1
whole or in part.
Mergers and Takeovers
Dissolution and liquidation are the processes by which a corporation terminates its existence. The last part of this
chapter discusses reasons for, and methods used in, terminating a corporation.
CHAPTER OUTLINE
1. One of the Firms Survives
After a merger, only one of the corporations continues to exist.
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
without a formal transfer. It also assumes liability for both firms’ debts and obligations.
ADDITIONAL BACKGROUND—
In the 1960s and the 1970s, regulators believed that even slight concentrations of economic power in
fewer hands was to be avoided. Mergers were viewed as steps toward monopolies that would force prices up,
workers out, and wages down. Today, a market share of 20 percent, 30 percent, or even more appears to be
required before a government review is undertaken. One of the factors that altered the view is the growth of
have created the biggest media corporation (Walt Disney and Capital Cities/ABC), the largest department
store corporation (R. H. Macy and Federated), the second largest cosmetics firm (L’Oreal and Maybelline),
the third largest tobacco company (B.A.T. Industries and American Tobacco), and a big hospital chain
(Columbia/HCA Healthcare and HealthTrust), among others.
2. It Inherits All Rights and Liabilities of Both Predecessors
The new corporation acquires all the rights, powers, and privileges that both corporations had. It
also assumes liability for both firms’ debts and obligations.
Procedures vary somewhat among jurisdictions (for example, in some states, a consolidation follows the
steps for incorporation set out above). Generally, the basic steps are—
CHAPTER 6: MERGERS AND TAKEOVERS 3
• The state issues a certificate of merger or consolidation.
E. SHORT-FORM MERGERS
The Revised Model Business Corporation Act (RMBCA) provides for merging a substantially owned
subsidiary corporation into its parent, under certain circumstances without shareholder approval.
G. APPRAISAL RIGHTS
A shareholder has a right to dissent and be paid fair value (according to an appraisal) for the number of
shares held on the date of a merger or consolidation. This right is available only when a state statute
provides for it. Where it exists, it normally extends to mergers, consolidations, short-form mergers, sales
of substantially all the corporate assets not in the ordinary course of business, and in certain states,
ENHANCING YOUR LECTURE—
WHO OWNS THE WEB SITE?
Popsmear’s address was www.1800Postcards.com. According to the purchase agreement, Popsmear’s
trademark rights were included in “all of the assets” being sold by Popsmear to 1-800.
THE PROBLEM WITH THE WEB SITE
whole or in part.
right to change the password. 1-800 then sued Morel for fraud and breach of contract and asked the court for
a preliminary injunction against Morel’s changing of the password. After all, argued 1-800, by making it
assets included the domain name rights. The question was complicated by the fact that Morel was the
registered owner of the domain name. The court, however, held that this “nuance” was of little significance
because both Morel and Popsmear were parties to the purchase agreement. The court also emphasized that
the parties “quite likely understood that the domain name registration for the Web site was among the ‘assets
of the business’ irrespective of whether record title was in [Popsmear] or its sole shareholder, Morel.”
agreement? Why or why not?
a. 1-800-Postcards, Inc. v. Morel, 153 F.Supp.2d 359 (S.D.N.Y. 2001).
A purchasing corporation is not usually responsible for any liabilities of the seller. Exceptions are—
• When the purchasing corporation impliedly or expressly assumes the seller’s liabilities.
• When the transaction is, in effect, a merger or consolidation of the two firms.
• When the purchaser continues the seller’s business and retains the same shareholders, directors,
Case 6.1: American Standard, Inc. v. OakFabco, Inc.
American Standard, Inc., sold its Kewanee boiler division to OakFabco, Inc. OakFabco agreed to buy the
assets subject to the liabilities. These liabilities were defined to include “all the debts, liabilities, obligations,
and commitments (fixed or contingent) connected with or attributable to Kewanee existing and outstanding at
whole or in part.
OakFabco appealed.
date of the sale.”
………………….………….………………………….………….………………………….…………...…………………
Notes and Questions
ANSWERS TO LEGAL REASONING
QUESTIONS AT THE END OF CASE 6.1
liabilities of Kewanee. Therefore, the exception just mentioned applied to the case.
2. How does this case illustrate the kinds of problems that can arise over contract interpretation?
The facts of the American Standard case—in particular, the different meanings that the two parties derived
from the contract’s language—illustrate the kinds of problems that can arise over contract interpretation. To
the acquirer was most likely not involved in the circumstances that gave rise to the liabilities?
Shouldering the acquiring corporation with the liability of an acquired corporation, even when the acquirer was
not involved in the circumstances that gave rise to the liability, is an issue of fairness. If the liability was not
imposed, corporate wrongdoers could avoid liability in almost any circumstance by effecting a merger,
consolidation, share exchange, or purchase of assets, and a firm with knowledge of the wrongdoing could
4. How might the Internet prevent a prospective acquiring company from unknowingly assuming the
liabilities in a purchase of assets? The Internet can prevent a prospective acquiring company from
unknowingly assuming the liabilities of an acquired company in a purchase of assets because it is generally
easier to research the history of a company online than to use more traditional sources. In many cases, an
A. TENDER OFFERS
A public offer to all shareholders is a tender offer. The price is usually higher than the market price of the
stock before the offer, but there may be a condition: the receipt of a specified number of outstanding
shares by a specified date, for instance.
ADDITIONAL BACKGROUND—
More Takeover Defenses
Federal and state securities laws and takeover statutes control the terms, duration, and circumstances of
Lobster traps are designed to catch large lobsters but allow small lobsters to escape. In
the “lobster trap” defense, holders of convertible securities (corporate bonds or stock
that is convertible into common shares) are prohibited from converting the securities into
common shares if the holders already own, or would own after conversion, 10 percent or
more of the voting shares of stock.
repay in the event of a takeover, thus making itself less financially attractive to the
acquiring corporation.
Shark Repellent
C. RESPONSES TO TENDER OFFERS
CHAPTER 6: MERGERS AND TAKEOVERS 7
D. TAKEOVER DEFENSES AND DIRECTORS’ FIDUCIARY DUTIES
The directors of the target firm must act in the best interest of their company in deciding whether the
shareholders’ acceptance or rejection of the offer would be most beneficial.
CASE SYNOPSIS—
Case 6.2: Air Products and Chemicals, Inc. v. Airgas, Inc.
board breached its fiduciary duties.
The court dismissed the plaintiffs’ claims. The power to defeat an inadequate tender offer lies with the
board of the target corporation. The Airgas board identified a valid threat—the allegedly inadequate price of
Air Products’ offer. Without adequate information about the value of Airgas stock, its shareholders might have
How might directors best fulfill their fiduciary duties to shareholders? Directors can best fulfill their
fiduciary duties to shareholders by maintaining the corporate status quo, running the company for the long–
term, and consistently showing improved financial results each quarter. Directors, when acting deliberately, in
an informed way, and in the good faith pursuit of corporate interests, should follow a course designed to
Suppose that the Airgas board had opposed the takeover in order to perpetuate the directors’ own
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
without a formal transfer. It also assumes liability for both firms’ debts and obligations.
ADDITIONAL BACKGROUND—
In the 1960s and the 1970s, regulators believed that even slight concentrations of economic power in
fewer hands was to be avoided. Mergers were viewed as steps toward monopolies that would force prices up,
workers out, and wages down. Today, a market share of 20 percent, 30 percent, or even more appears to be
required before a government review is undertaken. One of the factors that altered the view is the growth of
have created the biggest media corporation (Walt Disney and Capital Cities/ABC), the largest department
store corporation (R. H. Macy and Federated), the second largest cosmetics firm (L’Oreal and Maybelline),
the third largest tobacco company (B.A.T. Industries and American Tobacco), and a big hospital chain
(Columbia/HCA Healthcare and HealthTrust), among others.
2. It Inherits All Rights and Liabilities of Both Predecessors
The new corporation acquires all the rights, powers, and privileges that both corporations had. It
also assumes liability for both firms’ debts and obligations.
Procedures vary somewhat among jurisdictions (for example, in some states, a consolidation follows the
steps for incorporation set out above). Generally, the basic steps are—
CHAPTER 6: MERGERS AND TAKEOVERS 3
• The state issues a certificate of merger or consolidation.
E. SHORT-FORM MERGERS
The Revised Model Business Corporation Act (RMBCA) provides for merging a substantially owned
subsidiary corporation into its parent, under certain circumstances without shareholder approval.
G. APPRAISAL RIGHTS
A shareholder has a right to dissent and be paid fair value (according to an appraisal) for the number of
shares held on the date of a merger or consolidation. This right is available only when a state statute
provides for it. Where it exists, it normally extends to mergers, consolidations, short-form mergers, sales
of substantially all the corporate assets not in the ordinary course of business, and in certain states,
ENHANCING YOUR LECTURE—
WHO OWNS THE WEB SITE?
Popsmear’s address was www.1800Postcards.com. According to the purchase agreement, Popsmear’s
trademark rights were included in “all of the assets” being sold by Popsmear to 1-800.
THE PROBLEM WITH THE WEB SITE
whole or in part.
right to change the password. 1-800 then sued Morel for fraud and breach of contract and asked the court for
a preliminary injunction against Morel’s changing of the password. After all, argued 1-800, by making it
assets included the domain name rights. The question was complicated by the fact that Morel was the
registered owner of the domain name. The court, however, held that this “nuance” was of little significance
because both Morel and Popsmear were parties to the purchase agreement. The court also emphasized that
the parties “quite likely understood that the domain name registration for the Web site was among the ‘assets
of the business’ irrespective of whether record title was in [Popsmear] or its sole shareholder, Morel.”
agreement? Why or why not?
a. 1-800-Postcards, Inc. v. Morel, 153 F.Supp.2d 359 (S.D.N.Y. 2001).
A purchasing corporation is not usually responsible for any liabilities of the seller. Exceptions are—
• When the purchasing corporation impliedly or expressly assumes the seller’s liabilities.
• When the transaction is, in effect, a merger or consolidation of the two firms.
• When the purchaser continues the seller’s business and retains the same shareholders, directors,
Case 6.1: American Standard, Inc. v. OakFabco, Inc.
American Standard, Inc., sold its Kewanee boiler division to OakFabco, Inc. OakFabco agreed to buy the
assets subject to the liabilities. These liabilities were defined to include “all the debts, liabilities, obligations,
and commitments (fixed or contingent) connected with or attributable to Kewanee existing and outstanding at
whole or in part.
OakFabco appealed.
date of the sale.”
………………….………….………………………….………….………………………….…………...…………………
Notes and Questions
ANSWERS TO LEGAL REASONING
QUESTIONS AT THE END OF CASE 6.1
liabilities of Kewanee. Therefore, the exception just mentioned applied to the case.
2. How does this case illustrate the kinds of problems that can arise over contract interpretation?
The facts of the American Standard case—in particular, the different meanings that the two parties derived
from the contract’s language—illustrate the kinds of problems that can arise over contract interpretation. To
the acquirer was most likely not involved in the circumstances that gave rise to the liabilities?
Shouldering the acquiring corporation with the liability of an acquired corporation, even when the acquirer was
not involved in the circumstances that gave rise to the liability, is an issue of fairness. If the liability was not
imposed, corporate wrongdoers could avoid liability in almost any circumstance by effecting a merger,
consolidation, share exchange, or purchase of assets, and a firm with knowledge of the wrongdoing could
4. How might the Internet prevent a prospective acquiring company from unknowingly assuming the
liabilities in a purchase of assets? The Internet can prevent a prospective acquiring company from
unknowingly assuming the liabilities of an acquired company in a purchase of assets because it is generally
easier to research the history of a company online than to use more traditional sources. In many cases, an
A. TENDER OFFERS
A public offer to all shareholders is a tender offer. The price is usually higher than the market price of the
stock before the offer, but there may be a condition: the receipt of a specified number of outstanding
shares by a specified date, for instance.
ADDITIONAL BACKGROUND—
More Takeover Defenses
Federal and state securities laws and takeover statutes control the terms, duration, and circumstances of
Lobster traps are designed to catch large lobsters but allow small lobsters to escape. In
the “lobster trap” defense, holders of convertible securities (corporate bonds or stock
that is convertible into common shares) are prohibited from converting the securities into
common shares if the holders already own, or would own after conversion, 10 percent or
more of the voting shares of stock.
repay in the event of a takeover, thus making itself less financially attractive to the
acquiring corporation.
Shark Repellent
C. RESPONSES TO TENDER OFFERS
CHAPTER 6: MERGERS AND TAKEOVERS 7
D. TAKEOVER DEFENSES AND DIRECTORS’ FIDUCIARY DUTIES
The directors of the target firm must act in the best interest of their company in deciding whether the
shareholders’ acceptance or rejection of the offer would be most beneficial.
CASE SYNOPSIS—
Case 6.2: Air Products and Chemicals, Inc. v. Airgas, Inc.
board breached its fiduciary duties.
The court dismissed the plaintiffs’ claims. The power to defeat an inadequate tender offer lies with the
board of the target corporation. The Airgas board identified a valid threat—the allegedly inadequate price of
Air Products’ offer. Without adequate information about the value of Airgas stock, its shareholders might have
How might directors best fulfill their fiduciary duties to shareholders? Directors can best fulfill their
fiduciary duties to shareholders by maintaining the corporate status quo, running the company for the long–
term, and consistently showing improved financial results each quarter. Directors, when acting deliberately, in
an informed way, and in the good faith pursuit of corporate interests, should follow a course designed to
Suppose that the Airgas board had opposed the takeover in order to perpetuate the directors’ own