Flow of a Deal - Initial Communications + tone
- Casual – CEOs/Management types rubbing elbows
- Somewhat Casual – Financial Intermediary employed
- Formal – Offer Letter sent to Board of Directors of Target
- “Bear Hug” to a “Sleeping Beauty”
- Not-So-Formal – nor all that friendly
- “Dawn Raid”
- “Godfather Offer”
- Hard to refuse; if you don’t do something, you’re going to get sued by your shareholders
Flow of a Deal - Entry of Financial Advisors
- Investment Bankers
- Provide financial advice and various financial services
- Assess the condition of the market and specific market sectors
- Attorneys
- Assist in proper structuring of transaction
- Assure ongoing compliance with applicable legal rules
- Assess legal strengths and vulnerabilities of Bidder/Target
- Facilitate deal execution (e.g., drafting Confidentiality Agreements, drafting Board Resolutions, etc.)
- Accountants
- Accurate assessment of financial posture of Bidder/Target
NOTE: Assessment of Bidder particularly important when non-cash consideration is contemplated in the merger or acquisition
Flow of a Deal - Due Diligence
- Thorough “Cross-Examination”
- Bidder’s Goal – Pay enough but not too much
- Target’s Goal – Ensure that enough is paid
- Cash Deal – Minimal due diligence
- Equity Consideration – Broader due diligence
- Importance of Confidentiality Agreements
Flow of a Deal - Board Approval
- Thorough analysis of the proposed deal
- Critical management oversight function
- Reasoned approval or disapproval
- Enhanced accountability for decisions
Flow of a Deal - Shareholder Approval
- Often required per state law
- Federal law may play a role
Flow of a Deal - Potential Regulatory/Specialist Approval
- Antitrust regulators protecting interests not represented in the formal deal-making process (e.g., customers of regulated industry participants)
- Mandatory consultation with specialists to ensure continued compliance with specific requirements
Flow of a Deal - Closing of Transaction
Final steps taken, assuming “Conditions Precedent to Closing” have been satisfied
Flow of a Deal
- Initial Communications
- Entry of Financial Advisors
- Due Diligence
- Board Approval
- Shareholder Approval
- Potential Regulatory/Specialist Approval
- Closing of Transaction
Why do M&A Deals Occur?
Various reasons, including:
- Enhance operating efficeincy
- Enhance market power
- Reduce competition
M&A Activity TEnds to Spike in Phases because…
- Dismantling of regulatory barriers (i.e., changes in state or federal law, generally speaking)
- Technological change
- The need to globalize efficiently
- The inflation of stock prices
What is the Internal Affairs Doctrine?
Internal affairs doctrine = the law of the state where the business has decided to incorporate will govern the internal affairs of the corporation
Common Fundamental Changes
- Certain amendments to the Articles of Incorporation
- Mergers and Share Exchanges
- Disposition of All or “Substantially All” Assets OUTSIDE Regular Course of Business
Problem of Unanimous Shareholder Approval Requirements
- State corporation codes used to require unanimous shareholder approval of certain fundamental changes
- A minority shareholder could prevent a transaction that was clearly in the corporation’s best interests
- Some jurisdictions resorted to a “super-majority” standard (67% or 75% approval)
- Today, dominant approach is “absolute majority” standard (approval by a majority of outstanding shares entitled to vote)
Public Policy Concerns: Two Major Sources of Minority Shareholder Protection
- Appraisal Rights
- Fiduciary Duty Law
Appraisal Rights =
Allow dissenting shareholder to foce corporation to purchase shares for cash at FMV.
Fiduciary Duty Law =
- Duty of Care
- Duty of Loyalty
- Impact of Sarbanes-Oxley Act (“SOX”)
Duty of Care
- board has fiduciary duties to the corporation itself
- Fiduciary duty requires the board to conduct the affairs of the company in good faith and in a manner they reasonably believe to be in the company’s best interests
- Duty of care = the board must be informed in its decision-making capacity and devote attention to oversight
- The “shareholder primacy model” (albeit controversial) dictates that this duty be exercised to protect the interests of common stock holders
- Business judgment rule –> deference to board decisions
- Board may have to clear higher hurdle to secure and justify deference dictated by business judgment rule
Duty of Loyalty =
- deference to board decisions
- Board may have to clear higher hurdle to secure and justify deference dictated by business judgment rule
Impact of Sarbanes-Oxley Act (“SOX”) and its problems
- basically sent the decision police into the corporate boardroom
- Various problems:
- Non-independent directors
- Excessive delegation of decision-making to management
- Shareholder lockout
- Various problems:
What kind of Acquisition is this?
Direct Merger (“Statutory Merger”)
What kind of Acquisition is this?
Asset Purchase for Cash
What kind of Acquisition is this?
Stoch Purchase for Cash
What kind of Acquisition is this?
Forward Triangular Merger
What is this the Stock Consideration for?
Forward Triangular Merger
