Dynamic business law 4e kubasek 4e CH40

Chapter 40
Corporations: Mergers,
Consolidations, Terminations

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Overview
• LO40-1: What are mergers and
consolidations?
• LO40-2: What are the procedures for
mergers and consolidations?
• LO40-3: What are asset purchases?
• LO40-4: What are stock purchases?
• LO40-5: What is a takeover?
• LO40-6: In what ways could the termination
of mergers and consolidations occur?

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Chapter 40 Hypothetical Case 1
• As this chapter indicates, hostile takeovers are
corporate takeovers to which the management
of the target corporation objects. When a hostile
takeover succeeds, the target corporation's
management frequently compares the transition
to a full-scale invasion characterized by layoffs
and dramatic changes in company policy.
• Is a hostile takeover an ethical business practice?

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Chapter 40 Hypothetical Case 2
• Minisoft Corporation and Pear, Inc. are the two largest computer companies
in the United States. Pending Department of Justice antitrust review, the two
corporations plan to merge, renaming their company Mini-Pear, Inc. As an
integral part of the merger, existing shareholders of Minisoft Corporation
and Pear, Inc. will be offered an even stock swap. Per the terms of the
proposed trade, current shareholders of Minisoft Corporation and Pear, Inc.
will exchange each share of their company's stock for one share of MiniPear, Inc. stock.
A few shareholders of both Minisoft Corporation and Pear, Inc. do not
approve of the terms of the proposed merger, nor do they approve of the
merger itself. The vast majority of shareholders of companies approve of the
merger.
• What rights do these shareholders have, either in terms of blocking the
merger or in terms of estimating the fair value of their existing shares?

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What Are Mergers and
Consolidations?
• Merger: Legal contract combining two or
more corporations such that only one of the
corporations continues to exist; in essence,
one corporation absorbs another corporation
• Consolidation: Legal contract combining two
or more corporations, resulting in an entirely
new corporation; in consolidation, neither of

the original corporations continues to exist
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Procedures for Mergers and
Consolidations
• Boards of directors of all involved corporations must
approve the plan
• Shareholders must approve the plan through a vote
at a shareholder meeting
• The corporations must submit their plan to the
secretary of state
• The state must review the plan and, if it satisfies
legal requirements, grant an approval certificate
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Terminology and Rights Regarding
Mergers and Consolidations
• Rights of shareholders: Shareholders vote only
on exceptional matters regarding the corporation
• Short-form merger (parent-subsidiary merger):
Parent corporation merges with a subsidiary
corporation; does not require shareholder
approval
• Appraisal right: Shareholder's right to have
his/her shares appraised, and to receive
monetary compensation for their value
40-7

Purchase of Assets and Stock
• Purchase of assets: One corporation can extend its
business operations by purchasing the assets of
another company
• Corporate assets: All intangible items (corporate
goodwill, company name, company logo, etc.) and
tangible items (buildings, property, etc.) owned by the
corporation
• Note: Generally, corporation that purchases assets of
another corporation does not acquire its liabilities

• Purchase of stock: An acquiring corporation can take
control of another corporation by purchasing a
substantial amount of its voting stock

40-8


Types of Takeovers
• Hostile takeover: A takeover to which management of the
target corporation objects
• Tender offer: Aggressor (acquiring corporation) offers target
shareholders a price above current market value of their
stock
• Exchange offer: Aggressor offers to exchange target
shareholders' current stock for stock in aggressor's
corporation
• Cash tender offer: Aggressor offers target shareholders cash
for their stock

• Beachhead acquisition: Aggressor gradually accumulates
target company's shares

40-9


Responses to Takeovers
• Self-tender offer: Response to corporate takeover
attempt in which target corporation offers to buy its
shareholders' stock; if shareholders accept offer,
target corporation maintains control of business
• Leveraged buyout: Occurs when group within a
corporation (usually management) buys all
outstanding corporate stock held by the public;
group gains control over corporate operations by
going private (i.e., becoming a privately held
corporation)

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Termination of Mergers and
Acquisitions
• Dissolution: Legal termination of
corporation
• Two types: Voluntary and involuntary

• Liquidation: Process by which trustee
converts corporation's assets into cash,
and distributes them among corporation's

creditors and shareholders
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Voluntary versus Involuntary
Dissolution
• Voluntary dissolution: Occurs when
directors or shareholders initiate the
dissolution process
• Involuntary dissolution: State government
forces the corporation to close

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Reasons for State-Initiated
Involuntary Dissolution
• Corporation failed to pay taxes within 60 days of due
date
• Corporation failed to submit its annual report to
secretary of state with 60 days of due date
• Corporation did not have a registered agent or office in
the state for 60 days or more
• Corporation failed to notify secretary of state within 60
days that its registered agent/registered office had
changed
• Corporation's duration (as specified in its articles of
incorporation) has expired

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Reasons for Court-Ordered
Involuntary Dissolution
• Corporation obtained its articles of
incorporation fraudulently
• Corporate directors have abused their
power
• Corporation is insolvent

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Life Stages of a Corporation
• Incorporation: Company becomes incorporated when
articles of incorporation signed
• Corporation conducts business: Directors and officers
oversee business, as shareholders ensure company's
stock has value
• Dissolution: Corporation legally terminated, either
voluntarily or involuntarily
• Liquidation: Directors convert corporate assets into cash
and distribute them among corporation's creditors and
shareholders
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Chapter 40 Hypothetical Case 3
• Several circumstances can trigger a state government's right to involuntarily dissolve a
corporation headquartered in its state, including: (1) the corporation fails to pay taxes

within 60 days of the government-imposed deadline; (2) the corporation fails to submit its
annual report to the secretary of state within 60 days of the report's due date; (3) the
corporation does not have a registered agent or office in the state for 60 days or more; (4)
the corporation fails to notify the secretary of state within 60 days that its registered agent
and/or registered office has changed; or (5) the corporation's duration, as specified in its
articles of incorporation, has expired.
Arguably, many of the described triggering events are technicalities, and inquiring minds
might wonder why a state government would make such a drastic decision to revoke a
corporate charter, especially when it would jeopardize the livelihood of corporate
employees, as well as future corporate tax payments to the state. The absence of those
corporate tax dollars could jeopardize government social programs, which could negatively
affect scores of citizens who need access to those programs.
• In light of the potential negative impact on the community, how readily should a state
government use its involuntary corporate dissolution right?

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Chapter 40 Hypothetical Case 4
• Clothing manufacturer Wooltek has coveted textile manufacturer
Veltron since it developed a new miracle fiber, FabriSense. The new
fiber, and the fabric made from it, has amazing properties, including
being completely water-resistant, never wrinkling or bagging, and
resisting virtually all stains.
Wooltek decides to take over Veltron, a publicly traded company. It
begins by purchasing a large number of Veltron shares over the
course of a three-month period.
• Which type of takeover is Wooltek attempting: tender offer,
exchange offer, cash tender offer, beachhead acquisition, or hostile
takeover? What is Wooltek's next likely move in the takeover

process?

4017