978-1133019145 Chapter 12 Solution Manual

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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.

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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

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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

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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

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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?

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-

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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-