In California, Not Every Merger Is A "Reorganization"

Yesterday's post discussed the relevance of the maturity date of a debt security to the definition of a "sale-of-assets" reorganization under California's General Corporation Law.   The CGCL recognizes two other types of "reorganizations".  One of these is a "merger reorganization", which is defined as a merger pursuant to Chapter 11 of the CGCL.   Cal. Corp. Code § 181(a).   There are many types of mergers - forward, reverse, triangular, reverse triangular, short-form, and interspecies.

Section 1110, which authorizes short-form mergers, is within Chapter 11.  A short-form merger, however, does not constitute a "merger reorganization" under the CGCL because Section 181(a) expressly excludes short-form mergers from the definition of a "merger reorganization".   A short-form merger involves the merger of a parent corporation and a subsidiary corporation, domestic or foreign, when the parent corporation owns at least 90% of the outstanding shares of each class of the subsidiary corporation.    A short-form merger is generally effected by a resolution or plan of merger adopted and approved by the parent corporation's board of directors.  If the parent owns less than all of the outstanding shares of each class of the subsidiary, then the board of the subsidiary must approve the resolution or plan of merger as well as the consideration to be received by the shareholders (other than the parent).  If the parent is to be merged into its subsidiary in a short-form merger (a so-called "down-stairs transaction"), the board of directors of the surviving subsidiary corporation must approve the entire resolution or plan of merger.  In addition, if the down-stairs transaction would, but for Section 1101 be a "merger reorganization", the principal terms of which would require approval of the outstanding shares of any class of the parent corporation pursuant to Section 1201(d), then the outstanding shares of the same class of parent must approve the principal terms of the merger.   The effect of this last requirement is to prohibit reincorporation in another jurisdiction by means of a down-stairs short form merger without the vote of the shareholders of the parent corporation.