Chapter 41

Mergers and takeovers

 TABLE OF CONTENTS

MERGER
01 CONSOLIDATION
SHARE EXCHANGE
02 PURCHASE OF ASSETS

03 PURCHASE OF STOCK 04 TERMINATION

 mERGER
CONSOLIDATION
SHARE EXCHANGE
NGUYEN HAI PHUONG VY
 MERGER

● Legal combination of two or

A+B=A
more corporations, after which
only one company exists.

● One of the firms survives.

 MERGER

● It inherits all legal rights and obligations

of the other firm.
➢ Possesses all the rights, privileges and
powers of itself and the second
corporation.
➢ Automatically acquires all the second
corporation ‘s property, assets, debts
and obligations.
 CONSOLIDATION
A+B=C
● When two or more corporations combine
in such a way that each corporation
ceases to exist and a new one emerges.

● A new corporation is formed.

 CONSOLIDATION
● It inherits all rights and liabilities of both
predecessors.
➢ Inherits all the rights, privileges, powers, powers,
liabilities and debts previously held by the
former two corporations.
➢ Title to any property and assets owned by the
two former corporations passes to the new
corporation without a formal transfer.
 SHARE EXCHANGE
● Some/all the shares of one corporation are exchanged
for some or all the shares of another corporation.

➢ Parent corporation: owns all the shares

➢ Subsidiary corporation: wholly owned company
THe revised model business
corporation act
(rmbca)

KHANH LINH
RMBCA 11.01-11.07
The board of directors of each corporation involved must approve the
merger or share exchange plan.

+ How the value of the shares of

The plan must specify any terms and conditions of the merger
each merging corporation will be
determined
+ How they will be converted into
shares or other securities, cash,
property, or additional interests
The majority of the shareholders of each corporation must
in another corporation
vote to approve the plan at a shareholders’ meeting
Once the plan is approved, the surviving corporation files with the
appropriate official (usually the appropriate secretary of state)

When state formalities are satisfied, the state issues a

certificate of merger/ a certificate of consolidation to the
newly consolidated corporation.
 RMBCA 11.4

Short-Form Mergers can be accomplished

without the approval of the shareholders of
either corporation.
The parent corporation must own at least
90 percent of the outstanding shares of each
class of stock of the subsidiary corporation.
 RMBCA 11.4

STEP 1 STEP 2 STEP 3

The board of directors The plan is filled with Copies are sent to each
of the parent the state shareholders of record
corporation approve in the subsidiary
the plan corporation
 Shareholder Approval
◼Mergers and other combinations are extraordinary
business matters so the board of directors must
normally obtain the shareholders’ approval and
provide appraisal rights.
◼A transaction can be structured in such a way that
shareholder approval is not required, but if the
shareholders challenge the transaction, a court might
require shareholder approval.
 Appraisal right

◼ The law will not force a dissenting

shareholder to become an unwilling
shareholder in a corporation that is
new or different from the one in
which the shareholder originally
invested.
 Appraisal right

◼When Appraisal Rights Apply: Appraisal rights normally

extend to mergers, consolidations, share exchanges,
and sales of substantially all the corporate assets.
◼Procedures: Each state establishes the procedures for
asserting appraisal rights in that jurisdiction.
Shareholders may lose their appraisal rights if they do
not adhere precisely to the procedures prescribed by
statute.
PURCHASE OF ASSET
 Ways to structure an
acquisition of a company

Merger or share Purchase of Purchase of

exchange asset stock
When a corporation acquires all or substantially all of the
assets of another corporation by direct purchase
→ The acquiring corporation extends its ownership and
control over the physical assets of another company
→ The acquiring corporation usually does not need to obtain
shareholder approval for the purchase
In contrast, the acquired corporation must
obtain approval from both its board of
directors and its shareholders.
 WHEN SHAREHOLDER APPROVAL MAY BE REQUIRED

if the acquiring if there are not

corporation plans to enough authorized
pay for the assets unissued
with its stock shares available

Shareholder approval
is required
 SUCCESSOR LIABILITY IN PURCHASES OF ASSETS

Acquiring corporation is not responsible for liabilities

of selling corporation
 EXCEPTION
Express or implicit agreement:
the purchasing corporation
impliedly or expressly
undertake the seller’s liabilities
De facto merger: the sale
transaction amounts to a
merger or consolidation of the
two companies
Continuation: the purchaser
continues the seller’s business
and retains the same
shareholders, directors, and
officers
Fraud exception: the sale is
entered into fraudulently to
escape liability
PURCHASE OF STOCK
HOANG HUONG THAO
DEFINITION
 PROCESS

Tender Securities Responses

offers law To offers

Making a tender offer to Federal securities laws Neptune is the fourth-

buy shares of stock strictly control the terms, largest planet in the
duration, and Solar System
circumstances under
which most tender offers
are made
 $
COMPANY A COMPANY B

so,
company A has pay:

$50,19 = Stock price + 15% of it

(premium)
 PROCESS

Tender Securities Responses

offers law To offers

Making a tender offer to Federal securities laws Neptune is the fourth-

buy shares of stock strictly control the terms, largest planet in the
duration, and Solar System
circumstances under
which most tender offers
are made
 $
COMPANY A COMPANY B

- The source of the funds

If A takeover B used in the offer
successfully, then: - The purpose of the offer
- The acquiring
corporation’s plans for
the firm
Securities and Exchange
Commission (SEC)
 PROCESS

Tender Securities Responses

offers law To offers

Making a tender offer to Federal securities laws Neptune is the fourth-

buy shares of stock strictly control the terms, largest planet in the
duration, and Solar System
circumstances under
which most tender offers
are made
 $
COMPANY A COMPANY B $
What B will do:

Or persuade that the tender offer is not in their

best interests
Or issue additional stock!
 TAKEOVER DEFENSE & DIRECTORS’ FIDUCIARY DUTIES
◼The board of directors has a fiduciary duty to the
corporation and its shareholders to act in the best
interests of the company.
◼In a hostile takeover attempt, directors’ duties of care and
loyalty may collide with their self-interest.
◼Shareholders who would have received a premium for their
shares from the takeover may file lawsuits. Such lawsuits
frequently allege that the directors breached their
fiduciary duties in defending against the tender offer.

BUI DIEM LAN HUONG

 BUSINESS JUDGEMENT RULE
◼Courts apply the business judgment rule when
analyzing whether the directors acted reasonably in
resisting the takeover attempt.
◼The directors must show that they had reasonable
grounds to believe that the tender offer posed a
danger to the corporation’s policies and effectiveness.
The board’s response also must have been rational in
relation to the threat posed.

BUI DIEM LAN HUONG

 AN EXAMPLE: THE POISON PILL DEFENSE
◼Under the poison pill defense, a board gives
shareholders the right to buy new, additional
shares at low prices to dilute the shares and make
a takeover too expensive for the acquiring party.

◼The right is triggered when a party acquires a

certain proportion of the target corporation’s
stock—often between 15 and 20 percent.

BUI DIEM LAN HUONG

TERMINATION
BUI DIEM LAN HUONG
 ◆ The termination of a corporation’s existence
has two phases—dissolution and winding up.
◆ Dissolution is the legal death of the artificial
“person” of the corporation and can be
brought about by the following:

BUI DIEM LAN HUONG

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