by Stephen E. Pigott
State statutes generally give "dissenting" or "appraisal" rights to shareholders who vote against a statutory merger that is ultimately approved by the constituent corporations. Exercise of these rights allows shareholders who opposed the merger to require the corporation to purchase their shares at a price determined under the relevant statute. In some cases, corporate managers can combine two corporations into one without having to contend with dissenting or appraisal rights. This can be accomplished through a type of "D" reorganization often referred to as a "practical merger." In a "D" reorganization practical merger, substantially all the assets and liabilities of one corporation (the "transferor corporation") are transferred to another corporation (the "transferee corporation"), and the transferor corporation distributes to its shareholders stock or securities of the transferee corporation, resulting in one or more shareholders of the transferor corporation being in control of the transferee corporation immediately following the transfer. Control for this purpose is ownership of 50 percent or more of the combined voting power of all classes of voting stock or of 50 percent or more of the total value of all classes of stock. The result of a practical merger is that the businesses of the transferee and transferor corporations are combined within the transferee corporation, which is controlled by one or more shareholders of the transferor corporation.
The form below is a reorganization agreement designed to accomplish a basic "D" practical merger. The form contemplates a situation in which a corporation with a single shareholder wants to acquire a smaller corporation with a majority shareholder and a minority shareholder. The majority shareholder is in favor of, and the minority shareholder is opposed to, an acquisition or merger. The majority shareholder has sufficient voting power to approve a merger, but neither the majority shareholder nor the larger corporation wishes to create a situation in which the minority shareholder may exercise appraisal rights. Accordingly, the two corporations agree that all of the assets and liabilities of the larger corporation will be transferred to the smaller corporation in exchange for previously unissued shares of common stock and non-voting preferred stock of the smaller corporation. The larger corporation then will liquidate and distribute the stock of the smaller corporation to its shareholder. Assume, for example, that the smaller corporation has a 90 percent shareholder (90 common shares) and a 10 percent shareholder (10 common shares). The smaller corporation will issue 900 common shares to the larger corporation. The larger corporation will distribute these 900 shares, as well as the non-voting preferred shares, to its sole shareholder. As a result of the transaction contemplated in the form below, the shareholder of the larger corporation will become a 90 percent shareholder of the common shares of the smaller corporation (which now owns all the assets and business of the larger corporation). The original shareholders of the smaller corporation will have their ownership percentages in the combined entity reduced to 9 percent and 1 percent, respectively. Under applicable Delaware statutes, so long as the transaction, including the issuance of new shares to the larger corporation, is approved by the board of directors of the smaller corporation, the minority shareholder of the smaller corporation cannot prevent the transaction and does not have appraisal rights. The law of the applicable jurisdiction must be carefully reviewed, however, as laws of some states may give certain rights to minority shareholders in similar situations.
Because the constituent entities are effectively combining, each must complete and be satisfied with its due diligence investigations of the other. The form below contains some examples of representations and covenants common to purchase agreements, but is by no means exhaustive. A drafter must be sure that all appropriate representations and covenants needed to protect the drafter's client are included in such an agreement.
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