Design of Corporate Restructuring and Mergers

Recently I was going through JDA Software’s (JDAS) Form 8K dated Nov 2 2012. Something interesting caught my eye that I will like to discuss here.

“Item 1.01. Entry into a Material Definitive Agreement.

On November 1, 2012, JDA Software Group, Inc., a Delaware corporation (the "Company"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with RP Crown Parent, LLC, a Delaware limited liability company ("Parent"), and RP Crown Acquisition Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of Parent ("Merger Sub"). Parent and Merger Sub are affiliates of RedPrairie. The Merger Agreement was unanimously approved by the Company's Board of Directors.

Pursuant to the Merger Agreement, upon the terms and subject to the conditions thereof, Merger Sub will commence a tender offer (the "Offer") no later than November 15, 2012 to acquire all of the outstanding shares of common stock, $0.01 par value per share, of the Company (the "Company Common Stock") at a purchase price of $45.00 per share, net to the seller in cash without interest (the "Offer Price"). As promptly as practicable after the expiration of the Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will accept for payment, and pay for, any shares of Company Common Stock validly tendered and not validly withdrawn pursuant to the Offer, at which point Merger Sub will merge with and into the Company (the "Merger") and the Company will become a wholly-owned subsidiary of Parent.”

This section of SEC filing describes how this reorganization is being accomplished. Design of corporate restructuring is a complex task and is accomplished by a specialized team of corporate lawyers and tax experts. Such designs are done to properly address issues related to liabilities, cost basis of assets, asset ownership, contractual obligations, financial obligations, capital gain taxation, licensing, customer support and country specific laws. Even though such design is usually transparent to most of us, it is still worthwhile to know how it gets accomplished.

In this bog I will describe three well known designs for corporate mergers.

Most simple and straight-forward of these structure is a direct sales and transfer of ownership. In such reorganization, called “A” reorganization, acquiring company (acquirer) buys shares of target company (target) from target company’s shareholders.  Payment can be in form of acquirer’s shares or equivalent cash.

Another commonly used approach for corporate merger is a “Forward Triangular Merger”. In this approach, Acquirer  created a fully owned subsidiary (Merger Sub). Target merges with “Sub” with “Sub” surviving as final company. Ownership of Target’s asset is transferred to Sub.

Third and most commonly used approach in USA is “Reverse Triangular Merger”. This kind of merger is also accomplished through a subsidiary of Acquirer. However, in this case, “sub” merges in to “target” and “target” survives as a wholly owned subsidiary of Acquirer. Ownership of target’s assets remain with “target” that is now a subsidiary. JDA-Red Prairie merger is a Reverse Triangular Merger.

Such structures become even more complex when you look at international mergers. For example, Eaton Corporation of Ohio USA recently acquired Cooper Industries of Ireland. This merger was accomplished through a complex set of subsidiaries in the Ireland, the Netherlands and the USA. First, a new company, called “New Eaton”, was created in Ireland. Cooper Industries got acquired by and became a wholly owned subsidiary of “New Eaton”.  New Eaton through a chain of wholly owned subsidiaries (Comdell Ireland: a subsidiary of New Eaton,   Turlock B.V. The Netherlands: a subsidiary of Comdell) established a subsidiary “Turlock Corporation: A subsidiary of Turlock B.V” in USA. Eaton Corporation USA merged with Turlock Corporation and surviving as merged company. In summary, both Eaton Corporation USA and Cooper Industries Ireland become wholly owned subsidiaries of the “New Eaton”. Subsequently “New Eaton” requested SEC to list its share on stock exchange in replacement of Eaton Corporation USA’s shares. Such complex structures are needed to stay in compliance with country specific rules and regulations.

 

I will update this blog and add few more real-life examples. I hope that you will also find design of corporate mergers an interesting subject and share your insights and other examples. I look forward to your feedback.