River, Inc. v. ICAHN 701 F. 2d 278 (1983) SEC v. First City Financial Corp. 890 F.2d. 1215 5. Tender Offer Rule Sec. 19.1 Securities Regulation Code Cemco Holdings, Inc. v. National Life Insurance Company 529 SCRA 355 (2007) Gilbert v. El Paso Co. 575 A. 2d 1131 (1990) Hanson Trust PLC v. SCM Corp.774 F.2d 47 (1985) Field v. Trump 103 L. Ed. 2d 185 (1989) MAI Basic Four, Inc. v. Prime Computer, Inc. 871 F.2d 212 (1989) Koppers Co. Inc. v. American Express Co. 689 F. Supp. 1371 (1988) 6. Share Buybacks and Buyouts Kaufmann v. Lawrence 366 F. Supp. 12 Katz v. Oak Industries, Inc. 508 A. 2d 873 7. Stock Acquisitions Edgar v. Mite Corporation 73 L. Ed. 2d 268 (1982) CTS Corp. v. Dynamics Corp. of America 96 L.Ed. 2d 67 (1987) Amanda Acquisition Corp. v. Universal Foods Corp. 107 L. Ed. 2d 353 (1989)
8. Takeover Defenses Georgia-Pacific Corp. v. Great Northern Nekoosa Corp. 731 F. Supp. 38 Stahl v. Apple Bancorp. Inc. 579 A. 2d 1115 Moran v. Household International, Inc. 500 A. 2d 1346 Dynamics Corp. of America v. CTS Corp. 805 F. 2d 705 (1986) Minstar Acquiring Corp. v. AMF, Inc. 621 F. Supp. 1252 (1985) The Bank of New York v. Irving Bank Corp. 528 N.Y.S.2d 482 (1988) Stahl v. Apple Bancorp., Inc. Fed. Sec. L. Rep. ¶95,412 (1990) Unilever Acquisition Corp. v. Richardson-Vicks, Inc. 615 F. Supp. 407 (1985) Class 7 9. Fiduciary Duties of Officials Smith v. Van Groom 488 A.2d 858 (1985) Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 506 A.2d 173 (1986) Mills Acquisition Co. v. MacMillan, Inc. 559 A.2d 1261 (1989) Barkan v. Amsted Industries, Inc. 567 A.2d 1279 (1989) Citron v. Fairchild Camera and Instruments Corp. 569 A.2d 53 (1989) Gilbert v. The El Paso Company 575 A.2d 1131 (1990) IN RE RJR NABISCO Fed. Sec. L. Rep. (CCH) ¶94,194 (1989) (Opinion of ALLEN, CHANCELLOR) Wells v. Shearson Lehman/American Express, Inc. 526 N.E.2d 8 (1988) Schneider v. Lazard Freres & Co. 552 N.Y.S.2d 571 Ivanhoe Partners v. Newmont Mining Corp. 535 A.2d. 1334 Shamrock Holdings, Inc. v. Polaroid Corp. 559 A.2d 257 (1988) Donovan v. Bierwirth 74 l. Ed.2d 631 (1982) Paramount Communications, Inc. v. Time, Inc. 571 A.2d 1140 (1989) City Capital Associates Ltd. Partnership v. Interco, Inc. 551 A.2d 787 (1988) Cheff v. Mathes 199 A.2d 548 (1964) Tomczak v. Morton Thiokol, Inc. Fed. Sec. L. Rep. ¶95,327 (1990) Class 8 10. Obligation of Stockholders DeBaun v. First Western Bank and Trust Co. 120 Cal. Rptr. 354 (1975)
Essex Universal Corp. v. Yates 305 F.2d 572 (1962) Zetlin v. Hanson Holdings, Inc. 397 N.E.2d 387 (1979) David J. Greene & Co. v. Dunhill Intern, Inc. (Part I) 249 A.2d 437 11. Fiduciary Duties of Managers Muschel v. Western Union Corp. 310 A.2d 904 Summa Corp. v. Transworld Airlines, Inc. 102 L. Ed. 2d 112 (1988) Weinberger v. UOP, Inc. 457 A.2d. 701 (1983) Rosenblatt v. Getty Oil Co. 493 A.2d 929 (1985) Coggins v. New England Patriots Football Club, Inc. 492 N.E. 2d 1112 (1986) 12. Registration Piper v. Chris-Craft Industries, Inc. 51 L. Ed. 2d 124 (1977) Santa Fe Industries, Inc. v. Green 51 L. Ed. 2d 480 (1977) Goldberg v. Meridor 55 L. Ed. 2d 771 (1978) Schreiber v. Burlington Northern , Inc. 86 L. Ed. 2d 1 (1985) Panter v. Marshall Field & Co. 70 L. Ed. 2d 631 (1981) Kramer v. Time Warner, Inc. Fed. Sec. L. Rep. (CCH) ¶95,619 Mobil Corp. v. Marathon Oil Co. 669 F.2d 366 (1981) TSC Industries, Inc. v. Northway, Inc. 48 L. Ed.2d 757 (1976) GAF Corp. v. Heyman 724 F.2d 737 (1983) United States v. Matthews 787 F. 2d 38 (1986) Roeder v. Alpha Industries, Inc. 814 F.2d 22 (1987) Roberts v. General Instrument Corp. Fed. Sec. L. Rep. (CCH) ¶95,465 Basic v. Levinson 99 L. ed. 2d 194 (1988) Taylor v. First Union Corp. 857 F.2d 240 (1988) Walker v. Action Industries, Inc. 93 L.Ed.2d 1000 (1987) Isquith v. Middle South Utilities, Inc. 102 L. Ed. 2d 329 (1988) In re Genentech, Inc. Fed. Sec. L. Rptr. (CCH) ¶95,317 (1990) McMahan & Company v. Wherehouse Entertainment, Inc. 900 F.2d 576 (1990) In Re Phillips Petroleum Securities Litigation 881 F.2d 1236 (1989) Class 9 13. Insider Trading in Advance of Acquisitions Chiarella v. United States 63 L. Ed. 2d 348 USA v. Chestman 903 F.2d 75 (1990) Carpenter v. U.S. 98 L. Ed. 2d 275 Kern County Land Co. v. Occidental Corp. 36 L. Ed. 2d 503 Texas International Airlines v. National Airlines, Inc. 79 L. Ed 2d 721 (1984) Sterman v. Ferro Corp. 785 F.2d 162 (1986)
Class 11 Final Exams