in whole or in part.
CHAPTER 6
MERGERS AND TAKEOVERS
in whole or in part.
CHAPTER 6: MERGERS AND TAKEOVERS 3
in whole or in part.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Dissenting shareholder’s rights
Bonsetti has appraisal rights as a minority shareholder dissenting to the merger. The
shareholders of each corporation subject to a merger must approve the plan, by vote, at a
shareholders’ meeting. Most state statutes require the approval of two-thirds of the outstanding
shares of voting stock. If a shareholder disapproves of a merger but is outvoted by the other
shareholders, the dissenting shareholder is not forced to become an unwilling owner of a
corporation that is different from the one in which he or she originally invested. The shareholder
may be entitled to the fair value of the number of shares held on the date of the merger. This is
the shareholder’s appraisal right.
2A. Short-form merger procedure
A short-form merger would not be possible in this case. The Revised Model Business
Corporation Act provides a procedure for the merger of a substantially owned subsidiary
corporation into its parent. This short-form merger, or parent-subsidiary merger, can be
accomplished without the approval of the shareholders of either corporation. But it can be used
only when the parent owns at least 90 percent of the outstanding shares of the stock of the
subsidiary. Here, the corporations are not in a parent-subsidiary relationship and so a short-form
merger would not be possible.
3A. Acquiring corporation’s offer
Hula’s offer to purchase GVG stock is called a tender offer. An acquiring corporation can deal
directly with a target company’s shareholders in seeking to buy the shares they hold and gain
control of the target. The acquiring corporation does this by making a tender offer to all of the
shareholders of the target company.
4A. Surviving corporation’s liability
After a merger, the surviving corporation automatically acquires all of the merged corporation’s
property and assets without the necessity of a formal transfer. Also, the survivor becomes liable
for all of the disappearing corporation’s debts and obligations. Thus, the survivor in this problem
may be held liable for the injury suffered by the customer of the disappearing firm.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Corporate law should be altered to prohibit incumbent management from using
most of the legal methods available for fighting takeovers. Rarely will an outside group
attempt a corporate takeover if the target corporation is well run. For when a publicly held
corporation is well run, its stock price will be relatively high, thereby making it an uninviting
4 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
target for takeover. Therefore, if there is a takeover attempt, current management should be
prevented from using many popular defenses, all of which are utilized to benefit management as
opposed to shareholders.
Often, corporate takeover specialists will target a corporation, not for the benefit of
current shareholders, but as a quick “hit” that makes large short-run profits for the
former. Without any legal takeover defense tactics, current management cannot properly
defend the best interests of current shareholders (and employees, too). Takeover specialist
could therefore easily take over corporations, split them up and sell the parts off for a quick
profit.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. Macro Corporation and Micro Company combine, and a new organization, MM, Inc.,
takes their place. What is the term for this type of combination? What happens to the
assets, property, and liabilities of Micro? This combination is a consolidation in which two
corporations consolidate to form an entirely new organization. In the process, the two
corporations terminate, and a new entity comes into existence. The new entity inherits all of the
rights, privileges, and powers previously held by the disappearing firms. Title to any property
and assets owned by the disappearing firms passes to the new entity without a formal transfer.
The new entity assumes liability for all of the disappearing firms’ debts and obligations.
2A. Peppertree, Inc., hired Robert McClellan, a licensed contractor, to repair a
condominium complex that was damaged in an earthquake. McClellan completes the
work, but Peppertree fails to pay. McClellan is awarded $181,000 in an arbitration
proceeding. Peppertree then forms another corporation and transfers all of its assets to
the new corporation, without notifying McClellan. Can McClellan hold Peppertree’s
shareholders personally liable for the debt? Why or why not? If a corporation organizes
another corporation with practically the same shareholders and directors, transfers all the assets
but does not pay all the first corporation’s debts, and continues to carry on the same business,
the separate entities may be disregarded and the new corporation held liable for the obligations
of the old. The general rule is where one corporation sells or transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the former unless (1) the
purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a
consolidation or merger of the two corporations, (3) the purchasing corporation is merely a
continuation of the selling corporation, or (4) the transaction is entered into fraudulently to
escape liability for debts.
In certain instances of fraud, a court will further pierce the corporate veil (disregard the
corporate entity) and hold the shareholders personally liable. In this problem, it appears that the
new corporation was formed to avoid liability on the debt to McClellan. If so, the new corporation
CHAPTER 6: MERGERS AND TAKEOVERS 5
in whole or in part.
is liable, and the corporate veil may be pierced to hold the shareholders personally liable as
well.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
6-1A. Corporate merger
(Chapter 6—Page 99)
corporation. If Alir adheres strictly to statutory procedures, she has appraisal rights for the Ajax
shares she holds after approval of the merger. Alir’s appraisal rights entitle her to be paid by
6-2A. Purchase of assets
(Chapter 6—Page 100)
merger; (3) the successor may be considered a mere continuation of the predecessor; or (4) the
transaction was fraudulent. Here, PC was a mere continuation of Paradise Pools, Inc. (PPI). The
6-3A. Corporate takeover
(Chapter 6—Page 101)
purchase the shares they hold. A so-called takeover bid such as this is frequently subject to
state and federal securities regulations. Block could even make a tender offer (public offer)
6 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
use the patent.
6-4A. Successor liability
(Chapter 6—Page 100)
shareholders in the acquiring and acquired corporations. In this case, EMT assumed GFGA’s
assets and liabilities and was the successor corporation of GFGA. EMT was GFGA’s sole
unreturned funds.
6-5A. Dissolution
(Chapter 6—Page 105)
the two directors and sole shareholders, Richard Harris and Kenneth Stumpff, are deadlocked in
the management of the corporate affairs. . . . [T]here are two directors and two fifty-percent
Mahaffey’s. Harris also barred Stumpff from entering the business premises. Stumpff unilaterally
withdrew a substantial amount of funds from Mahaffey’s corporate account after he was
6-6A. Successor liability
(Chapter 6—Page 100)
pension fund under successor liability, the court should consider: (1) whether successor
CHAPTER 6: MERGERS AND TAKEOVERS 7
in whole or in part.
company had notice of the pension fund charge, (2) the predecessor’s ability to provide relief,
(3) whether there has been substantial continuity of business operations, (4) whether new
6-8A. A QUESTION OF ETHICS—Purchase of stock
(a) The shareholders argued that Topps’s failure to disclose certain facts about
Eisner’s offer and Topps’s deal with Upper Deck would affect the vote. In particular, Topps’
management’s failure to reveal the details of their negotiations with Eisner and Upper Deck, and
to accurately represent those details that were disclosed, would negatively affect the vote, in the
shareholders’ opinion. They complained that Topps denied its shareholders the chance to
decide for themselves whether to accept or reject the lower-priced Eisner offer or the higher-
priced offer from Upper Deck. In the court’s words, Topps’s conduct denied the shareholders the
chance to make a “mature, uncoerced” decision for themselves.
(b) The court concluded that an injunction against “the procession of the Eisner
Merger vote should issue until such time as: (1) the Topps board discloses several material
facts . . . regarding Eisner’s assurances that he would retain existing management after the
Merger; and (2) Upper Deck is [allowed to] (a) publicly [comment] on its negotiations with Topps;
and (b) [make] a non-coercive tender offer on conditions as favorable or more favorable than
those it has offered to the Topps board.” The court explained that the injunction was “warranted
8 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
to ensure that the Topps stockholders are not irreparably injured by the loss of an opportunity to
more attractive.” The court reasoned in part that Topps’s board likely breached its fiduciary
duties by prohibiting Upper Deck from communicating with Topps’s shareholders and presenting
a bid that those stockholders could find more favorable than the Eisner offer.
Why did Topps’s management do what it did? The court acknowledged that “Shorin and
treats workers and consumers well, or a commitment to product quality—will fare if the
corporation is placed under new stewardship.” The court noted that “[m]any people commit a
huge portion of their lives to a single large-scale business organization. They derive their identity
in part from that organization and feel that they contribute to the identity of the firm. The mission
“Although Shorin and the other defendants claim that they truly desire to get the highest
value and want nothing more than to get a topping bid from Upper Deck that they can accept,
their behavior belies those protestations. In reaching that conclusion, I rely not only on the
defendants’ apparent failure to undertake diligent good faith efforts at bargaining with Upper
the property of the corporation that ceases to exist will pass automatically to the surviving
corporation without a formal transfer being necessary. In addition, the debt liabilities of Fox
Express become the liabilities of Artel. Artel’s articles of incorporation are deemed to be
amended to include the terms stated in the articles of merger.
articles of incorporation of A&F Enterprises.
in whole or in part.
CHAPTER 6: MERGERS AND TAKEOVERS 3
in whole or in part.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Dissenting shareholder’s rights
Bonsetti has appraisal rights as a minority shareholder dissenting to the merger. The
shareholders of each corporation subject to a merger must approve the plan, by vote, at a
shareholders’ meeting. Most state statutes require the approval of two-thirds of the outstanding
shares of voting stock. If a shareholder disapproves of a merger but is outvoted by the other
shareholders, the dissenting shareholder is not forced to become an unwilling owner of a
corporation that is different from the one in which he or she originally invested. The shareholder
may be entitled to the fair value of the number of shares held on the date of the merger. This is
the shareholder’s appraisal right.
2A. Short-form merger procedure
A short-form merger would not be possible in this case. The Revised Model Business
Corporation Act provides a procedure for the merger of a substantially owned subsidiary
corporation into its parent. This short-form merger, or parent-subsidiary merger, can be
accomplished without the approval of the shareholders of either corporation. But it can be used
only when the parent owns at least 90 percent of the outstanding shares of the stock of the
subsidiary. Here, the corporations are not in a parent-subsidiary relationship and so a short-form
merger would not be possible.
3A. Acquiring corporation’s offer
Hula’s offer to purchase GVG stock is called a tender offer. An acquiring corporation can deal
directly with a target company’s shareholders in seeking to buy the shares they hold and gain
control of the target. The acquiring corporation does this by making a tender offer to all of the
shareholders of the target company.
4A. Surviving corporation’s liability
After a merger, the surviving corporation automatically acquires all of the merged corporation’s
property and assets without the necessity of a formal transfer. Also, the survivor becomes liable
for all of the disappearing corporation’s debts and obligations. Thus, the survivor in this problem
may be held liable for the injury suffered by the customer of the disappearing firm.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Corporate law should be altered to prohibit incumbent management from using
most of the legal methods available for fighting takeovers. Rarely will an outside group
attempt a corporate takeover if the target corporation is well run. For when a publicly held
corporation is well run, its stock price will be relatively high, thereby making it an uninviting
4 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
target for takeover. Therefore, if there is a takeover attempt, current management should be
prevented from using many popular defenses, all of which are utilized to benefit management as
opposed to shareholders.
Often, corporate takeover specialists will target a corporation, not for the benefit of
current shareholders, but as a quick “hit” that makes large short-run profits for the
former. Without any legal takeover defense tactics, current management cannot properly
defend the best interests of current shareholders (and employees, too). Takeover specialist
could therefore easily take over corporations, split them up and sell the parts off for a quick
profit.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. Macro Corporation and Micro Company combine, and a new organization, MM, Inc.,
takes their place. What is the term for this type of combination? What happens to the
assets, property, and liabilities of Micro? This combination is a consolidation in which two
corporations consolidate to form an entirely new organization. In the process, the two
corporations terminate, and a new entity comes into existence. The new entity inherits all of the
rights, privileges, and powers previously held by the disappearing firms. Title to any property
and assets owned by the disappearing firms passes to the new entity without a formal transfer.
The new entity assumes liability for all of the disappearing firms’ debts and obligations.
2A. Peppertree, Inc., hired Robert McClellan, a licensed contractor, to repair a
condominium complex that was damaged in an earthquake. McClellan completes the
work, but Peppertree fails to pay. McClellan is awarded $181,000 in an arbitration
proceeding. Peppertree then forms another corporation and transfers all of its assets to
the new corporation, without notifying McClellan. Can McClellan hold Peppertree’s
shareholders personally liable for the debt? Why or why not? If a corporation organizes
another corporation with practically the same shareholders and directors, transfers all the assets
but does not pay all the first corporation’s debts, and continues to carry on the same business,
the separate entities may be disregarded and the new corporation held liable for the obligations
of the old. The general rule is where one corporation sells or transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the former unless (1) the
purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a
consolidation or merger of the two corporations, (3) the purchasing corporation is merely a
continuation of the selling corporation, or (4) the transaction is entered into fraudulently to
escape liability for debts.
In certain instances of fraud, a court will further pierce the corporate veil (disregard the
corporate entity) and hold the shareholders personally liable. In this problem, it appears that the
new corporation was formed to avoid liability on the debt to McClellan. If so, the new corporation
CHAPTER 6: MERGERS AND TAKEOVERS 5
in whole or in part.
is liable, and the corporate veil may be pierced to hold the shareholders personally liable as
well.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
6-1A. Corporate merger
(Chapter 6—Page 99)
corporation. If Alir adheres strictly to statutory procedures, she has appraisal rights for the Ajax
shares she holds after approval of the merger. Alir’s appraisal rights entitle her to be paid by
6-2A. Purchase of assets
(Chapter 6—Page 100)
merger; (3) the successor may be considered a mere continuation of the predecessor; or (4) the
transaction was fraudulent. Here, PC was a mere continuation of Paradise Pools, Inc. (PPI). The
6-3A. Corporate takeover
(Chapter 6—Page 101)
purchase the shares they hold. A so-called takeover bid such as this is frequently subject to
state and federal securities regulations. Block could even make a tender offer (public offer)
6 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
use the patent.
6-4A. Successor liability
(Chapter 6—Page 100)
shareholders in the acquiring and acquired corporations. In this case, EMT assumed GFGA’s
assets and liabilities and was the successor corporation of GFGA. EMT was GFGA’s sole
unreturned funds.
6-5A. Dissolution
(Chapter 6—Page 105)
the two directors and sole shareholders, Richard Harris and Kenneth Stumpff, are deadlocked in
the management of the corporate affairs. . . . [T]here are two directors and two fifty-percent
Mahaffey’s. Harris also barred Stumpff from entering the business premises. Stumpff unilaterally
withdrew a substantial amount of funds from Mahaffey’s corporate account after he was
6-6A. Successor liability
(Chapter 6—Page 100)
pension fund under successor liability, the court should consider: (1) whether successor
CHAPTER 6: MERGERS AND TAKEOVERS 7
in whole or in part.
company had notice of the pension fund charge, (2) the predecessor’s ability to provide relief,
(3) whether there has been substantial continuity of business operations, (4) whether new
6-8A. A QUESTION OF ETHICS—Purchase of stock
(a) The shareholders argued that Topps’s failure to disclose certain facts about
Eisner’s offer and Topps’s deal with Upper Deck would affect the vote. In particular, Topps’
management’s failure to reveal the details of their negotiations with Eisner and Upper Deck, and
to accurately represent those details that were disclosed, would negatively affect the vote, in the
shareholders’ opinion. They complained that Topps denied its shareholders the chance to
decide for themselves whether to accept or reject the lower-priced Eisner offer or the higher-
priced offer from Upper Deck. In the court’s words, Topps’s conduct denied the shareholders the
chance to make a “mature, uncoerced” decision for themselves.
(b) The court concluded that an injunction against “the procession of the Eisner
Merger vote should issue until such time as: (1) the Topps board discloses several material
facts . . . regarding Eisner’s assurances that he would retain existing management after the
Merger; and (2) Upper Deck is [allowed to] (a) publicly [comment] on its negotiations with Topps;
and (b) [make] a non-coercive tender offer on conditions as favorable or more favorable than
those it has offered to the Topps board.” The court explained that the injunction was “warranted
8 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
to ensure that the Topps stockholders are not irreparably injured by the loss of an opportunity to
more attractive.” The court reasoned in part that Topps’s board likely breached its fiduciary
duties by prohibiting Upper Deck from communicating with Topps’s shareholders and presenting
a bid that those stockholders could find more favorable than the Eisner offer.
Why did Topps’s management do what it did? The court acknowledged that “Shorin and
treats workers and consumers well, or a commitment to product quality—will fare if the
corporation is placed under new stewardship.” The court noted that “[m]any people commit a
huge portion of their lives to a single large-scale business organization. They derive their identity
in part from that organization and feel that they contribute to the identity of the firm. The mission
“Although Shorin and the other defendants claim that they truly desire to get the highest
value and want nothing more than to get a topping bid from Upper Deck that they can accept,
their behavior belies those protestations. In reaching that conclusion, I rely not only on the
defendants’ apparent failure to undertake diligent good faith efforts at bargaining with Upper
the property of the corporation that ceases to exist will pass automatically to the surviving
corporation without a formal transfer being necessary. In addition, the debt liabilities of Fox
Express become the liabilities of Artel. Artel’s articles of incorporation are deemed to be
amended to include the terms stated in the articles of merger.
articles of incorporation of A&F Enterprises.