Corporations and LLC's July 2003 Flashcards
(5 cards)
Summary
None of the objections presented by Pat and Dale will suffice for unwinding this merger. Corp’s ownership of 95 percent of Sub’s shares gives it the power to merge Sub into itself without securing the approval of Sub’s board of directors and without holding any vote of Corp’s or Sub’s shareholders. However, Pat and Dale are entitled to receive the fair value of their shares, provided they properly invoke their appraisal rights.
The approval of Sub’s board of directors is not required for this parent-subsidiary merger.
A merger between two corporations is normally effectuated by adoption of a plan of merger by the board of directors of both corporations. Revised Model Business Corporation Act (RMBCA) §11.04(a) (1999 Rev.). However, when a parent owns at least 90 percent of the outstanding shares of each class of stock of a subsidiary, the parent may merge the subsidiary into itself without the approval of the subsidiary’s board of directors. See RMBCA § 11.05 (1999 Rev.). The rationale for this rule is that the parent owns sufficient shares of the subsidiary to remove any members of the board of directors voting against the merger and replace them with members who would vote in favor of the transaction. The facts of this problem present such a parent-subsidiary situation. Because Corp owns 95 percent of Sub, approval of the merger by the Sub board of directors is not necessary. Thus, Corp could proceed with the merger despite the Sub board’s negative vote on the plan of merger, and the negative vote provides no basis for unwinding the merger.
Note: Some state’s parent-subsidiary merger statutes require that the parent corporation own at least 95 percent (e.g., Arkansas), while other states require only 80 percent (e.g., Alabama).
Approval by the shareholders of Corp is not required for this parent-subsidiary merger.
A plan of merger usually must be submitted to shareholders for their approval. See RMBCA § 11.04 (1999 Rev.). However, RMBCA § 11.04(g) provides that approval by shareholders of the surviving corporation is not required when the merger will not result in a fundamental change in the corporation or the ownership rights of its shareholders. In particular, no shareholder approval is required if
(1)the corporation will survive the merger . . . ; (2) . . . its articles of incorporation will not be changed; (3) each shareholder of the corporation whose shares were outstanding immediately before the effective date of the merger . . . will hold the same number of shares, with identical preferences, limitations, and relative rights, immediately after the effective date of change; and (4) the issuance in the merger . . . of shares or other securities . . . does not require a vote under § 6.21(f).
RMBCA § 11.04(g)(1999 Rev.).
The facts presented satisfy the requirements for this exception insofar as Corp’s shareholders are concerned. First, Corp will survive the merger because Sub is being merged into it. Second, Corp’s articles of incorporation will not change as a result of the merger. Finally, no vote to issue shares is required because this is a cash-out merger (the Sub shareholders are receiving cash, not securities). The cash-out nature of the merger also means that no Corp shareholder will experience a change in the number of shares owned or the rights and preferences of those shares. Therefore, the fact that the Corp shareholders did not vote does not constitute a basis to unwind the merger.
Note: Prior to the RMBCA 1999 revision, approval by Corp’s shareholders would not have been required simply because this was a short-form merger (parent’s subsidiary). See old RMBCA § 11.04. Under the revised act, the analysis is more elaborate but the result is the same.
The shareholders of Sub are also not required to approve this parent-subsidiary merger.
As noted above, shareholder approval of a plan of merger is generally required. See RMBCA § 11.04(b)(1999 Rev.). However, parent-subsidiary mergers are an exception to this rule when the parent owns at least 90 percent of the outstanding shares of each class of the subsidiary. See RMBCA § 11.05 (1999 Rev.). Shareholder approval is not required in these circumstances because the parent corporation owns a sufficient number of shares to ensure that the plan of the merger will be adopted. In our problem, because Corp owns 95 percent of Sub, it would easily prevail in any shareholder vote and, accordingly, the law does not require a vote by the shareholders of Sub for the merger to proceed. Therefore, the failure of the Sub shareholders to approve the transaction does not constitute a basis to unwind the merger.
Pat and Dale are entitled to exercise appraisal rights and seek the “fair value” of their shares.
Appraisal rights (also referred to as dissenter’s rights) allow shareholders to force the corporation to pay fair value for their shares in the event of certain fundamental changes, including a parent-subsidiary merger for which shareholder approval is unnecessary. See RMBCA § 13.02 (a)(1)(ii) (1999 Rev.). Thus, Pat and Dale, as minority shareholders of Sub, are entitled to exercise appraisal rights in connection with this merger. As Pat and Dale believe that each share is worth $5 more than Corp paid the min the merger, they will exercise their appraisal rights. Assuming that they follow the procedure established by the applicable statute (including notifying the corporation of their assertion of appraisal rights and demanding payment), they will be entitled to receive the fair value of their shares.
If Corp and Pat and Dale cannot agree on fair value, a court will decide the matter. In the court proceeding, Pat and Dale would offer the testimony of the independent financial advisor, stating the fair value of Sub shares to be between $21 and $26 per share, to support their contention. They might not get $25 per share, but based on this independent evaluation, they would probably get more than $20 per share.
