Cash Out Merger

In a previous article, we discussed a stock swap statutory merger, which may be considered a “plain vanilla” statutory merger between two corporations.  It was also noted that this merger would be a tax free reorganization, known as an A Reorganization.  Certainly, not all mergers are tax free reorganizations.  The article below has been drafted by a Denver business attorney to discuss a Cash Out Merger, which would be a taxable transaction.

Through a cash out transaction the purchasing firm or business does not want the shareholders of the selling business to hold the purchasing businesses voting common stock.  The purchasing business wants to be able to pay cash for the purchasing business, or if the necessary amount of cash is not available, to pay the selling businesses shareholders with non-voting investments in the purchasing business such as a debt or loan, or non-voting common stock or preferred stock, which would be equity.

To provide an example, think of John Corporation and Jeff Corporation and John Corporation wishes to acquire or purchase Jeff Corporation.  The cash out merger thus involves cash (or potentially a substitute as stated above) being paid from John Corporation to Jeff Corporation.  The shareholders of Jeff Corporation would have to vote to ratify the merger.  The Jeff Corporation stock would be cancelled and Jeff Corporation would be extinguished.  The assets and liabilities of Jeff Corporation would become those of John Corporation.  Procedurally, the board of directors would in all likelihood have to pass a resolution approving the agreement to merger.  This agreement would state the terms and conditions of the merger and whether certification of incorporation of the John Corporation is amended.  The agreement would also need to go to the shareholders for a shareholder vote.  The issue of who will vote in a statutory merger deserves attention.  Under the Delaware Code, the default rule would be that shares without general voting rights (non-voting common shares and preferred shares with no voting rights unless dividend arrearages) would not vote in major transactions.  I think the majority of other state codes would follow this voting rule as well.  It is also important to note that certain preferred stock contracts can provide a preferred stock shareholder a class vote in certain acquisitions.

The minimum vote may require a majority of the outstanding shares and this may be true whether or not the shares are represented at the shareholder meeting.  The turnout at a shareholder meeting can be less than 75% of the outstanding shares, the successful vote on a merger can require the affirmative vote of the vast majority of the shares represented at a shareholder meeting.  There are exceptions to certain voting issues and requirements stated above, which will be discussed in a later article.

If you have questions regarding your business issues, you may speak with a Denver business attorney or tax attorney at The McGuire Law Firm. A free consultation is offered to all potential clients.

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