Corporate Combinations

AuthorJames D. Cox/Thomas Lee Hazen
ProfessionProfessor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
22.17 Alternative Remedies of Dissenting Shareholders
22.18 The Statutory Appraisal Remedy
22.19 Scope of Statutory Appraisal Rights
22.20 Valuation of Shares in Appraisal Proceedings
22.21 Exclusivity of Statutory Appraisal Rights
§ 22.1 Corporate Combinations Overview
Sales of assets, mergers, and consolidat ions present three different meth-
ods of corporate fusion, each with its ow n financial a nd legal consider-
ations. A fourth method of corporate combination is a share exchange,
whereby all the outstanding shares of an approving class of stock are
acquired by another corporation. A variation of this form is the pur-
chase of shares of another corporation (called the “target” corporation).
Such purchases can occ ur either through open market purchases or by a
solicitation of the shareholders to sell, generally referred to as a “tender
offer.” Unlike the other methods of corporate fusion, the tender offer
commits to the individual shareholders of the target corporat ion the
decision whether to part with t heir shares. In contrast, the combination
that is consummated by a sale of corporate asset s, a merger, or a con-
solidation is authorized by complex statutory procedures, and generally
requires shareholder approval by a set percentage of the class voting by
each class of shares affected by the class.1
Any method of corporate combination or other f undamental change
can work to the disadvantage of minority shareholders. The most preva-
lent mechanism to protect those who oppose the acqu isition is the statu-
tory appraisal remedy. This procedure allows dissenting shareholders to
receive in cash the fair va lue of their shares, as determined t hrough an
independent appraisal.2 As will be seen, the so-c alled dissenters’ right is
cumbersome and does not always protect the minority’s interests. Fur-
ther, the appraisal remedy does not apply to all ty pes of acquisitions.3 In
recent years, there has been a serious conf lict as to the availability of a
jud ici al re med y for unf air nes s whe n di ssen ters ’ ri ghts were ava ilab le. T he
trend of recent decisions is to allow for judicial scruti ny of alleged unfair
acquisitions in exceptional ca ses, independent of any statutory remedy.4
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The federal securities laws have subst antial impact on the law relating
to corporate combinations. Many methods of corporate combination
involve shareholders exchanging their shares either for another class of
shares, for shares of another corporation, or for cash. In each case, the
antifraud provisions of SEC Rule 10b-5 come into play, as is equally true
when the corporation rather than the individual shareholder acquires or
issues securities.5 Whenever the issuance of securities is involved, the
regist ration provisions of the Securities Act of 1933 must be considered.6
Moreover, the federal proxy rules heighten the disclosure when ca rrying
out acquisitions involving publicly traded corporations subject to sect ion
14(a) of the Securities Excha nge Act of 1934. Finally, significant regulatory
protection occurs through the 1968 Williams Act amendments to the
Securities Exchange Act of 1934 and subsequent state legislation that
regulate tender offers and open market purchases of corporate shares.7
§ 22.2 Comparison of Methods
of Combination or Reorganization
Although the three traditional methods of reorganization—merger,
consolidation, and sale-purchase of assets —are disti nct, they have a
number of similarities. The essential steps to consolidate or merge8 are
as follows:
(1) A consolidation or merger always involves a transfer of the
assets and business of one or more corporations to another
corporation in exchange for its securities, cash, or other
consideration.9 A merger results in a transfer of the assets to
one of the constituent corporations that absorbs the other.
With a consolidation, a new consolidated corporation is
created into which each constituent corporation tra nsfers
its assets and liabilities. In each case, the transfer is made by
operation of law—that is, by force of the statute operating on
the agreement of the constituents to merge or consolidate.10
(2) A merger or consolidation entails the assumption of the debts
and liabilities of the absorbed company or companies by
operation of law.11
(3) A necessary effect of a merger or consolidation is the dissolution
of the absorbed company or companies.12 As will be seen, a sale of
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assets does not constitute a dissolution and does not necessarily
call for the liquidation or dissolution of the seller.13
(4) A merger or consolidation involves a payment to the shareholders
of the absorbed corporation in shares, debt, or cash or secu rities
of the new or surviv ing corporation. Those who pursue t heir
appraisal remedy can receive cash equal to the appraised value
of their shares.
The principal differences bet ween an acquisition by sale of assets
and statutory merger or consolidation are:14
(1) In case of a sale by one corporat ion to another, the assets of
the selling corporation are transferred by written instruments
of conveyance, not by operation of law, as occurs in a merger
or consolidat ion.
(2) There are different statutory requirements as to the vote or
consent of shareholders. As will be seen, the shareholders of
both the successor/surviving corporation and shareholders of
the acquired corporation are generally entitled to vote and, if
approved, those who dissent to the merger or consolidation
are entitled to their appraisal remedy. In contrast, only the
shareholders of the corporation selling its assets are entitled to
vote on the transaction,15 because the purchasing corporation
acts only through its board of directors.
(3) In a consolidation or merger, the method and basis of exchanging
the shares of the constituent corporations for shares, debt, or cash
of the successor corporation are set forth in the consolidation or
merger agreement. This becomes binding on all parties except
dissenting shareholders who elect to invoke their appraisal
remedy. Thus, following approval there is a compulsory
exchange of new shares for old. In contrast, authority distinct
from the stockholders’ approval of the sale must be involved
to distribute the sales proceeds to the selling corporation’s
stockholders. Such authority arises after the stockholders have
approved the corporation’s dissolution. It is also possible, within
the limitations of the local state statute, to distribute the sales
proceeds through either a dividend or repurchase of shares.
That is, neither the dissolution of the selling corporation nor
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