Mergers & Acquisitions (2/2)
In this lesson, you’re expected to learn about:
– stock and asset purchases
– tender offers
– appraisal rights
What is a Stock Purchase?
Here, the A corporation acquires the T corporation’s stocks directly from its stockholders. In return, the buyer can pay the T’s shareholders in cash or with its shares.
The T corporation will keep the same assets and liabilities; however, the T ownership will be changed to the A corporation (T corporation will become a subsidiary of A corporation).
No approval from the board or shareholders from the A and T corporations is required if the consideration of the transaction is cash. Therefore, shareholders have no appraisal rights. As the T’s assets remain unchanged and contracts’ ownership does not change, the consent of third parties is not required, except if the contracts have “change of control” provisions.
If a company wants to buy all shares of a publicly-held company, it can go to the market and make a public offer (tender offer)directly to its shareholders.
Sometimes, the A corporation conditions the closing of the transaction to the acquisition of 100% of the T’s shares or, at least 90%, aiming at doing a short-form merger later. In this case, the acquirer can include escape clauses in the offer releasing liability for buying shares if the minimum number of shares is not tendered by the T’s shareholders.
• Securities law: A corporation is required to disclose to the market every 5% of shares acquired from the T corporation.
•Williams Act: Demands the A corporation to disclose to the T’s shareholders, among other things, the reason and purpose of the offer; the number of shares sought and the price offered; any conditions attached to the offer; the source and amount of funds the buyer has available for the purpose.
• If the A corporation acquires more than 90% of the T shares, the acquirer will have the right to complete the deal by means of a short-form merger.
• Neither A nor T board’s approval is necessary (even though they do so in practice).
• Shareholders’ formal approval is not necessary as it is a direct offer to T’s shareholders and if they do not like it, they just do not tend their shares.
• It is quicker: tender offers only last 20 days while a statutory merger may take months for board and shareholder approvals.
• Even if the board does not approve the transaction, the A corporation may make a hostile takeover.
• There are no appraisal rights.
• It is uncertain and riskier: no due diligence is made and the acquisition of the T corporation comes with all assets and liabilities.
• If another investor gets involved in a hostile takeover, the transaction may be riskier and the offer price may increase.
• When the tender offer is made as a hostile takeover, it may be harder to integrate both the A and T corporations later.
• Here, the A corporation acquires all or substantially all of T corporation’s properties and assets (rather than its stock). The A corporation can choose which assets it wants to purchase and the liabilities it wants to assume.
• It is usually used to acquire a single division or business unity entity of the seller, that allows the buyer to avoid unknown liabilities.
• Whenever the T corporation intends to sell all or substantially all of its assets, the approval of its board and its shareholders is required, and the approval from A’s board and its shareholders is needless. The dissenting shareholders have no appraisal rights.
Appraisal rights are a form of protection for minority shareholders, who are being cashed-out from the company. The concern is if they are receiving enough money or if they can trade the stock that they are getting.
• To all shareholders of the A and T corporations.
• To whoever has the right to vote.
• To whoever has voted against the corporate transaction.
• To whoever continuously holds shares from the date of the demand of appraisal rights (AR) until the date of the merger.
• After delivery of written demand for AR before the vote is taken.
• If cash is given as consideration of the deal.
• Market-out exception: if the target company is listed on a stock exchange, with its stock widely traded, and with more than 2,000 stockholders.
• Consideration is stock of the surviving company (or of any other company).