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Samenvatting - M&A Class notes
1397944800 class notes
What is the general rule regarding acquisitions using stock? The exception?
- the general rule is that shareholders of both firms have voting rights, but 5 exceptions result applying in large stock swap statutory mergers:
- If the amount of common stock in the purchasing firm used in the acquisition is less than 20% of its outstanding shares, the purchasing firm shareholders do not vote.
- In stock-for-stock acquisitions, the target firm shareholders do not vote.
Exceptions found in the Delaware code, followed by the codes of California & Ohio:
- If the purchasing firm in an asset acquisition is a Delaware corporation (or incorporated in a state that follows Delaware’s statute) the purchasing firm shareholders do no vote
- If the purchasing firm in a triangular acquisition is a Delaware corporation not the shareholders in the target firm vote, but the shareholders in the parent company.
- If the purchasing firm in a stock acquisition is a Delaware corporation, the shareholders in the purchasing firm, as well as those in the target firm, do not have voting rights.
What is the general rule regarding acquisitions for cash or cash equivalents?
- when the purchasing firm is paying cash or cash equivalents (non-voting, non-convertible stock or non-convertible debt), in general the shareholders of the purchaser do not vote.
What is the general rule in a cash for assets acquisition?
- In a cash-for-assets acquisition, the shareholders in the target vote, but the shareholders in the purchasing firm don’t.
What is the general rule in a cash merger?
- In cash mergers, the shareholders of the target vote, if an only if the target mergers into the purchasing corporation and there is no change to the rights and privileges
What is a reverse acquisition?
- A reverse acquisition is having the actual target firm technically purchase the assets of the actual purchasing firm
How are the voting rights allocated in a reverse acquisition?
- planners can allocate the voting rights to shareholders in the purchasing firm and eliminate the shareholder voting rights in the target.
What are the dissenter's rights?
- Dissenter’s rights are also known as “appraisal rights” or “buy-out rights”. They give the right to petition a state court for the fair cash value of their shares.
What is a statutory merger or consolidation (Plain vanilla merger)?
- 2 corporations (A & B) with separate owners (their shareholders), B merges into A, so A is the surviving corporation.
- The shareholders of A continue to hold their stock. The shares of A are exchanged for the shares in B and all the assets and liabilities of B are transferred to A.
- The shareholders of B now hold newly-issued additional A stock, and B shares are cancelled.
- The transaction is considered as an A reorganization and therefore, a tax-free merger
What is an asset acquisition?
- The buyer acquires certain enumerated assets and liabilities of the seller in exchange for the buyer’s cash, stock or other property.
- The acquirer only acquires those liabilities explicitly assumed.
- The seller will continue in place as it existed prior to the transaction.
What is a squeeze out?
- Applies for the minority of shareholders.
- If the buyer acquires typically 90% in the stock purchase step of the transaction, stockholders approval may not be required to effect the back-end merger, which may allow the buyer to use a stock purchase to acquire a company even when it is not able to directly acquire every last share.
What is a stock purchase?
- The buyer negotiates directly with the target and its stockholders to acquire the target’s outstanding shares of capital stock directly from each of the target’s stockholders.
- The buyer may pay cash, capital stock, debt or other property or a combination of any of these.
- After the closing, the target will continue as it existed prior to the acquisition with respect to the ownership of its assets and liabilities, its employees and the conduct of its business.
What are the 3 principal categories of negotiated acquisition structures?
- STOCK PURCHASE
- ASSET ACQUISITION
What is a leveraged buyout (LBO)?
- A group of investors, led by a leveraged buy-out fund (usually a private limited partnership), created an acquisition vehicle (a shell corporation) and funds the entity with cash.
- The acquisition vehicle then raises a substantial amount of cash by selling debt to banks, then it uses the cash to purchase 50.1% of the outstanding voting shares of a publicly-traded corporation.
- The acquisition vehicle then merges into the target.
- The remaining voting shares of the target are exchanged for debt or non-voting preferred securities and the owners of the acquisition vehicle take the only stock outstanding in the target.
- The surviving target corporation assumes the debt of the acquisition vehicle in the second stage merger.
- The result transforms a publicly-traded corporation into a privately-held one (or the corporation has gone dark).
What is a triangular asset acquisition?
- the purchaser drops down a shell subsidiary that purchases the assets of the target and the target dissolves.
What is a reverse triangular merger?
- when the shell subsidiary merges into the target
What is a forward triangular merger?
- when the target merges into the shell subsidiary
What is a triangular acquisition?
- The purchasing firm drops down a wholly-owned subsidiary and the selling firm merges with the subsidiary.
- (D) shareholders of the parent do not vote on the acquisition,
- If the target shareholders receive cash for their shares it is a taxable exchange.
What is single firm recapitalization?
- The firm drops down a new wholly-owned shell subsidiary and merges itself into the subsidiary.
- All of the stock in the corporation is cancelled.
- The majority shareholders receive stock in the surviving firm and the minority shareholders receive cash or debt securities.
Describe the procedure in a two stage stock acquisition
- FIRST STAGE: The stock acquisition is followed by a back-end merger.
- SECOND STAGE OR SQUEEZE-OUT OR FREEZE-OUT: the purchasing company drops down a subsidiary and merges the subsidiary with the partially-owned target.
- The corporation holding shares in a partially owned subsidiary drops down a new wholly-owned shell subsidiary and merges into the wholly-owned subsidiary.
- The constituent parties to the back-end merger are the wholly-owned shell subsidiary of the purchasing corporation and the newly acquired, partially-owned subsidiary that was the target of the stock acquisition.
- The firm gives the minority shareholders in the partially-owned subsidiary cash or debt securities (debentures) in A for the cancelled shares.
- The purpose of such acquisition is often speed.
- In Delaware corporations, shareholders of the parent corporation have no voting or appraisal rights in either the stock acquisition or the second stage.
What is a STATUTORY SHARE EXCHANGE or COMPULSORY SHARE EXCHANGE?
One firm acquires all of the outstanding stock in a second firm through an affirmative shareholder vote of the seller.
A majority of the shareholders of the acquired firm must approve a statutory share exchange;
A majority of the shareholders of the acquiring firm need to approve the exchange only if acquired-firm shareholders receive a substantial number of shares in the acquiring firm (usually 20% or more of the outstanding shares before the acquisition)
What is the procedure for a stock for asset acquisition?
- Neither the shareholders of A or B have the right to vote on the stock acquisition, because each shareholder individually decides whether or not to accept the consideration offered by A.
What is a cash for stock acquisition?
- A buys B’s stock directly from its shareholders in exchange for cash.
- A owns B stock, A is the parent corporation of a new subsidiary corporation, BC.
- There is no change in the certificates of incorporation of either A or B cause only the owner of B shares has changed.
- If A cannot convince all of B’s shareholders to tender their shares, B would be a partially-owned subsidiary.
What is the procedure in a stock for assets acquisition?
- To sell all or substantially all of its assets, the board of directors of B must submit a resolution to its shareholders and a majority of the outstanding shares entitled to vote must ratify the transaction. A’s shareholders are not entitled to vote on the transaction.
- All or substantially all assets: 25% of the total assets and 25% of either income (before taxes) or revenues.
- If B dissolves, a board resolution on dissolution is submitted to B shareholders for them to vote on it. A certificate of dissolution is then sent to the Delaware Secretary of State
What is a stock for assets acquisition?
- A buys all of B’s assets and assumes all of its liabilities.
- The shareholders of the constituent firms have pooled their ownerships interests in a corporation that itself has the combined assets and liabilities of both firms.
- The NYSE listing requirements require that shareholders of the acquiring corporation vote on the acquisition if more than 20% of a corporation’s outstanding voting shares are used as consideration.
What are the differences between a cash for assets acquisition and a stock swap merger?
- In the stock swap merger, the shareholders do not vote
- in the cash for assets merger B old shareholders are cashed out (they don’t hold shares in the survivor)
- In the cash for assets A may choose not to assume B’s liabilities
Describe the procedure in a cash for assets acquisition?
- Before the transaction: A pays cash to B for its assets. A may choose to accept some or all of B’s liabilities. There is no change in the constitutional documents or in the shares outstanding in either corporation.
- In the transaction: B dissolves and its charter is cancelled and its shares are extinguished. The assets held by B and the cash received in the transaction are transferred to B’s shareholders in a liquidating distribution.
- After the acquisition: B must either reinvest the cash received in operating assets or dissolve and pass the cash in a liquidation distribution back to its shareholders. If B invests, the Internal Revenue Code deems B a personal holding company, which has tax consequences and the acquisition also cannot qualify for tax-free status.
What is a cash out statutory merger?
- the purchasing firm wants to pay cash for the selling firm, or if cash is not available, to pay the selling firm shareholders in non-voting investments in the purchasing firm-debentures (debt) or non-voting preferred or common stock (equity).
What are the 3 exception to the general cash out statutory merger procedure?
- The small-scale merger: The shareholders of the surviving firm do not have a right to vote if the rights survive the merger and if their shares are not diluted by more than one/sixth. The acquiring company cannot issue to new shareholders an amount of shares that exceeds 20% of the number of shares of A outstanding before the transaction. Only the larger firm’s shareholders need not to ratify the transaction.
- The parent-sub merger exception: when is a merger of a parent corporation and a subsidiary corporation and the parent holds over 90% of the subsidiary’s stock. The shareholders of the parent have the right to vote if the parent issues stock in the parent to sub shareholders that carries more than 20% of the outstanding voting power in the parent. If the subsidiary is the surviving company is called a downstream merger (the parents board of directors issues a resolution for this to happen), and if the parent is the surviving company is called an upstream merger (the shareholders of the parent are entitled to vote).
- The holding company exception: is the reorganization of holding companies or in specified creations of holding company structure, no shareholder voting is required.
What is the procedure in a cash out statutory merger?
- If both corporations are organized under Delaware law, the section 51 of DGCL controls the acquisition. The board of directors of both corporations passes a resolution approving an Agreement of Merger and states whether the certification of incorporation of the survivor should be amended.
- Then, the agreement is submitted to a shareholders vote, which shall be ratified by the majority of all the outstanding shares entitled to vote, whether or not the shares are represented at the shareholder meeting.
What is a merger?
- Mergers result in the buyer’s acquisition of the seller’s equity from the seller’s stockholders, and depending on the type of merger, will often result in the continued existence of the seller as a separate legal entity.
- A merger does not require approval by each of the seller’s stockholders in order for the buyer to acquire 100% of the seller’s equity interests. Most state laws give the shareholders who do not vote to approve a merger and who decline the merger consideration. These rights enable them to petition the court to cause the buyer to pay them a higher value for their shares than that offered in the merger (“Appraisal Rights”).
How can the mergers be?
- he merges can be:
- DIRECT: The seller merges with and into the buyer with the buyer continuing as the surviving entity. This will generally require the approval of both the seller’s and the buyer’s stockholders under state law.
- INDIRECT OR TRIANGULAR: The buyer establishes a merger subsidiary to effect the acquisition.
- Forward Triangular Merger: the seller merges with and into the buyer’s merger subsidiary, with the merger subsidiary surviving the merger. The buyer pays the seller’s stockholders consideration in exchange for the cancellation of the shares of the seller’s stock. The merger subsidiary survives as the wholly-owned subsidiary of the buyer.
- Reverse Triangular Merger: The buyer’s merger subsidiary merges with and into the seller, with the seller surviving as a wholly-owned subsidiary of the buyer. The buyer receives all of the seller’s outstanding stock. This is often the favored acquisition structure for several reasons, including that the seller continues to exist after the closing, minimizing the need for contract assignments.
- he merges can be:
What considerations must be taken into account when choosing a structure?
- Business and Economic Considerations
- Corporate and Securities Laws and Mechanics
- Allocation and Assumption of Liabilities
- Need for Third Party Consents
- Tax Considerations
What are the main business and economic consideration that must be taken into account when choosing a structure?
- If the buyer is looking to acquire a line of business from the seller? (asset acquisition)
- The entire company? (stock purchase, sub merger).
What are the main corporate and securities laws mechanics that must be taken into account when choosing a structure?
- CORPORATE APPROVALS:
- a merger or substantial asset acquisition typically requires approval by the seller’s board of directors and of the buyer’s board of directors if the transaction is material to the buyer, a stock purchase often does not require approval of the seller’s board because the shares are acquired directly from the stockholders in a stock purchase transaction, however, the seller’s board will need to approve the agreement.
- A merger is a creature of state statute, each state’s merger law’s will dictate the baseline level of stockholder approval required in a merger.
- In a stock purchase transaction, each stockholder must approve the sale of its stock for the buyer to obtain 100% control over the equity. If the acquisition involves all or substantially all of the seller’s assets, stockholder approval is required. On the buyer’s side of public stock exchanges and national markets, the buyer’s stockholders would typically not need to approve an acquisition effect as a stock purchase, asset purchase or indirect subsidiary merger. However, they would likely need to approve an acquisition effected by the direct merger of the seller into the buyer.
- APPRAISAL RIGHTS:
- Delaware law states that these rights are not present in a stock purchase transaction because stockholders are required to agree to the sale of their shares.
- SECURITIES LAWS AND MECHANICS:
- If a seller’s stockholders are not all “accredited investors” the buyer may not be able to take advantage of an appropriate exemption from the registration requirement under the Securities Act of 1933. Securities law requirements could make a cash deal faster to close than a deal involving the buyer’s stock.
What are the main "allocation and assumption of liabilities" issues that must be taken into account when choosing a structure?
- An asset acquisition, a buyer can specifically identify which of the seller liabilities it wishes to assume.
- A stock purchase or merger, will result in the buyer acquiring the seller’s equity ownership, and thus the buyer will also assume responsibility for any and all liabilities inherent in the seller’s business.
- The concept of “De Facto Merger Doctrine” applies here, and this basically consists on treating a deal that the parties had originally structured as an acquisition as a merger. As a result, the buyer was required to assume all of the seller’s liabilities.
What are the main "third party concerns" that must be taken into account when choosing a structure?
- An asset acquisition by definition involves the assignment of assets between the seller and the buyer.
- A reverse triangular merger and stock purchase are not likely to trigger anti-assignment provisions in third-party contracts because the seller continues in existence as the surviving entity after the transaction.
- Any change of ownership or change of control would determine if consents are required under specific agreements.
What are the main "tax considerations" that must be taken into account when choosing a structure?
- The seller’s preferred result is often to eliminate the payment of tax upon closing the transaction.
- The buyer often seeks to obtain a “step-up” tax basis of the seller’s assets in order to claim larger tax deductions for depreciation later on.
What are the main deal structures available?
- Merger of the parent holding companies
- Reverse triangular merger of a newly-formed merger subsidiary of the acquirer with and into the target company, where the target company survives as a subsidiary of the acquirer
- Forward triangular merger where the target company is merged with and into a newly-formed merger subsidiary of the acquirer where the merger subsidiary survives
- Formation of a new holding company into which both companies are merged, either directly into the holding company or into separate merger subsidiaries of the holding company
What deal structures have been preferred by banks that worry about capital requirements?
- Historically, capital requirements and pooling-of-interests accounting requirements drove financial institution acquisitions and bank acquisitions to be structured as tax-free stock-for-stock mergers.
What deal structures are preferred by foreign acquirers without a US registered currency?
- Foreign acquirers without a US-registered currency in particular may want to rely on all-cash transactions.
When is issuing stock not practical?
- Acquisitions of subsidiaries of other corporations, or
- where the acquirer is not itself a publicly-traded company or is a foreign-bank holding company.
What is a dual pillar structure?
- These are structures in which the merger partners remain legally distinct entities with separate stocks that continue to trade in their respective home countries, instead of becoming bound together by contractual “equalization” arrangements and amendments to the charter and by-laws of each institution
- identical boards of directors,
- a unified management structure,
- cross-guarantees of indebtedness and
- ability of both sets of shareholders to vote on matters presented to either company’s shareholders for a vote.
What may be an issue for non-US acquirers whose stock do not trade in the US and that do not report results in the US?
- timing may be an issue
- favoring cash considerations.
What are some characteristics of a tender offer?
- The tender offer structure offers the potential to avoid the other time-consuming step in consummating most public company bank deals: a shareholder’s meeting to vote on the merger.
- This structure is the most common in the nonbank sector.
What are some considerations for payment in cash transactions for banks?
- Payment in cash (or debt securities) has the effect of diminishing capital, stock is often the primary consideration paid in financial institutions transactions of substantial size.
What is a section 351 transaction?For both Acquiror and Target to be acquired by a new holding company in a transaction intended to qualify as a tax-free exchange under Section 351 of the Internal Revenue Code. This is achieved when the holding company creates 2 subsidiaries and one of them merges with Acquiror and the other with Target in 2 simultaneous reverse triangular mergers. Shareholders of both companies merged would receive tax-free treatment to the extent that they receive the stock of the holding company, provided that the shareholders of Acquiror and Target own at least 80% of the voting stock and 80% of each other class of stock of the holding company immediately after the transaction. Here there’s no amount of cash that may be used as long as the 80% ownership test is satisfied.
Describe 4 different forms of transactions in which a tax free treatment can be achieved for shareholders who exchange their stock in the target company
- DIRECT MERGER:
- REVERSE TRIANGULAR MERGER:
- SECTION 351 TRANSACTION (less used)
- FORWARD TRIANGULAR MERGER:
How are brach purchase agreements typically structured?
- Branch purchase agreements are typically structured as asset sale transactions, using the form of an asset sale.
- Particularly important are:
- pricing provisions,
- the descriptions of the assets being sold and the liabilities assumed,
- conversion and post-closing transition matters,
- real estate provisions,
- employee-related provisions and
- non-solicit and non-compete provisions.
How is the pricing in an brach purchase agreement typically structured?
- Is generally expressed as a premium on branch deposits at or before closing, which are expressed with percentage premium levels ranging from the single digits to the teens.
- The deposit premium is generally based on average deposit balances over a predetermined period of time. This period usually covers a time ending close to completion of the transaction.
- The deposit premium may vary for different deposit products and for deposits located in different branches. Other variations are possible, including, premium payments paid against deposit balances as of a date prior to entering into the definitive documentation and premium payments paid based on closing date deposits but subject to a minimum and maximum payment.
- Is important to include exclusions in the deposits definition. Also, is important to the calculation of the purchase price the level of any required reserving in respect of loans.
- The seller will seek to avoid “paying” for the acquirers post closing integration plans by assuming the run-off risk in calculating deposit balances.
- Other assets of the branches are typically sold to the buyer at fair market value or book value.
What are some assets and liabilities issues that emerge in a brach purchase agreement?
- The acquirer is only purchasing a portion of the seller’s business.
- Some assets usually transferred include real estate and related fixtures and improvements, real property leases, freestanding remote site ATM’s, personal property located at the branches, safe deposit contracts, loans, overdrafts, servicing and similar contracts, ATM cash, cash and cash equivalents located at the branches, software licenses, brokerage and investment advisory contracts and accounts, trust accounts, derivative transactions, routing and transit numbers, etc.
- Assets that are usually excluded from the sale are proprietary merchandising equipment, rights in the seller’s name and other intellectual property.
- Liabilities assumed by the acquirer are generally deposit liabilities and other incident to the deposits and the assets being acquired, such as real property leases, safe deposit contracts and servicing contracts. The acquirer may also seek to exclude related liabilities to the extent they arouse prior to the completion of the transaction.
- It may be appropriate for the seller to retain historical liabilities.