M&A Outline PDF

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M&A (JD/LLM)...

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Week 1 1.

Introduction to M&A a. What is M&A? “Mergers and acquisitions” refers to the buying, selling and combining of different companies. Simply put, M&A is about the transfer of ownership of a business. Mergers Two companies consolidating operations into one company. Acquisitions A larger company purchasing a smaller company, a division of another company or assets of another company.

b. The Deal Process

c.

What is M&A Law? Not a discrete body of law. Includes the interplay of: Corporate law / Securities law / Contract law / Tax law / Antitrust Law / And other laws d. Characterizations of M&A Activity (Wall Street v. Main Street) Friendly (Negotiated) v. Hostile Transactions (Hostile Takeover) e. M&A players Corporation Diagram for Our Class

f.

Participants in the M&A Deal Internal Board of Directors Chairperson / Board members / Board committees Officers (Management) CEO, President, COO, CFO, Vice-Presidents, General Counsel Shareholders (Equity Owners)

Preferred / Common External Lawyers / Investment Bankers / Lenders / Accountants / Proxy Solicitors / Proxy Advisory Firms / Public Relations Firms / Regulators g.

2.

Lawyer’s Role: Buyer v. Seller Side Buyer’s Lawyer Minimizing Price Investigating Target (Due Diligence) Avoiding Regulatory Problems Preserving Ability to Walk Away Pre-Closing Establishing Post-Closing Remedies Seller’s Lawyer Maximizing Price Ensuring Deal Closes Avoiding Regulatory Problems Reducing Tax Liability Eliminating Post-Closing Liability h. What Do M&A Lawyers Really Do? Negotiate, negotiate, negotiate! Mediate and resolve differences between principals Add value through creative structuring Avoid or mitigate deal risk (and warn parties of risks even if they choose to take them) Monitor compliance with legal duties and regulatory regimes Draft agreements and disclosure documents that accurately reflect the business deal Keep the deal train on track and on time Anticipate and overcome deal roadblocks What begins the deal process? -- The Business Reasons for M&A Deals a. Why Buyers Buy & Sellers Sell Buyers Market Expansion (Product Line / Geographic); Lessen Competition; Diversification; Supply Chain Control; Asset Acquisition (Physical / Technology / Human Capital); Investment Factors; Market for Corporate Control; Operational Synergies (Economies of Scale / Economies of Scope); Regulatory Change; Social Motivations (CEO empire building / Executive compensation) Sellers Liquidity; Investment Factors; Personal Reasons; Regulatory Change b. Business Reasons: Diversification (But, consider the “conglomerate discount”) c. Investment Factors: Market for Corporate Control • Capital markets and investors play a key role in driving M&A deals and the M&A market • Efficient capital markets result in capital flows to investments that offer the best risk-adjusted return • Companies that are perceived to be better investments will have better access to capital, including to fund M&A deals • Companies that are not perceived to be good investments will become targets • Public shareholder activism (e.g., Carl Icahn) is often directed at forcing companies to engage in M&A activity to satisfy shareholder concerns d. Business Reasons: Operational Synergies Economies of scale Spreading of fixed costs over increasing production levels. Economies of scope Use of a specific set of skills or an asset currently employed in producing a specific product or service to produce related products or services. See Video e. Business Reasons: Regulatory Change (AT&T) f. M&A Market Drivers: Fueling the Fire

3.

Attractive Opportunities Rapid technological change following surge of investment (e.g., social media, life sciences) Market disruption forcing consolidation Attractive Valuations Assets are relatively cheap compared to anticipated returns (PE ratios) Market inefficiencies & distressed assets Availability of Capital Buyers can fund deals cheaply through debt or equity Capital providers are willing to take M&A risk (Banks, PE funds, public shareholders) Positive Regulatory Environment Government policy facilitates M&A Antitrust policy, monetary policy, tax policy, sector regulatory environment (e.g., health care, defense) g. Reasons Not To Do M&A! Strategic miscalculation / Poor valuation / Loss of control / Interlopers / No going back / Integration challenges / Deal expenses / Litigation risk / Management distraction Deal Structures a. Basic Deal Structures Mergers

Asset Purchases

Stock Purchases

Stock Purchases – The Effect If Enough Shares are Purchased

b. Other Deal Structures Short-Form Mergers A merger between a parent and subsidiary (in which the parent has at least 90% ownership), which permits a minimum of corporate formalities.

Upstream Merger Subsidiary mergers into parent Downstream Merger Parent merges into subsidiary Triangular Mergers In a triangular merger, the acquiring corporation acquires control of the target corporation without being a party to the merger. The acquiring corporation forms a new subsidiary into which the target corporation is merged. Triangular Mergers: The Process

Forward Triangular Merger: The subsidiary is the surviving corporation. Reverse Triangular Merger: The target company is the surviving corporation.

Week 2 1.

2.

Corporate Statutory Requirements Board Approval /Shareholder Approval / Dissenters Rights a. Corporate Governance Management runs the company day-to-day / appointed by BOD Board of Directors oversees management / makes major decisions / elected by shareholders Shareholders owns the company, but delegates management to others / limited access to information / limited decisionmaking authority / collective action problems b. Who Makes M&A Decisions? Transaction form Transaction nature Transaction size What deals require the approval of the board of directors? What deals require the approval of the shareholders? For publicly traded companies, also consider rules of stock exchanges, like NYSE. Dissenters Appraisal Rights These are rights given dissenting shareholders to require the corporation to buy shares for their fair value as determined by a court. Board & Shareholder Voting Corporate Events Requiring Shareholder Voting (Director Elections / Director Conflict Approvals / Fundamental Transactions) a. Voting Requirements for Each Transaction Type i. Direct Mergers: The Traditional Form of Merger

Voting Rules - MBCA

Voting Rules – Delaware

NYSE Listed Company Manual, § 312.03(c) (c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if: ▫ the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or ▫ the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock. ii. Short-Form Mergers A merger between a parent and subsidiary (in which the parent has at least 90% ownership), which permits a minimum of corporate formalities.

Voting Rules – MBCA

Voting Rules - Delaware

iii. Triangular Mergers In a triangular merger, the acquiring corporation acquires control of the target corporation without being a constituent corporation. The acquiring corporation forms a new subsidiary into which the target corporation is merged.

Voting Rules – MBCA

Voting Rules – Delaware

iv. Asset Purchases / Sales Asset Sales The sale of all (100%) or substantially all (?%) of a company’s property. The sale will constitute a fundamental change in the selling corporation requiring a shareholder vote.

Determining an M&A Asset Sale: MBCA (easy) v. Delaware (hard) ▫ MBCA Approach to Asset Sales

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Delaware Approach to Asset Sales Section 271 of the Delaware General Corporation Law (DGCL) authorizes a corporation’s board of directors to sell all or substantially all of its property and assets only with shareholder approval. Delaware’s statute only applies to sales of all or substantially all assets, not every sale of an asset. See DGCL § 271. Sales of all assets are easy to determine. But, still must ask whether sale is in the “ordinary course.” Sales of substantially all are more difficult to determine. Apply the Gimbel test to determine (see next slide). Delaware’s Gimbel Test (used to determine if sale of assets constitutes “Substantially All” assets) Quantitative Analysis Are the assets to be sold quantitatively vital to the operation of the corporation? Qualitative Analysis Is the sale of the assets out of the ordinary, and will it substantially affect the existence and purpose of the corporation? Delaware Cases Defining “All or Substantially All” Gimbel v. The Signal Companies, Inc. (1974) No vote required for sale of 26% of assets that generated 41% of net worth, and produced 15% of revenue. Katz v. Bregman (1981) Vote required for sale of assets that constituted more than 51% of total assets and generated about 45% of the net sales. Hollinger Inc. v. Hollinger Intl., Inc. (2004) No vote required for sale of assets that accounted for less than 50% of asset values and 50% of revenues. Would MBCA § 12.02(a) Require a Shareholder Vote?

v. Stock Purchases A company’s purchase of another company’s stock directly from individual shareholders. This is the method for a hostile takeover.

Board & Shareholder Voting Requirements

3.

Shareholder Voting Issues Vote Required for Approval Historically, shareholder vote had to be unanimous. This created a holdout problem. Many states eventually lowered voting requirement to a supermajority. Several states still require a 2/3 vote. Modern corporate statutes permit majority voting. There are two types of “majority” voting. Absolute majority voting:

Requires a majority of all outstanding voting shares to approve. Delaware follows this approach. Simple majority voting: Requires a majority of those shares voting at a meeting with a quorum to approve. MBCA follows this approach. See MBCA §§ 11.04(e), 7.25(b). Hypothetical: Corporation A has 100,000 outstanding shares. At a shareholder meeting to vote on a proposed merger, 60,000 shares attend, so a quorum is present. When the vote is taken, 40,000 shares approve and 20,000 shares vote not to approve. Has the merger been approved if Delaware law applies? Has the merger been approved if the MBCA applies? 4.

Are there class voting rights? Class Voting Rights If a corporation has multiple classes of shares, do all shares vote together or in separate classes? The answer may affect whether a transaction will be approved. Answer determined by state corporate law and articles of incorporation. MBCA: Separate class voting required for some but not all transactions. See MBCA § 11.04(f). Class Voting Rights Hypothetical: Corporation X has three classes of outstanding shares of common stock: Class A (1000 shares), Class B (500 shares), and Class C (250 shares). The state of incorporation requires shareholders to approve fundamental changes by an absolute majority. If the right to vote as a class is required, how many shares must vote in a favor of a proposed merger? Class A (1000 shares): 501 must vote in favor Class B (500 shares): 251 must vote in favor Class C (250 shares): 126 must vote in favor Total = 878 Without class voting, how many votes are required for approval? Total = 876 (1750 outstanding shares ÷ by 2 + 1)

5.

Appraisal Rights What are Appraisal Rights? Appraisal rights are the right of dissenting shareholders in an M&A transaction to have the corporation buy their shares in cash for their fair value as determined by a court. Policy Rationale for Appraisal Rights § A tradeoff for permitting mergers without minority shareholders being able to stop them. § Provides liquidity to minority shareholders. § A check on the power of majority shareholders.

Week 3 1.

2.

What are Appraisal Rights? Appraisal rights are the right of dissenting shareholders in an M&A transaction to have the corporation buy their shares in cash for their fair value as determined by a court. a. Policy Rationale for Appraisal Rights A tradeoff for permitting mergers without minority shareholders being able to stop them. Provides liquidity to minority shareholders. A check on the power of majority shareholders. b. Do appraisal rights really matter to M&A planners? Yes. Failing to consider whether shareholders will exercise appraisal rights can affect the true value of a deal. Availability of Appraisal Rights (MBCA v. Delaware) a. General Rules

b. MBCA Rules Availability of Appraisal Rights The MBCA permits appraisal rights when: § A corporate action results in a fundamental change in the shares to be affected by the transaction. § There may be uncertainty concerning the fair value of the shares.

c.

3.

Delaware’s rules DGCL Appraisal Rights § Appraisal rights available to shareholders in mergers (not stock purchase or asset deals) § Appraisal rights not available if: ▫ shares listed on national exchange ▫ corporation survives and shareholders did not have the right to vote on the transaction § Notwithstanding the prior bullet point, appraisal rights available if shareholders are required to accept anything other than shares of stock in the surviving corporation or shares listed on a national securities exchange Valuation of Dissenters’ Shares

4.

Determining “Fair Value” of Shares a. Fair Value Methodologies Merger Price ▫ How price was determined through deal process ▫ Courts consider best indicator Discounted Cash Flow ▫ Sum of cash flows over time, discounted to present value ▫ Most common valuation technique ▫ Courts consider second best indicator Comparable Companies Comparable Transactions Financial Issues in M&A Deals a. Type of Consideration Effect of Consideration Type

b. Business Valuation Methods to Value a Business Discounted Cash Flow / Market Capitalization / Revenue or EBIDTA Multiple / Enterprise Value / Comparable Transactions / Cost of in-house Development / Liquidation Value / Replacement Value c. Fairness Opinions What is a Fairness Opinion? A fairness opinion is a professional evaluation by an investment bank or other third party as to whether the terms of a merger or acquisition are fair to the shareholders. d. Some Techniques to Address Valuation Disputes Timing of Payment

Sample Earnout Provision “Buyer will issue an additional $4 million of its shares to seller if buyer's gross revenues from the acquired business exceed $2 million during a 12-month period ending after the closing.”

Week 4 1.

2.

Third Party Approvals a. Approvals & Practice Tips Equity holder consents Statutory approval requirements Other equity holder contracts may also grant approval rights (COI, voting agreements) Debt holder consents Bank lender consents (always required, but often paid off at closing, may trigger a fee) Bondholder consents (consent may not be required, but may trigger automatic payoff and usually a premium) Contracts with Other Business Partners Landlords Key Customers/Suppliers Insurance Companies Labor Unions Intellectual Property Advance Planning is Crucial Don’t get held up! Use deal structure to minimize risk Have a plan for getting consents Assess & allocate risk of not getting consents between parties Regulatory Approvals a. Regulatory Approvals Antitrust/Competition Laws Competition Statutes Notification Filings National Security Approvals CFIUS DOD DHS Other Federal Regulatory Departments & Agencies Financial Services – Federal Reserve, Treasury, OCC Energy – Energy Dept.; BLM Transportation – Dept. of Transportation, DOD Communications – FCC State Regulatory Bodies Insurance Health Care Attorney General (non-profits) b. History of Antitrust Laws (See Video) c. Antitrust Laws Sherman Act (1890) Generally prohibits anticompetitive conduct. Clayton Act (1914) Prohibits mergers and acquisitions that substantially reduce market competition. The Clayton Act 15 U.S.C. § 12 et seq. Clayton Act, § 7. Acquisition by one corporation of stock of another. No person […] shall acquire, directly or indirectly, the whole or any part of the stock […] and no person […] shall acquire the whole or any part of the assets of another person […], where in any line of commerce [i.e., relevant product market] or in any activity affecting commerce in any section of the country [i.e., geographic market], the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. This section shall not apply to persons purchasing such stock solely for investment […].

Example of Government Opposition to a Horizontal Merger See Video #1 (AT&T buy T-Mobile) See Video #2 (Government Sues to Block AT&T, T-Mobile Merger) Enforcement of Clayton Act The Department of Justice (DOJ) and Federal Trade Commission (FTC) jointly have issued Horizontal Merger Guidelines. Most recent version was released in 2010. The Guidelines describe the analytical framework used to determine whether to challenge a horizontal merger. Vertical and conglomerate mergers do not present the same threat to competition in a market. The government will challenge a proposed merger if it may create or enhance market power. Market power = ability to raise prices, reduce output, diminish innovation or otherwise harm customers as a result of diminished competitive restraints. d. Overview of Horizontal Merger Guidelines Market Power (Determined by analyzing the merging firms’ relevant markets) → Relevant Market (The relevant market = product market + geographic market) → Product Market (Determined by the group of products for which a monopolist could maximize prices by imposing a “small but significant and non-transitory” price increase) / Geographic Market (Determined by the relative geographic market in which the merging firms produce or sell) Market Shares (Once relevant market is determined, calculate market shares of merging firms. Market share = total sales in a relevant market) → Market Concentration (Use the Herfindahl-Hirschman Index to determine market concentration and any increase in concentration caused by the merger) → Herfindahl-Hirschman Index (Calculated by squaring the percentage market share of each firm in the market and summing the squares) Herfindahl-Hirschman Index (HHI) of Market Concentration

Other factors In addition to market share and concentration, regulators consider other factors to determine the competitive impact of a merger. Coordinated Effects Will there be post-merger coordination among firms? Unilateral Effects Will there be individual action by the merged firm that reduces competition? Efficiencies What efficiencies can the merger firm achieve? Market Entry How easily can new firms enter the market? Example of Importance of Relevant Market Definition FTC defined product market as “consumable office supplies through office superstores” Companies defined product market as “office products overall”

e.

Pre-Merger Notification Requirements - The Hart-Scott-Rodino Act of 1976 Pre-Merger Notification Requirements The Hart-Scott-Rodino Act gives the DOJ and FTC an opportunity to determine whether a proposed acquisition might violate the Clayton Act. It requires qualifying firms planning an M&A transaction to file a notification and report form with the DOJ and FTC. A waiting period (usually 30 days) is imposed before any qualifying merger can be consummated to provide time for the government t...