The Law of Corporations and Other Business Organizations

Chapter Review Answers

1. What is the difference between a consolidation
and a merger?

A merger is a combination of two or
more corporations whereby one of the
corporations survives (the surviving
corporation) and the other corporation
merges into the surviving corporation
and is dissolved (the merging corporation).
A consolidation involves the
merger of two or more corporations
into a newly formed corporation and
the subsequent disappearance of the
merging corporations.

2. What is the final relationship between
two corporations that were parties to a
share exchange?

The acquiring corporation becomes
the parent corporation, and the target
corporation becomes a subsidiary corporation.

3. What is a “surviving” corporation in a
merger transaction?

It is the corporation that the merging
corporation is merged into. It “survives”
the merger.

4. What general rights does a dissenting
shareholder have?

When shareholders object to certain
extraordinary actions being taken by
the corporation that affect them adversely,
they may be granted by statute
the right to dissent and to obtain payment
of the fair value of the shares
they hold.

5. What are the main purposes of the federal
antitrust laws?

They are to prevent unfair acts that
harm consumers, especially anticompetitive
acts that create monopolies.

6. Do all mergers and acquisitions require
shareholder approval?

No

Give examples.

Shareholder approval is not required
in the case of an upstream merger
when the parent corporation owns at
least 90 percent of the outstanding
stock of the subsidiary.

7. If the sole shareholder of Diane’s Auto
Parts, Inc., which holds 95 percent of the
stock of the D.G. Auto Parts Corporation,
decides to merge the two corporations
together, with Diane’s Auto Parts, Inc.
being the surviving corporation, what
type of merger would it be?

An upstream merger

Why are the requirements for shareholder
approval different for this type of merger?

The minority shareholders of the
merging corporations in this type of
merger would not have sufficient voting
power to block the merger.

8. What is a letter of intent?

It is a short document, often just a few
pages in length, that is entered into between
the proposed parties to a transaction
to set forth their preliminary
understanding and intent with regard
to the transaction.

9. What constitutes due diligence work?

Due diligence work includes the investigation
that is done to ascertain the
validity of statements made in an
agreement for merger, share exchange,
or asset or stock acquisitions.

10. Suppose that the shareholders of Kate’s
Household Products, Inc. are interested in
acquiring one of their biggest suppliers,
Nixon Chemical Corporation, but they
are concerned about past problems that
Nixon Chemical has had with toxic waste
disposal. What type of acquisition might
be the most beneficial to Kate’s Household
Products, Inc.?

An asset acquisition or other type of
transaction that would not transfer all
liabilities of the Nixon Chemical Corporation
to Kate’s Household Products,
Inc. would probably be beneficial
to Kate’s Household Products, Inc.

11. What are some possible disadvantages of
acquiring an auto dealership, or a corporation
that owns several pieces of real estate,
through an asset acquisition rather
than a stock acquisition transaction?

The transfer of title to numerous automobiles
or pieces of real estate could
make for a cumbersome transaction.