Ch6. Mergers, Divisions & Dissolution

Corporate Mergers

Merger:
Two or more corporations combine into a single legal entity.

Statutory Merger (Absorption):
Company A + Company B → Company A  (B disappears)
All assets, liabilities, and contracts of B transfer
to A by operation of law (universal succession).

Consolidation (New-Entity Merger):
Company A + Company B → Company C  (both A and B disappear)
New entity C is formed; A and B's assets and liabilities
vest in C automatically.

Effects of a Merger:
① Disappearing corporation(s) dissolve without winding up
② All rights and obligations transfer automatically (no need for
   individual contract assignments)
③ Shareholders of disappearing corporation(s) become shareholders
   of the surviving / new corporation

Merger Procedure (Model Business Corporation Act):
Board adopts plan of merger → shareholder approval
(usually supermajority) → creditor-notification period
→ file articles of merger with Secretary of State
→ merger effective on filing or stated effective date

Short-Form Merger & Small-Scale Merger

Short-Form (Parent-Subsidiary) Merger:
Parent owns ≥ 90% of subsidiary → parent may merge out
the subsidiary without subsidiary shareholder vote
(DGCL § 253; MBCA § 11.05)

Small-Scale Merger:
Surviving corporation issues shares equal to ≤ 20% of
its pre-merger shares → surviving corporation's shareholders
may not be required to vote
(protects against dilutive but minor transactions)

Appraisal Rights (Dissenters' Rights):
Shareholders who vote against a merger (or don't have a vote)
may demand that the corporation purchase their shares at
"fair value" determined by the court.
→ Typically available in statutory mergers, not stock-for-stock
  transactions where shares are publicly traded (market-out exception)

Corporate Divisions (Spin-Offs & Split-Offs)

Spin-Off:
Parent distributes shares of a subsidiary to its own
shareholders pro rata → shareholders hold shares in both
parent and the new independent company.

Split-Off:
Some shareholders exchange their parent shares for subsidiary
shares → those shareholders exit the parent.

Divisive Reorganization (Split-Up):
Parent dissolves and distributes multiple subsidiaries to
shareholders → parent ceases to exist.

Carve-Out / Subsidiary IPO:
Parent retains a majority stake but takes the subsidiary
public via an IPO → parent is the 100% owner initially,
then reduces stake over time.

Successor Liability in Divisive Transactions:
Pre-division liabilities generally follow the business unit
that incurred them; however, courts may impose successor
liability on the receiving entity depending on state law
and the nature of the claim (especially product liability).

Corporate Dissolution

Grounds for Dissolution:
① Expiration of the period stated in the articles
② Voluntary dissolution approved by shareholders (supermajority)
③ Administrative dissolution by the state (failure to file, pay fees)
④ Judicial dissolution (deadlock, oppression of minority, fraud)
⑤ Bankruptcy / insolvency

Winding-Up Procedure:
Board / liquidating trustee pays all known creditors
→ bar date for claims → distribute remaining assets
to shareholders → file certificate of dissolution
with the Secretary of State

Liquidating Trustee / Receiver:
Officers typically oversee dissolution;
court may appoint a receiver in judicial-dissolution proceedings.

Bankruptcy Dissolution:
If insolvent, the entity files for Chapter 7 (liquidation);
a bankruptcy trustee is appointed by the court.

Statutory Merger vs. Consolidation ★★★★★ : Merger = one entity survives (the other dissolves). Consolidation = both entities dissolve; a new entity is created. Memory hook: merger = one survives; consolidation = brand new entity

Universal Succession ★★★★★ : In a merger, all assets and liabilities of the disappearing corporation transfer automatically — no individual assignment required. Memory hook: merger = automatic transfer of everything

Spin-Off vs. Carve-Out ★★★★☆ : Spin-off = parent distributes subsidiary shares to shareholders (parent keeps nothing). Carve-out = parent sells a minority stake via IPO and retains control. Memory hook: spin-off = full separation; carve-out = partial IPO

Practice Questions

Q. Why must creditors be notified before a merger becomes effective?

A merger may transfer debts to a surviving entity with a weaker balance sheet, or eliminate the debtor entity entirely. To protect creditors, state law requires advance notice and often a waiting period during which creditors can object and demand payment or adequate security before the merger closes.

Q. What is the practical difference between a spin-off and a subsidiary IPO?

In a spin-off the parent distributes all subsidiary shares to its existing shareholders and retains no economic interest. In a subsidiary IPO (carve-out) the parent sells a minority stake to the public while retaining majority ownership and control. The spin-off fully separates the two businesses; the carve-out keeps them connected.