In a merger, the surviving company assumes all of the assets, rights, and liabilities of the extinguished company as a matter of law. In this regard, mergers are good for buyers wishing to acquire a going concern. One further advantage of mergers is that they usually can be structured as a tax-free reorganization. However, buyers need to be careful about assuming unknown or undisclosed liabilities, which requires a thorough due diligence process.
Mergers typically only require majority consent from the target company’s stockholders for the buyer to obtain 100% of the stock (subject to any additional requirements contained in a target company’s organizational documents, such as class voting rights for a series of stock), compared to 100% consent needed in a stock acquisition. A merger can be the best choice for buyers wanting to acquire a going concern with many stockholders, especially when some stockholders may not want to sell their stock.
Buyers can generally shield themselves (but not the acquired business) from unknown or undisclosed liabilities by structuring the merger as an indirect merger (that is, as a forward triangular merger or a reverse triangular merger) so the surviving company is maintained as a separate subsidiary. Foreign buyers often choose indirect mergers when acquiring the stock of a US entity to reduce their exposure to target company liabilities.
Buyers can also protect themselves by negotiating certain contractual provisions into the merger agreement, such as indemnities and escrow provisions. These contractual provisions may not completely protect buyers but they can minimize the impact of these liabilities.
For further information about mergers, please contact one of our attorneys.