MERGERS & ACQUISITIONS (M & A)

MERGERS & ACQUISITIONS (M & A)

COURSE OVERVIEW

1) INTRODUCTION

2) LEGAL FRAMEWORK

3) LEGAL PROCEDURES & DOCUMENTS 4) CASE STUDIES

5) CLASS PRESENTATIONS

DEFINITIONS

MERGER

COMBINATION (between equals)

friendly

stock swap + cash payment transfer of assets and liabilities

ACQUISITION

TAKEOVER (large vs. small)

hostile

acquire/control target company (shares / assets)

TYPES OF MERGERS

STATUTORY MERGER

 combination of 2 companies (one survives, other ceases to exist)

 surviving company assumes the assets and liabilities of the other company

 A + B = A

CONSOLIDATION

 2 or more companies join to form an entirely new company

 consolidated companies are dissolved, only new company operates

 A + B = C

TYPES OF MERGERS

FORWARD SUBSIDIARY MERGER

 target becomes (part of) subsidiary of parent company

 S + T = S

 Through its 100% ownership of the subsidiary (= acquisition vehicle) the acquiring parent owns and controls the target

 Advantage that acquiring parent is not a constituent party to the merger agreement:

 shareholders of parent company have no right to vote or to exercise appraisal rights in connection with the merger

 insulate liabilities of target by keeping them within the subsidiary rather than the parent

REVERSE SUBSIDIARY MERGER

 acquirer is merged into target’s subsidiary (acquisition vehicle)

 A + TS = TS

 preserve target company though its control has passed to acquirer

 Advantage that target is not a constituent party to the merger agreement:

 Avoid application of burdensome charter or by-law provisions of target, or applicable state corporation laws in the target’s jurisdiction (e.g. supermajority votes to approve merger; stringent appraisal rights)

 Target may be party to a valuable governmental or other contract or licence that by its terms terminates if target is acquired by another person

TYPES OF MERGERS

LONG-FORM STOCK-FOR-STOCK MERGER

 at least 3-4 months

 prepare, file and clear with SEC (Form S-4 Registration Statement)

 obtain regulatory approvals and third-party consents to merger (e.g. Hart-Scott- Rodino Antitrust filing)

 obtain shareholder approval

 Merger is completed upon filing of Merger Certificate

 Dissenting shareholders may exercise statutory appraisal rights or other remedies.

CASH TENDER OFFER + SHORT-FORM FREEZEOUT MERGER

 Merger may be effected as early as the day following the 20th business day of the tender offer period

 Target’s board of directors recommend cash tender offer to target shareholders

 Once the acquirer owns a certain threshold (e.g. 90% of the target’s stocks), the acquirer can eliminate (“cash out”) remaining minority shareholders of target corporation without formal shareholders’ meeting (short-form freezeout merger).

Minority shareholders of target corporation receive cash amount or may exercise statutory appraisal rights

 Only practical where the target’s shares are purchased for cash and the target is incorporated in a state that permits short-form freezeout mergers (e.g. Delaware)

TYPES OF MERGERS

LONG-FORM FREEZEOUT MERGER

 Alternative, when short-form merger not possible

 Acquirer owns majority but not required threshold (e.g. more than 50% but less than 90% of target’s stocks)

 Acquirer must convene formal meeting of target’s shareholders

 Acquirer will vote its newly purchased majority shares in the target to approve a freezeout merger where remaining minority shareholders are eliminated. Consideration paid to minority shareholders may be less or different than preceding cash tender offer.

 No guarantee that acquirer can eliminate remaining minority shareholders under a long-form freezeout merger. E.g.

supermajority vote of approval may be required under the target’s charter or under applicable state corporation anti- takeover statutes; other defensive measures (e.g. shareholder rights plans = “poison pills”) may preclude a long-form freezeout merger, or render it excessively expensive or impractical.

TYPES OF MERGERS

HORIZONTAL

 same industry

 e.g. competitor + competitor VERTICAL

 different production stage

 e.g. buyer + seller CONGLOMERATE

 different industry

 e.g. noncompetitor + noncompetitor

HOSTILE TAKEOVERS

Bear hug letters

 addressed to target’s board

 Propose takeover negotiations, price, conditions

 Higher price for recommended/negotiated transaction, lower price if board opposes

Shareholder coercion

 Partial offer (e.g. offer for only 51% of target’s shares) >

individual shareholders afraid of becoming minority shareholder (“prisoners” dilemma)

 Two-tier offer: higher price in front-end, lower price in back- end

 Time pressure (e.g. premium price only offered for 51% of the target’s shares on a first-come, first-serve basis)

 Minimal public disclosure

 Legality of coercive takeover structures in the US justifies defensive tactics

INTERDISCIPLINARY

OTHER

LABOUR LAW

TAX LAW

COMPETITION LAW CORPORATE

LAW

M&A

MOTIVES FOR M&A

OTHER

TAX SYNERGY

MARKET

“EMPIRE BUILDING”

M&A

STAKEHOLDERS

CREDITORS

OTHERS

SHAREHOLDERS

CUSTOMERS EMPLOYEES MANAGERS

M&A

FINANCING M&A

LOAN

CAPITAL STOCKS

CASH

M&A

M&A

VALUATION EXPERTS

ATTORNEYS

ACCOUNTANTS INVESTMENT

BANKERS

M&A

DEFENSE TACTICS

LEVERAGED BUYOUT

EXCLUSIONARY SELF-TENDER

SHARE REPURCHASE

“GREENMAIL”

GOLDEN PARACHUTE

ASSET/LIABILITY RESTRUCTURING

LAW SUITS POISON

PILL STAGGERED

BOARD

M&A

DEFENSE TACTICS

PRE-EMPTIVE/ANTICIPATORY MEASURES:

 Precautionary before specific takeover threat emerges.

 Require advance shareholder approval (exception: Poison pill)

Structural changes to corporation’s constitutional documents (“SHARK REPELLENTS”):

SUPERMAJORITY VOTING REQUIREMENT

 Any freezeout merger or similar business combination involving the target and an acquirer (“interested shareholder”) who owns certain threshold of shares (eg 5%, 10%, 15%) must be approved by a supermajority vote (eg 2/3, 75%, 85%) of all the target’s shares.

 Often coupled with FAIR PRICE PROVISIONS to ensure that minority shareholders are paid a fair price in any freezeout merger or other business combination

CLASSIFIED/STAGGERED BOARD OF DIRECTORS

 board of directors divided into (usually) 3 groups, directors of each class can be elected or removed only once every 3 years on rotating basis > prevents majority shareholder from replacing the board at once, ie old directors continue to hold 2/3 of the seats. However, in practice the remaining directors usually resign.

GOLDEN PARACHUTE

 lucrative compensation package for target’s management, activated in case of takeover and subsequent resignation of senior executives

POISON PILLS (SHAREHOLDER RIGHTS PLANS)

 Right for existing shareholders (not acquirer) to purchase additional shares at bargain price (eg 50%

discount) once bidder acquires threshold (eg 15%, 20%) > acquirer suffers substantial share dilution

 most effective defensive measure, no acquirer has ever “bought through” a poison pill in order to complete a takeover transaction. powerful deterrent effect discourages potential acquirers from acquiring certain thresholds which trigger shareholders’ rights, encourages bidder to negotiate with target’s board.

can be adopted by target’s board without advance shareholder approval, board alone typically has power

DEFENSE TACTICS

RESPONSIVE DEFENSIVE MEASURES:

 Responding to actual existing hostile takeover offer ASSET RESTRUCTURING

 sell assets (“crown jewels”) that the suitor desires to obtain, spin-offs

 purchase assets that the bidder does not want or that will create antitrust problems LIABILITY RESTRUCTURING

 issuing shares to a friendly third party (“white squire/knight”) to dilute the bidder's ownership position

 leveraged recapitalization: change of capital structure, usually substitute debt for equity, eg take on significant debt with purpose of either paying large cash dividend to shareholders or repurchasing shares SHARE REPURCHASE (“GREENMAIL”)

 repurchase the shares of an unfriendly suitor at a premium over the current market price

 Become insignificant due to anti-greenmail state laws, adverse tax laws, defensive effect of poison pills EXCLUSIONARY SELF-TENDER

 target firm offers to buy back its own stock at a premium from everyone except the bidder

 Anti-takeover effect: 1) Reduce number of outstanding shares that a hostile acquirer is able to purchase 2) After decrease in number of outstanding shares the proportionate voting power of remaining shareholders will increase 3) Method for dispensing of target’s surplus cash

LEVERAGED BUYOUT (LBO)

 "go private“, eg group (usually involving existing management) buys up all the publicly held stock

 typically structured as LBO (financed primarily with debt secured by the assets of target)

APPLICABLE LAWS

US FEDERAL REGULATIONS Securities Exchange Act (1934)

 Disclosure obligations (eg acquisition of 5% of class of registered securities)

Williams Act (1968)

 Enacted by Congress as amendment to the 1934 Securities Exchange Act in response to hostile takeovers during the 1960’s

 Cornerstone of US federal regulation governing tender offers

 Intends to protect target shareholders

 Not benefit directors of target company; takeover useful check on inefficient management

 Policy of full disclosure: Filing requirement in the event of 5%

acquisition! > prevent secretive accumulations, alert investors of possible changes in corporate control

Hart-Scott-Rodino Antitrust Improvement Act of 1976 (“HSR”)

 Filing and pre-clearance requirements for share purchases above

APPLICABLE LAWS

US STATE REGULATIONS

Anti-takeover statutes (defensive tactics) enacted as part of state corporation laws (e.g. http://delcode.delaware.gov/title8/c001/index.shtml)

 First generation anti-takeover statutes enacted in response to coercive tender offers during the 1960s.

 Goal: protect incumbent management from hostile takeovers

 Scope: very broad > unconstitutional under Commerce Clause and Supremacy Clause (Edgar v. MITE Corp., 1982)

 Second generation takeover statutes

 Goal: protect investors from coercive takeovers, enable shareholders to make collective takeover decision (CTS Corp. v. Dynamics Corp. of America, 1987)

 Scope: regulate only domestically chartered corporations

 Third generation anti-takeover statutes

 Business combination statutes prohibit an “interested stockholder” (who purchased large percentage of the target’s voting stock, e.g. 10%-20%) from post- acquisition “business combination” transactions with the target corporation for a specified period, unless the business combination is approved by the target’s board of directors or a supermajority of disinterested shareholders.

APPLICABLE LAWS

FIDUCIARY DUTIES IN US CORPORATE TAKEOVERS Standards of judicial review

Business Judgment Rule

 Directors must necessarily take business risks > presumption that defendant directors acted in compliance with their fiduciary duties (good faith, loyalty, due care)

 Should plaintiff successfully rebut presumption by producing evidence that director breached duty of loyalty or care, then burden shifts to director to demonstrate that the challenged action was nevertheless “entirely fair” to corporation and shareholders (test of entire fairness, cf. Weinberger v. UOP)

Unocal’s proportionality test

 Unocal Corp/ v. Mesa Petroleum Co. (Del. 1985) is one of the most important cases in US corporate takeover law and marks the beginning of an “era of judicial scepticism and restrictions”

on director discretion.

 Initial burden on target’s directors to show that defensive measures are reasonable in relation to threat posed by hostile offer. Once directors satisfy this initial scrutiny, their actions will again qualify for the presumptions of the business judgment rule. > directors must overcome initial burden before invoking business judgment rule.

Revlon Auction duty: Revlon, Inc. v. MacAndrews (Del. 1986)

 once the break-up of a corporation is inevitable and the target’s board decides to sell the

APPLICABLE LAWS

UK LAW

Companies Act 2006

 http://opsi.gov.uk/acts.htm

U.K. City Code on Takeovers and Mergers (www.thetakeoverpanel.org.uk)

 response to shareholder coercion and other abuses during the 1960’s

 Applies to acquisition of control (30% or more of target’s voting rights)

 In contrast to the Williams Act which is principally a disclosure based statute, the City Code prescribes substantive and procedural safeguards to ensure fair and equal treatment of shareholders

 In contrast to the US, where the target’s board of directors play a central role in employing defensive measures, the City Code restricts the director’s ability to unilaterally adopt defensive measures ie shareholders should ultimately decide about takeover bid. Self- regulatory nature.

 Administration and enforcement by Panel on Takeovers and Mergers Stock Exchange Regulations

 Purple Book

Merger control rules

 Enterprise Act 2002 (target company has turnover > British pounds 70 million) English common law

 Under English common law the director’s general fiduciary duty is owed exclusively to the company (in contrast to US jurisdictions where such obligations are owed both to the corporation and its shareholders). UK company law is rooted in principles of contract and partnership law, whereas US company law stresses internal allocation of powers.

APPLICABLE LAWS

SCOPE OF APPLICABILITY

 The UK City Code, as well as the UK perspective and views of the Panel on Takeover and Mergers, have greatly influenced the EC Takeover Directive

> applies throughout EU!