The third form of M&A transaction is the merger in all its forms. A merger generally achieves the same result as a stock purchase transaction but is usually a simpler transaction. It avoids many of the obstacles incident to dealing with a large number of shareholders. Absent special super-majority voting requirements in either party’s articles of incorporation, a merger that has the effect of selling 100 percent of the target company requires only majority approval by its shareholders, which is easier to obtain than the 100 percent shareholder approval – or 90 percent shareholder approval if a “short-form” merger is contemplated – required to achieve the same result through a stock purchase. Depending on the structure of the merger, the target’s assets and contracts may not need to be assigned or otherwise transferred.
There are several types of mergers, including: (1) the target merges into the buyer with the buyer continuing as the surviving corporation; (2) the buyer merges into the target with the target continuing as the surviving corporation; (3) the buyer forms a subsidiary into which the target merges and the target disappears (i.e., a “forward triangular merger”); or (4) the buyer forms a subsidiary which merges into the target and the target survives (i.e., a “reverse triangular merger”). We’ll delve into each of these in subsequent posts.
There are several advantages to the reverse triangular merger that make it a widely used form of merger transaction. The most important of these considerations is the fact the target corporation remains intact, and thus its business, organization, contracts, franchises, licenses, permits and other assets normally do not need to be renewed with a third party or transferred from one entity to another entity. Similarly, it is usually not necessary to obtain the consent of third parties with whom the target corporation has contracts, even though the third parties may have the a right of consent to transfers or assignments of the contracts, because no transfer or assignment takes place in this form of transaction.
Keep in mind, however, that some contracts, particularly loan agreements and leases, purport to require one party’s consent to the other party’s sale of a controlling interest or merger; generally known as a “change of control” of the seller corporation. It is important to be aware of each of the target company’s material contracts to determine whether the merger will trigger such a “consent” requirement.
Absent this type of provision, however, the typical contract containing a covenant limiting or prohibiting transfer or assignment should not require consent in a reverse triangular merger in which the target is the surviving corporation. A reverse triangular merger may also be desirable if the buyer does not want to merge the target company directly into its corporate structure because of the target’s actual, contingent or potentially latent liabilities, which the buyer would prefer to keep in a subsidiary for obvious reasons.
As we’ve mentioned before, Finkel Law Group, with offices in San Francisco and Walnut Creek, has a thriving M&A practice that continues to grow as both buyers and sellers gain confidence in the direction the economy is heading, the impact of this growth on their particular market segments, and the increasing availability of capital to finance transactions of all sizes. Over the last 16 years, we have assisted buyers and sellers in industries as diverse as software, financial services, toys, agriculture, ecommerce, automobiles, auto parts distributors, and pet supplies, successfully navigate through all forms of M&A transactions.
If you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with an M&A transaction you are contemplating, then please contact us at (415) 252-9600, (925) 274-9600 or firstname.lastname@example.org to speak with one of our attorneys about your deal.