Merger

DEFINITION of merger

The merger is the decision of two or more companies to become one entity, by either closing the old entities into one new entity or by one company absorbing the other.

WHAT IT IS IN ESSENCE

In other words, two or more companies consolidate into one company. From a legal point of view, a merger is a legal consolidation of two entities into one entity.

From a commercial and economic point of view, this results in the consolidation of assets and liabilities under one entity. Mergers usually take the form of a stock swap between shareholders.

Multiple listings on stock exchanges will have to form one listing. So shareholders in one firm are given securities in the other to compensate for the loss of their stock.

The merger may give each party’s shareholders partial ownership and control of the combined enterprise.

A deal may be euphemistically called a merger of equals if both CEOs agree that joining together is in the best interest of both of their companies.

While when the deal is unfriendly it may be regarded as an “acquisition”.

Both actions can be taken under one name M&A.

HOW TO USE

Mergers, asset purchases, and equity purchases each have different tax rates, and the most beneficial structure for tax purposes is highly situation-dependent.

One hybrid form often employed for tax purposes is a triangular merger. The target company merges with a shell company wholly owned by the buyer. Thus becoming a subsidiary of the buyer.

In a “forward triangular merger”, the buyer causes the target company to merge into the subsidiary. This is similar except that the subsidiary merges into the target company.

These two models of sale have different tax rates.

The documentation of an M&A transaction often begins with a letter of intent. The letter of intent generally does not bind the parties to commit to a transaction. 

But may bind the parties to confidentiality and exclusivity obligations. So that the transaction can be considered through a due diligence process involving lawyers, tax advisors etc

After due diligence is complete, the parties may proceed to draw up a definitive agreement.

Such contracts are typically 80 to 100 pages long and focus on five key types of terms:

  • Conditions, which must be fit before there is an obligation to complete the transaction. Conditions typically include matters such as regulatory approvals. And the lack of any material adverse change in the target’s business. 
  • Representations and warranties by the seller with regard to the company.
  • Covenants, which govern the conduct of the parties. Both before the closing and after the closing.
  • Termination rights, which may be triggered by a breach of contract. A failure to satisfy certain conditions or the passage of a certain period of time. Without consummating the transaction. And fees and damages payable in case of a termination for certain events.
  • Provisions concerning the shareholder approvals under state law and terms relating to the mechanism of the legal transactions to be consummated at closing.
  • An indemnification provision.

The merger can arise for various different reasons.