Mergers and Acquisitions

Introduction

Mergers and acquisitions (M&A) encompass the legal and financial mechanisms by which corporations combine or one corporation acquires control of another. M&A transactions take several forms, including statutory mergers, asset sales, stock purchases, and tender offers. The legal framework governing M&A includes state corporation law, federal securities law, antitrust law, and the common law of fiduciary duties.

Statutory Merger

A statutory merger is a transaction in which one corporation (the surviving corporation) absorbs another (the target corporation), with the target ceasing to exist. Under DGCL § 251, a merger must be approved by the boards of both corporations and by a majority of the shareholders of each corporation. The surviving corporation succeeds to all of the target’s assets and liabilities by operation of law.

Short-form mergers under DGCL § 253 are available when the parent corporation owns at least 90% of the subsidiary’s stock. Short-form mergers require board approval but not a shareholder vote, facilitating the elimination of minority shareholders after an acquisition.

Asset Sales

In an asset sale, the acquiring corporation purchases the target’s assets rather than its stock. The target corporation continues to exist as a shell unless it dissolves. Asset sales require board approval and shareholder approval if the assets constitute substantially all of the corporation’s property under DGCL § 271.

Asset sales may be used to avoid assuming the target’s liabilities, though successor liability doctrines may impose liability for certain claims, including products liability and environmental obligations. The buyer may also acquire liabilities by express assumption, de facto merger, or fraudulent conveyance principles.

Tender Offers

A tender offer is a public offer to purchase shares of a target corporation directly from its shareholders. Tender offers are regulated by the Williams Act of 1968, which added Sections 13(d), 13(e), and 14(d)-(f) to the Securities Exchange Act of 1934. The Williams Act requires disclosure of the offeror’s identity, purpose, and financing, and establishes minimum offer periods and withdrawal rights.

The SEC’s Regulation 14D governs tender offer procedures, requiring that the offer remain open for at least 20 business days and that shareholders be permitted to withdraw tendered shares. The best price rule requires that all shareholders receive the same consideration. The all-holders rule requires that the offer be open to all holders of the class of securities sought.

Appraisal Rights

Appraisal rights (also called dissenters’ rights) allow shareholders who object to a merger to receive the fair value of their shares in cash rather than the consideration offered in the transaction. Under DGCL § 262, shareholders who perfect their appraisal rights may petition the Delaware Court of Chancery to determine the fair value of their shares.

The appraisal remedy is limited to shareholders who did not vote for the transaction and who comply with statutory procedures, including filing a written demand before the shareholder vote. In Weinberger v. UOP, Inc. (1983), the Delaware Supreme Court held that fair value may be determined using any techniques or methods generally accepted in the financial community, including discounted cash flow analysis.

Defensive Measures: The Poison Pill

Shareholder rights plans, commonly known as poison pills, are defensive measures designed to deter hostile takeovers. A typical poison pill gives shareholders the right to purchase additional shares at a discount if an acquirer exceeds a specified ownership threshold (typically 10-20%). The exercise of these rights would dilute the acquirer’s ownership and make the acquisition prohibitively expensive.

The Delaware Supreme Court upheld the poison pill in Moran v. Household International, Inc. (1985), holding that directors may adopt a rights plan as a reasonable response to the threat of hostile takeovers. However, the Court in Unocal Corp. v. Mesa Petroleum Co. (1985) held that defensive measures must be reasonable in relation to the threat posed, and in Unitrin, Inc. v. American General Corp. (1995), the Court held that defensive measures are valid if they are not coercive or preclusive.

Fiduciary Duties in M&A

M&A transactions trigger enhanced fiduciary duties. The Unocal standard requires that defensive measures be reasonable in relation to the threat. The Revlon standard requires that when the sale of the corporation becomes inevitable, the board’s duty shifts to obtaining the highest price reasonably available. In Corwin v. KKR Financial Holdings LLC (2015), the Delaware Supreme Court held that when a merger is approved by a fully informed, uncoerced vote of disinterested shareholders, the business judgment rule presumptively applies.

Conclusion

Mergers and acquisitions law is a complex field that integrates corporate law, securities regulation, and fiduciary duty principles. The choice among statutory merger, asset sale, and tender offer depends on the parties’ objectives, tax considerations, and regulatory requirements. The appraisal remedy, poison pill, and enhanced fiduciary duties in M&A transactions represent the legal system’s response to the tension between management discretion and shareholder interests in control transactions.