Corporations: Mergers, Consolidations, Terminations
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LO40-1: What are mergers and consolidations?LO40-2: What are the procedures for mergers and consolidations?LO40-3: What are asset purchases?LO40-4: What are stock purchases?LO40-5: What is a takeover?LO40-6: In what ways could the termination of mergers and consolidations occur?
Chapter 40 Hypothetical Case 1
As this chapter indicates, hostile takeovers are corporate takeovers to which the management of the target corporation objects. When a hostile takeover succeeds, the target corporation's management frequently compares the transition to a full-scale invasion characterized by layoffs and dramatic changes in company policy.Is a hostile takeover an ethical business practice?
Chapter 40 Hypothetical Case 2
Minisoft Corporation and Pear, Inc. are the two largest computer companies in the United States. Pending Department of Justice antitrust review, the two corporations plan to merge, renaming their company Mini-Pear, Inc. As an integral part of the merger, existing shareholders of Minisoft Corporation and Pear, Inc. will be offered an even stock swap. Per the terms of the proposed trade, current shareholders of Minisoft Corporation and Pear, Inc. will exchange each share of their company's stock for one share of Mini-Pear, Inc. stock.A few shareholders of both Minisoft Corporation and Pear, Inc. do not approve of the terms of the proposed merger, nor do they approve of the merger itself. The vast majority of shareholders of companies approve of the merger.What rights do these shareholders have, either in terms of blocking the merger or in terms of estimating the fair value of their existing shares?
What Are Mergers and Consolidations?
Merger: Legal contract combining two or more corporations such that only one of the corporations continues to exist; in essence, one corporation absorbs another corporationConsolidation: Legal contract combining two or more corporations, resulting in an entirely new corporation; in consolidation, neither of the original corporations continues to exist
Procedures for Mergers and Consolidations
Boards of directors of all involved corporations must approve the planShareholders must approve the plan through a vote at a shareholder meetingThe corporations must submit their plan to the secretary of stateThe state must review the plan and, if it satisfies legal requirements, grant an approval certificate
Terminology and Rights Regarding Mergers and Consolidations
Rights of shareholders: Shareholders vote only on exceptional matters regarding the corporationShort-form merger (parent-subsidiary merger): Parent corporation merges with a subsidiary corporation; does not require shareholder approvalAppraisal right: Shareholder's right to have his/her shares appraised, and to receive monetary compensation for their value
Purchase of Assets and Stock
Purchase of assets: One corporation can extend its business operations by purchasing the assets of another companyCorporate assets: All intangible items (corporate goodwill, company name, company logo, etc.) and tangible items (buildings, property, etc.) owned by the corporationNote: Generally, corporation that purchases assets of another corporation does not acquire its liabilitiesPurchase of stock: An acquiring corporation can take control of another corporation by purchasing a substantial amount of its voting stock
Types of Takeovers
Hostile takeover: A takeover to which management of the target corporation objectsTender offer: Aggressor (acquiring corporation) offers target shareholders a price above current market value of their stockExchange offer: Aggressor offers to exchange target shareholders'current stock for stock in aggressor's corporationCash tender offer: Aggressor offers target shareholders cash for their stockBeachhead acquisition: Aggressor gradually accumulates target company's shares
Responses to Takeovers
Self-tender offer: Response to corporate takeover attempt in which target corporation offers to buy its shareholders'stock; if shareholders accept offer, target corporation maintains control of businessLeveraged buyout: Occurs when group within a corporation (usually management) buys all outstanding corporate stock held by the public; group gains control over corporate operations by going private (i.e., becoming a privately held corporation)
Termination of Mergers and Acquisitions
Dissolution: Legal termination of corporationTwo types: Voluntary and involuntaryLiquidation: Process by which trustee converts corporation's assets into cash, and distributes them among corporation's creditors and shareholders
Voluntary versus Involuntary Dissolution
Voluntary dissolution: Occurs when directors or shareholders initiate the dissolution processInvoluntary dissolution: State government forces the corporation to close
Reasons for State-Initiated Involuntary Dissolution
Corporation failed to pay taxes within 60 days of due dateCorporation failed to submit its annual report to secretary of state with 60 days of due dateCorporation did not have a registered agent or office in the state for 60 days or moreCorporation failed to notify secretary of state within 60 days that its registered agent/registered office had changedCorporation's duration (as specified in its articles of incorporation) has expired
Reasons for Court-Ordered Involuntary Dissolution
Corporation obtained its articles of incorporation fraudulentlyCorporate directors have abused their powerCorporation is insolvent
Life Stages of a Corporation
Incorporation: Company becomes incorporated when articles of incorporation signedCorporation conducts business: Directors and officers oversee business, as shareholders ensure company's stock has valueDissolution: Corporation legally terminated, either voluntarily or involuntarilyLiquidation: Directors convert corporate assets into cash and distribute them among corporation's creditors and shareholders
Chapter 40 Hypothetical Case 3
Several circumstances can trigger a state government's right to involuntarily dissolve a corporation headquartered in its state, including: (1) the corporation fails to pay taxes within 60 days of the government-imposed deadline; (2) the corporation fails to submit its annual report to the secretary of state within 60 days of the report's due date; (3) the corporation does not have a registered agent or office in the state for 60 days or more; (4) the corporation fails to notify the secretary of state within 60 days that its registered agent and/or registered office has changed; or (5) the corporation's duration, as specified in its articles of incorporation, has expired.Arguably, many of the described triggering events are technicalities, and inquiring minds might wonder why a state government would make such a drastic decision to revoke a corporate charter, especially when it would jeopardize the livelihood of corporate employees, as well as future corporate tax payments to the state. The absence of those corporate tax dollars could jeopardize government social programs, which could negatively affect scores of citizens who need access to those programs.In light of the potential negative impact on the community, how readily should a state government use its involuntary corporate dissolution right?
Chapter 40 Hypothetical Case 4
Clothing manufacturer Wooltek has coveted textile manufacturer Veltron since it developed a new miracle fiber, FabriSense. The new fiber, and the fabric made from it, has amazing properties, including being completely water-resistant, never wrinkling or bagging, and resisting virtually all stains.Wooltek decides to take over Veltron, a publicly traded company. It begins by purchasing a large number of Veltron shares over the course of a three-month period.Which type of takeover is Wooltek attempting: tender offer, exchange offer, cash tender offer, beachhead acquisition, or hostile takeover? What is Wooltek's next likely move in the takeover process?