Mergers Acquisitions (Fall 2012) by degarmos


									I.    Asset Acquisitions
      1. Bidder buys all or substantially all assets from Target. Following which Target typically
      distributes the proceeds to creditors and shareholders and dissolves
              a. Contract may require Target to dissolve, specifically where Bidder uses stock as
              the acquisition consideration. Bidder does not want its stock to just sit in a shell
              b. Bidder and Target agree in contract which liabilities Bidder will assume and which
              will remain with Target.

      2. “All or substantially”
              a. Gimbel v The Signal Companies:
                       i. Sale of “qualitatively” all business assets versus “quantitatively” all assets.
                                 A. Ct: If sale is of assets is qualitatively vital to Target corporate
                                 enterprise, out of the ordinary, and substantially affects the existence
                                 and purpose of the corporation, then it is beyond the power of the
                                 B. Here, the sale did not constitute “substantially all” assets.
                                 Defendant Corp had recently been diversifying and the assets sold
                                 constituted a small percentage of total assets and a small percentage
                                 of Defendant Corp’s income earning assets.
              b. Katz v Bregman
                       i. Assets sold were Target Co’s only source of income producing assets for
                       several years
                       ii. Ct: this constitutes “substantially all” assets
              c. Hollinger Inc. v. Hollinger Intl. Inc.
                       i. Viewed asset sold in both “qualitative” and “quantitative” value to Target
                       ii. Quantitative: Though the single most valuable asset, it comprised less than
                       50% of total revenue of the corporation.
                       iii. Qualitative: Target did not own the Asset when it went public. It also had
                       a history of buying and selling various publications. It was not anywhere near
                       the “Heart and Soul” of the business
                       iv. Ct: Not “substantially all”
      2. MBCA Safe Harbor
              a. If both prongs are satisfied, Target Co is deemed to have retained a significant
              continuing business activity, and thus not a sale of “substantially all”:
                       i. Co retains 25% of total assets; AND
                       ii. Retained business activities must comprise 25% of income OR revenue
                                 A. Income: Net Sales
                                 B. Revenue: Total Earnings

II.   De Facto Merger Doctrine
      1. Introduction
              a. Shareholders sometimes bring cause of action, arguing that deal transaction is
              really a merger, even though the acquisition is structured in some other way
                       i. Shareholder asks ct to enjoin the acquisition until merger statute formalities
                       complied w/
               b. These cases result in de facto mergers (if ct looks through form to substance of
       2.Applestein v. United Board & Carbon Corp.
               a. United gave Epstein, sole SH of Interstate, 40% of United in exchange for
               Interstate becoming a sub of United. Ct looks at factors and determines this looks
               like a merger in substance rather than form (ct willing to use equitable powers)
               b. Factors: (1) Transfer of all shares and assets of Interstate to United, (2)
               Assumption by United of Interstate’s liabilities, 3) Pooling of interests in 2 Co, 3)
               Absorption of Interstate by United, dissolution of Interstate 4) Joinder of
               management from both co on BOD 5) Present executive and operating personnel
               of Interstate will be retained by United, 5) Share exchange (Epstein to United) --
               looked like a direct merger
                       i. s/h hurt: no appraisal rights and higher voting req for mergers in their
       3.Hariton v. Arco:
               a. Looks like asset acquisition for stock but D271 (sale of assets) and D251(merger)
               are of “equal dignity” (one does not trump the other/independent legal significance)
               b. Loral gives Arco 230k shares for all of Arco shares, so long as Arco agrees to
               dissolve, distribute Loral shares to S/h. Delaware corp may resort to EITHER type,
               court will not second-guess form of company, form matters.
               c. Significance: Loral BOD must approve and no s/h vote req under Del for asset
               purchase; but for Arco will qualify as all or substantially all -- thus Arco needs a s/h
               vote but asset sale does NOT trigger appraisal rights.
       4.Rauch v. RCA
       5.Pasternak v. Glazer: not defacto merger case, but K interpretation.
               a. The AOI suggested 80% vote required for mergers. It was a forward triangular
               merger, Zapata Zsub and Houlihan. Stock of Zapata for Houlihan’s assets. Z shs only
               approve issuance of stock under NYSE rule but argue that merger w/a sub of Z falls
               under this requirement. the language used in the AOI did not clearly cover triangular
               mergers vs regular mergers so the ct had to construe the ambiguity and enjoined the
               proposed merger.
               R: An interpretation of a K renders one or more terms redundant is not preferred over
               a construction that gives effect to each of the agreement’s terms.
III.   Appraisal Rights
       1. Determining Fair Value
               a. Cavalier - NO Minority Discount
                       i. Rejects idea that, because one SH owns 98%, that no one would pay high
                       price for remaining 2%. This is not taken into account when determining fair
                       value in appraisal proceedings
               b. Weinberger - Conflict of Interest - Interlocking Directorates btw Parent and Sub
                       i. Plaintiff has burden to show a conflict of interest. If P is successful, the
                       review standard moves from BJR to Entire Fairness:
                                (1) Procedural Fairness
                                         A. Fair Dealing
                                (2) Substantive Fairness
                                         A. Fair Price
                       ii. Cleansing: Transaction can become cleansed if a majority of the minority
                       SHs approve the transaction (DGCL 144): ---> shifts the burden.
                              A. Majority and BOD must disclose all material facts to voting
                              minority SHs
                    iii. If properly cleansed, standard returns to BJR, and P must show some
                    fundamental unfairness
                              A. Here, because the majority did not disclose material facts, the
                              standard remained with Entire Fairness
                    iv. Entire Fairness Analysis from Weinberger
                              (1) Procedurally Unfair: Ct: The deal was rammed through in 4 days,
                              but then the SH vote did not until 5 months later. There should have
                              been a special SH meeting called to vote on this large transaction.
                              (2) Substantively Unfair: Ct: Parent’s execs performed a survey that
                              came up with a higher price per share, but it did not disclose it. Also
                              the interlocking directorate made it such that Parent’s board should
                              have created an independent committee of non-interlocking directors
                              to negotiate on behalf of Parent with Sub. If they had, they would
                              have gotten closer to the price that Parent’s execs figured out.
                    v. This case stands for the idea that a majority may squeeze out the minority
                    for a nonbusiness purpose, but the transaction must meet Entire Fairness
      2.     Appraisal Rights as Exclusive Remedy
             a. Rabkin v. Hunt Chemical
                    i. Case where BOD let the 1 yr period fixing 25/share lapse and then paid a
                    lower amount to SHs
                    ii. Stands for Idea that Minority SHs can bring fiduciary duty claims in cash
                    out transactions and that the appraisal right is not their only remedy.
                    iii. Here, BOD did create a special committee, HOWEVER, it didn’t really do
                    anything, BOD was just going through the motions so they could meet
                    procedural fairness
                    iv. Can’t just go through the motion of setting up a special committee. The
                    committee actually has to show information supporting the price/share
                    number they came up with. The committee here didn’t really do anything to
                    see if the price should be closer to 25 rather than 21
                              A. Violated Fiduciary Duty of fair dealing because there was
                              evidence that BOD, dominated by single SH, was just going wait for
                              the 1 yr period to lapse in order to avoid the contract price

      3.     Valuation Techniques and Fair Value
             a. Cede v. Technicolor - Do we include future value of what new owner will do?
                     i. Ct: Dissenting SHs’ interest is determined only after Co has been valued as
                     an operating entity on the date of the merger.
                     ii. THUS, value added to Co by a majority acquirer during the transient
                     period of a two step transaction accrues to the benefit of all SHs and must be
                     included in the appraisal process.

IV.   Successor Liability
      1.     Change of Control Clauses: Transfer of stock trigger non-assignment clause
                    a. Branmar Theatre:Ct held here there is no transfer of the lease—
                    Schwartz’s just purchased all of the stock of the corp that controlled the
                     lease; now there is just a new owner of the stock and thus a new person
                     who controls the corp.
                     b. Should have assigned it to person not entity.
                     c. Policy: doesn’t violate free transferability, can do it just terminates lease
     2.     Successor Liability in Patent Licenses
            a.PPG v. Guardian: Cross-licensing for patents: Guardian wanted Permaglass cross
            licensing deal with PPG. Federal law trumped: patents are non-assignable w/o
            consent of owner. (should have contracted with express agreement that says it can be
     3.     Successor Liability in Asset Acquisitions
            a.Contract Creditors
            i. American Paper Recycling v IHC: Was an asset acquisition case: APR argued de
            facto merger to hold new owner to a sales K.
            ii. Used 4 factors: 1. Continuity of enterprise 2. continuity of s/h 3. Seller corp ceases
            its former business operations 4. Assumption of obligations necessary to continue
            normal business operations
            iii. MA law weighed heavily against finding de facto merger between corporation and
            acquiring company; although acquiring company absorbed bulk of corporation's
            workforce, it did not retain key members of corporation's management team, had no
            officers or directors in common, and transaction involved arms-length exchange of
            good and fair consideration. IHC also kept factory and was willing to lease it back.
            iv. Ct implied that IHC is still in place and APR should sue them not MPS.
            b.Tort Creditors
            i. Ruiz v. Blentech: Choice of law between Ill. and CA. Illinois rule says a Corp that
            purchases assets of another corporation does not assume seller’s liabilities from tort
            claims with 4 Exceptions: (1) Expressly agrees to assume (2) asset sale amounts to de
            facto merger (3) Purchaser is a mere continuation of the seller 4) Sale is for
            fraudulent purpose of escaping liability for seller’s obligations.
            (5) CA EXCEPTION: Corporation that purchases a manufacturing business and
            continues to produce the seller’s line of products assumes strict liability in tort for
            defects in units of the same product line previously manufactured and distributed by
            seller (“Products line” exception”)
            Del 281: requires dissolving co to establish a plan of distribution that provides for
            claims that have not been made known, not arises, but are likely to arise within 10 yrs
            of dissolution. If the amt provided is insufficient, SHs are liable for lesser of pro rata
            share of claim or their liquidating distribution.
            MBCA: 14.08: similar rule but 3 years.

V.   Federal Securities Laws
     1. 1934 Act
             a. Applies to acquisitions involving reporting companies:
                     i. Cos listed on any national exchange
                     ii. Cos that meet BOTH of:
                              (1) Class of 500 or more SHs
                              (2) Assets totaling $10m or more
             b. Proxy Rules
                i. When management solicits votes from SHs of reporting company, SEC
                Proxy rules require Management to file a proxy statement with SEC and
                distribute that statement to Co SHs
                ii. Disclosure must provide full and adequate disclosure of all material facts
                about the deal
                iii. Goal: Provide SHs with information to make informed decision
2. 1933 Act
        a. Goal: protect purchaser of securities, disclosure of material facts allow investor to
        make informed decision
        b. Applies to:
                i. All Bidders who propose to issue stock in a transaction
        c. Does not apply to:
                i. Bidders using all cash to acquire Target
        d. Regulations distribution (issuance) of shares, requires issuer to register the
        distribution (offer and sale) of shares, unless one of following exemptions:
                i. § 4(1) Workhorse Exemption:
                         A. Transactions not involving an issuer, underwriter, or dealer are
                         exempted from registering requirements
                ii. § 4(2) Private Placement Exemption:
                         A. Proposed transaction does not involve a public offering
                         B. Nonpublic Offering:
                                 1. Proposed offer/sale of issuer’s securities must be limited to
                                 those who can “fend for themselves,” i.e., qualified investors
                                 who generally already have access to the type of information
                                 that registration would disclose
                iii. § 4(2) Safe Harbor provisions, Rule 506 Reg. D: No limit dollar
                amount for Private Placement, so long as offer is made only to:
                         A. Accredited purchasers; AND
                         B. No more than 35 unaccredited purchasers who do also satisfy a
                         Reg D standard of financial sophistication
                iv. Limited Offering Exemption, Rule 504 and 505
                         A. SEC has authority to exempt limited offerings of up to $5m
                i. Section 5 for Registered Transactions; if a registered transaction, requires:
                         A. Issuer must file registratio nstatement on Form S-4 with SEC
                                 1. Includes sending prospectus to SHs, including info about
                                 issuer, its business and financial affairs, and the proposed use
                                 of the proceeds to be raised
                                 2. Form S-4 is a joint proxy statement and registration
                                 statement for information to be disclosed to SHs of Bidder
                                 and Target, and the registration form for the issuance of stock
                                 to the other SHs
        e.      Rule 10b-5
                i. Duty to disclose all material facts
                         1. Certainty v. Materiality: uncertainty does not necessarily mean
                         2. There is no duty to speak until a fact becomes material. When you
                         do speak, 10b-5 requires you to speak fully and provide adequate
                         disclosure of all material facts
                        ii. Prohibits:
                                 1. Misrepresentations and omissions of key facts that could make the
                                 disclosure misleading
                        iii. Basic v. Levinson: Rejects bright line approach for determining whether
                        deal negotiations are a material fact
                                 1. Fact sensitive inquiry, factors:
                                         (1) How interested execs are in pushing the deal through
                                         (2) What support the BOD has given
                                         (3) Whether Bidder begins to make financing arrangements
                                         (4) How many people are involved in due diligence
                                                  A. e.g., Bidder brings in finance, R&D people, and
                                                  others. The more who get involved, the more likely it
                                                  looks like the deal will consumate.
                                         (5) Probability v. Magnitude of Deal
               f. 14e-3 Insider Trading in Anticipation of Acquisitions
                        i. US v. O’Hagan: member of lawfirm that represented bidder, became single
               largest holder of call options in Target company. Adopted 14e3 which prohibited
               insider trading while in possession of material nonpublic information relating to a
               tender offer.
               g. 16b Insider Trading in Anticipation of Acquisitions
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