Statutory Merger
A legal process for mergers between two or more companies
What is a Statutory Merger?
A statutory merger is a legal agreement that brings together two existing businesses where one company continues to exist as a legal entity while the other becomes part of it.
There are various types of mergers, each driven by different business goals. In a statutory merger, one of the merging companies maintains its distinct legal identity. This sets it apart from a statutory consolidation, where both merging entities cease to exist, replaced by an entirely new entity. In a statutory merger, either of the merging companies retains its identity throughout the process.
Mergers and acquisitions (M&A) deals are often undertaken to expand a business's clientele, enter new markets, or increase market share. In all these scenarios, the goal is to enhance shareholder value.
In a statutory merger (illustrated by the combination of Company A and Company B), only one of the two businesses continues to exist after the merger is completed. This type of combination is a frequent occurrence in mergers and acquisitions.
To prevent other companies from merging with one of the merging companies, a "no-shop clause" is commonly included in merger agreements. In an acquisition, one of the entities survives the transaction, and a statutory merger works similarly.
In a statutory merger (where company A and company B merge), only one of the two businesses continues to exist after the merger is completed. This type of combination is frequently seen in mergers and acquisition activities that take place.
For example, Company B may stop to exist as a separate entity and instead operate under the name of Company A. The entire statutory merger process is governed by the corporate laws of the relevant state, and any violations are considered illegal.
In a statutory merger, the assets and liabilities of the merged entity are acquired by the surviving company. As a result, the combined entity is rendered obsolete. The distinction between an acquisition and a merger can occasionally be quite subtle due to their similar characteristics.
Key Takeaways
- In a statutory merger, two companies combine but only one retains its legal identity after the merger.
- The merger must be approved by the boards and shareholders of both companies as per state laws. Dissenting shareholders can exercise appraisal rights.
- Benefits include cost efficiencies, increased market share, and enhanced competitiveness. Companies may merge to gain advantages over rivals.
- In a statutory consolidation, both companies are dissolved and a new entity is formed, whereas in an acquisition one company purchases the other.
- Other types of mergers include horizontal (competitors), vertical (suppliers/customers), conglomerates (unrelated businesses), and product extension (similar offerings).
Understanding Statutory Merger
Organizations often consider statutory mergers with other companies to enhance organizational and financial efficiency and gain a competitive edge in the market. While conflicts can arise during mergers, the advantages often outweigh the challenges. Shareholders of merging companies receive appropriate compensation for their approval, often in the form of shares in the newly merged entity.
To proceed with a merger, companies must adhere to state corporate laws and obtain approval from their respective boards of directors, the merger must be approved by the shareholders of each company using their voting rights. Finally, mergers are approved by the relevant regulatory authorities after all legal requirements have been met. This entire procedure could take months to complete.
A more compact form might be used if a parent company and a subsidiary merge. Proper due diligence should also be exercised to prevent unexpected material liability. Shareholders may exercise their appraisal rights if they oppose the merger, either by having their pre-merger corporation shares valued or receiving payment for their fair market value.The best interests of the entities, their members, or other constituencies may have been served by a statutory merger.
There are many reasons why businesses consider a merger of this kind. Here are a few of the most crucial ones:
1. Financial Advantage: Let us assume that a company believes pursuing a merger will be financially advantageous. In that case, the company will look for a partner prepared for such a merger.
2. Cost Reduction: An organization may consider mergers to lower costs, increase core competencies, or make business processes more efficient.
3. Competitive Edge: A company's primary motivation for a merger of this kind is to outperform a close rival on the market share or core competencies frontier.
From the perspective of a company losing its identity in a merger, we can see other benefits:
1. Stockholder Interests: The business might believe that joining forces with a more powerful rival would be in the best interests of its stockholders.
2. Minimal Conflict: The business might believe that by joining forces with another company, there would be little to almost no operational conflict of interest.
Ultimately, a merger of this kind cannot occur unless both parties consent.
How to Proceed with a Typical Statutory Merger?
Statutory Merger happens when two corporations combine, but only one maintains its legal existence. The procedures for conducting a merger are fairly straightforward, but they must be carried out precisely following the laws of each state.
In general, notice is required for several parties, the majority of whom typically have the right to vote on a merger after the board of directors of a corporation has investigated the situation and issued its resolution regarding the merger.
Both corporations' boards of directors will need to get together and adopt resolutions supporting or opposing the proposed merger. If both parties agree, they must then specify the terms and conditions of the proposed merger and make an effort to resolve any disagreements arising over them.
Additionally, one or both boards must carefully review their articles of incorporation to determine whether any formal amendments are required to make the proposed merger possible.
Thereafter, all the shareholders shall be given notice of the meeting at which a vote on the proposed merger will be taken, regardless of whether their shares entitle them to vote.
Before the vote, the shareholders should also be given a general overview of the proposed merger plan. This notice is necessary because some shareholders might want to use their appraisal rights. Although this notice is only necessary when a merger requires shareholder approval, almost all mergers provide notice in advance to the stakeholders concerned.
It is necessary to obtain approval from a specific statutory percentage. Despite the possibility of variations in this percentage, most states call for the approval of a merger by the holders of two-thirds of the total number of outstanding shares.
The merger must be carried out according to specific articles drafted. Naturally, the need for such articles only arises if the shareholders approve the merger. As is frequently stated in the media, only some proposed mergers are approved by shareholders.
The types of future negotiations that may be pursued will then be determined by each corporation's charter and the applicable state statutes. The articles of merger must then be submitted to the appropriate state office once the shareholders ultimately approve a merger.
Differences Between Statutory Merger and Statutory Consolidation
In a statutory merger, one of the two parties merges with the other and loses its identity, while in a statutory consolidation, two parties establish a new identity and become one combined entity, losing their separate identities.
The financial assets of the merging company (which is no longer current) are transferred to the acquiring company when two businesses merge (one that retains its identity intact even after the merger).
In a merger or acquisition, the assets and liabilities of the two companies are combined to form a new, larger company.
The Federal and State governments have the power to halt mergers and consolidations using antitrust laws if they determine that a company—new or old—gains an unfair advantage over rivals or has the potential to have an impact on the market by monopolizing as an outcome of the transaction.
What Distinctions Exist Between Mergers and Acquisitions?
The terms "mergers" and "acquisitions" are frequently used interchangeably, so we now shorten them to M&A. Even though they both refer to the merger of two businesses, the ideas behind them are very dissimilar.
We will discuss the distinctions between mergers and acquisitions as well as the benefits of each.
The main distinction between a merger and an acquisition is that a merger combines two organizations into a single, completely new entity. In contrast, an acquisition involves one company acquiring another without creating a new organization.
A merger would occur, for instance, if two businesses decided to combine and form a new legal entity. However, if one company bought another and incorporated it while maintaining its own identity, that would be considered an acquisition.
As previously mentioned, a merger occurs when two organizations form a new entity. The two prior organizations are dissolved, and each party owns a portion of the new business. t is given a new management structure and runs an entirely different company.
Acquisitions are typically less friendly than mergers.
Negotiations in a merger primarily revolve around the percentage ownership each entity will have in the merged company. The company issues additional shares, divided proportionally among the parent companies. Mergers typically do not involve any cash consideration.
Companies frequently merge to expand their access to new markets, reduce operating costs, and increase profits. Even if it means letting go of some of its power, each parent company may profit from the operational scope and reach of the other.
Due to the standard power imbalance, acquisitions are more hostile than mergers. The fact that two businesses with roughly equal standing rarely agree to merge makes them more common.
Acquisitions are frequently referred to as mergers only to avoid a negative connotation.
An acquisition is when one business buys another. As a result, the negotiations focus on the purchase price and are frequently expensive.
Acquisitions may occur when a business wants to increase the range of products it sells, cut costs associated with running its business, avoid paying for goods from suppliers, or obtain valuable assets that would otherwise require much more time and effort to develop.
Both mergers and acquisitions can be drawn-out processes that require extensive negotiations, thorough due diligence, and high fees.
Since the purchase agreement must be carefully crafted to protect all party's best interests, legal fees are a particular worry here.
Other types of mergers
In addition to statutory mergers, there are numerous other types of mergers. Conglomerate mergers, horizontal mergers, vertical mergers, congeneric mergers, and market extensions are a few of the most prevalent types.
Two or more companies that engage in unassociated business activities merge to form conglomerates. The industries and the geographic locations in which the businesses operate may differ.
Two companies with nothing in common—a pure conglomerate—are involved.
On the other hand, a mixed conglomerate is formed when two organizations merge even though their core business activities are unrelated in an attempt to expand their product or market offerings.
Only if a merger makes sense from the standpoint of shareholder wealth—that is, if the companies could indeed create synergy, which incorporates improving worth, performance, and cost savings—will companies combine without any overlap between their factors.
Another name for a congeneric merger is a product extension merger. This type involves merging two or more businesses that serve the same industry or market and have overlapping operations in areas like technology, marketing, production, and research and development (R&D).
When a new line from one company is added to an already-existing product line of another company, a product extension merger is achieved.
Through a product extension, two businesses can merge into one, giving them access to a larger market share and a wider range of consumers. Congeneric mergers include the 1998 union of Citigroup and Travelers Insurance, two businesses with complementary offerings.
Market extension happens between businesses that offer the same goods in rival markets. Companies that merge in a market extension transaction aim to gain access to a larger market and, consequently, a more extensive clientele.
A horizontal merger takes place between businesses engaged in the same sector. Usually, a merger involves two or more rival companies that provide the same goods or services.
The goal of these mergers, common in sectors with fewer companies because of the higher level of competition among smaller firms, is to grow the business and gain a larger market share.
Vertical mergers occur when two businesses that produce components or provide services for just a product merge. When two firms that operate at various levels of the same company's supply chain merge their operations, this is known as a vertical merger.
Such mergers are carried out to increase the cost savings that come from combining with one or even more supply companies, which results in synergies.
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