Chapter 39 Corporations – Merger, Consolidation, and Termination

1. Chapter 39 Corporations – Merger, Consolidation, and Termination

2. §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.

3. A B A 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.

4. A B C Consolidation • A 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.

5. 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 who issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.

6. Short-Form Mergers • For “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.

7. 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.

8. 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).

9. Appraisal Rights [2] • 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).

10. §2: Purchase of Assets • The 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.

11. 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. 

12. Potential Liability in Purchase of Assets [2] • 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).

13. § 3: Purchase of Stock • Common 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.

14. Tender Offers • Tender 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. • The SEC strictly regulates tender offers.

15. Tender Offer Terminology [2]

16. 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.

17. § 4: Termination • Termination of a corporation, like a partnership, consists of two phases: • Dissolution (voluntary or involuntary); and • Liquidation.

18. 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.

19. Voluntary Dissolution [2] • 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.

20. Involuntary Dissolution • Shareholders can initiate dissolution proceedings if the corporation is deadlocked. • Case 39.3:Chance v. Norwalk Fast Oil Inc. (1999).

21. 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.

22. 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.

23. 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.

24. 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.