Mergers and Corporate Restructuring - the ISS Framework

Corporations must continually restructure themselves. In addition to merger and acquisition activity within the United States, there are cross border transactions where the target company and the acquiring company are from different countries.

As a result, shareholders are confronted with the need to vote on a varied array of merger and restructuring proposals. However, some of these transactions do not require shareholder consent despite the significant changes that may accrue to the company as a result of the transaction.

Acquiring companies generally are not required under state law or stock exchange regulations to seek shareholder approval unless the acquisition is in the form of a stock transaction resulting in the issue of 20 percent or more of the potential acquirer's outstanding shares, or voting power, or unless the merger parties have agreed that shareholders of both companies must approve the deal. Under most state laws, however, management of a target company must submit merger agreements to a shareholder vote.

The financial health of the corporations involved in these transactions is a key issue. While some restructurings arise from a strong company's expansion plans or desire to increase efficiency, others may be a last ditch effort to keep the company afloat. In the latter case, the investor may decide to support a flawed proposal that would normally be unacceptable to the investor because the alternative of the company failing is unpalatable.

ISS evaluates merger and restructuring transactions on a case-by-case basis, giving consideration to economic, operational, and governance factors. Our analyses are based on the following principles:

Current shareholders' viewpoint: All analyses are conducted from the point of view of enhancing long-term shareholder returns for the company's existing shareholders. Since transactions discussed in this chapter will often involve more than one corporation, this may lead to contradictory recommendations. It is important for investors to evaluate our recommendations in light of their relative investment holdings. If an investor holds many shares of company A, for whom a transaction is deemed to be favorable, and relatively few shares of company B, for whom a transaction is held to be unfavorable, it may be in the best interests of the investor to vote for the transaction for both companies rather than follow ISS's recommendations.

Enhancing shareholder value: The fundamental objective of these analyses is to determine whether a transaction will enhance shareholder value. While the post-transaction governance structure is an important factor in the decision, the paramount concern is whether the transaction makes economic sense and is expected to produce superior shareholder returns. If poor governance is being introduced as a result of the transaction, the company must demonstrate that the economic benefits clearly outweigh any reduction in shareholder rights.

Independent evaluation: ISS prefers to see a fairness opinion prepared by a recognized investment banking firm. In transactions where inside directors or management have a conflict of interest, we prefer the assurance that the transaction was reviewed by the independent directors.

Shareholder approval: ISS prefers that companies bring all significant merger or restructuring proposals to shareholders whether or not shareholder approval is required by state law.

In this section, the major focus is on evaluating merger transactions in a stock-for-stock transaction. In addition, we discuss cash mergers and various forms of corporate restructuring including formation of a holding company, asset sales, recapitalization, spinoffs, and liquidations.