Corporate Combinations

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 500-536

PART C. REM EDIE S OF DISSENTING

SHA REHOLDERS

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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