A merger is a method of acquiring a company without using cash. It can be accomplished in one of several manners. For example, the target (the company that will be acquired) can be merged into the buying entity, with the target disappearing. Alternatively, the buying entity can be merged into the target, with the buying entity disappearing. Another method involves the buying entity and target combining to form a new entity. Many times, a merger involves using a subsidiary of the buyer to acquire the target, resulting in a “triangular” merger. If the subsidiary is merged into the target, then it is a “reverse triangular” merger. In any event, the surviving entity will own all the assets, rights, and liabilities of the buying entity and the target.

The Merger Process

The merger process starts by representatives of the buyer and the target company negotiating a merger agreement. The boards of directors of the two corporations then submit the merger agreement to the shareholders for a vote. In Texas, at least two-thirds of the shareholders of each corporation must approve the merger. Opposing shareholders can object to the merger. If a two-thirds majority approves the merger, then Texas law provides a dissenter’s rights procedure that the dissenting shareholders must follow to determine the values of their shares. This requires the corporation whose shareholders dissented to buy their shares for the value established by the dissenter’s rights procedure. The buyer and seller can structure a merger as a “tax-free” exchange to the shareholders and the corporations by following section 368(a)(1)(A) of the Internal Revenue Code.

Some Advantages and Disadvantages of a Merger compared to a Stock or Asset Purchase

Documenting Transfers. In a merger, individual stock or asset transfers do not have to be documented, and it is not necessary for each shareholder to agree to the merger. In a stock purchase, each selling shareholder must agree to the sale, if the buyer wants to wind up with one hundred percent of the shares. Similarly, in an asset purchase, the buyer and seller must transfer the title to each individual piece of real estate and each piece of titled personal property. In a merger, title to real estate and personal property transfers to the new or surviving corporation when the articles of merger are filed.

Liability Assumption. In a merger, the new or surviving corporation assumes all the liabilities and obligations, known or unknown, of the merged corporation that disappeared. The liability exposure is much more limited in asset purchases.

Loans and Contract Rights. If the target has loans that prohibit the sale of assets, except in the regular course of business, an asset sale without lender approval can result in the loans being called. Additionally, if the target holds non-assignable contracts such as franchises, licenses, or leases, then it may be better to use a merger or stock purchase rather than an asset purchase, because an asset purchase would require the other party to consent to the assignment of the otherwise non-assignable contracts.

For additional information, please see the accompanying articles:  How Do You Buy a Company, Some General Considerations in Buying or Selling a Business, Asset Purchase, Stock Purchase, The Acquisition Agreement

THIS INFORMATIONAL MEMORANDA FROM THE LAW OFFICES OF THOMAS D. SOLOMON, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the corporate acquisition area. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.