Mergers and Acquisitions: Structuring Mergers

A corporate merger, by definition, is a combining of corporations in which only one of the corporations survives.  Corporate mergers are authorized and governed by the statutes and regulations of the state in which the corporation is formed.  Other business entities, such as limited liability companies, can merge as well, but this article will primarily discuss corporate mergers.

While there are exceptions (such as those listed below), mergers generally involve two parties, a bidding corporation and a target corporation.  The bidding corporation is the corporation that is offering consideration for the shares of the target corporation.  Once the target corporation accepts the bidding corporation’s offer, the target corporation and the bidding corporation merge.  What this means is that the bidding corporation receives all of the outstanding stock of the target corporation, and pursuant to the merger agreement and the statutes regulating mergers, the target corporation ceases to exist.  However, which corporation survives the merger is decided by the merger agreement.  In some cases, the target corporation could be the surviving corporation, but would be controlled by the bidding corporation after the merger.

Short-Form Mergers

A “short-form merger” as when a corporation (the parent) that owns at least 90% of another corporation (the subsidiary), merges itself with the subsidiary.   Short-form mergers significantly lower the filing and documentation requirements that must be filed with the secretary of state to enact the merger.  A corporation that owns 100% of the other corporation it plans on merging with files minimal documentation, while corporations that own at least 90% of the corporation it plans on merging with must file a plan of merger as well.  However, the documentation required is significantly less than that of a standard merger (agreement of merger).

Forward Triangular Mergers

A forward triangular merger is structured in a way where, generally, the bidding corporation creates a wholly owned subsidiary funded by whatever consideration is to be paid to the target company for its shares (shares in the bidding corporation, cash, etc.).  When the merger transaction is effectuated, the bidding corporation’s subsidiary merges with the target company, and the subsidiary is the surviving corporation in the merger.  After the merger, the target corporation ceases to exist as a legal entity and is operated under the name of the bidding corporation’s subsidiary.

If, later in time, the bidding corporation desires to merge the subsidiary’s business into its own, the bidding corporation can enact a short-form merger (as discussed above) to merge the subsidiary into itself because the bidding corporation wholly owns the subsidiary.

Reverse Triangular Mergers

A reverse triangular merger is structured in a way where, generally, the bidding corporation creates a wholly owned subsidiary funded by whatever consideration is to be paid to the target company for its shares (similar to the forward triangular merger).  When the merger transaction is effectuated, the bidding corporation’s subsidiary merges with the target corporation, and the target corporation is the surviving corporation in the merger.  After the merger, the subsidiary ceases to exist as a legal entity and the target corporation is owned and controlled by the bidding corporation while still operating under the target’s name.

If, later in time, the bidding corporation desires to merge the target corporation’s business into its own, the bidding corporation can enact a short-form merger (as discussed above) to merge the target company into itself, as the bidding corporation owns and controls the target corporation.

It is important to remember that each merger is different, and an experienced attorney should be consulted to address the individual facts and circumstances of your merger transaction.