In a previous article, we have discussed merger negotiations and what happens in a merger negotiation process. After the negotiation stage, a merger needs to be approved in able for it to happen. Today, we will talk about merger approval procedures.
Adopt Resolution
Each state in the United States has a statute that authorizes the mergers and acquisitions of corporations. Sometimes, the rules differ for domestic and foreign corporations. After the negotiation and both board of directors of each company reach an agreement, they adopt a resolution approving the deal they agreed to.
Now, this resolution should always state the names of the companies involved in the deal. It should also include the name of the new company. Additionally, the resolution should also include the financial terms of the deal and other relevant information. Relevant information such as the method that is going to be used to convert the securities of each company into securities of the surviving corporation.
Moreover, should there be any changes in the articles of incorporation, any changes in the articles of incorporation, it must be referenced in the said resolution.
At this point in the deal process, target companies should be taken to the shareholders for approval. Shareholder approval is required if the bidder is financing the offer using 20% or more of its own stock, NYSE, NASDAQ, and AMEX.
According to recent research, when bidders issue as much as 20% or more of their shares to acquire the target company, the bidder should experience a 4.3% increase in their announcement returns.
This could be related to greater expected synergies and a less chance of overpayment, or so it is presumed. Additionally, the researchers have found that this effect was concentrated among acquirers with greater institutional ownership. These usually are the investors who are in a better position to evaluate the deal.
Friendly Deals
Typically, shareholders are the ones who approve friendly deals. After the shareholders’ approval, the merger plan will now be submitted to the relevant state official. Usually, this is approved by the secretary of state.
Once the state official is satisfied with the proper documentation and determines that all documentation has been received by the state, it issues a certificate of merger or consolidation. A proxy solicitation should be accompanied by a Schedule 14A as per SEC rules.
The 14th item of this schedule sets forth several specific information that must be included in a proxy statement when there will be a vote for approval of a merger. Additionally, it should also include the sale of substantial assets or liquidation or dissolution of the corporation.
This information should also include the terms and reasons for the transaction. It should also state the description of the accounting treatment and tax consequences of the deal. This is true for all mergers.
Moreover, it is also required to present the financial statements, a statement regarding relevant state and federal regulatory compliance. Not only that, but it is also required to include more documents such as fairness opinions and other related documents. Fairness opinions will be discussed later.
Once the deal is completed, the target company or the registrant must then file a Form 15 with the SEC. This terminates the target’s public registration of its securities. Here are some more important details that come into play when it comes to merger approval procedures.
Special Committees of the Board of Directors
When it comes to mergers and acquisitions, the board of directors has the right to choose or form a special committee. The aforementioned special committee will then review the proposed merger. For instance, directors who might personally benefit from the merger should not be members of the said committee. To explain further, directors who will benefit when the buyout proposal contains provisions that management directors may potentially profit from the deal.
There are higher chances of a special committee to be appointed the more complex the transaction gets. However, the committee cannot do all the evaluations by themselves. We also need legal counsel assistance. The legal counsel will help guide the committee on legal issues.
These legal issues can include the fairness of the transaction, the business judgment rule, and other legal issues they might face. It is paramount that the committee and the board itself carefully considers all of the relevant aspects of the transaction.
Otherwise, they might overlook important details in the decision-making process and later on be scrutinized by the court. The same happened in the Smith v. Van Gorkom case where the court found the directors personally liable because it thought that the decision-making process of said directors was inadequate.
Fairness Opinions
Earlier, we mentioned fairness opinions, but what does it really mean? Well, this phrase can mean different things. When it comes to mergers and acquisitions, fairness opinions focus on the financial fairness of the consideration paid by the bidder to the target.
On the other hand, in connection with a divestiture, a fairness opinion focuses on the fairness to the corporation as opposed to the stockholders of the company. Additionally, the fairness opinion could also focus on fairness to the holders of the seller’s shares if, and only if, the shareholders directly receive the buyer’s consideration.
Deal Closing
Now, we move on to the closing of a merger or an acquisition. This often takes place after the agreement has been reached. Why? Simply because there are plenty of conditions that have to be fulfilled prior to the eventual closing. This may include the formal approval of the shareholders.
Additionally, it may also be required for both parties to secure regulatory approvals from government authorities. These government authorities may include the Justice Department or Federal Trade Commission as well as regulators in other nations if it is a global firm. In a lot of cases, the final purchase price will be adjusted in accordance with the formula specified in the agreement.
That is it for Merger Approval Procedures. Check out our website to learn more about Mergers and Acquisitions.
©image credits to Amber Lamoreaux