Florida International University Corporate Law Takeovers Case Study

Mario Bonsetti and Rico Sanchez incorporated Gnarly Vulcan Gear, Inc. (GVG), to manufacture windsurfing equipment. Bonsetti owned 60 percent of the corporation’s stock, and Sanchez owned 40 percent. Both men served on the board of directors. Hula Boards, Inc., owned solely by Mai Jin Li, made a public offer to buy GVG stock. Hula offered 30 percent more than the market price per share for the stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the third member of the GVG board of directors. An irreconcilable dispute soon arose between Bonsetti and Sanchez over design modifications of their popular Baked Chameleon board. Despite Bonsetti’s dissent, Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, Gnarly Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information presented in the chapter, answer the following questions.

1. What rights does Bonsetti have (in most states) as a minority shareholder dissenting to the merger of GVG and Hula Boards?
2. Could the parties have used a short-form merger procedure in this situation? Why or why not?
3. What is the term used for Hula’s offer to purchase GVG stock?
4. Suppose that after the merger, a person who was injured on the Baked Chameleon board sued Hula (the surviving corporation). Can Hula be held liable for the injury? Why or why not

Debate This:Corporate law should be changed to prohibit management from using most of the legal methods currently used to fight takeover

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UNIT FIVE: Business Organizations
for the stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the
third member of the GVG board of directors. An irreconcilable dispute soon arose between Bonsetti
and Sanchez over design modifications of their popular Baked Chameleon board. Despite Bonsetti’s
dissent, Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, Gnarly
Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information
presented in the chapter, answer the following questions.
1. What rights does Bonsetti have (in most states) as a minority shareholder dissenting to the merger
of GVG and Hula Boards?
2. Could the parties have used a short-form merger procedure in this situation? Why or why not?
3. What is the term used for Hula’s offer to purchase GVG stock?
4. Suppose that after the merger, a person who was injured on the Baked Chameleon board sued Hula
(the surviving corporation). Can Hula be held liable for the injury? Why or why not?
Debate This
Corporate law should be changed to prohibit management from using most of the legal methods
currently used to fight takeovers.
Key Terms
appraisal right 830
consolidation 827
dissolution 834
merger 827
receiver 835
share exchange 827
short-form merger 829
takeover 833
tender offer 833
Chapter Summary: Corporate Mergers, Takeovers, and Termination
Merger,
Consolidation,
and Share
Exchange
1. Merger—The legal combination of two or more corporations, with the result that the surviving corporation
acquires all the assets and obligations of the other corporation, which then ceases to exist.
2. Consolidation—The legal combination of two or more corporations, with the result that each corporation
ceases to exist and a new one emerges. The new corporation assumes all the assets and obligations of the
former corporations.
3. Share exchange—Some or all of the shares of one corporation are exchanged for some or all of the shares of
another corporation, but both corporations continue to exist.
4. Procedure—Determined by state statutes.
5. Short-form merger—Possible when the parent corporation owns at least 90 percent of the outstanding shares
of each class of stock of the subsidiary corporation. Shareholder approval is not required. The merger need be
approved only by the board of directors of the parent corporation.
6. Appraisal rights—Rights of dissenting shareholders (given by state statute) to receive the fair value for their
shares when a merger or consolidation takes place.
Purchase
of Assets
A purchase of assets occurs when one corporation acquires all or substantially all of the assets of another corporation.
1. Acquiring corporation—The acquiring (purchasing) corporation is generally not required to obtain shareholder
approval. The corporation is merely increasing its assets, and no fundamental business change occurs.
2. Acquired corporation—The acquired (purchased) corporation is required to obtain the approval of both
its directors and its shareholders for the sale of its assets, because the sale will substantially change the
corporation’s business position.
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838
UNIT FIVE: Business Organizations
for the stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the
third member of the GVG board of directors. An irreconcilable dispute soon arose between Bonsetti
and Sanchez over design modifications of their popular Baked Chameleon board. Despite Bonsetti’s
dissent, Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, Gnarly
Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information
presented in the chapter, answer the following questions.
1. What rights does Bonsetti have (in most states) as a minority shareholder dissenting to the merger
of GVG and Hula Boards?
2. Could the parties have used a short-form merger procedure in this situation? Why or why not?
3. What is the term used for Hula’s offer to purchase GVG stock?
4. Suppose that after the merger, a person who was injured on the Baked Chameleon board sued Hula
(the surviving corporation). Can Hula be held liable for the injury? Why or why not?
Debate This
Corporate law should be changed to prohibit management from using most of the legal methods
currently used to fight takeovers.
Key Terms
appraisal right 830
consolidation 827
dissolution 834
merger 827
receiver 835
share exchange 827
short-form merger 829
takeover 833
tender offer 833
Chapter Summary: Corporate Mergers, Takeovers, and Termination
Merger,
Consolidation,
and Share
Exchange
1. Merger—The legal combination of two or more corporations, with the result that the surviving corporation
acquires all the assets and obligations of the other corporation, which then ceases to exist.
2. Consolidation—The legal combination of two or more corporations, with the result that each corporation
ceases to exist and a new one emerges. The new corporation assumes all the assets and obligations of the
former corporations.
3. Share exchange—Some or all of the shares of one corporation are exchanged for some or all of the shares of
another corporation, but both corporations continue to exist.
4. Procedure—Determined by state statutes.
5. Short-form merger—Possible when the parent corporation owns at least 90 percent of the outstanding shares
of each class of stock of the subsidiary corporation. Shareholder approval is not required. The merger need be
approved only by the board of directors of the parent corporation.
6. Appraisal rights—Rights of dissenting shareholders (given by state statute) to receive the fair value for their
shares when a merger or consolidation takes place.
Purchase
of Assets
A purchase of assets occurs when one corporation acquires all or substantially all of the assets of another corporation.
1. Acquiring corporation—The acquiring (purchasing) corporation is generally not required to obtain shareholder
approval. The corporation is merely increasing its assets, and no fundamental business change occurs.
2. Acquired corporation—The acquired (purchased) corporation is required to obtain the approval of both
its directors and its shareholders for the sale of its assets, because the sale will substantially change the
corporation’s business position.
CHAPTER 35: Corporate Mergers, Takeovers, and Termination
839
Takeovers
1. Purchase of stock—A purchase of stock occurs when one corporation acquires a substantial number of the
voting shares of the stock of another (target) corporation.
2. Tender offer—A public offer to all shareholders of the target corporation to purchase its stock at a price that
generally is higher than the market price of the target stock prior to the announcement of the tender offer.
Federal and state securities laws strictly control the terms, duration, and circumstances under which most
tender offers are made.
3. Target responses—Target corporations may respond to takeover bids in various ways, including
self-tender (the target firm’s offer to acquire its shareholders’ stock.) Other strategies are listed in Exhibit 35–3.
Corporate
Termination
The termination of a corporation involves the following two phases:
1. Dissolution—The legal death of the artificial “person” of the corporation. Dissolution can be brought about
voluntarily by the directors and shareholders or involuntarily by the state or through a court order.
2. Winding up (liquidation)—The process by which corporate assets are converted into cash and distributed to
creditors and shareholders according to specified rules of preference. May be supervised by members of the board
of directors (when dissolution is voluntary) or by a receiver appointed by the court to wind up corporate affairs.
Issue Spotters
1. Macro Corporation and Micro Company combine, and a new organization, MM, Inc., takes their place. What is the term for this type
of combination? What happens to the assets, property, and liabilities of Micro? (See Merger, Consolidation, and Share Exchange.)
2. Peppertree, Inc., hired Robert McClellan, a licensed contractor, to repair a condominium complex that was damaged in an earthquake.
McClellan completes the work, but Peppertree fails to pay. McClellan is awarded $181,000 in an arbitration proceeding. Peppertree
then forms another corporation and transfers all of its assets to the new corporation without notifying McClellan. Can McClellan hold
Peppertree’s shareholders personally liable for the debt? Why or why not? (See Takeovers.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.
Business Scenarios and Case Problems
35–1. Corporate Merger. Alir owns 10,000 shares of Ajax Corp.
Her shares represent a 10 percent ownership interest in Ajax.
Zeta Corp. wishes to acquire Ajax in a merger, and the board of
directors of each corporation has approved. The shareholders
of Zeta have already approved as well, and Ajax has called for
a shareholders’ meeting to vote on the merger. Alir disapproves
of the merger and does not want to accept Zeta shares for the
Ajax shares she holds. The market price of Ajax shares is $20
per share the day before the Ajax shareholder vote. On the day
of the vote, the shareholders approve the merger, and the share
price drops to $16. Discuss Alir’s rights in this matter, beginning
with the notice of the proposed merger. (See Merger, Consolidation, and Share Exchange.)
35–2. Purchase of Assets. Paradise Pools, Inc. (PPI) entered
into a contract with Vittorio, LLP, to build a pool as part of a
hotel being developed by Takahashi Development. PPI built
the pool, but Vittorio, the general contractor, defaulted on
other parts of the project. Takahashi completed the construction. Litigation followed, and Takahashi was awarded $18,656
against PPI. Meanwhile, Paradise Corp. (PC) was incorporated
with the same management as PPI, but different shareholders.
PC acquired PPI’s assets, without assuming its liabilities, and
soon became known as “Paradise Pools and Spas.” Takahashi
sought to obtain a writ of garnishment against PC to enforce
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the judgment against PPI. Is PC liable for PPI’s obligation to
Takahashi? Why or why not? (See Purchase of Assets.)
35–3. Corporate Takeover. Alitech Corp. is a small midwestern
business that owns a valuable patent. Alitech has approximately
1,000 shareholders with 100,000 authorized and outstanding
shares. Block Corp. would like to have the use of the patent,
but Alitech refuses to give Block a license. Block has tried to
acquire Alitech by purchasing Alitech’s assets, but Alitech’s
board of directors has refused to approve the acquisition.
Alitech’s shares are selling for $5 per share. Discuss how Block
Corp. might proceed to gain the control and use of Alitech’s
patent. (See Takeovers.)
35–4. Successor Liability. In 2004, the Watergate Hotel in
Washington, D.C., obtained a loan from PB Capital. At this
time, hotel employees were represented by a union. Under a
collective bargaining agreement, the hotel had agreed to make
contributions to an employees’ pension fund run by the union.
In 2007, the hotel was closed due to poor business, although
the owner stated that the hotel would reopen in 2010. Despite
this expectation, PB Capital—which was still owed $40 million by the hotel owner—instituted foreclosure proceedings.
At the foreclosure sale, PB Capital bought the hotel and
reopened it under new management and with a new workforce.
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