A short-form merger may take place in situations in which the stockholder approval process is not necessary. As a continuation of the previous article, we will discuss short-form mergers and how they are structured. We have previously established that there are different types of entity deals such as a stock deal or a merger.
In the previous article (Deal Structure: Asset Versus Entity Deals), we have discussed the difference between selling company assets and selling the company as a whole entity. Each of those options has its own pros and cons, which we have also discussed.
Mergers are often used by a large public company with a large and widely distributed shareholder base. In a merger deal, the company or corporation who survives the deal succeeds to all the liabilities of the company or corporation who did not survive.
Additionally, mergers can only happen if the majority of the shareholders agree to the deal. Voting approval needs between shareholders need to happen first.
Most giant companies use merger deals instead of asset deals. This is because a merger is much more beneficial to a seller in comparison to asset deals. You might have heard of giant companies merging with a similar company, this is done when a company or corporation is on the brink of bankruptcy. They merge with a similar company who will adapt all of their assets (including the liabilities), the surviving company will now own all of the non-surviving company.
There are different phases when it comes to mergers and acquisitions. It is also important to understand that there are different types of merger deals. First, there is what’s called the Forward Merger where the target merges directly into the purchaser corporation. In these types of deals, the target disappears while the purchaser survives. This is also known as a statutory merger sometimes.
Then we have the Forward Subsidiary Merger also known as a forward triangular merger. In this type of merger deal, the purchaser creates a merger subsidiary and the target merges directly into the subsidiary instead of the target merging directly into the purchaser.
Another type of merger deal is the Reverse Subsidiary Merger. This is also referred to as reverse triangular mergers sometimes. In these types of merger deals, acquirer subsidiary pays the target’s shareholders and receives the shares in the target exchange. This type of merger improves upon the forward subsidiary merger by reversing the direction of the merger.
Now that we have those three covered, it is time to focus on the Short Form Mergers.
This means that the stockholder approval may be bypassed when the corporation’s stock is concentrated in the hands of a small group. The said the small group could be the management who are advocating the merger.
However, all of that still depends on the state where the company is located. There are some state laws that may allow this “small group” to approve the transaction on its own without soliciting the approval of the other stockholders. Then, the board of directors simply approves the merger by a resolution. This law varies from state to state.
Furthermore, a short-form merger may also happen only when the stockholdings of insiders are beyond a certain threshold stipulated in the prevailing state corporation laws. Again, there are different state laws for this type of deal, so the percentage varies depending on the state in which the company is incorporated.
For instance, under Delaware state law, the short-form merger percentage is 90%. However, it could be different in other states. The 90% is the relevant percentage for most states with the exception of a few states such as Alabama, Florida, and Montana in which these states have an 80% threshold.
It is also important to mention that a short-term merger may follow a tender offer as a second-step transaction. This is where shareholders who did not tender their shares to a bidder who acquired substantially all of the target’s shares may be frozen out their positions. To know more details about tender offers, read our article about Tender Offers vs. Long-Term Mergers.
You might realize that the word “law” popped up quite a few times in this article. This is why it is important to have some great attorneys and law firms by your company’s side during merger deals and any type of deals. Look for law firms who specialize in mergers and acquisitions.
Once the short-form merger is approved by the company’s board of directors and they decide to take that route, it is typical that the board will also create a plan with a detailed definition of how the merger will proceed. This merger plan will also state the effects that the board of directors anticipates the transaction will have on the company.
Next, the plan will be distributed to the shareholders to allow them to determine whether or not they want to proceed with the transaction. Once the majority of shareholders approve of the short-form merger, the legal proceedings begin. The company will combine everything – including financial statements, business operations and legal rights with the parent company.
Should there be any shareholders who disapprove, the parent company will try to buy their shares out. There are also cases where shareholders disapprove of the short-form merger simply because they are not interested in the transaction. Either way, the parent company will have full control of the subsidiary.
As previously mentioned, there are a lot of options when it comes to the types of mergers. The type of merger deal you should take depends on the state of your company or corporation, and the agreement between shareholders. Again, a law firm who specializes in these cases is crucial for you and your company.
There you have it, a quick overview of short-form mergers and how it happens. In the next article, we will discuss more mergers and merger waves. To learn more about mergers and acquisitions, explore our website. We offer free articles regarding mergers and acquisitions as well as detailed guides on corporate restructurings.