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©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
CHAPTER 12
Mergers, Acquisitions, and Other Changes to the
Corporate Structure
THEME
Chapter 12 introduces the student to mergers
and acquisitions, an area in which many para-
legals work. Topics in this chapter include
statutory mergers and share exchanges, asset
and stock acquisitions, entity conversions, and
amending the articles of incorporation.
CHAPTER GOAL
The goal of this chapter is for students to
become familiar with the following terms
and topics concerning corporate mergers
and acquisitions:
• Statutory merger, share exchange, asset
acquisition, and stock acquisition
• Procedures for conducting statutory mer-
gers and share exchanges
• Procedures for asset and stock acquisitions
• Requirements and procedures for amend-
ing the articles of incorporation
• Entity conversions
• The role of corporate paralegals assisting
with corporate mergers and acquisitions
• Resources available to corporate paralegals
who may be assisting with mergers and ac-
quisitions
SUGGESTED APPROACH
Because paralegals often work in the area of
mergers and acquisitions, discussions accom-
panying this chapter may include practical ad-
vice on handling mergers and acquisitions. A
speaker with experience in the mergers and
acquisitions area may be beneficial to stu-
dents.
Discussions of mergers and acquisi-
tions currently in the news may also be of par-
ticular interest to students.
LECTURE NOTES
Mergers and Acquisitions in the United
States
1. Mergers and acquisitions take place in
the United States with increasing fre-
quency. While the megamergers (those
with a value in excess of $1 billion) make
the headlines, the more common mergers
are those that take place between smaller
corporations—including those that are
closely held.
Statutory Mergers and Share Exchanges
2. The business corporation act of most
states includes provisions for statutory
mergers and share exchanges between
corporations and between corporations
and other types of business organizations.
3. Statutory mergers and share exchanges
may be between domestic corporations or
domestic and foreign corporations. Mer-
gers may also involve noncorporate enti-
ties, such as limited liability companies.
4. A merger is a combination of two or
more corporations whereby one of the
corporations survives (the surviving cor-
poration), and the other merges into it
and ceases to exist (the merging corpora-
tion).
5. The shareholders of the merging corpora-
tion usually give up their shares of stock
and receive shares of the surviving cor-
poration in return. They then become
shareholders of the surviving corporation.
6. When a subsidiary corporation merges
into a parent corporation it is referred to
as an upstream merger.
CHAPTER 12 Mergers, Acquisitions, and Other Changes to the Corporate Structure 87
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
7. When a parent corporation merges into a
subsidiary corporation it is referred to as
a downstream merger.
8. A triangle merger involves three corpora-
tions. A subsidiary corporation is used to
acquire a target corporation. The parent
corporation funds the subsidiary corpora-
tion with cash or shares of stock. The target
corporation is then merged into the subsidi-
ary corporation. The parent and subsidiary
corporation are both surviving corporations.
9. In a reverse triangle merger, the subsidi-
ary is merged into the target corporation,
which then becomes a subsidiary of the
parent corporation. The target corpora-
tion and parent corporation both survive.
10. In a statutory share exchange, all of the
stock of the target corporation is acquired
by another corporation, which becomes
its parent corporation.
Laws Governing Mergers and Share Acqui-
sitions
11. State statutes usually address the following
with regard to statutory mergers and ac-
quisitions:
• Requirements for the plan of merger
or plan of exchange
• Specified method for adopting a plan
of merger or plan of exchange
• Requirements for articles of merger
or articles of share exchange
• Requirements for filing the articles of
merger or articles of share exchange
• Provisions regarding the effect of the
merger or share exchange
• Provisions for short-form mergers
• Provisions for dissenting shareholder
rights
12. Mergers and acquisitions must comply
with federal antitrust laws. Both the Fed-
eral Trade Commission and the Depart-
ment of Justice have responsibility for
overseeing the enforcement of federal an-
titrust statutes.
13. The Federal Trade Commission (FTC)
was created by the Federal Trade Com-
mission Act in 1914 to guard the market-
place from unfair methods of competition
and to prevent unfair or deceptive acts or
practices that harm consumers. The FTC
identifies and challenges anticompetitive
mergers.
14. Mergers and acquisitions may be subject
to the antimonopoly provisions of the
Sherman Act and the Clayton Act.
15. Section 7 of the Clayton Act, called the
Hart-Scott-Rodino Antitrust Improve-
ment Act of 1976, provides that notice of
certain contemplated mergers and acqui-
sitions must be filed with the FTC before
they are completed.
16. As of 2011, premerger notification under
the Hart-Scott-Rodino Act is required of
certain mergers and acquisitions valued
at more than $53.1 million.
Planning the Statutory Merger or Share
Exchange
17. When a merger or plan of exchange be-
tween two unrelated parties is contem-
plated, the two parties generally spend
time to negotiate the transaction and then
enter into a letter of intent to outline their
intentions.
The Plan of Merger and Plan of Share Ex-
change
18. The plan of merger or plan of share ex-
change is typically required by state stat-
utes to conduct merger or share exchange
transactions.
19. The plan of merger or plan of share ex-
change typically sets forth in detail the
agreement between the merging corpora-
tions or the corporations involved in the
share exchange.
88 PART I Guide for Instructors and Answers to Chapter Review Questions
88
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Board of Director and Shareholder Ap-
proval of the Merger or Share Exchange
20. Statutory mergers and statutory share ex-
changes, as well as the sale of assets or
all of the stock of a corporation, require
the approval of at least the majority of
the shareholders of the corporation.
21. Shareholders who object to a corporate
merger or acquisition may be eligible to
dissent and obtain payment for the fair
value of their shares.
Articles of Merger or Share Exchange
22. Articles of merger or articles of share ex-
change are executed and filed with the
secretary of state or other appropriate
state authority to effect a statutory mer-
ger or share exchange.
Due Diligence and Preclosing Matters
23. The investigation and examination of
documents prior to the closing of a mer-
ger or acquisition transaction is referred
to as the due diligence process. Due dili-
gence refers to the standard of care that
must be exercised by each responsible
party. In addition to reviewing the docu-
ments provided, due diligence often in-
volves on-site investigations to inspect
the real estate, buildings, assets, and in-
ventory involved in the transaction.
Closing the Merger or Share Exchange
Transaction
24. Merger and share exchange closings are
often attended by key officers and share-
holders from each corporation, and attor-
neys and paralegals representing both
corporations. The following tasks are
usually completed at a closing of a mer-
ger or share exchange:
• The shares of stock change hands.
• Assignments and transfers of con-
tracts and real and personal property
are executed and given to the appro-
priate individuals.
• Cash is paid to the appropriate indi-
viduals.
• Contracts for all future obligations
between the parties are signed and
given to the appropriate individuals.
Asset and Stock Acquisitions
25. One corporation may acquire another by
purchasing all of its stock or assets.
26. If a corporation is acquired by the pur-
chase of all of its outstanding stock, the
acquiring corporation typically assumes
the obligations and liabilities of the target
corporation.
27. If a corporation is acquired by the pur-
chase of all of its assets, the acquiring
corporation typically assumes only the
obligations and liabilities of the target
corporation specified in the purchase
agreement.
28. When one corporation attempts to pur-
chase or take over another corporation
against the wishes of the management
and board of directors of the target corpo-
ration, the transaction is referred to as a
hostile takeover.
29. Defensive measures adopted by a corpo-
ration to deflect hostile takeovers are
sometimes referred to as shark repel-
lants.
30. The de facto merger doctrine allows
courts to view a transaction as a merger if
it has the characteristics of a merger, re-
gardless of what it is called, to prevent an
injustice to third parties.
Asset and Stock Acquisition Procedures
31. Preliminary negotiations in an asset or
stock acquisition generally result in a let-
ter of intent setting forth the price, terms,
and format of the acquisition.
32. A detailed asset purchase agreement must
set forth very specifically all of the assets
to be acquired.
33. A detailed stock purchase agreement will
set forth the terms for the purchase of the
corporation’s stock. In addition, it will
CHAPTER 12 Mergers, Acquisitions, and Other Changes to the Corporate Structure 89
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
set forth details concerning the corpora-
tion to be acquired, its financial structure,
and its assets and liabilities.
Entity Conversions
34. State statutes generally provide for the
conversion of corporations to noncorporate
entities and for the conversion of noncor-
porate entities to corporations. Conversions
generally require the consent of the owners
of each entity and the board of direc-
tors/managers of each entity.
35. Statutes also typically provide for domes-
tication, the procedure to change a corpo-
ration’s state of domicile. Domestication
generally requires the approval of the
board of directors and shareholders.
Amendment to Articles of Incorporation
36. When the information included in the
corporation’s articles of incorporation
changes, articles of amendment must be
filed with the secretary of state or other
appropriate state official.
37. Under most circumstances, amendments
to the articles of incorporation require the
consent of shareholders.
The Paralegal’s Role
38. Corporate paralegals are often very active
in every phase of corporate mergers and
acquisitions.
CASE BRIEFS
Celotex Corporation v. Pickett, 490 So. 2d 35,
55 ALR4th 157 (1985)
Purpose: This case demonstrates the im-
portance of the type of transaction chosen to
combine businesses. It emphasizes that in a
merger transaction, all debts, liabilities, and
duties of the merging corporation are trans-
ferred to the surviving corporation.
Cause of Action: Negligence and strict liability
Facts: This case is an appeal by petitioner of a
trial court decision awarding punitive damages
to respondent.
The Philip Carey Corporation was
formed in 1888 and merged with Glen Alden
Corporation in 1967. Thereafter, Philip Carey
merged with another Glen Alden subsidiary,
Briggs Manufacturing Company, and became
known as Panacon Corporation. Celotex pur-
chased Glen Adlen’s controlling interest in
1972 and later purchased the remaining shares
of Panacon and merged it into Celotex.
Respondent Leonard H. Pickett was
employed in a Jacksonville shipyard from
1965 through June 1968, where, as part of his
employment as an insulator of ships, he exten-
sively used Philip Carey asbestos cement.
Pickett developed severe lung problems due to
his exposure to asbestos. Pickett and his wife
sued, on the grounds of negligence and strict
liability, several defendants, including peti-
tioner as corporate successor to Philip Carey.
The jury, in addition to compensatory damag-
es of $500,000 to Pickett and $15,000 to his
wife, determined that Philip Carey’s conduct
warranted punitive damages of $100,000
against Celotex, its corporate successor.
Celotex admitted liability because of
the merger for the compensatory damages
awarded to the Picketts, but maintained that
the imposition of punitive damages against
Celotex, simply because it is the statutory suc-
cessor of Philip Carey, contravenes the pur-
pose of such damages in Florida.
Issue: Can punitive damages be awarded
against a successor corporation for the actions
of its predecessor?
Holding: Yes, the merger between Celotex
and Panacon provided that Celotex was to as-
sume all debts, liabilities, and duties of Pana-
con. When a corporation voluntarily chooses a
formal merger, it must take the “bad will”
along with the “goodwill.”
REVIEW QUESTIONS
1. What is the difference between a consoli-
dation and a merger?
A merger is a combination of two or
more corporations whereby one of the
90 PART I Guide for Instructors and Answers to Chapter Review Questions
90
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
corporations survives (the surviving
corporation) and the other corporation
merges into the surviving corporation
2. What is the final relationship between
two corporations that were parties to a
share exchange?
The acquiring corporation becomes
the parent corporation, and the target
3. What is a “surviving” corporation in a
merger transaction?
It is the corporation that the merging
shareholder have?
When shareholders object to certain
extraordinary actions being taken by
the corporation that affect them ad-
5. What are the main purposes of the federal
antitrust laws?
They are to prevent unfair acts that
6. Do all mergers and acquisitions require
shareholder approval?
No
Give examples.
Shareholder approval is not required
7. If the sole shareholder of Diane’s Auto
Parts, Inc., which holds 95 percent of the
stock of the D.G. Auto Parts Corporation,
Why are the requirements for shareholder
approval different for this type of mer-
ger?
The minority shareholders of the
merging corporations in this type of
8. What is a letter of intent?
It is a short document, often just a few
pages in length, that is entered into be-
tween the proposed parties to a trans-
9. What constitutes due diligence work?
Due diligence work includes the inves-
tigation that is done to ascertain the
Household Products, Inc. are interested in
acquiring one of their biggest suppliers,
Nixon Chemical Corporation, but they
are concerned about past problems that
be the most beneficial to Kate’s House-
hold Products, Inc.?
An asset acquisition or other type of
transaction that would not transfer all
liabilities of the Nixon Chemical Cor-
CHAPTER 12 Mergers, Acquisitions, and Other Changes to the Corporate Structure 91
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
11. What are some possible disadvantages of
acquiring an auto dealership, or a corpo-
ration that owns several pieces of real es-
tate, through an asset acquisition rather
than a stock acquisition transaction?
The transfer of title to numerous au-
SUGGESTED ANSWERS TO
PRACTICAL PROBLEMS
The Practical Problems in this chapter ask stu-
dents to locate the statute sections within the
business corporation act of their home state to
answer some basic questions concerning the
requirements for statutory mergers and share
exchanges and entity conversions.
Resources for answering the Practical Prob-
lems include state statutes. Links to the state
business corporation acts can be found on the
CourseMate website that accompanies this
text at http://www.cengagebrain.com.
EXERCISE IN CRITICAL
THINKING
The Exercise in Critical Thinking for this
chapter asks students to consider the
importance of utilizing a letter of intent in the
early stages of a merger or acquisition nego-
tiation to ensure that information exchanged
will not be used to the detriment of either
party.
Exercise:
Why is it important to enter into a
letter of intent early in the negotia-
tion process of a proposed merger
or acquisition, even when the par-
ties are just exploring the possibility
of a transaction and there is a good
will never close?
SUGGESTIONS AND SAMPLE
DOCUMENTS FOR THE
WORKPLACE SCENARIO
The Workplace Scenario at the end of this
chapter asks students to prepare sample doc-
uments to merge their fictitious corporation,
Cutting Edge Computer Repair, Inc., with an-
other fictitious corporation by the name of
Kohler’s Computer Repair, Inc. Following the
statutes of the students’ home state, they can
prepare their own documents based on the
samples given in the text. In some instances,
merger forms may be available for download-
ing from the website of the secretary of state
or other appropriate state agency in the stu-
dents’ home state.
Appendix L includes a sample plan of
merger and articles of merger that could be
filed in states that follow the Model Business
Corporation Act in this regard, as well as a
cover letter for filing the documents.
