Acquisitions based on method of acquisition: Statutory transactions
An acquisition can be accomplished in several ways. Statutory acquisitions include the merger, consolidation, and share or interest exchange.
One advantage of using a statutory transaction is that the documents that are filed to effect the transaction are relatively simple, and the contents are specified by statute. Non-statutory transactions are effected by complex, contractual documents.
Another advantage statutory transactions have over contractual transactions is that the owners of the surviving company who disapproved of the transaction must turn in their ownership interests. Therefore, the acquirer is not left with any disgruntled minority owners. With non-statutory methods, the results of a merger, consolidation, or share or interest exchange are prescribed by law and therefore are certain.
Merger
A merger is generally defined as a combination of two or more business entities in which the assets, businesses, and liabilities of all the entities are transferred to one entity. The one entity continues in existence, while all the others cease to exist. Because it is a statutory transaction, the requirements of the business entity laws of the buyer and seller’s state or states of formation must be followed for the merger to become legally effective.
There are four types of mergers that you are likely to encounter: general mergers, parent-subsidiary mergers, triangular mergers, and multi-entity mergers.
Different entity types may be involved in a statutory merger, including corporations, limited liability companies (LLCs), Limited Partnerships (LPs), General Partnerships (GPs), and Limited Liability Partnerships(LLPs).
Regardless of type, each merger has unique elements and challenges.
"General" merger
In a merger, the target entity merges into the acquiring party in a deal effectuated under the “general” merger statutes. This merger type is general in the sense that it is not specific and can potentially apply to all mergers.
Any merger can be effectuated under the general merger statutes, even where specific or specialty types of mergers may apply. Interest holders in the non-surviving entity usually retain interests in the surviving entity.
Corporation, LLC, LP, GP, and LLP laws all contain merger statutes, although the statutory requirements vary by entity type and state.
General merger approval requirements
Approval of a “general” merger typically involves the following:
Corporation
- Approval by boards of each constituent
- Approval by shareholders of merged corporation(s)
- Shareholders of the survivor usually do not have to approve, although approval may be required under certain circumstances, such as where the shareholders’ interests are substantially affected
Limited Liability Company (LLC)
- Requirements may be set forth in the operating agreement
- Statutory default rule may require majority or unanimous member approval
Limited Partnership (LP), General Partnership (GP), Limited Liability Partnership (LLP)
- As provided in the partnership agreement or statutory default rule
Parent-subsidiary merger
Parent-subsidiary mergers are the most frequently used type of specialty merger. Once statutory conditions are met, a shortened process or short-form procedure can be used.
Parent-subsidiary mergers may be upstream or downstream. A parent-subsidiary upstream merger is a merger of a subsidiary business entity into its parent business entity, with the parent business entity surviving.
To simplify the procedure when there are no, or almost no minority shareholders, business corporation statutes authorize what is called a short-form merger. In general, only mergers where a parent corporation owns at least 90% of each class of voting stock of a subsidiary corporation may be effected using the short-form procedure. Only a few statutes provide for short-form mergers involving unincorporated entities.
Typically, in a short-form merger, only the parent’s board of directors has to approve the plan of merger. The subsidiary’s board does not have to approve. In addition, neither the parent’s shareholders nor the subsidiary’s shareholders have to approve of the plan. Approval of the subsidiary’s shareholders is considered unnecessary because the parent owns enough shares to ensure approval. Approval of the parent’s shareholders is unnecessary because the transaction will not materially change their interests.
A parent-subsidiary downstream merger is a merger of a parent into its subsidiary. The subsidiary survives and the parent disappears. Some corporation statutes provide that where the parent owns at least 90% of the voting stock of the subsidiary, the subsidiary’s board of directors is not required to approve the plan of merger. However, when the parent disappears, approval of the merger by the parent’s shareholders will be required.
Triangular merger
When a merger is used to complete an acquisition, it is often done as a triangular merger. A triangular merger involves three business entities:
- a parent (the acquirer)
- its subsidiary
- the entity to be acquired (the target)
In general, the subsidiary will be newly formed for the sole purpose of assisting the parent in acquiring the target. In a triangular merger, the merger is between the subsidiary and the target. The acquirer is not a constituent in the merger. The end result of the transaction is that the target becomes a wholly-owned subsidiary of the acquirer.
However, because the merger was between the target and the subsidiary, the acquirer does not assume the target’s liabilities. This is the main reason for entering into a triangular merger — to allow the acquiring entity to acquire the target without assuming its liabilities.
There are two kinds of triangular mergers: forward and reverse. In a forward triangular merger, the subsidiary survives and the target disappears. In a reverse triangular merger, the target survives and the subsidiary disappears.
Because the target survives the merger, both the acquiring and acquired business entities remain in existence. Therefore, the reverse triangular merger is useful where the loss of identity of a constituent would cause problems — such as where the target was organized under a special statute in which organization is difficult or where it possesses rights, licenses, or contracts that do not permit assignment.
Multi-entity merger
A multi-entity merger is a merger that involves at least two different types of business entities. This type of merger is also referred to as a cross-entity merger, inter-entity merger, or an interspecies merger. Multi-entity mergers can be more complex because they can involve different business entity statutes and different kinds of ownership interests.
Any of the above mergers — general, parent-subsidiary, and triangular — may involve more than one entity type.
Consolidation
A consolidation is a statutory transaction in which two or more business entities combine to form a new business entity. All of the business entities existing before the consolidation disappear as a result. The assets, businesses, and liabilities of all the disappearing entities are transferred to the new one.
Consolidations are not authorized by all state business entity statutes. Therefore, the first step in effecting a consolidation is to check for statutory authorization.
If authorized, consolidations are effected in a similar manner to mergers. A plan of consolidation must be drafted and approved by the disappearing entities and articles of consolidation filed to effect the consolidation.
Share exchange and interest exchange
An exchange is another statutory method of acquisition that is provided for in some (but not all) state business entity laws.
In a share exchange, one corporation becomes the owner of all the outstanding shares of one or more classes of another corporation. It is an exchange that is binding on all the shareholders of the acquired class of shares.
An interest exchange is the same type of transaction involving the exchange of ownership interests in an unincorporated entity. A plan of exchange must be drafted and approved and articles of exchange filed to effect the transaction.
An exchange accomplishes the same end as (and can be used in place of) the reverse triangular merger. In an exchange — like in a reverse triangular merger — the acquired entity does not go out of existence. It becomes a subsidiary of the acquirer. The advantage of the statutory exchange over the triangular merger is that there is no need to form a subsidiary to accomplish the transaction.
An exchange may also accomplish the same ends as a direct, non-statutory acquisition of shares or ownership interests. The advantage of the statutory exchange is that the acquirer only has to obtain — in most cases — a majority vote for approval, with the exchange thereby becoming binding on all of the holders of the acquired class of ownership interests. In order for the acquired entity to become a wholly-owned subsidiary in a contractual acquisition, the acquirer would have to convince all of the owners to sell their interests.
