Mergers and Acquisitions

Overview to Mergers and Acquisitions

In Chapter 5, we will discuss the various corporate changes that come under the heading of "Mergers and Acquisitions." This chapter is intended to cover the main types of corporate combinations:

• Mergers
• Consolidations, including "share based" transactions
• Purchase of all assets

We will discuss each of these transaction types in detail, concentrating on the following elements of each:

• Execution of the transaction
• Voting on the transaction
• Changes in liability and corporate obligations

Our objective in this section is not to learn the ins and outs of the entire corporate combination process. Attempting to do so would be futile. First, these can be extremely complicated transactions. In addition, the process varies from case to case. In the end, our goal is to acquaint ourselves with the various steps involved in the various transactions and to identify areas where missteps may result in costs and liabilities.

Introduction to Mergers

We will discuss the merger first because it is most frequently the form that a transaction will take when a company is sold. “Merger” implies some form of equality; two pieces coming together to make a bigger, stronger company. As such, transactions, even those that are not actually mergers per se, are often characterized as mergers, as calling a transaction a “merger” preserves the status of all companies involved.

The merger process involves two companies – for our purposes, we will refer to them as A Corp. and B Corp. In a merger transaction, A Corp. and B Corp. will merge, with the result being that only one company will “survive” the transaction (e.g., the new company may still be referred to as A Corp). The surviving corporation (A Corp.) is now the holder of, and is burdened by, all of the rights, benefits, duties and burdens of both A Corp. and B Corp. Thus, the merged company (the new A Corp.), though presumably bigger and stronger due to the merger, also faces the problem that it is now responsible for all of the legal obligations of the now extinct company (B Corp.).

EXAMPLE: Oil Inc. and Petrol Co. recently entered a transaction where the companies were merged. Oil, the surviving company, had engaged in the transaction to get access to Petrol’s customers and the huge refinery it had in the South. However, in completing the deal, Oil is faced with the reality that it needs to assume Petrol’s liabilities, including its debts and the tort liability for any tort that Petrol had previously committed.

The Merger Process

The merger process varies from state-to-state. However, there are some rules that all states have in common. 

First, you can expect every state to require board approval from the “target” firm (the one that will not survive for a merger). In fact, it is the board that will recommend the merger occur and draw up what is known as a "Certificate of Merger." Additionally, it will be the board that negotiates with the acquiring company for the terms of the merger. Finally, once the board has concluded negotiations and the terms of the deal are established, the board will then recommend the transaction to the shareholders. See 8 Del. C. § 251. 

Given the severity of change to the target firm, shareholders will have the right to vote as to whether or not the transaction should proceed. See N.Y. Business Corporation Law § 903. The vote for a merger is typically a vote requiring the approval of either a majority or two-thirds of all shares issued and outstanding for the company. See Anderson v. International Minerals & Chemical Corp. 295 NY 343 (N.Y. Ct of App. 1946). It is important to note that in a merger transaction, the shareholders of the surviving corporation do not get to vote on whether or not the transaction is to proceed, as they are not losing their property.

EXAMPLE: Apples Co. and Oranges Inc. have determined that a merger would be in the best interest of both firms. Apples will survive the merger, taking on Oranges' rights and responsibilities. The board of Oranges negotiates with Apples’ board to determine the terms of the deal. Subsequently, the two firms draw up a plan for the merger. Oranges' board then drafts a resolution in support of the merger and distributes it to shareholders along with the plan of merger. At a special meeting called to vote on the transaction, the board recommends the deal to shareholders who then vote for the plan. All along, several shareholders from Apples have objected to the deal. However, their only options in trying to avoid the transaction are to voice their concerns to management or to sell their shares in protest, as they have neither the right to vote on the deal nor any other remedy.

Short-Form Mergers 

In addition to a standard merger, many states allow for what is known as a “Short-Form Merger”. A short-form merger occurs in the case of a parent corporation who is merging with a subsidiary company of its own. The parent company is typically required to have an extremely large stake in the subsidiary – a typical requirement is that the parent own 80% or 90% of each class of stock issued by the subsidiary. See Code of Ala. § 10-2B-11.04.

If both of the above criteria are met, then a short-form merger is allowed. What a short-form merger allows the parent to do is to merge the subsidiary into itself – combining all of its financial statements, legal rights, and business operations – without a vote of the remaining shareholders of the subsidiary. The premise behind the short-form merger is that the parent company owns such a large percentage of the subsidiary, that they have control of the subsidiary. The remaining shareholders in the subsidiary are either holding their shares and fighting the sale just to hold out for more money before selling, or they are simply disinterested in the transaction.

EXAMPLE: Big Co. had invested in Small Time, Inc. largely on the basis of the research that Small Time’s team – consisting of only four people – had been conducting. The terms of the relationship between the two companies was such that Big provided Small with a substantial amount of research funding in exchange for a 90% ownership stake in the firm. After Small Time’s research finally yielded positive results, Big Co. decided to conduct a short-form merger that merged Small Time into Big’s operations. The merger was completed without a vote of Small’s remaining shareholders because of Big’s 90% ownership.

The benefits of a short-form merger to the parent company are obvious. First, the short-form merger allows the parent to save the huge expense that may be required to solicit proxies or votes from the few outstanding shareholders. Additionally, the process can be completed quickly as all that is required is a vote of the parent company’s board and a filing with the state. The requirements to carry out the short form merger vary from state to state, but the common thread is that the merger will certainly be simpler than would be a merger between two unrelated companies. See Cal Corp Code § 1110.

Note, however, that just because a pair of companies merge via a short-form merger (as opposed to a regular merger), that does not change the legal rights or responsibilities of the parent company. The parent still takes on all of the benefits and obligations – including any elements of civil liability – that attach to the now merged subsidiary.