Merger And Acquisition Transactions
Merger And Acquisition Transactions- In the last four Lawcasts in this series I discussed the responsibilities of the board of directors and in particular their fiduciary duties related to merger and acquisition transactions. Today I will discuss the forms that an M&A Transaction can take.
First back to basics, a merger or acquisition transaction is the combination of two companies into one resulting in either one corporate entity or a parent-holding and subsidiary company structure. Mergers can be categorized by the competitive relationship between the parties and by the legal structure of the transaction. When talking about the competitive relationship, there are three types of mergers: horizontal, vertical and conglomerate. In a horizontal merger, one company acquires another that is in the identical or substantially similar industry eliminating a competitor. In a vertical merger, one company acquires a customer or supplier. A conglomerate merger covers all other transactions where there is no direct competitive or vertical relationship between the merging parties. The result is generally the creation of a conglomerate – thus the name.
When talking about the legal structure of the transaction, an M&A transaction can be structured as an asset purchase, a stock purchase, a forward merger, a reverse merger or a triangular merger. In an asset purchase, stock acquisition, forward merger or forward triangular merger, the acquiring company – i.e. the company buying the other company – remains in control. In a reverse merger or a reverse triangular merger, the target company shareholders and management gain control of the acquiring company. I have previously recorded a series of Lawcasts on reverse mergers that can be viewed for more information on that type of transaction.
In an asset purchase transaction, the acquirer can pick and choose the assets that it is purchasing, and likewise the liabilities it is assuming. An asset purchase can be complex and requires careful drafting to ensure that the desired assets are included and that only the specified liabilities are legally assumed. Where third parties have interests in the assets, such as landlords or creditors or parties to a contract, those third parties will have to consent to the asset sale.
In a stock acquisition, the acquiring company purchases the stock of the target company directly from the target company shareholders. A stock acquisition can be structured as a forward or reverse merger depending on who will have the majority ownership and control of the acquirer once the merger is completed. In a stock acquisition transaction, the operations, assets and liabilities of the target remain unchanged; it just has different ownership. Complexities arise if some of the target company shareholders refuse to participate in the transaction. These dissenting shareholders may ultimately be bought out, or may remain as unfriendly minority shareholders.
Regardless of whether the merger is an asset or stock purchase, the acquiring company may use cash to pay for the acquisition or they may use their stock to pay, or a combination. Where the acquiring company uses their stock to buy the stock of the target company, the transaction is referred to as a “share exchange agreement” because the stock of one company is being exchange for the stock of the other company.
In a triangular merger – whether forward or reverse – the acquiring company forms a new acquisition subsidiary for the purpose of completing the transaction. Since there are then 3 parties to the transaction, it is called a triangular merger. A triangular merger can have certain tax benefits and can be useful in maintaining a parent-subsidiary structure.