Chapter 12 – Changes in the Corporate Structure and Corporate Combinations

Amending the Articles of Incorporation

• Corporations can amend their articles of incorporation to add or delete provisions or to modify existing provisions.
• Because the articles created the corporation and are available for public inspection by any potential shareholder, amending the articles requires shareholder approval.

Restating the Articles of Incorporation

• A procedure somewhat similar to amending the articles is restating the articles of incorporation.
• A restatement is a clean-up of previous amendments to articles so there is one easily readable complete document.
• Because no changes are made to the articles, restating the articles can be done without shareholder approval.

Amending the Bylaws of the Corporation

• Amending the corporate bylaws is typically accomplished by the directors, without shareholder participation.

Corporate Combinations

• Merger:  combination of two of more corporations into one corporate entity
• Consolidations:  combination of two or more corporations into one new entity

Mergers: Terms

• Extinguished corporation: corporation that does not survive a merger
• Survivor: corporation that survives a merger
• Subsidiary: corporation formed by another, called the parent

Share Exchange

• Exchange of all of target’s shares for shares in acquiring corporation

Asset Purchase

• Purchase of assets of an entity, terms of which are found in asset purchase agreement

Hostile Takeover

• Not all combinations of corporations are consensual. Although many transactions involve months and perhaps even years of planning and negotiating by the constituents, some combinations occur without the consent of the acquired, or target, corporation.
• Because these combinations are not consented to by management, they are usually referred to as hostile takeovers.
• There are two primary methods of conducting a hostile takeover:  tender offer or a proxy fight

Tender Offer

• Public offer made by bidder to acquire shares in a target corporation

Proxy Fight

• Competition between corporate management and an aggressor to take over board of directors

Pre-Tender Offer Defenses

• Staggered board of directors, with a provision that directors can only be removed “for cause.”
• Bylaw provisions calling for a supermajority vote
• Golden parachutes
• Target makes itself unattractive by selling off certain assets/divisions
• Poison pill defense

Poison Pill Defense

• Poison pill:  an anti-takeover measure triggered by a tender offer at which time the target’s shareholders are given additional rights (also called shareholder rights plan)

Hart-scott-rodino act

• Federal statute requiring notification to government before mergers involving certain amounts or parties

Domestication and entity conversion

• Chapter 9 of the MBCA provides a series of procedures allowing corporations to change their state of incorporation (domestication) and also allowing corporations to become different business structures (entity conversion.)

Key Features of Corporate Changes and Combinations

• Significant changes to a corporation typically require shareholder approval.
• A corporation may amend its articles at any time by resolution by the directors followed by shareholder approval.  Articles of amendment must be filed with the state agency.
• A corporation may restate its articles to create one composite document superseding prior amendments; shareholder approval is unnecessary because nothing new is being added to the articles.
• Amending corporate bylaws is typically handled by directors without shareholder approval inasmuch as the bylaws regulate only the internal affairs of the corporation.
• A merger is the combination of two or more corporations into one corporate entity.  The survivor succeeds to all of the business, debts, liabilities, and assets of the extinguished corporation.  Shareholders of both corporations must approve the transaction.
• Shareholders who dissent from a merger or consolidation have the right to have their shares appraised and purchased from them at fair value.
• In a share exchange, the target’s shareholders exchange their shares for cash or shares in the acquiring corporation.
• As an alternative to merger, one corporation can purchase all of substantially all of another’s assets.  Liabilities are generally not purchased.
• One corporation can purchase a majority or all of another corporation’s stock as a means of gaining control of a corporation.  If the acquisition is consensual, directors and the seller’s shareholders will vote.  In a hostile acquisition or takeover, the bidder bypasses the target’s management and appeals directly to the shareholders.
• Some takeovers are regulated by federal law.
• Corporations may implement a variety of measures to ward off a takeover.
• A corporation may change its state of incorporation (domestication) or may convert its business structure to an unincorporated form (such as to an LLC).