Corporate Law And Shareholder Approval

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Most equity carve-outs do not require shareholder approval and require only approval by the parent company’s and subsidiary company’s boards of directors. More complicated corporate law considerations, particularly those related to fiduciary duties, typically arise following the closing of an equity carve-out, especially if the parent retains a significant equity interest in the subsidiary.
Shareholder Approval
The question of whether shareholder approval is required to implement an equity carve-out is determined by state law. While shareholder approval statutes vary by state, most are substantially similar to Delaware’s statute, which provides that shareholders must approve a transaction in which a company will sell all or substantially
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Most equity carve-outs are not large enough to require shareholder approval; if the parent sells less than a majority stake and retains control over the subsidiary, there is a strong argument against needing to obtain shareholder approval. If the parent sells between 50% and 100% of its subsidiary shares, on the other hand, and the subsidiary’s business is important to the parent, there is a strong argument in support of needing shareholder approval. The requirement for shareholder approval is significant because proxy materials must be mailed, a shareholder meeting must be organized and approval must be obtained before the transaction can be completed. If the parent’s shares are registered under the Exchange Act, proxy materials must comply with Regulation 14A and meet disclosure requirements. While proxy materials should disclose the material terms of the offering, details such as final price and size of the offering are typically not determined until the registration statement is effective, which creates a risk that the parent will not be able to meet its disclosure obligations.
Board Approval
Approval is typically required by both the parent’s and the subsidiary’s boards of directors in order to implement an equity carve-out. While the specific
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