Can one company buy all the stock of another?
December 15, 2006 5:57 PM   Subscribe

How can one company buy all the stock of another public company?

Yesterday my huge company bought another company for $150 million which came out to something like $18 a share. This newly bought company is now a "fully owned subsidiary" of my company.

Does my company really own every piece of stock? What if someone was holding out for $20 and when the buyout happened they said "F--- you" and kept their stock?
posted by sideshow to Work & Money (8 answers total)
If one person holds out with one share, they pretty much retain the right to exchange that share for $18 in the future, for a specified period, after which their share may become worthless.

If there is a significant amount held out, it comes under the minority interest rules.
posted by ikkyu2 at 6:07 PM on December 15, 2006

The terms of stocks can allow compulsory purchase of remaining shares once one person (or company) owns more than a certain percentage.
posted by cillit bang at 6:11 PM on December 15, 2006

It can get very complicated for a company who purchases another company and runs into a rump of shareholders who do not wish to part with their shares. Basically, if there are enough of them, it has to keep sweetening the pot until enough of them sell and they can take full control of the company.

However this can become horribly expensive if they have entered into agreements with people who sold in the earlier stages that they will pay them more if they have to pay more to the minority shareholders.

Sometimes companies do this to get their hands on the cash reserves of the target company. A rump of shareholders can basically block access to the money, which may have been required to pay off loans that were taken out to buy the company in the first place. The buyer can then get stuck with the costs of running two public companies and see their own stock dive because they are now overleveraged and having to service a massive debt burden. They can then become takeover targets themselves. It's high wire stuff.

I just munched popcorn as a family member, who was the Chairman of the Board of a public company, went through all of this. Machiavelli had nothing on these guys.
posted by unSane at 6:22 PM on December 15, 2006 [1 favorite]

Cillit Bang has it: a small group of hold-outs can almost always be bought out against their will. The mechanisms for this include both provisions of law (especially the Delaware General Corporation Law) and provisions of companies' own constitutive documents.
posted by MattD at 6:26 PM on December 15, 2006

Basically, there are two kinds of mergers:

1: a one-step merger: the board of directors signs a merger agreement and then seeks stockholder approval via the proxy process. The exact percentage of shareholders required to approve the merger depends on the company and state of incorporate, but could be as low as a simple majority of shares. Shareholders will receive an S-4 document that puts forth the details of the merger and will usually include one or two "fairness" opinions from the advising investment bank(s). The SEC reviews the S-4, which takes time. This time may allow a competing bid to surface. Laws exist in various jurisdictions giving minority shareholders rights to protect them from a bad deal. But, most of the time, if the shareholders voting to approve the deal, 100% of the stock will be transfered to the new owner. If some old lady has a stock certificate locked away somewhere, it becomes invalidated and the new security or cash is sent to the address of record. Proxy solicitation firms exist to handle this process.

2: a two-step merger: in a friendly deal, the board of directors signs a merger agreement and then the buyer issues a "tender offer" at the deal price. Anyone can choose to sell to the buyer at the tender offer price. The goal is for the buyer to accumulate 90% of the shares, then they can execute a squeeze-out of the remaining 10% without much trouble (this is called a "short-form merger" and is part of Delaware law, but I think this is common in other jurisdictions as well). But if the buyer gets less than 90%, they have to go through the shareholder vote process just like the one-step process. If you were in that 10% that held out, your shares will be invalidated and you'll receive new securities.
posted by mullacc at 6:30 PM on December 15, 2006

I'm sorry, the document you're likely to receive as part of the shareholder vote is the Schedule 14A. The Form S-4 is a related document that registers the new securities. They contain similar information about the merger.
posted by mullacc at 6:45 PM on December 15, 2006

Mostly-related: Airtran is in the process of trying to do just this to local (to me) Midwest Air. Now there is a potential class-action suit if Midwest rejects the offer.
posted by niles at 10:07 PM on December 15, 2006

A corporation couldn't acquire a "fully owned subsidiary" through a vanilla merger, exactly. A corporation is a fully owned subsidiary of another if the latter owns all of the stock of the former. There are still two legally distinct entities in such an arrangement, though. In contrast, if two corporations merge, only one corporation results from the transaction.

Anyway, trying to buy out every last shareholder of the target is probably the worst way to acquire a subsidiary.

A much better choice would be a reverse triangular merger. Such a transaction has three players, all of them corporations.

I'm going to call them P, T, and S because I lack imagination. P is the corporation that will ultimate own the target, and T is the target corporation.

Step 1: P creates a corporation S and transfers to S some mix of cash and P stock in exchange for all of S's stock. S is now a wholly owned subsidiary of P.

Step 2: S merges into T, so that T acquires all of S's assets (the cash and P stock), and P's S stock is exchanged for T stock. P is now a partial owner of S.

Step 3: T now distributes all of the assets S formerly held to it's shareholders (except P) in redemption of their stock. T is now a fully owned subsidiary of P, and T's former shareholders have received either cash or P stock (so they are now P shareholders).

This requires cooperation from T's shareholders and board, obviously, and this is where the usefulness of a tender offer lies. If cooperation is not forthcoming, P can use a tender offer to acquire enough of a stake in T push approval of the above transaction through. This may not even require simple majority control, depending on who the other shareholders are and what they want.
posted by Mr. President Dr. Steve Elvis America at 12:34 AM on December 16, 2006

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