Chapter 39 Corporations – Merger, Consolidation, and Termination

1© 2004 West Legal Studies in Business

A Division of Thomson Learning

Chapter 39Corporations – Merger,

Consolidation, and Termination

2© 2004 West Legal Studies in BusinessA Division of Thomson Learning

§1: Merger and Consolidation Corporations can grow and expand by:

Mergers. Consolidation. Purchase of another corporation’s assets. Purchases of a controlling interest in another

corporation.


Merger Merger is the legal combination of two or more corporations after which only one corporation remains. A’s articles of incorporation are amended to include articles of merger. After merger, A continues as the surviving corporation with all of B’s rights and obligations.

AA BB

AA


ConsolidationA and B combine such that

both cease to exist and a new corporation C emerges which has all the rights and obligations previously held by A and B.

The articles of consolidation for C take the place of the original articles of A and B.

AA BB

CC


Merger and Consolidation Procedures

Board of Directors of each corporation involved must approve the merger plan.

Next shareholders of each corporation must approve.

Then, articles filed with Secretary of State and who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.


Short-Form MergersFor “Parent-Subsidiary” Merger.No approval of shareholders needed.Parent must own at least 90% of each class of stock

of the subsidiary corporation.Board of parent corporation approves.New articles filed.Copy of merger sent to each shareholder of

subsidiary corporation.


Merger and Consolidation Procedures [1]

When allowed by state statute, a shareholder has the right to dissent and be bought out” of his/her shares (shareholder’s appraisal right).

In cases of: merger, consolidation, sale of most of corporation’s assets not in the ordinary course of business, adverse amendments to the articles of incorporation.

Certain procedures must be followed.


Appraisal Rights

Dissenting shareholder gives written notice of dissent prior to vote on proposed transaction. The notice shows what dissenters stock will cost corporation if action takes place.

If approved, shareholder must make a demand for payment of shares at fair market value (calculated on day prior to the date on which the vote was taken -- or court will determine).


Corporation must: Make written offer to purchase a dissenting

shareholder’s stock, accompanied by current balance sheet and income statement for the corporation.

States differ as to whether dissenting shareholder loses his status as a shareholder during appraisal process.

Case 39.1: Glassman v. Unocal Exploration Corp. (2001).

Appraisal Rights [2]


§2: Purchase of AssetsThe acquiring corporation extends its

ownership and control over the physical assets of another company.

Acquiring corporation shareholders do not need to approve: Unless acquiring corporation is paying for assets with its

own stock and there is not enough stock authorized or An acquiring corporation sells on a national exchange, is

paying with its own stock, and newly issued stock = 20% or more than the outstanding shares.


Potential Liability in Purchase of Assets

Acquiring corporation is not liable for liabilities of selling corporation unless: Acquiring corporation impliedly or expressly

assumes the liabilities. Sale amounts to what is really a merger or

consolidation. Purchaser continues the seller’s business and

retains the same personnel.


Sale is fraudulently executed to escape liability.

The selling corporation needs both board and shareholder approval. Case 39.2: Lee Thomas Inc. v. Hallmark

Cards, Inc. (2002).

Potential Liability in Purchase of Assets [2]


§ 3: Purchase of StockCommon alternative to merger or consoli-

dation is the purchase of a controlling interest (up to 51%) of a “target” corporation’s stock (called a “takeover”) giving the purchaser corporation controlling interest in the target.

The aggressor deals entirely with the target’s shareholders.


Tender OffersTender Offers.

A publicly advertised offer addressed to all shareholders of the target is called a tender offer.

Tender offer is usually higher than market value per share but conditioned on the acquisition of a certain % of shares• Can be in exchange for aggressor's stock.• Sec strictly regulates tender offers.


Tender Offer Terminology [2]

Term DefinitionCrown Jewel Management makes company less attractive by selling

company’s most valuable asset (crown jewel).

Golden Parachute If takeover successful, top management “bails out” of the target corporation with forced “retirement” benefits.

Greenmail To regain control, target company may pay higher-than-market price to repurchase the stock.

Scorched Earth Target company sells off assets or divisions or takes out loans to make it unattractive to hostile takeover.

White Knight Target corporation solicits merger with 3rd party which is a better match. 3rd party “rescues” the target.


Target’s Responses

Directors of a corporation may consider the takeover to be friendly or unfriendly to the present management. If directors consider it unfriendly, they may want to resist the

hostile takeover. Directors may seek an injunction against acquiring corporation

on grounds that the attempted takeover violates antitrust laws. But directors must not breach their fiduciary duty to

corporation in resistance.


§ 4: Termination

Termination of a corporation, like a partnership, consists of two phases: Dissolution (voluntary or involuntary); and Liquidation.


Voluntary Dissolution

Shareholders can initiate dissolution by a unanimous vote to dissolve.

Or, the Board can initiate by submitting a proposal to the shareholders for a vote at the annual shareholder meeting or specially-called meeting.


Board files dated articles of dissolution -- this date is the date of dissolution.

Corporation must notify its creditors and establish a date within 120 days of dissolution by which all claims are to be paid.

Voluntary Dissolution [2]


Shareholders can initiate dissolution proceedings if the corporation is deadlocked. Case 39.3: Chance v. Norwalk Fast Oil Inc.

(1999).

Involuntary Dissolution


Involuntary Dissolution

State can dissolve corporation if: Fails to pay taxes. Fails to file annual report. Fails to designate registered agent for service. Secured its charter through fraud. Abused its corporate power. Violated criminal laws. Failed to commence business operations. Abandoned operations before start-up.


Involuntary Dissolution [2]

Court can dissolve if: Board is deadlocked and irreparable damage to

corporation will ensue. Mismanagement. Minority shareholder is “frozen out” or oppressed.


Liquidation

Voluntary Dissolution. Board liquidates and acts as trustees of assets. Court will appoint a receiver if:

• Board refuses; or• Creditors want a receiver.

Involuntary Dissolution. Court appoints receiver.


Law on the Web

Statutory Requirements for Merger and Consolidation.

Ballard Law Firm shows how to uncover company information.

Legal Research Exercises on the Web.

http://wwwsecure.law.cornell.edu/topics/state_statutes.html

http://wwwsecure.law.cornell.edu/topics/state_statutes.html

http://corporate-law.widener.edu/

http://corporate-law.widener.edu/

http://wbl.westbuslaw.com/

Chapter 39 Corporations – Merger, Consolidation, and Termination

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