Denver Business Attorney Discusses Voting in a Statutory Merger

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.

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.

Denver Small Business Attorney Denver Business Lawyer


Stock Swap Statutory Merger by Denver Business Attorney

How do businesses merge, or how does one business acquire another business?  Maybe you have read of mergers and acquisitions in the Wall Street Journal, or maybe you hear about them on the news.  But, how do these mergers or acquisitions actually occur internally in terms of corporate ownership?  There are multiple ways for one corporation to acquire another corporation or for entities to merge.  One very common form of merger is the Stock Swap Statutory Merger.  From a tax perspective, this is a tax free merger and commonly referred to as an “A Reorganization.”

A Stock Swap Statutory Merger would likely involve two corporations (we will say Corporation J and Corporation S) and these corporations would start as separate legal entities with separate legal owners, the owners being the corporate shareholders.  In our example, Corporation S will merge into Corporation J, and thus Corporation J will be considered the survivor or the surviving corporation.  Of course, Corporation J could merge into Corporation S or Corporation J and Corporation S could merge into a completely new corporation that was formed for the transaction, say Corporation JS, which would be a consolidation.

Through this type of merger, Corporation S shareholders have their stock cancelled and they receive consideration in the form of Corporation J shares.  Thus, this is a stock for stock merger, or a stock swap merger.  Corporation J will absorb the assets and liabilities of Corporation S as a matter of law (this is a statutory merger, and you must think about successor liability issues).

After the merger, we now only have one corporation, which is Corporation J.  You could think of this like a prize fight- after the fight there is only one boxer or fighter standing.  Not that every merger or acquisition is hostile, and of course you could think of this as a marriage, the union of two corporations into one corporation!  As stated above, only Corporation J will survive and Corporation S is extinguished.  The shareholders of Corporation J will continue to hold their stock as they did before the merger, but the shareholders of Corporation S will receive newly issued additional Corporation J stock.  Thus, the ownership interests of Corporation J and Corporation S will be pooled in Corporation J.  Corporation J now has the assets and liabilities of Corporation S and of course Corporation J’s original assets and liabilities.

In short, you can consider the transaction to have three stages, which will be stated below and significantly simplified:

Stage 1: The shareholders of Corporation J and Corporation S will need to vote and ratify the merger.

Stage 2: Corporation S shares are cancelled, Corporation J shares are issued to Corporation S shareholders, the assets and liabilities of Corporation S are transferred to Corporation J and Corporation S is extinguished.

Stage 3: The shareholders of Corporation J are the “original” shareholders of Corporation J (those pre-merger) and the “old” shareholders of Corporation S.  The assets and liabilities of Corporation J are those of “old” Corporation J (prior to merger) and Corporation S.

The above merger is an example of only one type of merger.  To speak with a Denver business attorney or tax attorney, please contact The McGuire Law Firm.

Denver Business Attorney Denver Small Business Attorney or 720-833-7705