When you enter the corporate world, many confusing terms will be used. One term you may be unfamiliar with is the statutory merger. Mergers and acquisitions can seem quite complex, often with billions of dollars at stake, but the statutory merger is quite simple, though precise rules must be followed. Read on to learn more about statutory mergers.
What is a statutory merger?
A statutory merger is used when two companies decide to merge. One of the two companies loses its singular legal identity, and the other retains it. An official merger ensures that laws are followed, and compliance is upheld.
For example, if companies A and B enter into a statutory merger, one company will retain its legal entity, but one will lose it. Company B will bring company A under a unified identity. This is how acquisitions are usually made, with the surviving entity continuing to trade with all of the assets previously owned by the merged corporation.
The benefits of a statutory merger
There are many benefits to a statutory merger, for example:
- One organization will be in a stronger position; if an organization feels like it’ll benefit financially from a merger, it may seek a partner willing to merge.
- If an organization looks to improve business efficiency, improve its core competencies or reduce costs, it can look into a merger.
- Another common reason for a merger is that a company will team up with another to beat another competitor, ‘The Enemy of My Enemy,’ as a business principle.
While a company typically loses its identity, there are several reasons for merging with a larger company. Here are a few reasons this may be ideal:
- The company owner may consider that merging with a large company will benefit its shareholders more than an independent owner. Since the purpose of business is to maximize value for the shareholders, this isn’t a bad idea.
- Secondly, the company may reduce the risk of conflict of interest (though this is a rarer explanation).
A merger can only happen if both parties agree; let’s look at the specific legal processes behind a statutory merger.
Legal processes of a statutory merger
Before a statutory merger happens, business law sets out conditional laws for mergers. Each party in the merger must adhere to the regulations set out per corporate law.
The most challenging part of a merger is gathering the shareholders’ approval. Shareholders with voting rights must vote to approve a merger. If shareholders don’t support the merger, it can’t go ahead. The Board of Directors of each company must approve the merger before it takes place. After the approvals, the final approval can be sought (from the authorities). Usually, a statutory merger takes quite some time and is tedious. You must have large amounts of patience.
A statutory merger cannot go ahead without adhering to the well-being and interests of the business and the shareholders. A short form of the merger is possible if specific circumstances, such as a subsidiary and parent company, though this still requires due diligence. Shareholders may still need an appraisal of the company’s shares before the merger; the merger cannot go ahead unless the shareholders are given the company’s fair market value.
Differences between statutory merger and statutory consolidation
There is sometimes confusion between a statutory merger and statutory consolidation. In a merger, one of the two parties will retain its identity while the other loses it, as in the example with company A and company B.
However, in a statutory consolidation, the two parties forge a new identity together. For example, companies A and B may become company AB1, creating an entirely new identity that leaves behind the old one.
In a merger, the liabilities and assets of the merging company (the one losing its identity) become subject to the ownership of the acquiring company (the one retaining its identity). In a consolidation, the assets and liabilities of both become the larger company’s assets jointly.
There are similarities, though. In both consolidations and mergers, federal and state laws can be enacted to prevent the process of a consolidation or merger. These anti-trust laws may be enacted if a company (existing or proposed) would gain an unfair market advantage and allow for a monopoly.
How is a merger completed?
Now that we know what a merger is, let’s look at the four basic steps you’ll need to undertake before a merger can be completed.
Firstly, the Board of Directors of the respective corporations will require a meeting to issue resolutions; this will indicate whether or not they are in favor of the merger. If they are, they can set forth conditions under which they’re willing to merge ‘a plan of merger’ and ‘merger agreement’ – attempting to negotiate through any differences or disagreements. Both will carefully examine their articles of incorporation to see if they allow for merging. If they don’t, you may require an amendment.
Next, a vote will be taken, which you must notify all shareholders of. They should also be given a brief outline of the merger plan proposed before voting takes place. This is necessary so that shareholders can exercise their appraisal rights.
A specific percentage must usually be obtained – this varies state-by-state or may be addressed in a company’s incorporation documents, but the majority requires a 2/3 majority.
Finally, specific articles must be agreed upon and drafted; they’ll detail how the merger occurs. As is commonly seen, not all proposed mergers are approved, but if it is, then each charter and governing state statutes will dictate what negotiations can occur. The articles of merger (or ‘certificate of merger’) must be filed once negotiations conclude and the merger is approved.
The final word
A statutory merger is a way to combine two different corporations officially. One will lose their legal status and be absorbed into the surviving company. There are several benefits to statutory mergers, including market dominance (though this is a grey area) and financial gain.
It’s relatively arduous but straightforward, with several critical steps involved. The shareholders have a right to appraisal and valuation of their shares before a merger. Most crucially, the merger must protect the interests of the business and shareholders without causing any monopoly. Statutory mergers should be completed carefully and, where possible, under the watchful eye of an experienced business attorney.
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