Mergers and Acquisitions

• Pages: 449-539
• Author: Stephen M. Bainbridge

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Chapter 12

MERGERS AND ACQUISITIONS

§ 12.1 Introduction

The corporation’s legal personhood is a fiction, of course, but it

is a very useful one. Among the powers thereby granted corporations

are the rights to hold, acquire, and dispose of stock of other

corporations. As a result, one corporation can acquire control of

another through a merger or other acqui sition device. To be sure,

natural persons and many other entities also can acquire

corporations, but the vast majority of corporate takeovers are effected

by another corporation.

Corporate acquisitions provide transactional lawyers many

opportunities to create value for their clients. One of the most basic

is regulatory arbitrage in the choice of acquisition form. If a given

substantive deal structure necessarily led to a single legal structure,

there would be no issue. But the law provides a number of acquisition

forms, providing m ultiple ways of structuring any given deal. Each

form has its own advantages or disadvantages—or, put in economic

terms, each form has its own transaction cost schedule. The

transaction planner’s task is to identify, in the context of a particular

transaction, the legal form imposing the lowest costs for the deal at

hand.

A. Classifying Acquisition Techniques

Acquisition techniques can be classified in various ways. One

might, for example, distinguish between negotiated and hostile

acquisitions. Negotiated acquisitions are those in which the target is

willing to be bought—indeed, the target may have initiated the

transaction by searching out a buyer. Here the focus is on the

mechanics by which the acquisition takes place, the duties of

management in selecting and negotiating with a bidder, and the risk

that competing bidders will try to buy the target out from u nder the

initial bidder. Hostile acquisitions are those in which the target

company’s board of directors is unwilling to be acquired. Here the

focus will be on how the target can defend itself against the bidder

and what the bidder can do to defeat those defenses.

A more useful classification system, however, distinguishes

between statutory and nonstatutory acquisition techniques.

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The

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The statute in question is the corporation code of the relevant state.

Although the so-called nonstatutory techniques are largely unregulated by state

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former category includes the merger, its variants, and the sale of all

or substantially all corporate assets. The latter includes the proxy

contest, the tender offer, and stock purchases. The role of the target

board of directors is the chief distinction between the two categories.

Statutory forms, such as a merger or asset sale, require approval by

the target’s board of directors. In contrast, the nonstatutory

techniques do not. A proxy contest obviously does not require board

approval, although a shareholder vote is still required. A tender offer

or stock purchase require neither board approval nor a shareholder

vote—if the buyer ends up with a majority of the shares, it will

achieve control.

The need for board approval creates insurmountable barriers to

use of a statutory form if the bidder is unable to secure board

cooperation. The nonstatutory forms eliminate this difficulty by

permitting the bidder to bypass the target’s board and obtain control

directly from the stockholders. But why would a board be unwilling

to cooperate? Several reasons suggest themselves: (1) The board may

refuse to sell at any price, perhaps out of concern for their positions

and perquisites. (2) The board may hold out for a price higher than

the bidder is willing to pay. (3) The board may hold out for side-

payments.

B. A Preliminary Overview of Acquisition Mechanics

There are five principal ways of acquiring control of a

corporation: merger; purchase of all or substantially all of the target’s

assets; proxy contest; tender offer; negotiated or open market stock

purchases. Subsequent sections will describe their mechanics in

more detail, but a quick overview may be helpful.

1. The Merger

Although much planning and preparatory work must take place

beforehand, a merger actually occurs when a document called the

articles of merger is filed with the appropriate officials of the states

of incorporation of the corporate parties to the transaction. At that

instant, two companies magically become one. This happens because

a number of events take place by operation of law and without the

need for further action after the merger becomes effective, including

most notably: (1) the separate existence of all corporate parties, with

the exception of the surviving corporation, comes to an end; (2) title

to all property owned by each corporate party is automatically vested

in the surviving corporation; (3) the surviving company succeeds to

corporation codes, they are governed by various other statutes, such as the federal

securities laws.

§ 12.1

INTRODUCTION

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all liabilities of each corporate party; and (4) the consideration passes

to non-dissenting shareholders.

Before it may take effect, a merger must be approved by the

board of directors and shareholders of each of the constituent

corporations (i.e., the corporations that are party to the transaction).

In most states the requisite vote is a majority of the outstanding

shares. The requirement of shareholder approval can be a significant

disadvantage to the merger in comparison to some other acquisition

devices. Where public corporations are involved the process of

obtaining shareholder approval is cumbersome and expensive. One

must hire accountants to prepare the financial statements and to

give an accounting opinion. Lawyers must be paid to prepare opinion

letters on corporate, securities and tax law questions. The lawyers

will also draft, or at least review, the proxy statement that must be

disseminated to shareholders in order to solicit their votes. A proxy

solicitation firm usually will be retained to run the shareholder

meeting and to solicit proxies. Finally, senior corporate officers must

expend considerable time and effort. As a result, the cost of the

shareholder approval process can easily run into seven figures. After

all of that, moreover, shareholders occasionally do something silly

like not approving the acquisition.

A consolidation is a merger-like transaction that differs mainly

in the identity of the surviving company. In a merger, two (or more)

corporations combine with one of the constituent corporations

surviving. In a consolidation, two (or more) corporations co mbine

with none of the constituent corporations surviving. Instead, an

entirely new corporation is created. The approval requirements and

other procedural aspects are otherwise the same as for a merger.

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In most mergers, the shareholders of the target corporation

receive a premium for their shares over the market price that

prevailed before the deal was announced. In the famous merger case

of Smith v. Van Gorkom,

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for example, the pre-announcement price

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Another transaction closely related to the merger is the so-called compulsory

share exchange. In a share exchange, the acquiring corporation buys all of the

outstanding shares of one or more classes of target corporation stock. Unlike a tender

offer or other stock purchase transaction, in which each individual shareholder decides

whether or not to sell, a share exchange is binding on all shareholders of the affected

class of stock. See, e.g., MBCA § 11.03. As with a merger or consolidation, the share

exchange must be approved by the board of directors and, subject to a limited but

important exception, the shareholders of all constituent corporations. See, e.g., MBCA

§ 11.04. The exception just mentioned provides that shareholders of the acquiring

corporation are not entitled to vote if the acquirer’s articles of incorporat ion will not

change, there is no change in the shareholders stock or rights, and the number of

shares to be issued does not exceed 20% of the outstanding shares. See, e.g., MBCA

§ 11.04(g). Although the Model Act provision for compulsory share exchanges has been

adopted by over 40 states, Delaware has no comparable provision. Even in states

where the procedure is available, moreover, it is rarely used.

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488 A.2d 858 (Del.1985).