Mergers, Acquisitions, and Corporate Restructurings. Gaughan Patrick А.

For larger deals, however, costs can easily be several million dollars. The actual opinion itself may be somewhat terse and usually features a limited discussion of the underlying financial analysis. As part of the opinion that is rendered, the evaluator should state what was investigated and verified and what was not. The fees received and any potential conflicts of interest should also be revealed.

Voting Approval

      Upon reaching agreeable terms and receiving board approval, the deal is taken before the shareholders for their approval, which is granted through a vote. The exact percentage necessary for stockholder approval depends on the articles of incorporation, which in turn are regulated by the prevailing state corporation laws. Following approval, each firm files the necessary documents with the state authorities in which each firm is incorporated. Once this step is completed and the compensation has changed hands, the deal is completed.

      Deal Closing

      The closing of a merger or acquisition often takes place well after the agreement has been reached. This is because many conditions have to be fulfilled prior to the eventual closing. Among them may be the formal approval by shareholders. In addition, the parties may also need to secure regulatory approvals from governmental authorities, such as the Justice Department or Federal Trade Commission as well as regulators in other nations in the case of global firms. In many cases the final purchase price will be adjusted according to the formula specified in the agreement.

      Short-Form Merger

      A short-form merger may take place in situations in which the stockholder approval process is not necessary. Stockholder approval may be bypassed when the corporation's stock is concentrated in the hands of a small group, such as management, which is advocating the merger. Some state laws may allow this group to approve the transaction on its own without soliciting the approval of the other stockholders. The board of directors simply approves the merger by a resolution.

      A short-form merger may occur only when the stockholdings of insiders are beyond a certain threshold stipulated in the prevailing state corporation laws. This percentage varies depending on the state in which the company is incorporated, but it usually is in the 90 % to 95 % range. Under Delaware law the short-form merger percentage is 90 %.

      A short-term merger may follow a tender offer as a second-step transaction, where shareholders who did not tender their shares to a bidder who acquired substantially all of the target's shares may be frozen out of their positions.

      Freeze-Outs and the Treatment of Minority Shareholders

      Typically, a majority of shareholders must provide their approval before a merger can be completed. A 51 % margin is a common majority threshold. When this majority approves the deal, minority shareholders are required to tender their shares, even though they did not vote in favor of the deal. Minority shareholders are said to be frozen out of their positions. This majority approval requirement is designed to prevent a holdout problem, which may occur when a minority attempts to hold up the completion of a transaction unless they receive compensation over and above the acquisition stock price. This is not to say that dissenting shareholders are without rights. Those shareholders who believe that their shares are worth significantly more than what the terms of the merger are offering may go to court to pursue their shareholder appraisal rights. To successfully pursue these rights, dissenting shareholders must follow the proper procedures. Paramount among these procedures is the requirement that the dissenting shareholders object to the deal within the designated period of time. Then they may demand a cash settlement for the difference between the “fair value” of their shares and the compensation they actually received. Of course, corporations resist these maneuvers because the payment of cash for the value of shares will raise problems relating to the positions of other stockholders. Such suits are difficult for dissenting shareholders to win. Dissenting shareholders may file a suit only if the corporation does not file suit to have the fair value of the shares determined, after having been notified of the dissenting shareholders' objections. If there is a suit, the court may appoint an appraiser to assist in the determination of the fair value.

      Following an M&A it is not unusual that months after the deal as many as 10 % to 20 % of shareholders still have not exchanged their frozen-out shares for compensation. For a fee, companies, such as Georgeson Securities Corporation, offer services paid by the shareholders, where they locate the shareholders and seek to have them exchange their shares.

      Reverse Mergers

      A reverse merger is a merger in which a private company may go public by merging with an already public company that often is inactive or a corporate shell. The combined company may then choose to issue securities and may not have to incur all of the costs and scrutiny that normally would be associated with an initial public offering. The private-turned-public company then has greatly enhanced liquidity for its equity. Another advantage is that the process can take place quickly and at lower costs than a traditional initial public offering (IPO). A reverse merger may take between two and three months to complete, whereas an IPO is a more involved process that may take many months longer.13 Reverse mergers usually do not involve as much dilution as IPOs, which may involve investment bankers requiring the company to issue more shares than what it would prefer. In addition, reverse mergers are less dependent on the state of the IPO market. When the IPO market is weak, reverse mergers can still be viable. For these reasons there is usually a steady flow of reverse mergers, which explains why it is common to see in the financial media corporate “shells” advertised for sale to private companies seeking this avenue to go public.

The number of reverse mergers rose steadily from 2003 to 2008. Falloff in 2009 was relatively modest compared to the decline in the number of traditional M&As (see Figure 1.7). In terms of deal value, however, 2006 was the banner year and the value of these deals generally declined over the years 2008–2013.

Figure 1.7 (a) Value of Reverse Takeovers (b) Volume of Reverse Takeovers. Source: Thomson Financial Securities Data, March 6, 2015.

      For many companies, going public through a reverse merger may seem attractive, but it actually lacks some of the important benefits of a traditional IPO – benefits that make the financial and time costs of an IPO worthwhile. The traditional IPO allows the company going public to raise capital and usually provides an opportunity for the owners of the closely held company to liquidate their previously illiquid privately held shares. This does not automatically happen in a reverse merger. If the company wants to sell shares after the reverse merger, it still has to make a public offering, although it may be less complicated than an IPO. Being public after a reverse merger does not mean the shares of the combined company are really liquid. It all depends on how attractive the company is to the market and the condition of the market itself.

      One advantage of doing a reverse merger is that it gives the company more liquid shares to use to purchase other target companies. Prospective targets might be reluctant to accept illiquid shares from a privately held bidder. Shares from a public company for which there is an active market are often more appealing. Thus if the goal is to finance stock-for-stock acquisitions, a reverse merger may have some appeal.

      Reverse mergers have often been associated with stock scams, as market manipulators have often merged private companies with little business activity into public shells and tried to “hype” up the stock to make short-term fraudulent gains. The SEC has tried to keep an eye out for these manipulators and limit such opportunities.

Special Purchase Acquisition Vehicles

Special purchase acquisition vehicles (SPACs) are companies that raise capital in an IPO where the funds are earmarked for acquisitions. They are sometimes also referred to as blank check companies or cash-shells. SPACs were very popular between 2006 and 2008, especially in 2008. The number of SPACs peaked in 2009 and declined in the years that followed (see Figure 1.8).

Figure 1.8 (a) Value of SPACs (b) Volume

13

Daniel Feldman, Reverse Mergers (New York: Bloomberg Press, 2009), 27–33.