FIU Business Law Corporate Law Takeovers Discussion

• Debate This:Corporate law should be changed to prohibit management from using most of the legal methods currently used to fight takeover
• Part A: Chapter 35, p.838

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.

PART B: write an opinion about the following post one of my classmate wrote about chapter 35 :

Takeovers are done according to the law. Challenging them requires the use of legal methods. Corporate law should not be amended to prohibit the management from using legal methods to challenge the takeover. The only way that fairness can prevail among the shareholders is if the legal methods are used in resolving the disputes that emerge among them (Miller, 2021). Corporate law outlines the procedure that should be used in takeovers. Management is supposed to follow these procedures. If the management has followed the procedures in takeovers, the takeovers cannot be challenged. Using legal methods to challenge the takeover would have outcomes that are favorable to the management. If the use of legal methods by the management is prohibited, the decision made would be unfavorable to the management (Miller, 2021). When the legal methods are not used in challenging the takeover, the rights that the parties have, especially the shareholders are disregarded. Using legal methods, rights are accurately determined. Legally, the merger decisions require shareholder approval in the acquired corporation. The approval is not required in the acquiring corporation. Bonsetti is not entitled to the right to fight the takeover since he is a shareholder in the acquiring corporation. Prohibiting management from using legal methods to fight the takeover would make the takeover be seen as unacceptable. Shareholders’ approval would be required on both sides. This may lead to the delay of the takeover since there is disagreement in the acquiring corporation (Miller, 2021). What happened, in this case, was not a short-form merger. GVG did not own over 90% of the stocks in the subsidiary corporation. Once a takeover happens, the original corporation is dissolved. Subsequently, its corporate assets are distributed to the shareholders. This ensures justice to the shareholders. Certainly, fairness will only prevail when legal methods are used.

Stock photo © Maxiphoto
35
Learning Objectives
The four Learning Objectives below
are designed to help improve your
understanding of the chapter. After reading
this chapter, you should be able to answer
the following questions:
1. What are the basic differences between a merger, a
consolidation, and a share
exchange?
2. Under what circumstances
is a corporation that purchases the assets of another
corporation responsible for
the liabilities of the selling
corporation?
3. What actions might a target
corporation take to resist a
takeover attempt?
4. What are the two ways in
which a corporation can be
voluntarily dissolved?
Corporate Mergers,
Takeovers, and Termination
“Business is a
combination of war
and sport.”
During the later part of the twentieth century, the acquisition of corporations by other corporations became a common
phenomenon, and corporate takeovers have continued into
the twenty-first century. Observers of the numerous corporate takeovers occurring in the business world today might
André Maurois
1885–1967
well conclude, as André Maurois did in the chapter-opening
(French author and historian)
quotation, that business is indeed a “combination of war
and sport.”
A corporation often extends its operations by combining with another corporation
through a merger, a consolidation, a share exchange, a purchase of assets, or a purchase of a
controlling interest in the other corporation. This chapter will examine these types of corporate expansion. Dissolution and winding up (liquidation) are the combined processes by
which a corporation terminates its existence. The latter part of this chapter will discuss the
typical reasons for—and methods used in—terminating a corporation’s existence.
35–1
Merger, Consolidation, and Share Exchange
A corporation may extend its operations by combining with another corporation through a
merger, a consolidation, or a share exchange. The terms merger and consolidation traditionally
referred to two legally distinct proceedings, but some people today use the term consolidation
to refer to all types of combinations. Whether a combination is a merger, a consolidation, or
a share exchange, the rights and liabilities of shareholders, the corporation, and the corporation’s creditors are the same.
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CHAPTER 35: Corporate Mergers, Takeovers, and Termination
35–1a Merger
A merger involves the legal combination of two or more corporations in such a way that only
one of the corporations continues to exist. Example 35.1 Corporation A and Corporation B
decide to merge. They agree that A will absorb B. Therefore, on merging, B ceases to exist as
a separate entity, and A continues as the surviving corporation. ■ Exhibit 35–1 graphically
illustrates this process.
One of the Firms Survives Continuing with Example 35.1, after the merger, Cor-
Merger The legal combination of
two or more corporations in such a
way that only one corporation (the
surviving corporation) continues
to exist.
Exhibit 35–1 Merger
poration A—the surviving corporation—is recognized as a single corporation, and B no
longer exists as an entity. A’s articles of incorporation are deemed amended to include
any changes stated in the articles of merger (a document setting forth the terms and
conditions of the merger). Corporation A will issue shares or pay some fair consideration
to the shareholders of B.
A
It Inherits All Legal Rights and Obligations of the Other Firm After the merger,
B
A
Corporation A possesses all of the rights, privileges, and powers of itself and B. It automatically acquires all of B’s property and assets without the necessity of a formal transfer.
In addition, it becomes liable for all of B’s debts and obligations, and it inherits B’s preexisting legal rights. Thus, if Corporation B had a right of action against a third party under
tort or property law, Corporation A can bring a suit after the merger to recover B’s damages.
35–1b Consolidation
In a consolidation, two or more corporations combine in such a way that each corporation
ceases to exist and a new one emerges. Example 35.2 Corporation A and Corporation B consolidate to form an entirely new organization, Corporation C. In the process, A and B both
terminate, and C comes into existence as an entirely new entity. ■ Exhibit 35–2 graphically
illustrates this process.
A New Corporation Is Formed The results of a consolidation are similar to those of a
Consolidation The legal combi-
nation of two or more corporations
in such a way that the original
corporations cease to exist, and a
new corporation emerges with all
their assets and liabilities.
Exhibit 35–2 Consolidation
merger—only one company remains—but it is a completely new entity (the consolidated
corporation). In terms of Example 35.2, Corporation C is recognized as a new corporation, while A and B cease to exist. C’s articles of consolidation take the place of A’s and
B’s original corporate articles and are thereafter regarded as C’s corporate articles. As with
a merger, the newly formed corporation will issue shares or pay some fair consideration
to the shareholders of the disappearing corporations.
A
C
B
It Inherits All Rights and Liabilities of Both Predecessors Corporation C inherits all of the rights, privileges, and powers previously held by A and B. Title to any
property and assets owned by A and B passes to C without a formal transfer. C assumes
liability for all debts and obligations owed by A and B.
True consolidations have become less common among for-profit corporations because
it is often advantageous for one of the combining firms to survive. In contrast, nonprofit
corporations and associations may prefer consolidation because it suggests a new beginning
in which neither of the two initial entities is dominant.
35–1c Share Exchange
In a 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 companies continue to exist. Share
exchanges are often used to create holding companies—that is, a company whose business
activities is holding shares in another company. For instance, UAL Corporation is a large
Learning Objective 1
What are the basic
differences between a
merger, a consolidation, and
a share exchange?
Share Exchange A transaction in
which 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.
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UNIT FIVE: Business Organizations
holding company that owns United Airlines. If one corporation owns all of the shares of
another corporation, it is referred to as the parent corporation, and the wholly owned company is the subsidiary corporation.
35–1d Merger, Consolidation, and Share Exchange Procedures
All states have statutes authorizing mergers, consolidations, and share exchanges for domestic (in-state) and foreign (out-of-state) corporations. The procedures vary somewhat among
jurisdictions. In some states, a consolidation resulting in an entirely new corporation simply
follows the initial incorporation procedures, whereas other business combinations must
follow the procedures outlined below.
The Revised Model Business Corporation Act (RMBCA) is used by the majority of states
to govern corporate formation and operations. The RMBCA sets forth the following basic
requirements:
1. The board of directors of each corporation involved must approve the merger or consolidation plan.
2. The plan must specify any terms and conditions of the merger. It also must state how the value of
the shares of each merging corporation will be determined and how they will be converted into
shares or other securities, cash, property, or other interests in another corporation.
3. The majority of the shareholders of each corporation must vote to approve the plan at a shareholders’
meeting. If any class of stock is entitled to vote as a separate group, the majority of each separate
voting group must approve the plan.
Although RMBCA 11.04(e) requires the approval of only a simple majority of the shareholders
entitled to vote once a quorum is present, frequently a corporation’s articles of incorporation or
bylaws require approval by more than a simple majority. In addition, some state statutes require the
approval of two-thirds of the outstanding shares of voting stock, and others require a four-fifths vote.
4. Once the plan is approved by the directors and the shareholders of both corporations, the surviving
corporation files the plan (articles of merger, consolidation, or share exchange) with the appropriate
official, usually the secretary of state.
5. When state formalities are satisfied, the state issues a certificate of merger to the surviving corporation or a certificate of consolidation to the newly consolidated corporation.
Note that when a merger or consolidation takes place, the surviving corporation or newly
formed corporation will issue shares or pay some fair consideration to the shareholders of
the corporation or corporations that cease to exist.
In the following case, the attorneys for a group of shareholders argued that the plaintiffs
had not been given enough information before they were asked to vote on a proposed merger.
Case 35.1
In re Trulia, Inc. Stockholder Litigation
Court of Chancery of Delaware, 129 A.3d 884 (2016).
Background and Facts Trulia, Inc. is an online provider
of information on homes for sale or rent in the United States.
Zillow, Inc. is a real estate marketplace that helps house buyers,
sellers, landlords, and others find and share information. Zillow
proposed to acquire Trulia. When the deal was announced
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publicly, complaints filed in a Delaware state court on behalf
of Trulia shareholders alleged that the company’s directors had
breached their fiduciary duties in approving the proposed merger.
Attorneys for a group of shareholders argued that the plaintiffs
had not been given enough information before they were asked
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CHAPTER 35: Corporate Mergers, Takeovers, and Termination
to vote on the proposal. The court was asked to enjoin Zillow’s
acquisition. The parties agreed to settle. Trulia would supplement the proxy materials provided to the shareholders before
the vote to include additional information. In exchange, the
plaintiffs would drop their request for an injunction and agree
to release any claims arising from the transaction that they, as a
class, might otherwise have.
In the Words of the Court
BOUCHARD, C. [Chancellor]
****
Under Delaware law, when directors solicit stockholder
action, they must disclose fully and fairly all material information within the board’s control. * * * Information is material
if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.
In other words, information is material if, from the perspective
of a reasonable stockholder, there is a substantial likelihood
that it significantly alters the total mix of information made
available. [Emphasis added.]
Here, the * * * Proxy that Trulia and Zillow stockholders
received in advance of their respective stockholders’ meetings to
consider whether to approve the proposed transaction ran 224
pages in length, excluding annexes. It contained extensive discussion concerning, among other things, the background of the
mergers, each board’s reasons for recommending approval of the
proposed transaction, prospective financial information concerning the companies that had been reviewed by their respective
boards and financial advisors, and explanations of the opinions of
each company’s financial advisor.
The Supplemental Disclosures plaintiffs obtained in this case
solely concern the section of the Proxy summarizing J.P. Morgan’s
financial analysis, which the Trulia board cited as one of the factors it considered in deciding to recommend approval of the proposed merger. Specifically, these disclosures provided additional
details concerning * * * J.P. Morgan’s * * * analysis.
* * * Under Delaware law, when the board relies on the
advice of a financial advisor in making a decision that requires
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stockholder action, those stockholders are entitled to receive in
the proxy statement a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or
tender rely.
A fair summary, however, is a summary. By definition, it
need not contain all information underlying the financial advisor’s opinion or contained in its report to the board. * * * A fair
summary is not a cornucopia [abundance] of financial data, but
rather an accurate description of the advisor’s methodology
and key assumptions. * * * Disclosures that provide extraneous
[inessential] details do not contribute to a fair summary and do not
add value for stockholders.
****
* * * The disclosures in the original Proxy already provided
a fair summary of J.P. Morgan’s methodology and assumptions
* * *. Inserting additional minutiae [intricacies] underlying some
of the assumptions could not reasonably have been expected to
significantly alter the total mix of information and thus was not
material. * * * The supplemental information was not even helpful
to stockholders.
Decision and Remedy The court denied approval of the
settlement. The additional information in the supplemental disclosures did not warrant a release of all claims against the defendants. “Accordingly, * * * the proposed settlement is not fair or
reasonable to Trulia’s stockholders.”
Critical Thinking
t
Legal Environment When the parties to a dispute agree to
a settlement, they share the same interest in obtaining the court’s
approval. What are the advantages and disadvantages of this
situation?
t
Economic In the Trulia case, the settlement, if approved,
would not have yielded any genuine benefit for the shareholders.
If the court had approved the settlement, however, who would
have benefited?
Short-Form Merger A merger that
35–1e Short-Form Mergers
RMBCA 11.04 provides a simplified procedure for the merger of a substantially owned subsidiary corporation into its parent corporation. Under these provisions, a short-form merger—
also referred to as a parent-subsidiary merger—can be accomplished without the approval of
the shareholders of either corporation.
30301_ch35_hr_826-840.indd 829
can be accomplished without the
approval of the shareholders of either
corporation because one company
(the parent corporation) owns at
least 90 percent of the outstanding
shares of each class of stock of the
other corporation (the subsidiary
corporation).
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UNIT FIVE: Business Organizations
The short-form merger can be used only when the parent corporation owns at least 90
percent of the outstanding shares of each class of stock of the subsidiary corporation. Once
the board of directors of the parent corporation approves the plan, it is filed with the state,
and copies are sent to each shareholder of record in the subsidiary corporation.
Know This
35–1f Shareholder Approval
State statutes, articles
of incorporation, and
corporate bylaws can
require the approval
of more than a simple
majority of shares for
some extraordinary
matters.
As mentioned, except in a short-form merger, the shareholders of both corporations must
approve a merger or consolidation plan. Shareholders invest in a corporation with the expectation that the board of directors will manage the enterprise and make decisions on ordinary
business matters. For extraordinary matters, normally both the board of directors and the
shareholders must approve the transaction.
Mergers and other combinations are extraordinary business matters, meaning that the
board of directors must normally obtain the shareholders’ approval and provide appraisal
rights (discussed next). Amendments to the articles of incorporation and the dissolution of
the corporation also generally require shareholder approval.
Sometimes, a transaction can be structured in such a way that shareholder approval is
not required, but if the shareholders challenge the transaction, a court might use its equity
powers to require shareholder approval. For this reason, the board of directors may request
shareholder approval even when it might not be legally required.
35–1g Appraisal Rights
Appraisal Right The right of a
dissenting shareholder, who objects
to a merger or consolidation of
the corporation, to have his or her
shares appraised and to be paid
the fair value of those shares by the
corporation.
What if a shareholder disapproves of a merger or a consolidation but is outvoted by the
other shareholders? The law recognizes that a dissenting shareholder should not be forced
to become an unwilling shareholder in a corporation that is new or different from the one
in which the shareholder originally invested. Dissenting shareholders therefore are given
a statutory right to be paid the fair value of the shares they held on the date of the merger
or consolidation. This right is referred to as the shareholder’s appraisal right. So long as the
transaction does not involve fraud or other illegal conduct, appraisal rights are the exclusive
remedy for a shareholder who is dissatisfied with the price received for the stock.
When Appraisal Rights Apply Appraisal rights normally extend to regular mergers,
consolidations, share exchanges, short-form mergers, and sales of substantially all of the
corporate assets not in the ordinary course of business. Such rights can be particularly
important in a short-form merger because the minority stockholders do not receive advance
notice of the merger, the directors do not consider or approve it, and there is no vote.
Appraisal rights are often the only recourse available to shareholders who object to parent-subsidiary mergers.
Procedures Each state establishes the procedures for asserting appraisal rights in that
jurisdiction. Shareholders may lose their appraisal rights if they do not adhere precisely to
the procedures prescribed by statute. When they lose the right to an appraisal, dissenting
shareholders must go along with the transaction despite their objections.
35–2
Purchase of Assets
When a corporation acquires all or substantially all of the assets of another corporation by
direct purchase, the purchasing, or acquiring, corporation simply extends its ownership and
control over more physical assets. Because no change in the legal entity occurs, the acquiring
corporation is not generally required to obtain shareholder approval for the purchase.
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CHAPTER 35: Corporate Mergers, Takeovers, and Termination
35–2a When Shareholder Approval May Be Required
Shareholder approval may be required in a few situations, however. If the acquiring corporation plans to pay for the assets with its own corporate stock and not enough authorized unissued shares are available, the shareholders must vote to approve the issuance of additional
shares by amendment of the corporate articles. Also, if the acquiring corporation’s stock is
traded on a national stock exchange and it will be issuing a significant number (at least 20
percent) of its outstanding shares, shareholder approval can be required.
Note that the corporation that is selling all of its assets is substantially changing its business position and perhaps its ability to carry out its corporate purposes. For that reason, the
corporation whose assets are being sold must obtain the approval of both the board of directors and the shareholders. In most states and under RMBCA 13.02, a dissenting shareholder
of the selling corporation can demand appraisal rights.
Both the U.S. Department of Justice and the Federal Trade Commission have guidelines
that significantly constrain and often prohibit mergers that could result from a purchase of
assets. (These guidelines will be discussed in the materials covering federal antitrust laws.)
35–2b Successor Liability in Purchases of Assets
Generally, a corporation that purchases the assets of another corporation is not responsible
for the liabilities of the selling corporation. Exceptions to this rule are made in certain circumstances, however. In any of the following situations, the acquiring corporation will be
held to have assumed both the assets and the liabilities of the selling corporation.
1. Express or implicit agreement. The purchasing corporation impliedly or expressly assumes the
seller’s liabilities.
2. De facto merger. The sale transaction amounts to a merger or consolidation of the two companies.
3. Continuation. The purchaser continues the seller’s business and retains the same shareholders,
directors, and officers.
Learning Objective 2
Under what circumstances is
a corporation that purchases
the assets of another
corporation responsible for
the liabilities of the selling
corporation?
Case Example 35.3 American Standard, Inc., sold its Kewanee Boiler division to OakFabco,
Inc. The agreement stated that OakFabco would purchase Kewanee assets subject to Kewanee
liabilities. “Kewanee liabilities” were defined as “all the debts, liabilities, obligations, and
commitments (fixed or contingent) connected with or attributable to Kewanee existing
and outstanding at the Closing Date.”
Because the boilers manufactured by Kewanee had been insulated
with asbestos, many tort claims arose in the years following the purchase
of the business. Some of those claims were brought by plaintiffs who had
suffered injuries after the closing of the transaction that were allegedly
attributable to boilers manufactured and sold before the closing.
American Standard filed an action against OakFabco in New York,
asking the court for a declaratory judgment on the issue of whether
liabilities for such injuries were among the “Kewanee liabilities” that
OakFabco had assumed. The court held that OakFabco had expressly
assumed the liabilities of the selling corporation in the contract, including claims that arose after the closing date. A state appellate court
affirmed that decision. According to the reviewing court, “nothing in the
When does the purchase of a boiler division create
nature of the transaction suggested that the parties intended OakFabco,
ongoing liabilities for past acts?
1
which got all the assets, to escape any of the related obligations.” ■
1. American Standard, Inc. v. OakFabco, Inc., 14 N.Y.3d 399, 901 N.Y.S.2d 572 (2010).
ultramarinfoto/E+/Getty Images
4. Fraud exception. The sale is entered into fraudulently for the purpose of escaping liability.
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UNIT FIVE: Business Organizations
Does a purchasing corporation assume the liability of the selling corporation if the buyer
has constructive notice of potential liability? That was the issue in the following case.
Case 35.2
Heavenly Hana, LLC v. Hotel Union &
Hotel Industry of Hawaii Pension Plan
United States Court of Appeals, Ninth Circuit, 891 F.3d 839 (2018).
Background and Facts The Hotel Union & Hotel Industry
of Hawaii Pension Plan is a multiemployer plan that represents
more than 12,000 members who work at unionized hotels in
Hawaii. Ohana Hotel Company, which operated Ohana Hotel on
the island of Maui, contributed to the plan for its hotel employees but had underfunded the contributions for years. The plan’s
annual funding notices revealed Ohana’s underfunding and
were publicly available online. Ohana agreed to sell the hotel to
Heavenly Hana, LLC, and its parent company, Amstar-39. Amstar
had previously owned and operated a hotel that participated in a
multiemployer pension plan. The purchase agreement stated that
Ohana contributed to such a plan. Before the deal closed, however, Ohana withdrew from the plan without informing Amstar.
The plan’s administrators demanded that the new owner cover the
unfunded “withdrawal” liability. Amstar filed a suit in a federal
district court against the plan, contesting the demand. The court
entered a judgment in Amstar’s favor. The plan appealed.
In the Words of the Court
THOMAS, Chief Judge:
****
* * * Under a constructive notice standard, purchasers are
deemed to have notice of any facts that one using reasonable
care or diligence should have. [Emphasis added.]
****
* * * Requiring purchasers to make reasonable inquiries into
the existence of withdrawal liability advances the * * * interest in
preventing underfunding in multiemployer pension plans. Imposing
this burden [has] little negative impact on the fluid transfer of
corporate assets. Purchasers [can] simply investigate the possible
liability and negotiate a purchase price [or other accommodation]
that would take it into account. [Emphasis added.]
* * * Of the three relevant parties to successor withdrawal
liability—the seller, the purchaser, and the pension plan—
purchasers are in the best position to ensure withdrawal liability
is accounted for during an asset sale. Sellers have no incentive
to disclose potential liabilities because such liabilities are likely
30301_ch35_hr_826-840.indd 832
to drive the sale price in one direction only: down. Pension plans
cannot be asked to investigate sales rumors, track down the identity of all potential purchasers, avoid confidentiality or contract
interference concerns, and send notice of its publicly available
funding status directly to potential purchasers. Rather, pension
plans are only responsible for (1) determining the amount of the
employer’s withdrawal liability, (2) notifying the employer of
the amount of the withdrawal liability, and (3) collecting the amount
of the withdrawal liability from the employer. Purchasers, in contrast, have the incentive to inquire about potential withdrawal
liability in order to avoid unexpected post-transaction liabilities.
****
Applying a constructive notice standard in this case leads
us to conclude that Amstar had constructive notice because
a reasonable purchaser would have discovered Ohana’s withdrawal liability.
Amstar previously operated a hotel that participated in a
multiemployer pension plan * * *. The Agreement [between
Amstar and Ohana] plainly informed Amstar that * * * Ohana had
contributed to a multiemployer pension plan. Finally, the Plan’s
annual funding notices, which indicated a state of underfunding,
were publicly available.
Decision and Remedy The U.S. Court of Appeals for the
Ninth Circuit reversed the lower court’s judgment. “The undisputed
facts indicate that Amstar should have determined that . . .
Ohana would incur withdrawal liability.”
Critical Thinking
t
Legal Environment What actions might a purchasing corporation take to determine if withdrawal liability exists?
t
What If the Facts Were Different? Suppose that
Amstar’s lawyers had advised, “Absent an express assumption
of liability, a purchasing corporation does not assume a selling
corporation’s withdrawal liability.” Would the result have been
different? Why or why not?
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CHAPTER 35: Corporate Mergers, Takeovers, and Termination
35–3
Takeovers
An alternative to the purchase of another corporation’s assets is the purchase of a substantial
number of the voting shares of its stock. This enables the acquiring corporation to control
the target corporation (the corporation being acquired). The process of acquiring control over
a corporation in this way is commonly referred to as a corporate takeover.
35–3a Tender Offers
The acquiring corporation deals directly with the target company’s shareholders in seeking
to purchase the shares they hold. It does this by making a tender offer to all of the shareholders of the target corporation. The tender offer can be conditioned on receipt of a specified
number of shares by a certain date.
To induce shareholders to accept the tender offer, the acquiring corporation generally
offers them a price higher than the market price of the target corporation’s shares before the
announcement of the offer. In a merger of two Fortune 500 pharmaceutical companies, for
instance, Pfizer, Inc., paid $68 billion to acquire its rival Wyeth. Wyeth shareholders reportedly received approximately $50.19 per share (part in cash and part in Pfizer stock), which
amounted to a 15 percent premium over the market price of the stock.
Federal securities laws strictly control the terms, duration, and circumstances under
which most tender offers are made. In addition, many states have passed antitakeover
statutes.
Takeover The acquisition of control
over a corporation through the
purchase of a substantial number of
the voting shares of the corporation.
Tender Offer An offer made by one
company directly to the shareholders
of another (target) company to
purchase their shares of stock.
35–3b Responses to Takeover Attempts
A firm may respond to a takeover attempt in many ways. Sometimes, a target firm’s board
of directors will see a tender offer as favorable and will recommend to the shareholders
that they accept it. Frequently, though, the target corporation’s management opposes the
proposed takeover.
To resist a takeover, a target company can make a self-tender, which is an offer to acquire
stock from its own shareholders and thereby retain corporate control. Alternatively, the target
corporation might resort to one of several other defensive tactics. Several of these tactics are
described in Exhibit 35–3.
In a hostile takeover attempt, sometimes directors’ duties of care and loyalty collide with
their self-interest. Then the shareholders, who would have received a premium for their
shares as a result of the takeover, file lawsuits. Such lawsuits frequently allege that the directors breached their fiduciary duties in defending against the tender offer.
Business Judgment Rule Courts apply the business judgment rule when analyzing
whether the directors acted reasonably in resisting the takeover attempt. The directors
must show that they had reasonable grounds to believe that the tender offer posed a danger
to the corporation’s policies and effectiveness.
In addition, the board’s response must have been rational in relation to the threat posed.
Basically, the defensive tactics used must have been reasonable, and the board of directors
must have been trying to protect the corporation and its shareholders from a perceived
danger. If the directors’ actions were reasonable under the circumstances, then they are not
liable for breaching their fiduciary duties.
An Example—The Poison Pill Defense One technique to avoid takeovers is the poison
pill defense. With this defensive measure, a board gives shareholders the right to buy additional shares at low prices. The right is triggered when a party acquires a certain proportion
of the target corporation’s stock—often between 15 and 20 percent. (This party, of course,
does not have the right to purchase shares at a discount.) With more shares outstanding, the
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Learning Objective 3
What actions might a target
corporation take to resist a
takeover attempt?
“In the takeover
business, if you want a
friend, you buy a dog.”
Carl Icahn
1936–present
(American financier)
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UNIT FIVE: Business Organizations
Exhibit 35–3 The Terminology of Takeover Defenses
TERM
DEFINITION
Crown Jewel
When threatened with a takeover, management makes the company less
attractive to the raider by selling the company’s most valuable asset (the
“crown jewel”) to a third party.
Golden
Parachute
When a takeover is successful, top management usually is changed. With this
in mind, a company may establish special termination or retirement benefits
that must be paid to top managers if they are “retired.” In other words, a
departing high-level manager’s parachute will be “golden” when he or she is
forced to “bail out” of the company.
Greenmail
To regain control, a target company may pay a higher-than-market price to
repurchase the stock that the acquiring corporation bought. When a takeover
is attempted through a gradual accumulation of target stock rather than a
tender offer, the intent may be to get the target company to buy back the
shares at a premium price—a concept similar to blackmail.
Pac-Man
Named after the Atari video game, this is an aggressive defense in which the
target corporation attempts its own takeover of the acquiring corporation.
Poison Pill
The target corporation issues to its stockholders rights to purchase additional
shares at low prices when there is a takeover attempt. This makes the
takeover undesirably or even prohibitively expensive for the acquiring
corporation.
White Knight
The target corporation solicits a merger with a third party, which then makes
a better (often simply a higher) tender offer to the target’s shareholders. The
third party that “rescues” the target is the “white knight.”
acquiring party’s interest is diluted. The tactic is meant to make a takeover too expensive
for the acquiring party.
Example 35.4 Back in 2012, Netflix, Inc., used the poison pill defense to effectively block
a takeover attempt by billionaire investor Carl Icahn. Netflix gave its shareholders the right
to acquire newly issued stock if any individual acquired more than 10 percent of the company. At the time, Icahn held 9.98 percent of the shares. If his interest had risen to 10 percent, new shares would have flooded the market, and his interest in the corporation would
have been immediately diluted. Consequently, he was effectively prevented from buying
more shares. ■
35–4
Dissolution The formal disbanding
of a corporation.
Corporate Termination
The termination of a corporation’s existence has two phases—dissolution and winding up.
Dissolution is the legal death of the artificial “person” of the corporation. Dissolution can be
brought about by the following:
1. An act of the state.
2. An agreement of the shareholders and the board of directors.
3. The expiration of a time period stated in the certificate of incorporation.
4. A court order.
Winding up is the process by which corporate assets are liquidated, or converted into
cash and distributed among creditors and shareholders. Some prefer to call this phase
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CHAPTER 35: Corporate Mergers, Takeovers, and Termination
835
liquidation. Here, we use the term winding up to mean all acts needed to bring the legal and
financial affairs of the business to an end, including but not necessarily limited to liquidation
of assets.
Dissolution can be either voluntary or involuntary. Winding up may differ to some extent
based on whether voluntary or involuntary dissolution has occurred.
35–4a Voluntary Dissolution
Dissolution can be brought about voluntarily by the directors and the shareholders. State
corporation statutes establish the procedures required to voluntarily dissolve a corporation.
Basically, there are two possible methods:
1. By the shareholders’ unanimous vote to initiate dissolution proceedings. Example 35.5 Dee and
Jim form Home Remodeling, Inc. They are Home Remodeling’s only shareholders and directors.
After three years, they decide to cease business, dissolve the corporation, and go their separate ways. ■
Learning Objective 4
What are the two ways in
which a corporation can be
voluntarily dissolved?
2. By a proposal of the board of directors that is submitted to the shareholders at a shareholders’
meeting.
When a corporation is dissolved voluntarily, the corporation must file articles of dissolution
with the state and notify its creditors of the dissolution. The corporation must also establish a
date (at least 120 days after the date of dissolution) by which all claims against the corporation
must be received [RMBCA 14.06].
35–4b Involuntary Dissolution
Because corporations are creatures of statute, the state can also dissolve a corporation in
certain circumstances. The secretary of state or the state attorney general can bring an action
to dissolve a corporation that has failed to pay its annual taxes or to submit required annual
reports, for example. A state court can also dissolve a corporation that has engaged in ultra
vires acts or committed fraud or misrepresentation to the state during incorporation.
Sometimes, a shareholder or a group of shareholders petitions a court for corporate
dissolution. In such a situation, the court may dissolve the corporation if the controlling
shareholders or directors have engaged in fraudulent, illegal, or oppressive conduct.
Example 35.6 The Miller family—Todd, Otilia, and Breanna—operates Seven Oaks Farm in
rural Virginia, as a close corporation. When Todd and Otilia are arrested for stealing from
the farm’s financial accounts, Breanna petitions the court for dissolution so that she can
wind up Seven Oaks’s business. ■ Shareholders may also petition a court for dissolution
when the board of directors is deadlocked and the affairs of the corporation can no longer
be conducted because of the deadlock.
35–4c Winding Up
When dissolution takes place by voluntary action, the members of the board of directors act as trustees of the corporate assets. As trustees, they are responsible for winding
up the affairs of the corporation for the benefit of corporate creditors and shareholders.
This makes the board members personally liable for any breach of their fiduciary
trustee duties.
When the dissolution is involuntary—or if board members do not wish to act as trustees of the assets—the court will appoint a receiver to wind up the corporate affairs and
liquidate corporate assets. Courts may also appoint a receiver when shareholders or creditors can show that the board of directors should not be permitted to act as trustees of the
corporate assets.
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Receiver In a corporate dissolution,
a court-appointed person who winds
up corporate affairs and liquidates
corporate assets.
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836
UNIT FIVE: Business Organizations
35–5
Major Business Forms Compared
When deciding which form of business organization would be most appropriate, businesspersons normally take into account several factors, including the liability of the owners, tax
considerations, and the need for capital. Each major form of business organization offers
advantages and disadvantages with respect to these and other factors.
Exhibit 35–4 summarizes the essential advantages and disadvantages of each form of
business organization discussed in this unit.
Exhibit 35–4 Major Business Forms Compared
CHARACTERISTIC
SOLE PROPRIETORSHIP
PARTNERSHIP
CORPORATION
Method of Creation
Created at will by owner.
Created by agreement of the
parties.
Authorized by the state under the
state’s corporation law.
Legal Position
Not a separate entity; owner is
the business.
A general partnership is a
separate legal entity in most
states.
Always a legal entity separate
and distinct from its owners—a
legal fiction for the purposes of
owning property and being a
party to litigation.
Liability
Unlimited liability.
Unlimited liability.
Limited liability of shareholders—
shareholders are not liable for the
debts of the corporation.
Duration
Determined by owner;
automatically dissolved on
owner’s death.
Terminated by agreement of
the partners, but can continue
to do business even when a
partner dissociates from the
partnership.
Can have perpetual existence.
Transferability
of Interest
Interest can be transferred, but
individual’s proprietorship then
ends.
Although partnership interest
can be assigned, assignee does
not have full rights of a partner.
Shares of stock can be
transferred.
Management
Completely at owner’s discretion.
Each partner has a direct and
equal voice in management
unless expressly agreed
otherwise in the partnership
agreement.
Shareholders elect directors, who
set policy and appoint officers.
Taxation
Owner pays personal taxes on
business income.
Each partner pays pro rata
share of income taxes on net
profits, whether or not they are
distributed.
Double taxation—corporation
pays income tax on net profits,
with no deduction for dividends,
and shareholders pay income
tax on disbursed dividends they
receive.
Organizational Fees,
Annual License Fees,
and Annual Reports
None or minimal.
None or minimal.
All required.
Transaction of
Business
in Other States
Generally no limitation.
Generally no limitation.a
Normally must qualify to do
business and obtain certificate of
authority.
a. A few states have enacted statutes requiring that foreign partnerships qualify to do business there.
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CHAPTER 35: Corporate Mergers, Takeovers, and Termination
CHARACTERISTIC
LIMITED PARTNERSHIP
LIMITED LIABILITY COMPANY
LIMITED LIABILITY PARTNERSHIP
Method of Creation
Created by agreement to carry
on a business for a profit. Must
include at least one general
partner and at least one limited
partner. Certificate of limited
partnership is filed. Charter must
be issued by the state.
Created by an agreement of the
member-owners of the company.
Articles of organization are filed.
Charter must be issued by the
state.
Created by agreement of
the partners. A statement of
qualification for the limited
liability partnership is filed.
Legal Position
Treated as a legal entity.
Treated as a legal entity.
Generally, treated same as a
general partnership.
Liability
Unlimited liability of all general
partners; limited partners are
liable only to the extent of capital
contributions.
Member-owners’ liability is
limited to the amount of capital
contributions or investments.
Varies, but under the Uniform
Partnership Act, liability of a
partner for acts committed by
other partners is limited.
Duration
By agreement in certificate, or
by termination of the last general
partner (retirement, death, and
the like) or last limited partner.
Unless a single-member LLC, can
have perpetual existence (same
as a corporation).
Remains in existence until
cancellation or revocation.
Transferability
of Interest
Interest can be assigned (same
as in a general partnership), but
if assignee becomes a member
with consent of other partners,
certificate must be amended.
Member interests are freely
transferable.
Interest can be assigned same as
in a general partnership.
Management
General partners have equal
voice or by agreement. Limited
partners may not retain limited
liability if they actively participate
in management.
Member-owners can fully
participate in management, or
can designate a group of persons
to manage on behalf of the
members.
Same as a general partnership.
Taxation
Generally taxed as a partnership.
LLC is not taxed, and members
are taxed personally on profits
“passed through” the LLC.
Same as a general partnership.
Organizational Fees,
Annual License Fees,
and Annual Reports
Organizational fee required;
usually not others.
Organizational fee required;
others vary with states.
Fees are set by each state for filing
statements of qualification, foreign
qualification, and annual reports.
Transaction of
Business
in Other States
Generally no limitation.
Generally no limitation, but may
vary depending on state.
Must file a statement of foreign
qualification before doing
business in another state.
Practice and Review
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
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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.