United States of America Squeeze-out Guide IBA Corporate and M&A Law Committee 2014

Transcription

1 United States of America Squeeze-out Guide IBA Corporate and M&A Law Committee 2014 Contact Harvey J. Cohen, Esq. Dinsmore & Shohl LLP

2 CONTENTS Page INTRODUCTION 2 FEDERAL SECURITIES LAWS 2 OVERVIEW OF DELAWERE LAW 2 OTHER REMEDIES AND CLAIMS 5 APPLICABILITY TO OTHER TYPES OF ENTITIES 5 CONCLUSION 5 Page 1

3 INTRODUCTION Each U.S. state has merger and consolidation statutes. Majority shareholders may use these state merger and consolidation statutes to squeeze out minority shareholders provided that the majority shareholders obtain the requisite votes and comply with the state statutory requirements. All state statutes provide that on the filing of the appropriate documentation with state officials, by operation of law, the merged or consolidated entity and its assets and liabilities become one with the surviving entity. Additionally, under the statutory framework of most U.S. states, appraisal is a dissenting shareholder's sole and exclusive remedy unless the corporate action triggering the appraisal rights was unlawful or fraudulent. As mergers are governed by statute, it is essential that the applicable statute or statutes be followed closely to ensure that the transaction will be deemed valid. This task is more complex if the entities involved are domiciled in multiple jurisdictions. Although the state statutes are very similar, there are requirements that may vary. It is essential to engage counsel with a national practice to ensure that your transaction complies with the statutes of all applicable states. FEDERAL SECURITIES LAWS While, as stated above, merger transactions are principally governed by state law, federal securities laws are also implicated. With regard to transactions involving publicly-traded or registered companies, all mergers are subject to securities regulation to some degree, and in particular, a squeeze-out merger may be subject to the going-private rules under the Securities and Exchange Act of Rule 13e-3 requires detailed, expanded disclosures regarding going-private transactions, including, among other things, the purposes of, reasons for, and alternatives to the transaction; whether the related part(ies) believe the transaction is fair to the unaffiliated stockholders and how they reached that conclusion; whether and why any of the company's directors disagreed with the transaction or abstained from voting on the transaction; and whether a majority of independent directors approved the transaction. The preparation of these disclosures can be time consuming and often requires significant management collaboration. The U.S. Securities and Exchange Commission (the SEC ) reviews proxy statements in general, and with respect to going-private transactions, reviews all documentation rigorously and typically comments extensively. In addition to the Rule 13e-3 filing and disclosure requirements, the transaction may be subject to other filing and disclosure requirements pursuant to other statutory provisions or rules of the SEC, such as those governing a third-party tender offer or merger. The going-private rules and tender offer rules under federal law and the heightened duties which may also be implicated in this situation under state law are not the subject of this article. OVERVIEW OF DELAWARE LAW In the United States, depending on the circumstances, the State of Delaware is the state of choice for the incorporation of business entities. Delaware, more than any other state, is home to publicly-held corporations. Not surprisingly, Delaware is a leader in corporate law. This article describes Delaware law as an example of relevant U.S. state merger statutes. Page 2

4 MERGER PROCESS Domestic Mergers Section 251 of the Delaware General Corporation Law governs the merger or consolidation of domestic corporations. The procedure is briefly outlined as follows: The boards of directors of each respective corporation adopt resolutions approving an agreement of merger and recommending the merger to its stockholders. The agreement of merger (also called a plan of merger) must include certain details as set forth in the statute including the merger consideration. In most cases, the agreement must also be approved by the vote of a majority of the outstanding stock of each corporation entitled to vote thereon. If the agreement is adopted by the stockholders of each involved corporation, the secretary of each corporation must certify the adoption. The merger then becomes effective either upon the filing of the agreement or a certificate of merger with office of the Secretary of State, or if the agreement so provides, on an alternate date specified in the agreement of merger, which such date cannot be more than 90 days after the filing date. Foreign Mergers Section 252 of the Delaware General Corporation Law authorizes the merger of Delaware stock corporations with stock corporations organized under the laws of other states, the District of Columbia or other non-us jurisdictions, if, in each case, the laws of such jurisdiction also permit the merger. The requirements and procedures for a merger under this Section are predominately the same as those required under the Section 251 merger, provided that, the agreement must include any other provisions required by the laws of the state of the surviving corporation. If the Delaware corporation is not the surviving corporation, the surviving corporation must consent to service of process in Delaware for enforcement of any obligation of the disappearing corporation against the surviving corporation (including any suit by a stockholder of the disappearing corporation to enforce appraisal rights). As previously stated, the merger of corporations domiciled in multiple jurisdictions must comply with the requirements of each jurisdiction. APPROVAL Section 251 of the Delaware General Corporation Law generally requires that mergers be approved by a majority of the outstanding stock entitled to vote. With respect to mergers approved at a stockholders meeting, the notice must go out to the stockholders not less than 20 days prior to the meeting. A stockholder must demand appraisal prior to the taking of the vote on the matter. If a merger is to be approved by written consent, the corporation must, either before the effective date of the merger, or within 10 days thereafter, give notice of the appraisal rights to its stockholders. Stockholders have 20 days from the date of the mailing to demand appraisal. The notices must go to all stockholders, not just those entitled to vote on the merger. Page 3

5 APPRAISAL RIGHTS Section 262 of the Delaware General Corporation Law permits stockholders that comply with certain procedures and processes to seek the appraisal of the fair value of their shares in a special proceeding in the Court of Chancery. The right is generally available to any stockholder of the corporation that: holds the stock on the record date for the meeting at which the merger agreement is to be voted on; makes a demand for appraisal rights at the time required under the statute; continuously holds the shares through the effective date of the merger; and has not voted in favor of or consented to the merger. Within 60 days after the effective date of the merger, any stockholder that previously opted for appraisal, may withdraw such demand and accept the terms offered by the corporation even if a petition for appraisal has been filed. 1 If a petition for appraisal has not been filed with 120 days from the effective date, the right to appraisal ceases. Appraisal rights are not available where the stockholders have the ability to sell their shares on a public market. APPRAISAL METHOD In an appraisal proceeding, the court determines the fair value of the shares exclusive of any element of value arising from the merger itself. Delaware courts have held that the fair value of a minority stockholder's shares should not be discounted to reflect its non-marketability or illiquidity. SHORT FORM MERGER Section 253 of the Delaware General Corporation Law governs short form mergers, which applies to mergers between domestic and foreign corporations and mergers between domestic corporations. A short form merger may be utilized when at least 90% of the outstanding shares of each class of stock that, absent Section 253 would be entitled to vote on such merger, is owned by another corporation. The corporation that owns such stock may merge itself into a subsidiary or merge a subsidiary into itself by filing a certificate of ownership and merger with the secretary of state and including a copy of the resolution of its board of directors. If the subsidiary is not wholly-owned, the resolution must state the terms and conditions of the merger. If the subsidiary is the entity that survives the merger, the resolution must include a provision for the pro rata issuance of stock of the surviving corporation to the stockholders of the parent, and the certificate of ownership and merger must state that the merger has been approved by a majority of the outstanding stock of the parent corporation entitled to vote at a meeting and held after 20 days' notice of the purpose of the meeting. If all of the stock of a subsidiary Delaware corporation party to a merger is not owned by the parent corporation immediately prior to the merger, the stockholders of the subsidiary Delaware corporation party to the merger may have appraisal rights. 1 This right exists as long as the stockholder neither filed the petition nor joined the proceeding as a named party. Page 4

6 OTHER REMEDIES AND CLAIMS In many states, the only exception to the rule that statutory appraisal rights are the exclusive remedy for dissenting shareholders to a merger would be in the case of a shareholder action against a corporation claiming that the corporation's conduct was illegal or fraudulent. In such a case, a shareholder may be able to contest or seek to enjoin, set aside or rescind the transaction. Some states also allow shareholder actions for breach of fiduciary duty. Additionally, some states have retained the business purpose requirement and have invalidated mergers if the sole purpose was to eliminate a minority interest. Courts have also held that a stockholder derivative suit instituted by a stockholder of the merged corporation does not survive the merger. There is disagreement among the states and courts as to whether shareholders may assert claims for fraud, self-dealing and breach of fiduciary duty (when available) within an appraisal proceeding or whether a separate action must be instituted. APPLICABILITY TO OTHER TYPES OF ENTITIES Most states have statutes that mirror the corporate merger statute and authorize mergers and consolidations between and among corporations, general partnerships, limited partnerships, limited liability companies and other foreign and domestic entities that are not corporations. CONCLUSION Squeeze-out mergers are governed by state statute in the United States and provide a procedure for majority shareholders to buy out minority shareholders who are unwilling to sell their shares. While the procedures are similar in most states, it is essential that the applicable statute or statutes be followed closely to ensure that the transaction will be deemed valid. Additionally, in most jurisdictions in the United States, unless a corporate action is fraudulent or unlawful with respect to the shareholder or corporation, a shareholder who is entitled to dissent may not challenge the merger; statutory appraisal is the shareholder's exclusive remedy. Corporations or other business entities undertaking a squeeze-out merger must work closely with counsel to mitigate risks associated with the merger and potential shareholder claims. Page 5