Legal Rules Governing Mergers and Acquisitions

Applicable Corporate Laws

Corporate law in the United States There is no single corporate law in the United States, since every state has its own domestic corporation law. The most relevant corporate law is in Delaware. For example, all mergers and acquisitions require the approval of the board of directors, but not of the general meeting, if less than 20% of the corporation's shares is offered as the consideration in the merger. This enables large companies to buy small companies without the need to go through the red tape of a shareholder approval process. Obviously, the shareholders of the target (the startup) are required to give their approval, according to both Delaware corporation law and, typically, the terms stipulated in the investment agreement.

The approval of the boards of directors of the companies has to include, among other things, a specification of the terms of the merger and a decision on which entity will survive the merger. If a shareholders' meeting is required, then it is the one which decides to approve the merger. Once the required approvals are obtained, a notice is filed by the surviving entity with the Delaware Secretary of State. After the notice, the merging company ceases to exist and its shareholders are allotted shares in the surviving entity. All of the companies' assets and liabilities become the property of the surviving entity.

Applicable Securities Rules

Securities rules are generally applicable to traded companies which are subject to reporting requirements pursuant to the Securities Law. Although the acquirer is subject to securities rules, these rules are not applicable when the offering is exempt from registration under the Securities Act of 1933 (see the section discussing legal restrictions on raising private equity). Therefore, the discussion of such rules in this book has been limited.

For transactions that are not exempt, a registration with the SEC is required in the event that such transactions include modifications, reorganizations, or transfers of control in a company, in cases in which the law in the seller's state of incorporation requires the consent of the seller's shareholders for the consummation of the transaction. Deals falling under this rule include, among others, reclassifications of securities, mergers, and asset sales.

Rule 145 also requires the delivery of a registration statement on a Form S-4, which is limited in scope compared to the Form S-1 (that is required in the case of ordinary public offerings of shares). The registration statement must be submitted to all of the company's registered security holders who are entitled to vote on the consummation of the transaction. Regulation M-A, which became effective in January 2000, regulates all the details pertaining to the consummation of various merger deals and determines the manner and scope of the disclosure required in such transactions.

Stock exchange rules Both NASDAQ and the NYSE require the approval of the acquirer's shareholders only if it is issuing more than 20% of its shares as the consideration in the merger. Any material transaction must be reported immediately to the stock exchanges and the acquirer, if it is a traded company, also makes a press release with all the details of the transaction.