Corporate Dissolution and Distribution of Shares Flashcards
Shareholder-Level Transactions
Shareholder-Level Transactions – Purchase or Sale of Shares of Target Co – Direct Buyer-S/H Transaction – Action by Target S/Hs individually • Shares not a corporate asset – No Target corporate action required • Target B/D approval not required • Defensive measures??
Shareholder-Level Transaction Action by Buyer Co. • Buyer Corporate action required • Generally B/D only – Charlestown Boot & Shoe v. Dunsmore – Corporate-Level Transactions • Merger • Sale of All or Substantially All Assets • Statutory Share Exchange (Texas) • TBOC 10.001 et. seq., 21.451 et. seq.
Corporate-Level Transactions
• Action by all corporations required • B/D of all corps • S/Hs – Target Co • Mergers (almost always) • Sales of all/substantially all Assets not URCB • Statutory Share exchanges – Buyer Co • Only in certain contexts
S/H approval:
• When S/H approval is required
• Statutory/Absolute voting
– Del: absolute majority
– TBOC
• 21.457 absolute 2/3 majority (unless C/F)
• 21.458 voting by class in some circumstances
Hollinger v Hollinger
Hollinger shareholders sought a preliminary injunction to prevent the B/d from auctioning Hollinger’s subsidiary.
Shareholder voter approval is required if a sale includes “all or substantially all” of its Corporate assets.
To determine whether their is a sale of all assets courts must look at the quantitative and qualitative characteristics of the transaction. Must be approved by a majority of all shares entitled to vote with at least 20 days notice.
Quanitative Measures
- Is the transaction quantitatively vital to the operations of the Corp? (Will it affect future profits of the Corp?)
- Is the transaction at the heart of the Corp’s existence and purpose? (What is the company losing as far as #s?)
Qualitative Measures
Does the transaction substantially effect the existence and purpose of the Corporation?(Is the transaction separate from the Corporate purpose? Is it going to contribute to the Corporate income?)
-Is the transaction outside the ordinary scope of business?
“Sale of Substantially All Assets” MBCA & TBOC
MBCA 12.02(a)
∙ A sale of subst. all assets IS WHEN:
- the sale leaves the corporation WITHOUT a “significant continuing business activity”
∙ A sale of substantially all assets does NOT happen WHEN:
- the sale leaves the company at lease 25% of it’s assets AND 25% of income or revenues
- **this is a safe harbor
∙ TBOC 21.451: A sale of all or substantially all of the assets of a corporation that is NOT made in the usual and regular course of business,
However, does not include transactions where the corporation directly or indirectly:
(1) continues to engage in 1 or more businesses (basically if you have one or more businesses after selling assets, then you are not engaging in selling all or substantially all)
or
(2) applies proceeds from the sale to conduct of “a business in which the corporation engages following the transaction”
» if you apply the money to another transaction, then you are not selling all or substantially all
∙ The main idea of this is IF the HC is going to be making money by selling and buying up subsidiary companies, as long as the HC is still going to be actively engaged in a business after that, THEN the HC’s SH’s have no right to approve or disapprove of the sale of the assets.
What constitutes a Corporate statutory merger?
A combination of two corporations in which one corporation is legally absorbed into another and the survivor succeeds to the assets and liabilities of the disappearing corporation.
What is a Corporate consolidation?
Similar to a merger, except in a consolidation, 2 or more existing corporations for a wholly new corporation.
Requirements for consolidation and merger are identical except for the fact, consolidation requires a new CoI.
Steps of a Merger
(1. ) Negotiations
(2. ) Pre-liminary agreement (letter of intent signed by representatives for the constituent corporations)
(3) . Once approved by board the articles of merger are filed with the sos and stock issued by the surviving corporation is exchanged for the stock and other securities of the disappearing corporation, which is fused into the survivor with 1 identity. By law the survivor receives all rights and assets of disappearing corporation as well as liabilities.
Short Form and Small Scale Mergers
In the past all statutory mergers required approval by 2/3 vote of the outstanding shares of each constituent and triggered appraisal rights for each shareholder.
Now statutes have taken out these exceptions in the place of “small-scale” mergers and “short-form”
Small-scale mergers: The req of Del 251(f) is to assure that during the merger the CoF is not used so that shareholders will not be deprived of voting rights and makes mergers on the same level as acquisition of assets. The theory underlying the 20% limitation on the increasing # of common shares is that a merger that involves less than 20% is not a major change as to requirer shareholder voting. As long as merger is being used to satisfy business needs no vote is required.
Short form mergers provide a cash out to the minority shareholder of a disappearing corporation. Basically buys the company out. Used by parent companies and less than 100% owned subsidiaries to take over the entire corporation. Parent buying kid.
TBOC process for a Statutory Merger
TBOC §21.452(a)—Board Approval
∙ Merger begins when B/D of each constituent corp adopts a plan of resolution approving of the merger
∙ TBOC §10.002—Plan of merger must contain:
- Names of the parties to the merger (ppl who will have their existence effected)
- Name of the surviving party/parties
- Terms & conditions of merger
- Mode of putting terms into effect - Statement of any amendments to survivor’s articles
- Manner/basis of converting the shares of each party to the merging company
- EX: if little is going into little and the HC is not effected then state that those shares will be untouched - Any other agreed upon terms.
• TBOC §21.452(b)—Board submits plan to SH’s for approval [if necessary]
∙ TBOC 21.456–.457: If merger is a fundamental business transaction,
(1. ) Notice must be given to each s/h, whether or not entitled to vote, that a meeting will be held
(2. ) The Notice must also state the purpose of the meeting (to vote on merger plan) AND,
(3. ) A copy/summary of the plan.
(4. ) Must be given no later than the 21st day before the meeting
(5. ) If SH wants to seek appraisal rights, must give notice of intent to do so after receiving notice
(6. ) At this point, the BD can decide to abandon the merger, even after the SH’s have approved
• TBOC §21.452 (c)—SH Approval
∙ Approval of a fundamental business transaction so it requires an absolute majority vote → 2/3 of SH’s 21.457
- This can be lowered or raised in your CoF. DE would only require maj.
- Exceptions: types of mergers that do not require S/H approval because not fundamental business transaction:
1. Corp that is only a party to the plan of merger, not to a party to the actual merger (21.457(d))
»EX: issuing shares as part of the merger does not make you a party to it. This is also the triangle merger
2. Short-form merger (10.006), you only need the BD of parent comp to approve
» When a parent corp owns at least 90% of the outstanding shares of a subsid comp, then the small can merge into the big
3. Small scale merger, e.g., 21.459
» This is where there is no survivor, there is no change in the CoF, and of the shares that are issued by the survivor, no more than 20% is changed in the voting & dividend rights
•File Certificate/Articles of Merger with the State
∙ After approved by BOTH BD and SH’s, certificate of merger is executed by both corps.
- Must contain:
1. Names of parties to merger
2. Names of surviving party/parties
3. Manner/basis of conversion of shares
• Effect of a Merger
∙ TBOC 10.008(a)(1): the separate existence of each company that was a party to the merger cease, except the surviving company
∙ The assets of the parties to the merger are the assets of the surviving company now
- This is a succession by operation of law (statute required) NOT by transfer
∙ The liabilities of the parties are now the liabilities of the survivor and this also happens automatically, without assumption.
De Facto Merger (Not in TX or Del)
o Definition: sale/purchase of all or substantially all assets that resembles “in fact” a merger but does not follow merger procedure. The sale/purchase works like a merger so it then places all the obligations of merger on the sale/purchase.
What are the 2 situations in which a person would want o claim a de facto merger?
(1) SH’s in a state w/ no dissent & appraisal rights for sale of all/subst all assets
- - bc SH have more rights when there is a merger than when there is a sale of all assets
(2) Creditors who become orphaned b/c Buyer Co. does not choose to take on all the liabilities of the corp from which they purchased the assets.
- - bc if not a merger then the creditor has no assets to go after bc they have been sold
- - Also remember the fraudulent transfers
Hariton v Arco Electronics
o Arco sold all of its assets to Loral in consideration of the issuance of some of Loral’s shares. Arco held a meeting of the stockholders to vote on the approval and majority approved of the dissolution of Arco. P a stockholder who did not vote on the meeting sued to prohibit the merger based on that the fact he didn’t agree. The ct holds that the dissolution and re-distribution of shares by Arco is legal and that the sale-of-assets statute and merger statute are independent of each other.
o Hariton-shareholders must be given the opportunity to dissent to a merger even if it is defacto just as in a statutory merger. The failure to offer the opportunity of a majority quorum of shareholders to vote on a combination of corporations is illegal and the merger will be void.
When would a shareholder want a corporate transaction to be considered as a De Facto merger?
o After sale of all assets
• In TX – s/h may still dissent
• In Delaware – s/h/ may NO longer dissent
o This may piss off s/hs of both corps because they didn’t get to approve of the sale (by the board) of all of the Corporations assets.
• Thus, when corp enters into a transaction that is not labeled as merger, court may deem the transaction a de facto merger for the purpose of giving shareholders dissenting and appraisal rights, and also to protect orphaned creditors by making purchaser assume the obligations.
Reasons the board prefers a “sale of all/substantially all assets”
When there is a sale of all or substantially all assets Corporations can avoid taking on the liabilities of the disappearing company because there are no formal documents.
There is no adopted plan, S/H approval or Cert of Merger, but the transaction is in fact a merger between the two.
By purchasing the assets of the disappearing company you get the full benefit of owning the other company w/o taking on their liability.
What are the rights of dissenting shareholders?
- In Texas the sale of assets is not in fact a merger and the buyer is not liable for obligations they did not assume.
- S/hs may still dissent if the transaction is considered a fundamental business transaction and the sale of all the assets affects the business to where it may not be able to continue.
Delaware does not allow dissenter rights.
Appraisal Rights
The ability of a shareholder of a corporation to opt out of a plan or agreement to restructure the corporation by obtaining a valuation of his stock at its fair market value price at which the corporation is then required to purchase his shares.
Rationale behind Shareholder appraisal rights
When a corporation combines with another so as to lose its essential nature and alter the original fundamental relationships of the shareholders among themselves and to the corporation, a shareholder who does not wish to continue his membership therein may treat his membership in the original corporation as terminated and have the value of his shares paid to him.
How do you determine a shareholder’s right to fair value?
TBOC 10.354 (a)(2)
- Negotiate b/w parties
- If cannot agree and act timely, the court can determine the fair value of the shares through appraisal.
What are the ways to determine a corporation’s worth?
(1) Delaware Block Method
(2) Traditional Valuation
(3) Discounted cash flow
How do you determine the Delaware Block Method?
- Generally accepted method since 1950s (Older method)
- Combine the:
- Stock Market value per share (price at which the shares are being traded on the market just prior to announcement of the upcoming transaction)
- Asset value per share (based on liquidation of corporate assets)
- Earnings value per share (Measured by determining the corp’s average annual earnings during some years before the event triggering the appraisal rights)
- Using weighted average (Gpa is a weighted average)
- Expert testimony as to weights
Ex: Stock Market $10 x .10=$1
Assets $30 x .40=$12
Net Cashflow (Earnings) 40 x .50=$20
100%=$32
Limits/problems with stock market value
1. Many companies have no public market or a thinly traded market
2. Market may not have all the info
3. Do not know if market values shares as:
» Financial instruments, or
» Pro-rata part of value of corp as a going concern
How do you determine Traditional Valuation of shares method?
• Use Comparable company approach(CC) to estimate the market price for value of the co shares
(1) Determine if the Corporations are engaged in a similar line of business
(2) Observe (market) Mostly public companies, per-share asset value earnings
(3) Come up with the multiplier (which is market ratio for the CC)
- - Market (Price) to Book (M/B) or
- - Price to Earnings (P/E)
- - - - How much the market is willing to pay for a dollar of earnings of the cc. The lower the multiplier the riskier the Corporation.
(4) Multiply CC ratios by company’s asset and earnings value per share
(i) Then apply P/E ratio to current co earnings per share to see what market is willing to pay for a dollar of current co’s earnings (or assets) (once we know the multiplier you take the multiplier and * times your companies current earnings per share)
- - Ex: company to be valued, the earnings are $2 per share. CC is traded at market price $60 per share and earnings are $3 per share.
- - P/E ratio of CC is 60/3 = 20 (market is willing to pay $20 for every $1 of earnings of cc). Apply P/E ratio of 20 to Pu = $2 x 20 = $40.
• What are we exactly figuring out?
- - If the market is willing to pay $10 for every $1 of earning for that co. Then you multiply it by your earnings to determine the earning value of your shares.
How do you determine the Discounted Cash Flow method?
• Used in lieu of earnings of cc
- - Cash flow = EBITDA=Earnings before interest, taxes, depreciation, and amortization
• Figure out the present value of future cash flows-the money the co is going to bring in
1. Requires calculation of a discount rate (k)
o Discount rate (k)-the rate at which we are turning the earnings into a price
- - Time value of money (opportunity cost) 2 components:
(1) Risk-free rate of return
(2) Risk premium
2. Present value of perpetuity (perpetual annuity)
• Multiply the cash flow by the amount of years to which you are going to receive income.
o Assumption: perpetuity (perpetual annuity)
o Annual CF or Earnings (E)
o P = PV = CF/k or E/k
o Markets: implicit market capitalization rate
• Observe earnings (E) and price (P)
• Capitalization rate: K=E/P
DCF: Determining k
• Capita Assets Pricing Model
• Arbitrage Pricing Theory
• Comparable companies
• Implied Market Capitalization Rate
• P = CF/k => kcc =CF/P
• Your Price (Pv) = Your CF/kcc = CFv/kcc
•= Your CF x (1/kcc)
• Caveat re Weighted Average Cost Capital
• Values all “capital”
• Common & preferred shares & long-term debt
How are stocks issued?
Stocks are issued in the CoF which authorizes:
(1) # of shares
(2) Whether the shares or with or without par value
- - RMBCA 6.01 eliminates concept of par value
(3) If there is multiple classes of stock:
- - The designation, #, and par value of each class (Note: Don’t have to include par value. All shares considered equal unless CoF states otherwise)
- - The preferences, limitations, and relative rights of each class of shares.
- - The authority of the B/D to issue series & details for each series
What are the different classes of stocks?
(1) Common Stock-which represents the residual ownership of the Corp
- Generally stockholders who have voting rights and are entitled to final share in distribution of assets in liquidation
(2) Preferred Stock- has some sort of preference over the other classes of stock, generally in the form of dividends or liquidation rights.
(3) Treasury Stock- Which are repurchased shares
