359
CHAPTER 41
CORPORATE MERGER, CONSOLIDATION,
AND TERMINATION
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 41.1—QUESTION (PAGE 800)
THE LEGAL ENVIRONMENT DIMENSION
Generally, a corporation that purchases the assets of another is not automatically responsible for the
liabilities of the selling corporation, with some exceptions. Which exception applied to this case?
CASE 41.2—QUESTIONS (PAGE 804)
1A. A corporation might do business under a variety of names. How strictly should the law require a
judgment to be issued against a corporation in its “true” name? This case involved a small claim pursued
by a plaintiff without the aid of a lawyer. The court acknowledged that “laymen often do not know the
360 UNIT EIGHT: BUSINESS ORGANIZATIONS
to include “but not be limited to maintaining signs at business premises or on business vehicles;
advertising; entering into contracts; and printing or using sales slips, checks, invoices or receipts.”
CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, AND TERMINATION 361
2A. Could a corporation’s former directors or shareholders, or its successors, avoid liability following
its informal dissolution by claiming that they did all they felt was necessary to protect its creditors? Why
or why not? No, because it is the failure to afford a creditor a sufficient opportunity for a review of his or
CASE 41.3—QUESTIONS (PAGE 806)
THE ETHICAL DIMENSION
Did Sartori or Stacy behave unethically toward the other or the corporation? Discuss. The lower court
concluded that Sartori breached his fiduciary duty to the corporation, causing damages in excess of
$4,600 (Stacy claimed the amount was more than $24,000, including $12,000 in lost profits, $4,600 for a
trailer repair, $3,600 for a rental trailer, $3,300 for permit fees, and miscellaneous other expenses), but
did not calculate or award a specific amount. The Montana Supreme Court reversed and remanded the
case for a determination of damages in the corporation’s favor. Sartori’s breach of fiduciary duty—
incorporating Brimstone as an S&S competitor, having S&S’s mail forwarded to Brimstone, transferring
S&S’s licenses to Brimstone, and attracting S&S’s customers to Brimstone—certainly constitutes
unethical conduct.
THE LEGAL ENVIRONMENT DIMENSION
At the time of the defendants’ appeal, S&S had twelve employees and, according to Stacy, its business
was thriving. Should the court have taken these factors into consideration when deciding whether to
order the dissolution of the firm? Explain. Yes, because the economic situation of an enterprise and the
effect of any decision on all of the interested parties, including employees and customers, should be
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
362 UNIT EIGHT: BUSINESS ORGANIZATIONS
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.
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 currently
legal methods to fight 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 target for takeover. Therefore, if there is a takeover attempt, cur-
rent 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
41-1A. Corporate acquisitions
(Chapter 41—Pages 796–798)
If Faraday acquires the stocks and assets of Firebrand, a merger will take place. Faraday will be the
surviving corporation, and Firebrand will disappear as a corporation. If Faraday and Firebrand combine
41-2A. QUESTION WITH SAMPLE ANSWER: Corporate merger
Ajax apparently has given shareholder Alir notice of the meeting for approval of the merger. In addition,
however, Ajax should have notified Alir of her right to dissent and of her right, should the merger be
41-3A. Corporate takeover
(Chapter 41—Page 801)
Block obviously cannot get Alitech’s patent by merger, and the present Alitech board of directors has
refused Block a license to use the patent. Therefore, Block’s best chance to gain the control and use of
41-4A. Successor liability
(Chapter 41—Pages 799–800)
The court granted the motion to amend the judgment. Northridge appealed to a state intermediate
appellate court, which affirmed the judgment. The appellate court explained that “if a corporation
41-5A. Corporate dissolution
(Chapter 41—Pages 805–806)
The court awarded Scott back wages and, when the parties were unable to reach an agreement, ordered
the dissolution of the corporation. Northwestern appealed to a state intermediate appellate court,
41-6A. Purchase of assets
(Chapter 41—Pages 799–800)
The court denied the motion to dismiss, and Paradise Corp. (PC) appealed to the Mississippi Supreme
41-7A. Successor liability
(Chapter 41—Pages 799–800)
Generally, a corporation that buys or otherwise acquires the assets of a second corporation does not
41-8A. CASE PROBLEM WITH SAMPLE ANSWER: Dissolution
The court issued a judgment that included an order to dissolve Mahaffey’s. On appeal, a state
intermediate appellate court upheld the lower court’s order. The appellate court pointed out that under
the applicable Ohio state statute, “to affirm the decision of the trial court ordering the judicial
41-9A. Successor liability
(Chapter 41—Pages 799–800)
No. There is no successor liability in this situation. The Watergate Hotel had ceased operations in 2007.
41-10A. 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
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 to ensure that the Topps stockholders are not
irreparably injured by the loss of an opportunity to make an informed decision and to avail themselves
of a higher-priced offer that they might find 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
CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, AND TERMINATION 367
rival. . . . More important, it is often the case that founders (and sons of founders) believe that their
businesses stand for something more than their stock price. Founders therefore often care how their
family legacy—in the form of a corporate culture that 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 of the firm is not seen by those involved with it as wholly economic,