In previous articles, a Denver business attorney at The McGuire Law Firm has discussed certain types of mergers. Recently, a client inquired as to who votes in statutory merger and such question or issue deserves some attention. The article below has been prepared by a business attorney to provide general information regarding corporate voting issues in auspices of a statutory merger. This article will use Delaware law as such law is followed in many jurisdictions and has been the cornerstone of many state corporate codes.
The default rule in Delaware is that corporate shares without general voting rights (non-voting common shares and preferred shares with no voting rights unless there are dividend arrearages) do not have the power to vote in large transactions. Of course, to immediately contradict the above statement, many states do not follow this Delaware default law and class voting may be mandatory on statutory mergers. Further, Delaware companies can and often do provide preferred shareholders a class vote in acquisitions.
There are exceptions to the rule as stated above. Exception one is: the shareholders of the surviving corporation in a statutory merger do not have a right to vote if their rights, preferences and privileges of their shares will survive the merger, because their investment or investment contract has not changed. Furthermore, their shares cannot be diluted by more than a specified amount through the statutory merger. Exception two exists through a statutory merger of a parent corporation and a subsidiary when the parent holds over 90% of the subsidiary’s stock. The Delaware code permits the merger of the subsidiary into the parent, also called an “upstream merger” solely on a resolution of the parent’s board of directors. Thus, neither the shareholders of the subsidiary or the parent corporation vote to ratify the transaction. Certain corporate codes may give the parent the right to vote if the parent is issuing stock in the parent to the subsidiary shareholders that carries more than 20% of the voting power in the parent corporation. Exception number two is often referred to as the parent-subsidiary merger exception. It is important to note that if the subsidiary is the surviving corporation (called a downstream merger) the shareholders of the parent corporation are entitled to vote. The third exception may be somewhat novel to Delaware but other states will likely follow. Under Delaware code, no shareholder voting may be required in specific reorganizationswhereby holding companies are reorganized, or holding companies are created. This exception has been termed the holding company exception.
The merger of two businesses or the acquisition of a business can be confusing and have many implications, including tax implications. If you have questions regarding the potential merger with another business or acquisition of another business, speak with a Denver business attorney and tax attorney by contacting The McGuire Law Firm. A free consultation is offered to all potential clients.
