The Biz Blog
March 05, 2019 by Alex Estrin
There are three principal ways to acquire a business: a purchase of the Target's assets or stock, or a merger. Alex Estrin business broker with BizEx, and Alex Prasad, business attorney with AEGIS Law, present a high-level summary of mergers.
Merger
Fundamentally, a merger is a more complicated stock purchase. “The result is that two legal entities are merged into one, which assumes all of the assets and liabilities of the extinguished entity,” says Alex Estrin. In some forms of merger, when the Target's corporate existence continues, the Buyer can avoid many third party consent issues.
The tax treatment, relation to third parties and ability to force stockholders into a transaction vary based on the type of merger.
“There are two types of mergers: direct and indirect,” says Alex Prasad. Direct mergers result in the Target and the acquiror becoming one entity (whether the Target mergers into the acquiror or vice versa). Indirect mergers require an acquiror to create a wholly-owned subsidiary that is then either merged into the Target or that the Target merges into.
Forward merger
In a forward merger, a form of direct merger, the Target company is merged into the acquiring company. The acquiring company assumes all the assets and liabilities of the Target company and they are integrated directly into the books of the acquiring company. This form of merger is not often used because it directly exposes the acquiror to all of the potential liabilities of the Target.
In a forward triangular merger, a form of indirect merger, the acquiror creates a new wholly-owned subsidiary. Then, the Target company is merged into the new wholly-owned subsidiary.
Reverse triangular merger
In a reverse triangular merger, a form of indirect merger, the acquiror creates a new wholly-owned subsidiary. Then, the new wholly-owned subsidiary is merged directly into the Target company. This eliminates the need for third-party consents under most state law.
Short Form merger
Under certain state law (e.g., Delaware), if a Buyer purchases more than 90% of a Target's stock, post-closing it can effectuate a short-form merger. A short-form merger drags the minority owners into a transaction and forces them to sell without a vote. This can be a solution for a Buyer who wants to own 100% of the stock of a Target, but the Target has a few holdout minority stockholders who cannot be dragged into the transaction under the Target's organizational documents.
This information is intended for high-level informational purposes only. Prior to making any decisions regarding the acquisition of a business, readers should seek the advice of an attorney and tax professional. The publishing of this article does not constitute endorsement, recommendation, or favoring by BizEx.
Alex Prasad, AEGIS Law business attorney, is a contributing author to the BizEx blog. Alex specializes in middle market M&A, as well as working with early-stage and startup companies.
How to Buy, How to Sell, Business Sales Process
