The Law of Corporations and Other Business Organizations

Lecture Notes

Mergers and Acquisitions in the United
States
1. Mergers and acquisitions take place in
the United States with increasing frequency.
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. Mergers
may also involve noncorporate entities,
such as limited liability companies.
4. A merger is a combination of two or
more corporations whereby one of the
corporations survives (the surviving corporation),
and the other merges into it
and ceases to exist (the merging corporation).
5. The shareholders of the merging corporation
usually give up their shares of stock
and receive shares of the surviving corporation
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.
7. When a parent corporation merges into a
subsidiary corporation it is referred to as
a downstream merger.
8. A triangle merger involves three corporations.
A subsidiary corporation is used to
acquire a target corporation. The parent
corporation funds the subsidiary corporation
with cash or shares of stock. The target
corporation is then merged into the subsidiary
corporation. The parent and subsidiary
corporation are both surviving corporations.
9. In a reverse triangle merger, the subsidiary
is merged into the target corporation,
which then becomes a subsidiary of the
parent corporation. The target corporation
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 Acquisitions
11. State statutes usually address the following
with regard to statutory mergers and acquisitions:
• 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 Federal
Trade Commission and the Department
of Justice have responsibility for
overseeing the enforcement of federal antitrust
statutes.
13. The Federal Trade Commission (FTC)
was created by the Federal Trade Commission
Act in 1914 to guard the marketplace
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 Improvement
Act of 1976, provides that notice of
certain contemplated mergers and acquisitions
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 between
two unrelated parties is contemplated,
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 Exchange
18. The plan of merger or plan of share exchange
is typically required by state statutes
to conduct merger or share exchange
transactions.
19. The plan of merger or plan of share exchange
typically sets forth in detail the
agreement between the merging corporations
or the corporations involved in the
share exchange.
Board of Director and Shareholder Approval
of the Merger or Share Exchange
20. Statutory mergers and statutory share exchanges,
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 exchange
are executed and filed with the
secretary of state or other appropriate
state authority to effect a statutory merger
or share exchange.
Due Diligence and Preclosing Matters
23. The investigation and examination of
documents prior to the closing of a merger
or acquisition transaction is referred
to as the due diligence process. Due diligence
refers to the standard of care that
must be exercised by each responsible
party. In addition to reviewing the documents
provided, due diligence often involves
on-site investigations to inspect
the real estate, buildings, assets, and inventory
involved in the transaction.
Closing the Merger or Share Exchange
Transaction
24. Merger and share exchange closings are
often attended by key officers and shareholders
from each corporation, and attorneys
and paralegals representing both
corporations. The following tasks are
usually completed at a closing of a merger
or share exchange:
• The shares of stock change hands.
• Assignments and transfers of contracts
and real and personal property
are executed and given to the appropriate
individuals.
• Cash is paid to the appropriate individuals.
• 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 purchase
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 purchase
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 purchase
or take over another corporation
against the wishes of the management
and board of directors of the target corporation,
the transaction is referred to as a
hostile takeover.
29. Defensive measures adopted by a corporation
to deflect hostile takeovers are
sometimes referred to as shark repellants.
30. The de facto merger doctrine allows
courts to view a transaction as a merger if
it has the characteristics of a merger, regardless
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 letter
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
set forth details concerning the corporation
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 noncorporate
entities to corporations. Conversions
generally require the consent of the owners
of each entity and the board of directors/
managers of each entity.
35. Statutes also typically provide for domestication,
the procedure to change a corporation’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 importance
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 transferred
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 purchased
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 extensively
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 petitioner
as corporate successor to Philip Carey.
The jury, in addition to compensatory damages
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 successor
of Philip Carey, contravenes the purpose
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 assume
all debts, liabilities, and duties of Panacon.
When a corporation voluntarily chooses a
formal merger, it must take the “bad will”
along with the “goodwill.”