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mergers and acquisitions

Goals. Develop an appreciation and understanding of business transactionsIdentify the strengths and weaknesses of the various forms of corporate transactionsIdentify the strengths and weaknesses of cross-entity combinationsLearn how business (corporate, partnership and limited liability entity), securities, tax, accounting, antitrust and bankruptcy effect our decisions.

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mergers and acquisitions

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    1. Mergers and Acquisitions Professor Jack Williams Jwilliams@gsu.edu 404.651.2139

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

    4. 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

    5. Exams Open book Part multiple choice, part short answer Class participation: Up to 3 points

    6. 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)

    7. 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)

    8. 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)

    9. 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

    10. 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)

    11. 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

    12. Team Focus contd Tax issues General rule: Any combination is a taxable event Special rule: Nontaxable transaction Nontaxable means deferred IRC section 368

    13. 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

    14. Team focus contd Antitrust issues Hart-Scott-Rodino Act Pre-acq notification to the FTC Industry-specific clearances from applicable agencies

    15. Team Focus contd Accounting issues Purchase method Goodwill

    16. Team Focus contd Bankruptcy issues Control future liabilities Terminate successor liabilities

    17. Merger A Corp + B Corp. = A Corp

    18. Consolidation A Corp + B Corp = New Co.

    19. 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

    20. 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

    21. Reverse Triangular Merger New Co merged into Target T shares converted to P shares P has complete ownership of merged entity

    22. 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

    23. 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

    24. 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

    25. 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

    26. Cross- Entity Combinations Corp. Ptshp General Limited Sole proprietorship LLC LLP LLLP

    27. Cross-Entity Combinations contd Self-contained model Junction model

    28. 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

    29. 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

    30. 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

    31. 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

    32. 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

    33. Conclusion

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