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The Anatomy of an M&A Transaction from Beginning to End

The Anatomy of an M&A Transaction from Beginning to End. PRESENTED BY: Lori Ann Fox, Esq. Seminar Preview. Mergers & Acquisitions Overview Merger Types Pre-Transaction Planning Post-Transaction Filing Issues. Announced M&A: North America – 1985-2017. Announced M&A: Worldwide– 1985-2017.

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The Anatomy of an M&A Transaction from Beginning to End

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  1. The Anatomy of an M&A Transaction from Beginning to End PRESENTED BY: Lori Ann Fox, Esq.

  2. Seminar Preview • Mergers & Acquisitions Overview • Merger Types • Pre-Transaction Planning • Post-Transaction Filing Issues

  3. Announced M&A: North America – 1985-2017

  4. Announced M&A: Worldwide– 1985-2017

  5. Business Deal vs. Statutory Merger • Corporations do business “deals” to gain market share, add products, reduce costs, etc. • The price is always part of the deal • The statutory merger is not the deal • The statutory merger is the legal device used to effectuate the deal

  6. Acquisitions Defined • The act of becoming the owner of certain property • Taking with or without consent, especially a material possession obtained by any means • Two types • Share • Asset

  7. What is a Merger? A statutory device which allows the combination of two or more business entities by the transfer of assets, liabilities and business of all tooneof them, which continues in existence, the other(s) being swallowed up or merged into the continuing entity.

  8. “Mergers” vs. “Acquisitions” • Terms are not interchangeable • Mergers are a subset of acquisitions

  9. Basic M&A Terminology • Acquiring = Acquirer = Acquiror = Buyer = Continuing Entity = Survivor • Target = Acquired = Seller = Disappearing Entity = Merged Entity = Non-survivor • Constituent Entity = All • Acquisition sub = Merger subsidiary

  10. Why Legal Professionals Like Statutory Mergers • Precise way to acquire another business entity • The results are clearly prescribed by law • It is an old adage that mergers call for less lawyering but more paperwork than other types of acquisition vehicles Statutory Merger

  11. What Statutes Prescribe • Document contents and effects • Post-merger status of parties • Survivor gets all assets and liabilities • Seller’s shareholders (or members/partners) usually receive shares (or membership/partnership interests) in the survivor or cash • Appraisal rights may be available to minority owners

  12. Types of Mergers

  13. Types of Statutory Mergers • General mergers • Parent-subsidiary mergers • Triangular mergers

  14. General Merger B A

  15. General Merger • Target merges into acquirer • Target’s shareholders/members/partners may receive shares/membership interests/partnership interests in the acquirer, cash or other property • No special requirements must be met • Corporation, LLC, LP, GP laws have general merger statutes • Cross entity mergers allowed

  16. Approval by Corporations • Boards of each constituent must approve Plan • Shareholders of merged corporation(s) must approve • Shareholders of the survivor usually do not have to approve • Approval required under certain circumstances • Situations where shareholders’ interests are substantially affected

  17. Approval by LLCs, LPs, LLPs • LLC • May be set forth in operating agreement • Some states have a default rule requiring unanimous member approval • Some states have a default rule requiring majority approval • LPs • As provided in partnership agreement or default rule • GPs, LLPs, and other entities that may be involved in merger • Approval as provided in organizational documents and statute

  18. Parent-Subsidiary Mergers • Up-stream: parent survives • Down-stream: sub survives • Short form mergers • Simplified procedure • Approval by subsidiary’s board of directors not required • No vote required by shareholders of surviving parent or disappearing sub

  19. Parent-Sub | Up-Stream Merger P S

  20. Parent-Sub Up-Stream Merger • Statutory merger of subsidiary into its parent • Short form procedure authorized by corporation laws • Does parent own statutory percentage required? • Shareholder vote unnecessary – why? • Avoids costly proxy solicitations and meetings of publicly traded companies • Amendment of the parent’s formation document is restricted • LLC/LP laws may or may not authorize short form procedure

  21. Parent-Sub Down-Stream Merger P S

  22. Parent-Sub Down-Stream Merger • Parent merges into subsidiary • Can use to change the parent’s home state • Some corporation laws permit short form merger of parent into sub • Parent must own a certain % of sub • Parent’s shareholders must approve • Amendment of the survivor’s formation document may be restricted • If short form provision unavailable, use the general merger statute

  23. Triangular Mergers • Involves three parties – acquirer, subsidiary formed by acquirer, and target • Only the target and subsidiary actually merge • Statute must permit ownership interests of one constituent to be exchanged for ownership interests of a non-constituent entity

  24. Forward Triangular Merger A A T S T S

  25. Forward Triangular Merger • Action • Merger subsidiary created for the transaction • Target merges into subsidiary • Merger sub survives • Target disappears • Owners of Target receive ownership interests in Parent/Acquirer, not merger sub • Parent/Acquirer not a constituent • Parent/Acquirer not liable for obligations & liabilities of Target

  26. Reverse Triangular Merger A A A S T T S

  27. Reverse Triangular Merger • Action • New merger sub created for this transaction • Merger sub merges into Target • Target survives • Merger sub disappears • Two exchanges take place • Target’s owners get ownership interests in Acquirer • Sub’s owners get ownership interests in Target

  28. Holding Company Merger • First permitted by Delaware (Sec. 251(g)) in 1995 • Other states have adopted • Facilitates operating company changing to holding company structure • Ex. – Google (operating co.) used 251(g) to merge into Alphabet (holding co.) Now Alphabet is publicly traded and Google is wholly owned by Alphabet • Operating company (parent) merges with sub (holding company) • Each share of parent is converted into identical share of sub • Both corporations survive • Holding company owns all stock of operating company • Operating company’s former shareholders own holding company • Stockholder approval not required if certain conditions met • E.g., same charter, bylaws, directors

  29. Two Step Acquisition (“Intermediate Form Merger”) • Delaware added in 2013 (Sec. 251(h)) • Facilitates friendly acquisition of Delaware public corporation through two step transaction • First step – tender or exchange offer for at least a majority of target’s outstanding shares • Second step – back-end merger to acquire shares not tendered • Pre 2013 – back-end merger required standard short-form threshold of 90% to avoid needing stockholder approval • Sec. 251 (h) permits back-end merger without stockholder approval • Certain requirements must be met including that amount of shares purchased in first step must be sufficient to have approved a general merger

  30. Multi-Entity Merger A B

  31. Multi-Entity Mergers • Mergers between different entity types (Example: corporation merges with LLC) • Also referred to as cross-entity, inter-entity or inter-species merger • Can be used as a vehicle to change entity forms as well as a vehicle to acquire an entity

  32. Some Considerations • Domestic state statutes must be examined for each constituent • Determine if statutes authorize each of the constituents to participate • Manner of adoption for different entities • Execution requirements for each constituent • Exchange of ownership interest issues will need to be addressed in the plan

  33. Recent Statutory Trend • Statutes enacted by some states to address differences in their statutes governing mergers of different entity types • Some based on Uniform Law Commission’s Model Entity Transactions Act • Inter-entity merger procedure set forth in a central location for all filing entity types instead of separately in each entity types governing statute

  34. Pre-Transaction Planning

  35. Pre-Transaction Planning Issues • Status • Tax • Qualifications • Timing • Effective date

  36. Potential Complexities • Multi-state aspects of filings and document orders can be overwhelming • Multi-entity transactions are even more complicated • Precise timing is crucial • Good organizational skills and planning are your best defense against confusion

  37. Where are the Entities? • Know who the parties to the transaction are • Are they in good standing in their home states? • Are they in good standing where they are qualified? • If not, all delinquent reports must be filed and any fees and taxes due must be paid • It may take time to remedy delinquencies

  38. Good Standing Status • If the entity has been administratively revoked, follow the reinstatement procedures where available • Reinstatement relates back, but name rights may have been lost

  39. Tax Status • Non-surviving entities need to determine if they have outstanding taxes • Two basic standards • Status - many jurisdictions only require the entity’s tax status to be good, meaning that the entity has no taxes due • Clearance - some jurisdictions require that a formal tax clearance be obtained from the tax department

  40. Assumption of Tax Liability • May avoid having to obtain tax clearance by having the survivor assume tax liability of other constituent(s) • Advantageous if tax clearance certificates difficult or time consuming to obtain • States generally permit tax assumption but may require the assuming entity to be a domestic or qualified foreign entity

  41. Pre-Transaction Planning: Name Issues • Check availability of name • Name protection • Reservation or registration • State name standards • Options if name is unavailable • Assumed/fictitious name/trade name • Not to be confused with trademarks

  42. Name Availability • Check name availability • Telephone • On-line at the SOS web site • Written request to filing office • Even if available on the SOS records, another party may have superior rights under federal or state trademark law • Avoid getting a cease & desist letter from name holder with superior rights • Trademark searches • Compare service marks, trademarks, trade names • Search federal and state trademark listings, business listings, internet search

  43. Name Availability Standards • Distinguishable standard • A name that is “distinguishable upon the records of the filing office” from specific types of entities or all entities on record • Deceptively similar standard • A name that is “not deceptively similar to” or does “not have a likelihood of confusion with” the name of specific types of entities or all entities on record

  44. Name Reservation • Name reservation provides short term protection for a name filed at the central filing office • Generally 30 to 120 days depending on state • Do not allow the reservation period to expire before the effective date of the transaction • Calendar the date

  45. Name Registration • Protects the legal name of an entity in a foreign jurisdiction in which it has not yet qualified • Usually involves a long term of protection

  46. Name Protection - Practice Pointer • Generally, use name reservation to protect the name of an entity not yet formed (Short term protection) • Use name registration to protect the name of an entity that is planning to qualify in the state at a future time (long term protection)

  47. Domain Names • What about domain names? • In determining if a name is available on the state’s records, states generally disregard the .com, .net • Although search with domain name registrar may indicate name is available, check name availability under trademark law and on the SOS records

  48. Name Not Available • Option 1: Obtain written consent of name holder • Must be permitted by statute • Option 2: Use of a conflict name • Required in those foreign jurisdictions where the true name is unavailable • Generally referred to as fictitious name in statute • Fictitious name is set forth on the qualification document

  49. Voluntary Assumed Name • In most states, entities may voluntarily use a name other than the true name • Easy to confuse conflict name and voluntary assumed name • States will often use same term to refer to these two distinct concepts • Different states use different terms: assumed name/fictitious name/trade name

  50. Pre-Transaction Qualifications • If the transaction will result in an entity engaging in activities in a state where it is not qualified, consider in advance whether the entity will need to be qualified • Do the activities constitute “doing business” within the meaning of the relevant statute?

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