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Defining the Five Most Common Types of Corporate Mergers


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9/23/2014
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Hardly a week goes by without major headlines telling us that one large American corporation is thinking about buying another one. This desire to grow and gain more capital is just a part of a company’s desire to wield more power in the marketplace. Yet knowing how to properly handle a merger is critical since there are many different types.  Each company must give serious thought to taking the proper approach at the most appropriate point in time.               

The five most basic ways of merging corporations include: a regular statutory merger; a short-form merger, a de facto merger; a conventional (forward) triangular merger, and a reverse triangular merger. Here are basic descriptions and definitions regarding each of these corporate ways of combining with other companies.

General Examples Helping to Define Basic Corporate Mergers

  1. A regular statutory merger. Let’s assume that Corporations “A” and “B” have decided to merge and that “Corporation A” is the more dominant or acquiring corporation. What frequently happens is that in accordance with the agreed-upon merger plan, “Corporation A” will usually convert all of “Corporation B’s” stocks into specific types of securities or interests. Then, “Corporation B” will basically disappear and “Corporation A” will become liable for all of “Corporation B’s” remaining legal obligations;

  2. short-form merger. To understand this type of merger, you can just assume that “Corporation A” above already owns the vast majority of “Corporation B’s” shares. If the total percentage is close to about 85 or 90%, a merger usually won’t require the approval of either “Corporation A’s”  board of directors or shareholders;

    A conventional (forward) triangular merger. Assume that Corporation Big has created a subsidiary called Corporation Small. Now, Corporation Big transfers some of its stock into Corporation Small in exchange for some of Corporation Small’s stock. Next, Corporation Small exchanges all of its Corporation Big stock for all of the stock owned by Corporation Three. At this point, Corporation Three disappears and Corporation Small becomes liable for all of Corporation Three’s legal obligations. It’s important to add that Corporation Big is not directly liable for Corporation Three’s legal liabilities;

  3. A de factor merger. Assume that Mammoth Burger Corporation purchases basically all of Small Burger Corporation’s assets in exchange for Mammoth Burger stock – or acquires most of Small Burger Corporation’s stock in exchange for Corporation Mammoth Burger stock and agrees to take on all of Small Burger’s legal liabilities. In many states, this is considered a merger;

  4. A reverse triangular merger. Assume that the Texas Corporation creates a subsidiary called the Armadillo Subsidiary and then transfers Texas Corporation stock into the Armadillo Subsidiary in exchange for the latter’s stock.

The Armadillo Subsidiary then merges into the American Corporation, governed by an agreement that says that all previously outstanding American Corporation stock will be converted into shares of the Armadillo Subsidiary, and all Armadillo Subsidiary shares will be converted into American Corporation stock.  

As a result, Armadillo Subsidiary disappears and American Corporation becomes a subsidiary of Texas CorporationTexas Corporation is not directly liable for American Corporation’s obligations and American Corporation’s corporate identity is preserved.

Although these examples are provided to illustrate how various types of mergers take place, you may find it easier to understand the verbal definitions for all of these mergers that can be found by visiting the links provided under each numbered merger form above.  

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.



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