Mergers and acquisitions, also referred to as M&A, are typically complex transactions. In some cases, the contractual documents can be hundreds of pages long, although your agreement may be shorter if your business is small. Mergers and acquisitions are often effective ways for small businesses to gain entry into new markets because the other company involved may already have access to these markets.
A Merger is a Combining of Companies
In a merger, two companies combine their assets and liabilities. One of these companies is known as the “surviving” company. Shares of the other, or “non-surviving,” company are converted into shares of the surviving company. Shareholders in the non-surviving company become shareholders in the surviving company. The surviving company may change its name to become an entirely new entity. Each company involved in a merger must carefully examine the finances and legal status of the other company – a process known as due diligence. This is because a hidden flaw in one company, like a pending lawsuit, can devastate the finances of the surviving company.
One Company Can Acquire the Shares of Another
In a share purchase acquisition, one company purchases the shares of another company, known as the “target company.” By purchasing shares, the target company becomes a subsidiary of the acquiring company. In many cases, shareholder approval is required for a share purchase acquisition. The acquiring company takes on all of the target company’s assets and liabilities, just as a surviving company does in a merger. If the target company is publicly traded, the acquiring company can acquire it even if the target company opposes the transaction. This is known as a “hostile takeover.”
An Asset Purchase Avoids Unknown Liabilities
A common alternative to a share purchase acquisition is when one company simply purchases most or all of the assets of the target company without purchasing any of its stock. Like a share-purchase acquisition, an asset purchase typically requires shareholder approval. The main advantage of an asset-purchase acquisition is that the acquiring company typically doesn’t take on the debts or other liabilities of the target company. An important disadvantage is that the acquiring company must change the title of target company assets, such as real estate, bank accounts and trademarks, into its own name. This process can be complex and time-consuming.
M&A Transactions Can Violate Federal Law
Although mergers are generally governed by Oklahoma law, federal authorities (such as the U.S. Department of Justice and the Federal Trade Commission) routinely examine M&A transactions to ensure they don’t violate anti-monopoly law by reducing competitiveness in the market. Anti-monopoly law is an extremely complex area of law. For this reason, your M&A agreement must be carefully written so that you don’t run into legal problems after the deal is done.