THE 23rd ANNUAL FESTIVAL OF LEGAL LEARNING

February 89, 2013

School of Law, The University of North Carolina at Chapel Hill

“MERGER OR SHARE EXCHANGE: A PRIMER”

Anthony Gaeta, Jr.

Gaeta & Eveson, P.A., Raleigh, North Carolina

Adjunct Professor of Law, UNC School of Law

IThe Elements of a Merger:

  1. Adoption of Plan of Merger by Board of Directors (NCGS 55-11-01)
  1. Requirements of a Plan of Merger:
  1. name the merging corporations (may be more than two)
  2. name the surviving corporation
  3. set forth the “terms and conditions” of the merger
  4. set forth the “manner and basis” of conversion of merging corporations’ shares (cash, stock, other securities of the surviving or other corporation) or cash or other property
  1. Permissive in Plan of Merger – set forth amendments to charter of surviving corporation and other provisions relating to the merger.
  1. Action on Plan of Merger (NCGS 55-11-03)

a.Approval by shareholders of target or “disappearing” corporation always required unless it is a 90% plus subsidiary (see NCGS 55-11-04 if effecting a subsidiary merger for additional special requirements regarding communications with minority shareholders and timing of merger)

b.Board of Directors’ recommendation

  1. must be made unless conflict of interest
  2. if no recommendation, must tell shareholders “why”
  1. 50% plus 1 vote required for approval unless Articles of Incorporation require greater percentage. However, be aware if there is an anti-takeover provision in Articles of Incorporation of target for “super-majority” vote unless incumbent board of directors approves the transaction; in such a case, approval reverts back to the 50% plus 1 vote requirement.
  1. Shareholders must receive notice of the Plan of Merger along with a copy or summary
  1. Separate voting by voting groups of shareholders may be required if consideration is other than cash. Note: shares without voting rights may get to vote
  1. Shareholders vote of surviving corporation is not required if certain matters are effected; most frequent exception to this “no vote” rule is the “20% rule” i.e. if the surviving corporation after the merger will have a number of shares outstanding that exceeds 20% of the number of shares outstanding before the merger, then surviving corporation’s shareholders must vote. Note: also a NASD and NYSE rule.
  1. Closing of the Merger (NCGS 55-11-05)
  1. Filing of Articles of Merger with Secretary of State containing the following:
  1. names of each merging corporation;
  2. name of surviving corporation;
  3. any amendments to the Articles of Incorporation of the surviving corporation;
  4. statement regarding appropriate method of approval, if any, by shareholders
  1. Effective time is filing date and time unless otherwise stated in the Articles of Merger
  1. Plan of Merger may be abandoned at any time (subject to contractual rights) by Board of Directors or as set forth in the Plan of Merger
  1. If real property is involved, obtain certificates of merger from Secretary of State and file with the Register of Deeds in each county where real property is situated (NCGS 47-18.1)
  1. Note: to effect closing, only Articles of Merger need to be filed. It no longer is necessary to attach the Plan of Merger (NCGS 55-11-05)
  1. The Elements of a Share Exchange
  1. Adoption by Board of Directors of a Plan of Share Exchange (NCGS 55-11-02)
  1. Action on Plan of Share Exchange (identical to action for Plan of Merger above)
  1. Closing of Share Exchange (identical to Merger set forth above)
  1. Effect of Merger or Share Exchange
  1. Merger
  1. separate existence of each merging (i.e. target) corporation disappears; corporate existence of surviving corporation remains
  2. title to real and other property owned by each corporation vested in surviving corporation
  3. surviving corporation assumes all liabilities
  4. litigation in process against a disappearing corporation gets continued against surviving corporation
  5. shares of merging corporation get converted into the consideration agreed upon (securities or other obligations of survivor, cash, etc.), and have no further rights as shares of merging corporation except for appraisal rights (NCGS 55-13-01 et. Seq.)
  1. Share Exchange – the acquiring corporation becomes the parent holding company of the selling corporation and will own 100% of the selling corporation’s issued and outstanding stock. (This is major advantage over a share exchange prior to creation of the share exchange statutory provisions wherein 100% of the issued and outstanding shares might not be voluntarily exchanged. (i.e. an “exchange offer”) Shareholders are entitled to rights of exchange set forth in the Articles of Share Exchange or appraisal rights.)
  1. Issues Regarding Merger or Share Exchange Consideration
  1. Merger or share exchange – selling corporation shareholders may bargain for stock (common or preferred), debt instruments, property or cash of surviving or acquiring corporation (See Internal Revenue Code Section 368 regarding tax free versus taxable mergers or exchanges.)
  1. While Delaware and other states may differentiate between holders of a single class of securities as to the consideration to be received, North Carolina law does not permit discrimination among the holders of shares of a single class in the kind of property that can be received in a merger or share exchange. All the shares of a single class must be treated the same both in value and kind. (See North Carolina Commentary to 55-11-01.)
  1. How then effect a combination for stock or other securities or cash of the surviving corporation?
  1. shareholders are permitted to elect to receive alternative forms of consideration as long as proration is provided if one of the alternatives is oversubscribed;
  2. utilize a Form of Election and send it to each shareholder permitting them to make selection with “cramdown” provisions for oversubscribers.
  3. Allow shareholders to elect either 100% cash or stock or percentage for each (i.e. 75% stock and 25% cash) or allow each shareholder to choose his/her allocation with overall limits, in the aggregate, for all shareholders.
  1. Forms of Merger
  1. Straight statutory merger. (Target merges into survivor).
  1. Forward triangular merger. (Target merges into existing or newly created “acquisition subsidiary” of acquiror; retain as wholly-owned subsidiary with potential for future merger of subsidiary into acquiror.)
  1. Reverse triangular merger. (Merge existing subsidiary or “acquisition subsidiary” of acquiror into selling corporation with selling corporation as survivor. This format tantamount to a share exchange.)

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