Business 2

BUSINESS ASSOCIATON

Chapter Seven (7)

Mergers, Acquisitions, and Takeovers

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Introduction

Entrepreneurs enter into business for different reasons. Due to this, these entrepreneurs tend to have objectives that may align with certain government regulations. This is the reason why there are many different forms of businesses. Some of the most common are sole proprietorship, partnerships, limited liability companies and corporations among others. On the same note, there are different ways through which entrepreneurs can form companies. Some of these ways include forming mergers and acquisitions, these two forms of business formation methods have their advantages and disadvantages, and their differences. This paper will try to investigate the details that surround the formation of businesses through mergers.

The manner in which businesses are formed is of great importance to businesses. In the special cases of the formation of mergers, care needs to be taken to ensure that the interests of all the stockholders are taken care of. In as much as the minority stockholders do not seem to have a lot of say when it comes to the operational management of the firm, it is also quite important for the merging parties to consider the provisions that protect the interests of the minority stockholders. One mistake such as overlooking the interests of the stockholders could lead into total rescinding of the mergers formed.

1-Mergers and Acquisitions

A merger kind of business is an arrangement where two companies reach a mutual decision to join forces and become one entity. The joining of forces involves combining structural and operational strategies, with the aim of cutting costs while increasing profits. In such an arrangement, the shareholders do not lose their investments, but usually have their shares in the old company exchanged for an equal number of shares in the merged entity. Mostly, mergers take place between peer companies which join together to become one, in order to enhance their worth. Mergers are considered as legal entities, since they become a common entity (Introduction, page 729, ¶ 2).

One form of a merger is the statutory merger. This is a type of a merger that involves the combination of two companies by using a procedure prescribed in the state corporations law. In the event of the formation of a statutory merger, the provisions and guidelines for the merger are prescribed under a document called the merger agreement. The merger agreement is drafted by the parties that are coming together to form the merger and is aimed at prescribing the guiding principles for the operation of the merger. Among others, one of the topics that is of utmost importance in the merger agreement is the manner in which the shareholders shall be treated. As stated earlier, the shareholders do not lose their holding, rather, they shareholding is transferred to the new business with an equivalent measure of the shares in the old business. The problem with statutory merging is that the company would have to acquire all the unforeseen liabilities that come with buying off the target business (Introduction, page 729, ¶ 2).

When statutory mergers are being formed, companies need to invite their shareholders to vote for the board of directors. However, when the merger is being formed using another method other than the statutory method, then the merger would not have to vote in new directors. The alternative method for formation of mergers is to use the practical merger method. In this method, the company that intends to gain control over another might want to contact individual shareholders and buy shares from these shareholders. The aim in this case is to gain as much control over the company that is being targeted as possible. A company aiming to buy off another might also chose to use a subsidiary to buy the shares in one company, eventually buying off the target company (Introduction, page 730, ¶ 1).

Another method would be to use what is known as asset acquisition. This is a strategy where the parent company buys off all the assets of the target company. This way, the acquiring company owns assets that belong to the target company. Unlike in the case of statutory mergers, in this case, there are no dangers of inheriting any unforeseen liabilities that come with the buying of the acquired company. This would result into complete ceasing to exist of the acquired company since the acquired company would have been liquidated, and its shares distributed among its different shareholders, leaving it with nothing to offer (Introduction, page 730, ¶ 3).

Case:

Farris v. Glen Alden Corporation (1958):

Glen Alden was a Pennsylvanian corporation that was mainly involved in the mining of anthracite coal and manufacture of conditioning units and fire-fighting units. Lately, however, the company has been on its knees, with consistent losses, to a point where its arrears in taxes now have escalated to the range of millions. During its period of economic turmoil on the side of Glen Alden, another firm, List Industries Corporation bought 38.5% of Glen Alden’S outstanding stock. The large amount of shareholding in favor of List enabled List to place three directors in the board of directors at GlenAlden, in order to protect its interests (Farris, page 732, ¶ 1).

As the organizations continued to work together, they decide to organize themselves, subject to the approval of their stockholders. In the arrangement, Glen Alden was to take over all the assets of List apart from the money that List was to use in the transaction. In exchange, List was to acquire a hefty amount of shares from Glen Alden, and distribute the shares among its shareholders. Glen Alden would also assume all the liabilities of List and change its name to List Alden as well (Farris, page 730, ¶ 2).

To further seal the deal, the directors of the two companies would remain to be directors of List Alden which would now replace List, which would be dissolved after the merger. Soon after the reorganization deal was passed, the shareholders of the organization met and approved the reorganization strategy as outlines in the notice for an annual general meeting. However, Farris, a shareholder of Glen Alden was not pleased with the deal and sought to have it stopped from taking place. The basis for filling the complaint was an irregularity in the manner through which the meeting was convened. The plaintiff was concerned that the directors of the organization did not reveal to the shareholders that the real intention of the meeting was to discuss a merger. As a result, the meeting was convened in a manner as to mislead and lure the shareholders. In addition, the reorganization strategy failed to give the shareholders a chance to dissent to the union, and even ask to be compensated for their shares instead of being pushed into the merger. In addition, the notice to convene the meeting failed to have certain sections of the Business Corporation Law, as a result of which, the meeting should not have been considered legal (Farris, page 733, ¶ 1).

In the argument presented by the plaintiff, there was no chance for the shareholders to refuse to comply to the union of the organization. Therefore, the meeting was just a bluff to ensure there is some bit of compliance. Notwithstanding, the court should declare the union null and void. He sought that the court enjoins the carrying out of the plan, otherwise he would suffer great loss on the property rights. In response, the defendant agreed that indeed, the allegations presented before the court were true, but they also added that the transaction was merely a purchase of assets. For the buying off of assets, the shareholders had no mandate to allow or deny the corporation from doing so. As a result, the allegations presented were inadequate to stop the organization from going ahead with its planned joining, since the assets had already been sold. The court, after looking at the arguments presented rules that the failure of the notice to comply with the Business Corporation Law made it null and void, and all actions emanating from the notice and the subsequent meeting were not legally binding (Farris, page 733, ¶ 4).

Based on the Pennsylvanian Business Corporation Law, if any of the shareholders objects to the formation of a merger between the companies that are planning to merge, he or she is liable to being reimbursed for the value of their shares. To do so, the shareholders need to surrender their share certificate. By passing the agreement, the size of Glen Alden would reduce by a great percentage since it would accumulate huge long-term debts, while selling some of its shares to List. In addition, the new organization formed from the merger would be managed by directors of List since they would be more in number compared to the directors of Glen Alden. With no option to dissent to the plan, the plaintiff and other shareholders of Glen Alden would lose a huge value of their investment after the merger. However, according to section 908, shareholders of a company which is intending to sell its assets have no right to dissent to the sale of the assets. The managers of such a company can sell the assets of such a company at will, in the best interest of the company. In this case, the defendant argued that the right for the shareholders to dissent to the sale of the assets only apply when the formation of the merger is compliant with the statutory procedure. The court, however, found that the merger should not have been formed without giving a notice to the shareholders of Glen Alden, and as such, the court of appeal affirmed the ruling by the junior court, at the cost of the appellant ( Farris , page 737, ¶ 2).

Personal opinion

This is one case where the formation of the merger was the profound example of the no-go-zone for directors of an organization. In this case, it was unfair for the organizations to decide to merge without seeking the consent of all the other stakeholders. In this case, the merger ought to have been rescinded as it had not been formed in the best interest of the people who bore an interest in the corporation. It was completely unfair for directors to reach a unilateral decision about a matter of common interest without making adequate consultations and considerations of all affected parties.

B. FREEZE-OUT MERGERS

Case:

Kahn v. M & F Worldwide Corp (2014):

This was a case presented to the Chancery Court following an acquisition that was supposedly irregular and unfair. In this case, it is reported that in the year 2011, MacAndrews & Forbes Holdings Inc which owned 43 percent of the M & F Worldwide Corp, which was the merger formed did not follow the right procedure in forming the merger. In this case, there were two requirements that had been brought before the court. Number one, it was required that the formation of the merger be negotiated by a special committee of MFW directors. Number two, it was required that the merger be discussed by a majority of stockholders unaffiliated with MFW. The merger had been formed after it was approved by a majority of the minority shareholders. However, the majority shareholders felt that even though the verdict had been made since there was a huge voting by the minority shareholders, their interests of the majority shareholders had not be well considered. The majority shareholders, as such, requested for a special reconsideration of the case. The aim was to get the few majority shareholders given a chance to present their case before the many minority shareholders (Kahn, page 752, ¶ 4).

With a proposal to buy off shares in the targeted corporation in order to enable the formation of the merger, a special committee was required to be formed, and to convene in order to advise on the formation of the merger. Being that some of the members of the committee would have been directors of the targeted corporation, they asked to be excused from the committee. The committee formed was, as such, made up mostly of independent directors who had not openly expressed special interest in the proceedings. The committee was granted powers to investigate the proposal to purchase shares in the target corporation as the committee deemed fit, evaluate and analyze the terms of the proposal, and make negotiations with MacAndrews & Forbes Holdings Inc concerning any elements of the proposal. In addition, the special committee was granted powers to present a report to the board concerning its recommendations and conclusions in regards to the proposal, which included giving its proposal as to whether the purchase of the shares was fair to all other stakeholders. Furthermore, and probably most importantly, the special committee was given power to decide not to pursue the proposal based on its assessment (Kahn, page 753, ¶ 4).

According to the understanding put forward, the board of directors was not to reach any decision about the proposal brought forward, up to and until the time when the special committee would make its recommendations to the board of directors. In order to carry out its mandate effectively, the special team was allowed to employ legal counsel and seek the services of a financial adviser. The Court of Chancery advised that such a shift to private may only be approved by the special committee formed as well as a supporting vote from the majority of the minority stockholders. The court found that by including the minority stockholders in the voting, their rights are protected from manipulation by the controlling stockholders. However, the appellants in this case argued that this provision does not absolutely protect the interests of the minority, since the minority stockholders can easily be influenced by arbitrageurs who might only be interested in making a decision that would be based on market premium offers. Based on this premise alone, it is not entirely fair to argue that the law has fully done whatever is possible to protect the interests of the majority of the minority stockholders (Kahn, page 755, ¶ 4).

Personal opinion

In this case, there seems to be ambiguity in the standing of the law. In as much as the courts have the mandate to deny the go ahead for mergers to be formed without the consent of the majority of the minority stockholders, presumably for the purpose of protecting the interests of the minority stockholders, it is also quite unfair to assume that such an action protects the minority stockholders from any chance of exploitation. As a result, there is need for this provision to be revised to ensure that there are better and tighter ways to investigate the formation of mergers.

Case:

Coggins v. New England Patriots Football Club Inc (1986):

In this case, William H Sullivan, Jr. bought a football team that had been formed as part of the teams that made up the American Football League. The buyer then formed a corporation and received an equivalent money from investors as to give them voting and non-voting shares in the corporation. Sullivan accumulated many shares of both voting and non-voting nature. However, soon, he was ousted from the presidency of the corporation, effectively making him unfit to operate and control the corporation. The new leadership changed the name of the corporation. Meanwhile, Sullivan was able to purchase all the 100,000 voting shares of the newly renamed corporation. Upon obtaining all voting rights, Sullivan immediately set out to vote out all hostile directors, whom he replaced with more friendlier directors. In the meantime, he made arrangements to regain total control of the corporation and to resume the presidency of the organization. In order to successfully implement his plan, Sullivan took a loan, and was required to enhance the performance of the team so that the proceeds from the corporation’s activities would be used to repay the loan. This was strategically done as Sullivan had all the voting rights, hence the nonvoting shareholders had not right of say (Coggins , page 764, ¶ 3).

Sullivan was then able to form a new corporation which he called New Patriots, and formed a merger with the Old Patriots, with an agreement to adopt the name that was formerly used by the Old Patriots. Having exchanged his shares in the Old Patriots for 100 percent shares in the New Patriots, Sullivan was the sole decision maker in the New Patriots. Having convinced the non-voting shareholders, the way was clear, and so the decision to make the merger was followed through. However, one of the nonvoting shareholders, David Coggins was not happy about this arrangement, and voted against the formation of the merger. A filed a suit in which he represented the interests of other stock holders who were not in support of the formation of the merger. Like the other nonvoting stockholders of the firms, David believed that the transaction to form the merger would be unfair and illegal. This was mainly because it would compel these stock holders to give up their shares. One of the judges of the Superior Court termed David Coggins and his colleagues as a group of people who had voted against the formation of the merger, but who had not turned in their shares, nor perfected their appraisal rights. The judge termed such people as only interested in voiding the merger (Coggins, page 765, ¶ 2).

Although the court ruled that indeed the formation of the merger was unfair to David Coggins and his colleagues, it also recommended that the formation of the merger not be undone. As a result, the judge advised that the affected stockholders be refunded a sum of money which would be equivalent to the value of their shares. All other hearings were to be set to determine the value of money that the nonvoting shareholders who did not support the formation of the merger were entitled to, and not the dissolution of the merger. This decision was affirmed by the Supreme Court that found the decision to be accurate in finding that the stockholders had been wronged, and that the formation of the merger was unfair and illegal. However, the court founds that it would not be fair to rescind the merger since the merger was almost ten years old, and so, the best intervention was the affirmation of the monetary refunds, for which the court ruled that the specific amounts to be refunded would be determined (Coggins, page 765, ¶ 4).

Personal opinion

The ruling in this case had a lot of dynamics to put into consideration. It was the best ruling made in the interest of the whole corporation. In as much as there was a problem that had been identified, rescinding the corporation would just have added a problem on top of another. It was indeed unfair, and against the law to form the merger and force the nonvoting stockholders to give up their share unwillingly. Although not the best, the ruling made to repay the affected parties was worthwhile. At least, the parties would not lose on everything they had invested in the corporation.

C. De-Facto non-mergers

Case:

Rauch v. RCA Corporation (1988):

This was a case that emanated from the acquisition of RCA Corporation by General Electric Company in the year 1985 where all common and preferred shares of RCA were coveted to cash. The plaintiff, a holder of preferred shares posted a complaint that the agreement meant for the liquidation or dissolution of the corporation or the winding up of the RCA Corporation through redemption of the preferred stock. The plaintiff sought to have the merger issue a value of $100 per share and not $40 as the merger had already valued, as this was consistent to the RCA certificate of incorporation. The plaintiff noted that the corporation had unlawfully issued a misleading value of the preferred shares, preserving the excess money for its own use. As a result, the plaintiff sought damages and injunctive relief, of which the defendant was opposed to. In its initial ruling, the district court ruled that the merger formation was carried out in accordance to the law (Rauch , page 770, ¶ 3).

The court ruled that the defendant had every right to choose to convert its stock to cash in order to accomplish a desired merger. There was no law that gave the holders of preferred shares the right to initiate a redemption process. According to the Delaware law, shareholders are protected from any unfairness in the value of shares, such as undervaluation of the shares. Had the plaintiff taken this route, she might have won, but she opted not to use unfairness of the transaction as her basis of argument, and thus, lost the case (Rauch, page 772, ¶ 3).

Personal opinion

The undervaluation of the preferred shares was a clear violation of the expectations of the shareholders. However, I agree with the court ruling that in as much as the transaction was unfair, the outcome of the case was fair. This was because the plaintiff approached the case from a different perspective, instead of using the right perspective if the unfairness of the transaction to argue out her case.

D. LLC mergers

Case:

VGS, Inc, v. Castiel (2001):

This is a case where one member owns and controls two entities that have merged with a third entity to form a limited liability company. Unhappy about the leadership style of the larger owner, the owner of the third entity goes ahead to merge the LLC into a Delaware corporation without the notice of the other owner. It was found, in this case, that the third member managed to convince a manager to join him in forming the corporation. In this case, the managers failed to notify the majority owners, as they knew that had they done so, he would have sacked them in a move to protect his majority shareholding. As such, the two managers acted in bad faith, and breached their duty of loyalty to the original member. Notwithstanding, the successful attempt to form the merger, it was not done in an appropriate manner, hence was declared invalid (VGS, Inc , page 774, ¶ 2).

Sahagen who was the minority owner of the LLC was uncomfortable with the manner that the LLC was ran, ad managed to convince two managers and some employees to back his bid to oust David Castiel from leadership. The formation of the corporation meant that the LLC ceased to exist, and its assets and liabilities were passed to the new corporation. The board members of the corporation excluded David Castiel from the board membership. The court found in such cases, a majority vote would prevail over a unanimous vote. However, because both Sahagen and the manager failed to act in good faith by notifying David Castiel of their planned actions, the corporation was invalid (VGS, Inc, page 779, ¶ 4).

Personal Opinion

I agree with this ruling that in the interest of ensuring that all parties have their interests well preserved, there was need for the managers to act in good faith. There was need to ensure that major decisions are not carried out without the notice of some important stakeholders. Declaring the corporation invalid was the right move by the court.

2 -Takeovers

Case:

Cheff v. Mathes (1964):

This is a case presented to the court to rule on the complain of loss incurred on a corporation due to alleged misuse of corporate funds by certain directors of the Holland Furnace Company. The company had been experiencing economic turbulence, apparently attributed to the post-war decline in the economy. To survive the situation, the company had come up with measures to reorganize its sales department, had also closed down all unprofitable branches in order to reduce its overhead costs. There had been a request from an investor to merge his company with Holland, but the request was denied by Mr. Cheff. The investor expressed no interest to pursue the merger, or any stock from Holland forthwith, but secretly continued to buy stocks from Holland. Apparently, the investor was trying to force his way into the board of directors of Holland, otherwise, he threatened to liquidate the company (Cheff, page 780, ¶ 2).

The court found that the actual purpose for the purchase of the shares was to perpetuate control. It further noted that only four of the board members were aware of the alternative, and as such only four of them would be tried for fraud, if there was substantial evidence provided by the plaintiff. The plaintiff was to bear the burden of proof of any misconduct, otherwise, the court presumed that the four directors acted in good faith. However, it was found that there was no intention to liquidate Holland, and as such, the Vice Chancellor found that the purchase of shares amounted to fraud on the side of the directors, a view that contradicted the lower court’s ruling (Cheff, page 787, ¶ 3).

Personal Opinion

The ruling made in this case was fair enough. This case seems to portray a phobia for control where the directors went ahead to engage in financial misconduct out of fear of losing control of their organization, using corporate funds for reason that did not benefit the overall organization.