Mergers and Acquisitions

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Mergers and Acquisitions

• Professor Jack Williams
• Jwilliams_at_gsu.edu
• 404.651.2139

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Goals

• Develop an appreciation and understanding of
  business transactions
• Identify the strengths and weaknesses of the
  various forms of corporate transactions
• Identify the strengths and weaknesses of
  cross-entity combinations
• Learn how business (corporate, partnership and
  limited liability entity), securities, tax,
  accounting, antitrust and bankruptcy effect our
  decisions

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Goals contd

• Recognize the appropriate structures for any
  given business interest
• Understand the meaning and importance of due
  diligence
• Have fun and be safe

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Assignments

• Follow the casebook
• Skip Chapter 2, parts 3-4 Chapter 7, part 7.
• Our pace is about one chapter a week (except the
  first two weeks will focus on chapter 1)
• Deviations may be necessary and should be expected

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Exams

• Open book
• Part multiple choice, part short answer
• Class participation Up to 3 points

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What Forms Can an Acquisition Take?

• Why do you care?
• Many available forms of acquisition
• Which entity should survive?
• Financial realities of parties
• Voting and appraisal rights (Corporate law
  issues)
• Securities laws
• Tax consequences (tax-free and taxable)
• Antitrust issues
• Accounting and finance issues
• Bankruptcy issues
• Atmosphere (friendly or hostile)

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Taxonomy

• Business entity (Corp. A, Ptshp A, LLC A)
• Special purpose vehicle (New Co. or NC)
• Target (T)
• Surviving Corp. (SC)
• Finance vehicle (FI(s) or (u), BF, EF, or OF)
• Shareholders (S/H)
• Bondholders (B/H)
• Noteholders (N/H)

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Various Structures Overview

• Purchase assets
• Purchase equity
• Open market purchase
• Privately negotiated transaction
• Tender offer
• Share exchange (combine two sets of shareholders
• Combination (merger or consolidation)

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Team Focus

• Convenience of competing procedures
• Contractual limitations, e.g., defaults, due on
  sale, etc.
• Liability exposure
• Contingent liabilities, emerging theories of
  liability
• Shareholder voting
• State rights
• NYSE 20 rule
• Minority or Dissenting S/H rights
• Minority s/h has fairness issues
• Dissenting s/h may have appraisal rights

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Team Focus contd

• Securities law
• Generally triggered where transaction is anything
  other than cash-for-assets sale
• Securities Act of 1933
• Registration requirement for public offering plus
  extensive disclosure document
• Exemptions may apply
• Any transaction that triggers s/h vote of public
  company, then proxy disclosures required by
  section 14 of Securities Exchange Act of 1934
• Acq. corp. purchases shares of public co., then
  sections 13(d) (general) and 14(d) and (e)
  (tender offers) of 1934 Act must be met (Williams
  Amendments)

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Team Focus contd

• Securities law (contd)
• Any sale or exchange of securities requires
  assessment of antifraud proscriptions in SEC Rule
  10b-5
• Any sale or exchange of securities requires an
  assessment of insider short-swing profit
  provisions of Section 16b of the Securities
  Exchange Act of 1934

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Team Focus contd

• Tax issues
• General rule Any combination is a taxable event
• Special rule Nontaxable transaction
• Nontaxable means deferred
• IRC section 368

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Team Focus contd

• Tax taxonomy
• A reorgs Mergers and consolidations (entitled
  to tax deferred treatment under IRC 368(a))
• B reorgs Exchange of shares may be subject to
  368(b)
• C reorgs Purchase of assets
• D reorgs Spin-offs, split-offs, and split-ups
• E reorgs Recapitalization

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Team focus contd

• Antitrust issues
• Hart-Scott-Rodino Act
• Pre-acq notification to the FTC
• Industry-specific clearances from applicable
  agencies

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Team Focus contd

• Accounting issues
• Purchase method
• Goodwill

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Team Focus contd

• Bankruptcy issues
• Control future liabilities
• Terminate successor liabilities

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Merger

• A Corp B Corp. A Corp

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Consolidation

• A Corp B Corp New Co.

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Triangular Merger

• Acquirer creates New Co (Phantom Corp), a
  subsidiary
• Transfer shares in P to New Co to be used for
  share exchange for merger plan

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Forward Triangular Merger

• Merger transaction between New Co and Target
• T merged into New Co
• Merger plan requires conversion of prior T shares
  into P shares (those shares with which New Co was
  funded)
• P has complete ownership of the merged entity

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Reverse Triangular Merger

• New Co merged into Target
• T shares converted to P shares
• P has complete ownership of merged entity

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Comparisons

• Mergers and consolidations result in one
  corporate entity
• Triangular mergers result in two corporate
  entities in the parent/sub form
• Follow up with short form merger where sub is
  merged in parent

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Triangular v. Two-Party Merger

• No automatic assumption of liabilities
• Ps shareholders do not vote and have no
  appraisal rights (P is not a party to the merger)
• Option to keep New Co in existence

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Triangular v. Asset Purchase

• Flexibility in consideration
• Tax free (relative) status of share exchange for
  Ts shareholders
• T can remain in existence, thus not triggering
  termination clauses
• Ps shareholders do not vote
• BUT T shareholders may have voting and
  appraisal rights

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Triangular v. Stock Acquisition

• Flexibility in consideration
• Tax free (relative) status of share exchange for
  Ts shareholders
• P is assured of 100 control of ownership
• Proportionality of shares
• BUT Ts shareholders have voting and appraisal
  rights

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Cross- Entity Combinations

• Corp.
• Ptshp
• General
• Limited
• Sole proprietorship
• LLC
• LLP
• LLLP

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Cross-Entity Combinations contd

• Self-contained model
• Junction model

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Sale of Asset Transactions

• Regular course No s/h approval
• Outside regular course Possible s/h approval
  and appraisal rights (but not in DE)
• Sale of substantially all the assets
• Sale must not be in the ordinary course

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Sale of Substantially All Assets

• Gimbel v. The Signal Companies, Inc.
• Test Is the sale of assets quantitatively vital
  to the operation of the corporation and is it out
  of the ordinary and substantially affects the
  existence and purpose of the corporation.
• Primary income generating asset
• 68 of assets

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Sale of Substantially All Assets contd

• MBCA disposition would leave the corporation
  without a significant continuing business
  activity.
• Safe harbor MBCA test met if the business
  activity represents at lest 25 of total assets
  and 25 of either income (before income taxes) or
  revenues from pre-transaction operations

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The Case of Unwanted Assets

• Type D reorg (IRC)
• Spin off
• Subs shares distributed to P shareholders as a
  dividend
• Split off
• Some of Ps shareholders exchange shares for
  shares in Sub
• After split off, some of Ps shareholders
  continue to own stock in P and while others own
  stock in what was formerly the Sub
• Split up
• Assets divided into two Subs
• P liquidates, passing on Subs shares to Ps
  shareholders as liquidating dividend

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Due Diligence

• Identifying the deal
• Identifying the impediments
• Assistance in drafting
• Identifying liabilities
• Organizational status
• Material contracts
• Labor

• Employee benefits
• Litigation
• Environmental and Safety
• Tax
• Intellectual property
• Real Estate
• Bankruptcy risk

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Conclusion