Transcript MA Section 2a: Acquisition mechanics

Mergers & acquisitions
Section 2a:
Acquisition mechanics
Prof. Amitai Aviram
[email protected]
University of Illinois College of Law
Copyright © Amitai Aviram. All Rights Reserved
S15
Acquisition mechanics
Overview of Section 2a
• Acquisition mechanics
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Share acquisition mechanics
Structural acquisition mechanics
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Acquisition mechanics
How can Y acquire X?
Control can be transferred / consolidated by:
1. Proxy solicitation (no changes to X or to ownership of X’s shares)
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2.
Share acquisition methods (no changes to X itself)
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3.
Market share acquisition
Bilateral share acquisition
Tender offer
Structural acquisition methods (changes to X itself)
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We studied this in Section 1b
Not actually an M&A technique, because the transfer of control is temporary
When is this technique useful? When isn’t it?
Long-form merger (“LFM”)
Short-form merger (“SFM”)
Asset sale (considered an M&A technique when all of a firm’s assets are sold;
if only specified assets in a firm are sold, an asset sale does not transfer
control, but is a viable alternative to M&A in acquiring assets)
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Acquisition mechanics
Share acquisition methods
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Y buys X’s shares from XS, until Y accumulates enough shares to
control X
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Does Y care if others know that its purchases are for M&A purposes
rather than investment purposes?
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Market share acquisition: Y buys X shares on the stock exchange
Bilateral share acquisition: Y negotiates with individual XS to purchase X shares
Tender offer: Y makes public offer to XS to buy their shares
In which case (bilateral vs. market) are others more likely to know?
Which of these options is most convenient if Y wants to purchase a
lot of shares?
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Acquisition mechanics
Share acquisition methods
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Example: Y wants to acquire control of X
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Y is worth $400; X is worth $100
Each has 100 shares outstanding; neither currently owns other’s shares
Y offers to buy 100 X shares at $1 per share
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In a market share acquisition, Y’s broker places orders for 100 shares on the
stock exchange, while the current shareholders place orders with their brokers
to sell those share (so no one knows who their counterparty is)
In a bilateral share acquisition, Y buys the 100 shares in face to face deals with
the current share owners
In a tender offer, Y publicly offers to buy 100 X shares at $1/share
XS sell all 100 shares; Y pays $100; X becomes Y’s wholly-owned subsidiary
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Acquisition mechanics
Structural acquisition methods
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Merger example
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Y signs a merger agreement with X, under which X & Y will merge, with Y
surviving the merger. Under the agreement:
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The boards of X and Y approve the agreement
The SHs of X and Y approve the agreement
X and Y file (with Delaware Secretary of State) Articles of Merger
Result:
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Y consists of businesses of both former Y & former X, minus $100 paid to XS
XS received $100
YS own the merged Y; X ceases to exist
Asset sale example
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YS receive 1 share in merged (new) Y for each pre-merger (old) Y share they own
XS receive $1 for every X share they own
Y pays X $100 in return for all of X’s assets
X is now an empty shell with $100 in cash
X dissolves, distributing $1 to each XS
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Share acquisition mechanics
Skirting pitfalls in tender offers
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Too many shares tendered
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Too few shares tendered
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Y is stuck as a MSH in X
Solution: Y conditions tender offer so that Y is obligated to purchase only if a
minimum # of shares (e.g., 51%) were tendered
Not all shares tendered
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Y can’t afford / doesn’t want all of X’s shares
Solution: Y makes a tender offer for a certain # of shares (less than 100%)
Y has to deal with MSHs in X
Solution: freezeout merger to ‘cash-out’ MSHs
Why not condition tender offer on being offered 100% of shares?
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Share acquisition mechanics
Williams Act
• Share acquisitions are regulated under federal law by the
Williams Act (1968 amendments to §§ 13-14 of the Exchange Act)
– Apply only to registered securities
• The Williams Act regulates:
– Disclosure of share holdings
– Disclosure in tender offers
– Rules regarding the tender offer process
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Share acquisition mechanics
Disclosure of share holdings
• Beneficial owner of 5% of a registered security must file a disclosure
(Schedule 13D) within 10 days of crossing the 5% threshold [§13(d)(1)]
– 5% threshold includes aggregate purchases by several people as part of a single
plan [§13(d)(3)]
– Passive filers (who do not seek control of the issuer) may file a (shorter)
Schedule 13G
• Schedule 13D filing includes:
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Identity of Y
Number/class of shares owned
Plans / intentions (including an intention to seek control of the issuer)
Any contracts, arrangements, understandings or relationships with respect to
the securities of the issuer
• Board-supremacy supporters (e.g., Delaware Chief Justice Strine)
push to shorten reporting deadline (to 24 hours) & to reduce
ownership threshold (to 2%)
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Share acquisition mechanics
Disclosure of share holdings
• Changes in holdings: Schedule 13D must be amended promptly in
the event of any material change in the facts set forth in the
statement (Rule 13d-2)
– Acquisition/disposition of at least 1% of a class of securities is material
• Enforcement: X can sue a 5% beneficial owner for failing to file a
Schedule 13D or for filing a misleading statement
– Has standing to seek equitable relief (injunction, rescission of securities
purchases, divestiture of the securities, suspension of voting rights), but not
damages
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Share acquisition mechanics
Disclosure/process of tender offers
• Rules triggered when a tender offer is made for more than 5% of X’s
equity securities
• An offer commences when the bidder provides security holders with
means to tender their securities
– A transmittal form; or
– Information regarding how the transmittal form may be obtained
• Bidder may communicate intent to acquire shares without
commencing the tender offer if communication
– does not include means to tender the securities, and
– all written communications re tender offer are publicly filed
[Rule 14d-2(b)]
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Share acquisition mechanics
Disclosure in tender offers
• By the date tender offer commences, Y must file a Schedule 14D-1
disclosure statement
– Same info must be disseminated to SH via newspaper publication or mailing
• XB must then file a Schedule 14D-9 form, in which the management
states, with reasons, whether they:
– Support the offer
– Oppose it
– Are unable to take a position
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Share acquisition mechanics
Process of tender offers
• Tender offer must be open for at least 20 biz days [Rule 14e-1(a)]
– If Y changes amount of shares acquired or price offered, offer must be open for
10 biz days after change [Rule 14e-1(b)]
• If tender is over-subscribed (i.e., more shares are tendered than Y offered to
purchase), Y must accept shares on a pro-rata basis [§14(d)(6)]
• Any Y who raises his price during the term of the tender offer must
raise it for any shares already tendered [§14(d)(7)]
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Structural acquisition mechanics
Procedure of a LFM
1.
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4.
5.
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Parties sign a merger agreement
Board approval of merger agreement (each party) [DGCL §251(b)]
SH approval of merger agreement (each party) [DGCL §251(c)]
Approval by majority of shares entitled to vote
No vote required (subject to some conditions) in mergers preceded by tender
offer, after which Y owns enough shares to approve the merger [DGCL §251(h)]
Filing [DGCL §251(c)]
Merger becomes effective when Articles of Merger are filed
At that point, all merging parties cease to exist except for one surviving entity;
all property & liabilities of merging parties vest in/attach to surviving entity
[DGCL §259(a)]
Appraisal [DGCL §262]
SH who opposed the merger (but lost) may petition the court to determine
the fair price to be paid to them (rather than accept the price Y offered)
DGCL §262(h): Appraisal value is the fair value “exclusive of any element of
value arising from the accomplishment or expectation of the merger…”
Why do we have appraisal rights?
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Structural acquisition mechanics
Procedure of a SFM
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Y notifies all other SHs that it is merging with X in a SFM, specify the
terms of the merger & provide all info material to a decision
whether to seek appraisal
Only allowed if Y owns ≥90% of X’s shares
Filing
Merger becomes effective when owner files a certificate of merger (certifying
that Y owns ≥90% of X’s shares & that Y’s board approved a SFM
3. Appraisal [DGCL §262]
– Any MSH may petition the court to determine the fair price to be paid to them
• Statutory authority
– DGCL §253 allows SFM with corporation
– DGCL §267 (2010 amendment) allows SFM with non-corporate entities
(partnerships, LLCs, and other unincorporated associations)
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Structural acquisition mechanics
Procedure of an asset sale
1.
Parties sign an asset sale agreement
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Board approval of agreement (each party)
SH approval of agreement (seller only) [DGCL §271]
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Required if seller is selling “all or substantially all of its property and assets”
Approval by majority of shares entitled to vote
Seller dissolves, giving its SHs the consideration it received
Appraisal rights to seller’s SHs (in some jurisdictions; e.g., MBCA)
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Buyer receives all of seller’s assets, pays seller agreed consideration
DGCL does not provide appraisal rights to SHs of seller
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Structural acquisition mechanics
Differences between merger & asset sale
• Tax consequences [advantage merger]
– Merger may be structured as tax-free reorganizations
– Asset sale has tax consequences for X/Y. Also, when empty shell of X is
dissolved (to give XS the cash/stock received for X’s assets), this has tax
consequences for XS.
• Complexity of transferring control [advantage merger]
– Merger: title to all properties is automatically vested in the surviving firm by
operation of law
– Asset sale: each asset must be transferred separately (e.g., deed of transfer
needs to be filed in every county in which X has real-estate)
• Transfer of liabilities (e.g., hidden liabilities) [advantage asset sale]
– Merger: surviving firm assumes all merging firms’ liabilities
– Asset sale: liability isn’t transferred (exceptions discussed in Section 2c2)
• Approval/appraisal [advantage asset sale]
– Merger: requires SH approval by & invokes appraisal rights for both XS & YS
– Asset sale: requires approval of both XB & XS, but only board approval on Y’s
(buyer’s) side; no appraisal under DGCL
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Structural acquisition mechanics
Triangular merger
• Mergers generally require SH approval of both parties, and create
appraisal rights for SHs of both parties
• However, a form of merger called a triangular merger allows Y to
bypass these SH rights
– The trick: Y forms S, and S merges with X
– S’s SHs get voting & appraisal rights, but S has just one SH: Y, which is controlled
by YB (who supports the deal)
• Called triangular merger because there are three parties: Y, S, X
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Structural acquisition mechanics
Triangular merger
• Y forms S
• S is capitalized with the consideration to be paid to XS
• S merges with X, paying XS
Before Merger
Acquirer (Y)
Step 1: Y forms S
Acquirer (Y)
XS
100%
Subsidiary (S)
Target (X)
After the Merger
Step 2: S has a cash-out merger with X
Acquirer (Y)
Acquirer (Y)
XS
100%
100%
Subsidiary (S)
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Target (X)
Consideration to XS
Subsidiary (S)
[including Target]
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XS
Consideration to XS
Structural acquisition mechanics
Triangular merger
• Triangular mergers combine advantages of mergers & asset sales
– Tax consequences & complexity of transferring control may be similar to a
merger
– S’s limited liability (subject to PCV) shields Y from X’s liabilities like an asset
acquisition would
– XS vote & get appraisal rights, but YS get neither
• Y is the only SH in S, and YB (not YS) controls how Y votes
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Structural acquisition mechanics
Triangular merger
• Forward triangular merger – S is the surviving entity
Target (X)
Acquirer (Y)
Acquirer (Y)
Subsidiary (S)
Subsidiary (S)
• Reverse triangular merger – X is the surviving entity
Target (X)
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Acquirer (Y)
Acquirer (Y)
Subsidiary (S)
Target (X)
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Structural acquisition mechanics
Appraisal rights
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To be entitled to appraisal rights:
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No appraisal rights if both:
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stock is publicly traded or held by over 2,000 SHs [DGCL §262(b)(1)]; and
the consideration to the SH is publicly held stock [DGCL §262(b)(2)]
No class procedure for appraisal rights
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SH must perfect his appraisal right by sending a written notice to the firm prior
to the SH vote, informing that he intends to exercise his appraisal rights [DGCL
§262(d)]
SH must not vote in favor of merger, consent to it in writing or accept the
benefits of the transaction
SH must hold shares continuously through merger’s effective day
Why is this important?
A can manage appraisal risk by having a condition in the merger agreement
that allows A to abandon the merger if more than a certain # of SHs demand
appraisal (or if less than a certain # of SHs approve the merger)
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Structural acquisition mechanics
Remedies for faulty mergers
• Berger v. Pubco Corp. [Del. Ch. ’08, S.Ct. ‘09]
– Berger is a MSH in Pubco; Kanner owns >90% of Pubco
– Kanner transfers Pubco shares to Pubco Acquisition, Inc. (“PAI”), then executes
a short-form merger @$20
– Kanner sends notice of merger to MSHs, but includes very little financial info &
an outdated copy of appraisal statute
– Berger sues Kanner for breach of fiduciary duty of disclosure, demanding the
fair value of his shares (an appraisal)
• SHs have appraisal rights in a SFM. Why does Berger need to allege a
breach of FD?
• Note the distinction between appraisal rights & an appraisal remedy
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Structural acquisition mechanics
Remedies for faulty mergers
• FD of disclosure is breached only if misrepresentation or omission is
material
• Test for materiality of an omission: Substantial likelihood that
disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of
info made available
– Info doesn’t need to be necessary to reach the decision
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Structural acquisition mechanics
Remedies for faulty mergers
• Did Kanner breach duty of disclosure?
– Outdated statute
• Court: explicit statutory requirement is always material
– No explanation for how Kanner set the $20 price
• Kanner: Not material since there’s no duty to set a fair price
• Court: It is material since it affects SH’s decision whether $20 is a fair price or
SH should seek appraisal
– No details of products or services Pubco offered
• Court: Not material; irrelevant to SH’s decision whether to seek appraisal
– No explanation for what company intended to do with its cash
• Court: Plaintiff noticed that company has $36 of cash/share – suggests appraisal
is sensible; no need for additional info
• Kanner is liable, but what’s the remedy?
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Structural acquisition mechanics
Remedies for faulty LFMs
• Remedy for breach of FD in a LFM is usually limited to appraisal
(receiving the fair value of plaintiff’s shares)
– Reason: if merger was approved by majority of SHs, plaintiff did not have the
power to block the merger, and shouldn’t get this power as a remedy
• However, in cases of fraud, misrepresentation & corporate waste
other remedies are available, such as rescission of the merger or
rescissory damages
– I.e., keep shares in firm or receive value as if firm didn’t merge
– When would rescissory damages exceed an appraisal?
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Structural acquisition mechanics
Remedies for faulty SFMs
• Glassman (Del. 2001): appraisal is exclusive remedy for a faulty SFM
– SFM doesn’t require SH consent & takes effect before the disclosure takes
place, so SHs couldn’t rescind merger even if A acted legally
– The appraisal remedy requires SH to formally demand appraisal (i.e., opt-in)
and to remit shares & entire merger consideration
• Glassman has 3 exceptions: fraud, illegality & inadequate disclosure. Case
didn’t say what remedy applies then.
– Gilliland (Del.Ch. 2004): “quasi-appraisal”
• SHs must opt-in & must place in escrow (not give to firm) a portion (not all) of
merger consideration
• In Berger, Del.Ch. adopts this remedy; Del. Reverses (so Gilliland is not longer
valid law)
– Berger (Del. 2009): (also) “quasi-appraisal”
• SHs automatically in (may opt-out) & don’t need to place any money in escrow
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Structural acquisition mechanics
Remedies for faulty SFMs
• Why do Del. Ch. & Del. disagree?
– Del.Ch. in Berger: Without escrow requirement, SHs risk nothing; get appraised
value if higher than merger consideration, otherwise keep merger
consideration
– Del. in Berger: With escrow requirement, deceiving controller risks nothing; if
MSHs win suit, they get same appraisal rights they had anyway
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