Corporations (Changes in Corporate Structure)

Question 1

Corporations (Changes in Corporate Structure)

Fundamental Changes in Corporate Structure

Answer 1

1. Certain Amendments to the Articles of Incorporation
2. Certain Mergers
3. Consolidations
4. Sale of All or Substantially All Assets Outside the Ordinary Course of Business
5. Dissolution/Liquidation
6. Termination

Question 2

Corporations (Changes in Corporate Structure)

Common Corporate Combinations

Answer 2

1. Merger/Consolidation
2. Stock for Assets
3. Stock for Stock
4. Spinoff Transaction
5. Stock Acquisition

Question 3

Corporations (Changes in Corporate Structure)

Common Corporate Combinations:
Stock for Assets

Answer 3

The acquirer purchases all or substantially all of the target’s assets with the acquirer’s stock as consideration to the target’s shareholders

1. All or Substantially All of Target’s Assets –> Acquirer
2. Acquirer Stock –> Consideration to Target Shareholders
3. Target –> Continues to Exist with all Liabilities

Question 4

Corporations (Changes in Corporate Structure)

Common Corporate Combinations:
Stock for Stock

Answer 4

The acquirer purchases all of the target’s stock with the acquirer’s stock as consideration to the target’s shareholders

The target becomes the acquirer’s subsidiary
.
.
1. Target Stock –> Acquirer
2. Acquirer’s Stock –> Consideration to Target Shareholders
3. Target –> Acquirer’s Subsidiary

Question 5

Corporations (Changes in Corporate Structure)

Common Corporate Combinations:
Spinoff Transactions (Division)

Answer 5

The parent spins off certain assets into a new subsidiary in which the parent owns 100% of the subsidiary’s stock

The parent stockholders do not surrender any stock, they receive equivalent shares in the new subsidiary to compensate for the loss of equity in the parent stock

Question 6

Corporations (Changes in Corporate Structure)

Common Purposes for Corporate Combinations

Answer 6

1. Corporation wants to acquire special process or tech owned by another corporation
2. Corporation wants to diversify and expand its product line
3. Corporation wants to get rid of competitor
4. Corporation wants to sell line of business (or other assets) to raise cash

Question 7

Corporations (Changes in Corporate Structure)

Constituent Corporations

Answer 7

Corporations involved in corporate combinations

NOTE: does not include parent corporations when the subsidiary is merging

Question 8

Corporations (Changes in Corporate Structure)

Structuring Considerations

Answer 8

1. Tax Considerations
2. Liability Considerations

Question 9

Corporations (Changes in Corporate Structure)

Restructuring Considerations:
Tax Considerations

Answer 9

Nomenclature (Tax “Reorganization”) –> De Facto Merger –> No Gain Recognition

Solely Cash Consideration –> Recognize Gains

Solely Stock Consideration –> No Gain Recognition

Mixed Consideration –> May have to Recognize Boot

Question 10

Corporations (Changes in Corporate Structure)

Structuring Considerations:
Liability Considerations

Answer 10

1. Mergers
   a. Known Liabilities
   b. Contingent Liabilities
   c. Unknown Liabilities –> Use Escrow to protect
2. Stock Purchase Transactions
3. Asset Purchase Transactions
   a. Strict Successor Liability
   b. Express Assumption
   c. Deemed Assumption (De Facto Merger & Product Line Exceptions)

Question 11

Corporations (Changes in Corporate Structure)

Structuring Considerations:
Liability Considerations
Asset Purchase Transactions

Answer 11

Under most state laws and common law principles, a corporation that purchases the assets of another company is not liable for the seller’s liabilities unless the purchaser expressly or impliedly assumed the seller’s liability

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Factors to Consider
1. Whether buyer expressly or impliedly agreed to liability
2. Whether the transaction amounts to a de facto consolidation/merger
3. Whether the buyer corporation is **merely a continuation **of the seller corporation, or
4. Whether the transaction was entered into fraudulently for the purpose of avoiding liability

Question 12

Corporations (Changes in Corporate Structure)

Product Line Exception

Answer 12

A successor corporation that manufactures the same line of products as its predecessor may be held liable for injuries caused by products manufactured by the predecessor corporation

Question 13

Corporations (Changes in Corporate Structure)

De Facto Merger Doctrine

Answer 13

The purchase of assets from another company may be considered a de facto merger when there is:

1. Continuity of Ownership
2. Assumption of the Successor Corporation of the liabilities ordinarily necessary to continue the acquired business
3. Continuity of management, personnel, physical location, assets, and general business operation

Question 14

Corporations (Changes in Corporate Structure)

Leveraged Buyouts

Answer 14

Where a corporation goes private by purchasing all of its publicly held shares

Often the corporation will borrow money to fund the buyout.

Question 15

Corporations (Changes in Corporate Structure)

Domestication
Reasons & Requirements

Answer 15

Where a corporation changes its state of incorporation.

Domestication has no effect on the corporation’s debts, assets, or liabilities

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Common Reasons for Domestication

1. Preparing for an IPO
2. Escaping unfavorable regulations (generally tax & labor)

Requirements

1. Board Approval
2. Shareholder Approval
3. Certain Filing Requirements in relevant states

Question 16

Corporations (Changes in Corporate Structure)

Entity Conversion:
Requirements & Liability Concerns

Answer 16

Where a corporation converts to a different type of business entity

Requirements

1. Board Approval
2. Shareholder Approval
3. Certain Filing Requirements in relevant states

Liability Concerns

Because some former shareholders may now face personal liability (if changing to a Partnership), each person who would be subject to such personal liability must sign a separate written consent

Question 17

Corporations (Changes in Corporate Structure)

Dissolution
Types of Dissolutions

Answer 17

1. Voluntary
2. Administrative
3. Involuntary/Judicial

Question 18

Corporations (Changes in Corporate Structure)

Dissolution:
Voluntary Dissolution

Answer 18

(1) Initiation by
a. Board or
b. Shareholders
(2) Shareholder Approval

Initiation Rights: Usually initiated by the board, but may be initiated by shareholders

Shareholder Approval Requirements: A decision to voluntarily dissolve must be approved by shareholders

Question 19

Corporations (Changes in Corporate Structure)

Dissolution:
Administrative Dissolution

Answer 19

An administrative dissolution is generally the result of technical/administrative defaults, such as:

1. Failure to pay taxes or file annual reports
2. Failure to have a registered agent or notify the state of a change
3. Continuing to operate after the corporation’s duration has expired

Reinstatement

Most states allow corporations to apply for reinstatement within a certain period of time.

The corporation must cure the default.

Reinstatement is retroactive, meaning one the default is cured the company continues as if it never dissolved.

Question 20

Corporations (Changes in Corporate Structure)

Dissolution:
Involuntary/Judicial Dissolution

Answer 20

A corporation can be forced to dissolve by the state, unsatisfied creditors, or by its shareholders

Question 21

Corporations (Changes in Corporate Structure)

Dissolution:
Involuntary/Judicial Dissolution
by the State

Answer 21

The state is the “creator” of the corporation and therefore it can dissolve the corporation for reasons such as:

1. Procuring the articles of incorporation through fraud,
2. Exceeding/abusing its granted authority,
3. Doing something illegal

Question 22

Corporations (Changes in Corporate Structure)

Dissolution:
Involuntary/Judicial Dissolution
By a Creditor

Answer 22

A creditor may bring an action for dissolution if:

1. The creditor is can establish that the corporation is insolvent, and
2. Either:
   a. The creditor has received a judgment against the corporation for the claim, or
   b. The corporation has acknowledged in writing that the claim is owed.

During liquidation, the expenses of liquidation are paid first, then the creditors, then the shareholders

Question 23

Corporations (Changes in Corporate Structure)

Dissolution:
When can a Shareholder cause Involuntary/Judicial Dissolution

Answer 23

Only the MBCA and some states allow shareholder judicial dissolution in close corporations (but not for oppression or fraud) or in situations where the board or shareholders are deadlocked.

Question 24

Corporations (Changes in Corporate Structure)

Liquidation:
General Activities

Answer 24

The process of wrapping up the business affairs of the corporation

1. Collecting Assets
2. Disposing of Properties that will not be distributed to shareholders
3. Discharging liabilities or making provisions for discharging liabilities, and
4. Distributing the remaining property to the shareholders according to their respective interests

Question 25

# Corporations (Changes in Corporate Structure) **Liquidation:** Non-Judicial

Answer 25

Occurs when dissolution is _voluntary_ or _administrative_ The corporate officers and directors **liquidate** the corporation by: 1. Completing Contracts 2. Notifying Creditors to Submit Claims 3. Collecting Assets

Question 26

# Corporations (Changes in Corporate Structure) **Liquidation:** Judicial

Answer 26

Usually only when dissolution is _involuntary/judicial_, but a _voluntarily_ or _administratively_ dissolved corporation **may** request **judicial supervision** of liquidation when appropriate. The court **may appoint** a **receiver** to receive and distribute the corporation's assets

Question 27

# Corporations (Changes in Corporate Structure) **Liquidation:** Claims Against the Corporation

Answer 27

**Known Claims** Claims, debts, and obligations the corporation knows about and **must provide notice to creditors** to submit their claims during liquidation . . **Unknown Claims** Claims that have *not yet* **matured** _or_ **been made** against the corporation The corporation may place a **notice of dissolution** in a newspaper of general circulation stating that the claim will be barred unless it is brought within 3 years of the publication. Companies may **provide for unknown claims** by ***purchasing insurance*** or ***setting aside a portion of assets in escrow*** **Assets Distributed Before Claim Made** --> **Shareholder may be liable**, but only to the extent to which corporate assets were distributed to them **Corporation Dissolved Due to Merger/Consolidation** --> **Creditors may enforce** a claim against the **surviving corporation**

Question 28

# Corporations (Changes in Corporate Structure) **Liquidation:** Distribution to Shareholders

Answer 28

Occurs after **all debts discharged** _and_ **any expenses of liquidation paid** Liquidation distributions are determined in accordance with **shareholders' ownership interest** (residual interest) Shareholders may receive **cash** or **assets**

Question 29

# Corporations (Changes in Corporate Structure) **Mergers:** Types of Mergers

Answer 29

1. Direct Merger 2. Upstream and Downstream Mergers 3. Forward Triangular Merger 4. Reverse Triangular Merger

Question 30

# Corporations (Changes in Corporate Structure) **Mergers:** Direct Mergers

Answer 30

The **target** merges *into and with* the **bidder** . 1. Target's Assets & Liability --> Bidder 2. Target's Outstanding Shares --> Converted (Bidder Stock or other Consideration) 3. Target --> Ceases to Exist . **Constituents** = Bidder & Target . **Bidder** = Survivor **Target** = Extinguished Corporation NOTE: Direct Mergers are more dangerous because of assumed liabilities

Question 31

# Corporations (Changes in Corporate Structure) **Mergers:** Forward Triangle/Subsidiary Merger

Answer 31

The **target** merges *into and with* the **subsidiary-bidder**, with the **subsidiary-bidder** as the **survivor** ``` ``` 1. Target's Assets & Liability --> Subsidiary 2. Target's Outstanding Shares --> Converted (Parent-Bidder Stock or other Consideration) 3. Target --> Ceases to Exist ``` ``` **Constituents** = Subsidiary-Bidder & Target **Subsidiary-Bidder** = Survivor **Target** = Extinguished Corporation **Parent-Bidder** = Parent

Question 32

# Corporations (Changes in Corporate Structure) **Mergers:** Reverse Triangle/Subsidiary Merger

Answer 32

The **subsidiary-bidder** is merged i*nto and with* the **target** and the **target** is the **survivor** The **target** becomes the **subsidiary** of the **parent-bidder** ``` ``` 1. Subsidiary's Assets & Liability --> Target 2. Target's Outstanding Shares --> Converted (Parent-Bidder Stock or other Consideration) 3. Subsidiary's Shares --> Converted (Target Common Stock) 4. Subsidiary --> Ceases to Exist ``` ``` **Constituents** = Subsidiary & Target **Target** = Survivor (now Subsidiary) **Subsidiary-Bidder** = Extinguished Corporation **Parent-Bidder** = Parent

Question 33

# Corporations (Changes in Corporate Structure) **Mergers:** Short-Form, Upstream, & Downstream Mergers

Answer 33

Mergers between **parent** **corporations** and their **subsidiaries** . **Short-Form Mergers** If the **parent owns more than 90% of the subsidiary stock**, the MBCA and most states allow the merger to take place **without shareholder approval** from either the parent corporation or the subsidiary. MBCA § 11.05 . **Upstream Merger** Where the **subsidiary merges into the parent** and the parent is the survivor . **Downstream Merger** Where the **parent merges into the subsidiary** and the subsidiary is the survivor

Question 34

# Corporations (Changes in Corporate Structure) **Mergers:** Key Events & Procedures

Answer 34

1. Constituent Corporation **Discussions/Exploration** 2. **Letter of Intent**/MOU/Term Sheet 3. Drafting the **Plan of Merger** 4. **Director Approval** 5. **Shareholder Approval** (& Exceptions)

Question 35

# Corporations (Changes in Corporate Structure) **Mergers:** Shareholder Approval Exceptions

Answer 35

1. Short-Form Merger 2. Small-Scale Merger 3. Certain Triangular Mergers (that do not impact shareholder's equity) **Short-Form Merger** If the **parent owns more than 90% of the subsidiary stock**, the merger may occur without shareholder approval **Small-Scale Mergers** If **less than 20%** of the **survivor's outstanding shares** are transferred to extinguished shareholders, the merger may occur** without surviving shareholder approval** If more than 20% -->Parent shareholders get a vote

Question 36

# Corporations (Changes in Corporate Structure) **Mergers:** Dissenter's Right of Appraisal | Procedural Requirements & Exception

Answer 36

Shareholders **opposed** to a merger ***may*** have the right to be **bought out** (at FMV), following strict procedural rules **Procedural Requirements** 1. Shareholder must deliver **written notice of intent** 2. **Notice** is delivered to the corporation _before_ the vote 3. Shareholder **does not vote** 4. *Within 10 days*, the corporation must deliver **written appraisal notice** to any dissenting shareholder 5. Shareholder must **return the form** (Not less than 40 days, not more than 60 days) 6. Corporation **estimates FMV** 7. Corporation **buys out **shareholder for *equal or more than FMV* **"Market Out" Exception** Many states do not allow appraisal rights if: 1. The shares are listed nationally, or 2. There are more than 2000 Shareholders

Question 37

# Corporations (Changes in Corporate Structure) **Hostile Takeovers**

Answer 37

Combinations that are *not consented* to by the **target's management ** The aggressor/bidder goes over the head of the target's management and courts stockholders directly **Primary Methods of Hostile Takeovers** 1. Tender Offer 2. Proxy Fight

Question 38

# Corporations (Changes in Corporate Structure) **Hostile Takeovers:** Tender Offer | Process & Regulations

Answer 38

A broad solicitation by a company or a third party **offer to purchase** a substantial percentage of a company's shares or units for a **limited period of time** at a **fixed price**. . **Toehold Positioning** Gaining an **equity position** in order to ***advance the takeover*** and to exercise shareholder rights (information & access) Purchasing a 4.9% of a target's outstanding shares, avoiding required SEC disclosures and filings. . . **Regulations** 1. § 13(d) of the 1934 Act --> Regulating the **reporting** of stock acquisitions over 5% 2. § 14(d) of the 1934 Act --> Regulating the **making of tender offers** 3. The Williams Act --> Requires **certain disclosures** by both the _aggressor_ and _target_ a. Refines §§ 13 & 4 for § 12 Reporting Companies b. Prevents Fraud c. Protects Shareholder . . **All Holders Rule** An issuer tender offer must be open to all security holders

Question 39

# Corporations (Changes in Corporate Structure) **Hostile Takeovers:** Tender Offer *Announcement & "Put into Play"*

Answer 39

The announcement of a tender offer is usually done by advertisement or press release **Usually includes:** 1. Limited need (How much stock we need) 2. Limited price (at this price) 3. Limited time (for this amount of time) Once the announcement is made, the ***target*** is **"put into play" **--> possible Risk Arbitrage (aka speculators/"arbs" buying the target stock)

Question 40

# Corporations (Changes in Corporate Structure) **Hostile Takeovers:** Proxy Battles

Answer 40

An alternative to a **tender offer** The **bidder/acquirer** tries to take over the **target's board of directors**, generally by **soliciting shareholders** with new director proposals

Question 41

# Corporations (Changes in Corporate Structure) **Hostile Takeovers:** Proactive & Retroactive Defensive Strategies

Answer 41

**Proactive Defensive Strategies** 1. Staggered Board 2. Super-majority Vote Requirement 3. Golden Parachute Payments 4. Poison Pills . **Reactive Defensive Strategies** 1. White Knight 2. Pac-Man 3. Jonestown 4. Self-Tender 5. Crown Jewel

Question 42

# Corporations (Changes in Corporate Structure) **Hostile Takeovers:** Enhanced Scrutiny of Defensive Measures

Answer 42

Delaware courts have developed an **enhanced scrutiny standard of review** for defensive measures implemented in response to a potential hostile takeover All Holders Rule *Unocal* Test

Question 43

# Corporations (Changes in Corporate Structure) **Hostile Takeovers:** *Unocal* Test for Director Defense Strategies

Answer 43

1. Board must have **reasonable grounds** to believe the tender offer **presents a danger** to the company, *based on*: a. Good Faith b. Reasonable Investigation c. Independent Directors 2. The Board's response must be **reasonable** a. **Proportional** to the threat b. **Not coercive** or preclusive Satisfied --> Business Judgment Rule Applies Not Satisfied --> Breach of *Revlon* Duties

Question 44

# Corporations (Changes in Corporate Structure) **Hostile Takeovers:** Impact on Director's Fiduciary Duties

Answer 44

Once a hostile takeover **becomes inevitable**, the board's **duty shifts** from ***protecting shareholders*** to ***maximizing sale price of stock*** (*Revlon* Duties) *Revlon* duties are **more stringent** than the **business judgment rule**