o Del Code §251
- § Governs mergers in Delaware
- § Any 2 or more corporations can merge
- § Board must approve
- § §251(f) – no vote of stockholders necessary to authorize merger if…
o Do not exceed 20% of common stock immediately before effective date of merger.
o “fully diluted basis”
§ Pre-dilution Basis = 10 shares
§ Fully diluted basis = 11 shares
§ Means whether or not you get shares before or after you calculate how many shares will be issued to you. 10% of 100 shares = 10… but then 110 shares exist. So 10% of 110 shares = 11 fully diluted.
o Del Code §253
§ Whether or not you need board approval.
§ If you have > 90% of outstanding shares, then do not need board approval
o Del Code §262
- (2) a – C
- § Valuation doesn’t trigger need for approval; only affecting inherent rights, like voting.
- ú Nature of stock not changing
- ú Documents changing
- ú More than 20% shares
What do you need to know from your client before the deal:
- · Their name
- o You must make sure there is no conflict of interest with the company.
- · “How are you going to get the money?”
- · “Are you being sued?”
- · “In trouble with regulators?”
- · Look for liens
Valuation Term - Control Premium
§ Situation where somebody is willing to pay, say, $10 per share of stock in a company. But if you’re willing to give them more than 50% of control, they would be willing to pay more than $10/share
Valuation Term - Minority Discount
§ So insignificant in control, that you are just along for the ride. So you get a discount.
Valuation - Market Discount
§ When there is no active market for the shares
Weinberger =
fair dealings and fair price
Glassman (under Delaware) =
short form merger doesn’t need mechanics of weinberger
Strategy: Get rid of someone with 1% who won’t sell stock:
- · Do a merger with a cash-out
- o New company takes control of target
- o Merger happens
- o Cash-out shareholders
- § Must be fair
- § Based on all relevant factors (not speculation) (weinberger)
· If I have 50%, they need my approval to merge –
o 50% allows you to kill a merger, but gives the other shareholder(s) the right of first refusal to buy me out at FMV
Important Parts of Drafting
- Indemnification Clauses
- Hold-back/defrred
- Buyers want it
- Sellers hate it; if its delayed, its at risk of not happening
- Sellers want it up front
- Survival Clause
- “All the terms in this agreement shall expire on XX, thereafter you can’t look to this agreement for remedy.”
- Basket Clause
- Nick in the knob
- Until the amount of daamges gets to a certain amount, you can’t make a claim against the seller
- Cap
- LImit on liability of seller equal to total purchase price.
2 types of Change in Control
ú 1) Change of ownership
· If this happens, we have right to call back loan
ú 2) Change of manager control via the board
· If more than 4 change within X month period, we have a right to call back the loan
Term: Standstill
§ In company that is publicly held, and a raider is causing a ruckus, a standstill agreement is where you give seats on the board in exchange for a K that raider will stop acquiring stock.
Terms - Tag Along and Take along/Drag Along
- § Tag along
- ú Opposite of the take-along… gets a minority shareholder in on the good deals.
- § Take along / Drag along
- ú When minority shareholder threatens to kill a deal, you have the right to force them to take it.
· “Material” adverse change/affect:
o If any of these things happen prior to closing, buyer gets to walk and get damages
ú When you sell securities and comply with 1933 act, you have to register securities
· Register shares with SEC, give info about company to be transparent
· SEC critiques it all
· When you’re good, SEC “clears you” and your registration is good
Accredited investor…
ú 1 million $ in their networth
ú Minimum income of $200k
ú $300k with spouse
ú if business, $5 MM in income
ú To check if someone is accredited, give them a document that says “tell me, are you an accredited investor”
o SEC – Full, Fair & Timely Disclosure of ALL MATERIAL INFORMATION.
§ NOT merits of the security/investment
§ Securities only
§ No opinion on merits, just full disclosure.
§ Public must inform/educate themselves
o Securities Exchange Act of 1934 – triggered when:
you have more than 500 shareholders and $10million in assets
o Proxy Statements
- § Schedule 14-a
- ú It’s a questionnaire with a bunch of basic questions.
- ú The detail on how you have to comply with the questions = Reg. SK (SEC)
- · All other documents will refer to questions found inside Reg. SK (common reporting system)
o Williams Act – Fixed the problem of
takeovers
§ 14d-9
ú board of public company must review tender offer and let shareholders know if it is a good deal
o GAF (13d case)
§ If you have 3% and your friend has 2%, that’s fine – but if you work in cahoots with your friend to operate as a single 5% opinion, then you cross the line.
