Types of M&A Transactions

Recall that a merger is when multiple businesses come under common control. That's a vague statement. We haven't defined "business" or "control."

Some businesses are mostly a collection of assets. For example, if you want control of my lemonade stand you can buy my lemons, sugar and table. You don't need fancy merger statutes; you just buy the assets that make the business work.

But most businesses are more than assets. For example, if you bought the land, building and inventory of an outdoor gear store, you wouldn't have a functioning business. That type of business needs supply agreements and employees, and you can't purchase supplier and employment relationships like assets.

To acquire the full business there are a few approaches you could take, depending on your goals. You might just buy the company's shares. This would give you the economic benefits of owning the company and give you the ability to replace the board. But this can be difficult if some shareholders do not want to sell.

If shareholders do not want to sell, you might do a statutory merger. We use the term "statutory merger" to distinguish this process from the other merger types. Delaware law and the MBCA permit two companies to become one company by process of statute. You can think of this somewhat like a marriage; each company agrees to become one company, and the state merges them into one. You don't need every shareholder to agree, typically a majority is sufficient. But you also need approval from both both boards, and sometimes a target's board doesn't want to sell.

A hostile acquisition is an acquisition in which the target's board opposes the merger. There are a couple of ways this can be done. You might just go around the board and purchase shares directly from shareholders, as discusssed above. Alternatively, you might conduct a proxy contest. A proxy contest is a campaign to convince other shareholders to vote to replace the directors on the board. Recall that shareholders typically vote by designating a proxy to cast a vote on their behalf. It's called a proxy contest because the acquiror is competing with management to to obtain more proxy cards (i.e., votes).

The following sections will discuss the pros and cons of each of these four acquisition methods.

• Asset sale
• Share purchase
• Statutory merger
• Proxy contest

As you read, focus on what approvals are required and what type of control the acquiror gets.

A Note on Consideration

When you buy a company, you can pay in cash, shares or a combination of both. For example, when Frontier Airlines tried to buy Spirit Airlines, the merger agreement said that each share of Spirit Airlines would be converted into the right to receive $2.13 and 1.9 shares of Frontier Airlines. In aggregate, the Spirit Airlines shareholders would have received almost $3 billion in cash and owned 48% of the new company.

If you were a shareholder of Frontier Airlines, this might make you upset. You're gaining all of Spirit Airlines' business, but you're also being diluted nearly 50%. Maybe this is a good deal, but it certainly is a major shift in your share position.

To protect against abuse, the New York Stock Exchange requires that shareholders approve any transaction that would issue shares that would represent 20% or more of (i) the total number of shares outstanding before the transaction or (ii) the voting power before the transaction. So if my company is listed on the New York Stock Exchange and has 100 shares outstanding, then I can't issue 20 shares as part of a transaction without a shareholder vote.