When conducting mergers and acquisitions, companies should be aware of the many rights and responsibilities that accompany these processes. This is particularly important when it comes to tax liabilities.
Although many people use the terms “mergers” and “acquisitions” interchangeably, the two terms have different meanings. A merger occurs when two or more companies combine to form a single, new business, termed the “survivor” corporation or business. After a merger occurs, the survivor will typically issue new shares of stock for those held in the old company by its shareholders. An acquisition, on the other hand, is when one business, termed the “successor,” buys either another company’s stock or assets. This “target company” ceases to exist and is enveloped by the purchasing company.
The differences between mergers and acquisitions are significant when it comes to understanding the companies’ respective rights and liabilities after the merger or acquisition occurs. In a merger, the surviving corporation will assume all of the merged company’s liabilities and obligations, including tort liability, as well as any criminal penalties imposed for conduct that occurred before the effective date of the merger. Although a merged corporation ceases to exist, legal proceedings that were pending against it at the time of the merger may proceed without formal substitution of the surviving corporation as a named party in the suit. In addition, if a merging corporation has filed suit against another party before the date of the merger, the suit may be continued after the merger in the name of the merged corporation or the survivor.
It is important to note that mergers do require stockholder approval, and stockholders have the right to oppose the merger and to have the value of their stock appraised by an independent party. Often, the court is responsible for this appraisal.
When an acquisition occurs through the purchase of a company’s assets, the purchasing company is not generally responsible for the target company’s debts and liabilities. There are, however, several important exceptions:
- When the purchasing company agrees to assume the target company’s debts and liabilities, perhaps in exchange for a lower sale price.
- When the sale is a fraudulent one; this arises when the seller has insufficient funds or other assets to pay off its debt and the seller’s creditors can’t be paid off.
- When the purchaser is a continuation of the seller; this occurs when the directors, officers, and shareholders for the buyer and seller are the same before and after the sale.
In order to acquire a company’s assets, the approval of the purchaser’s stockholders is not necessary. However, the seller’s stockholders must approve the sale of all or most of the assets. Those stockholders who oppose the sale usually also have the right to the appraisal value of their stock, which will be determined by a neutral third party.
When a business is acquired through stock purchase, the purchasing company generally steps in for the target company with business continuing as usual. The purchaser will take on all of the target company’s debts and liabilities, whether they are known at the time of the sale or not. That is, even if a purchaser is not aware of a company’s debts and the time of the sale, they will still be held responsible for them after the acquisition.
In a stock transaction, formal approval by the seller’s shareholders is not necessary, because they are signaling their approval on an individual basis by consenting to sell their shares to the purchaser.
Navigating these processes can be difficult, and a corporate attorney can help provide you with guidance whether you are merging with another company or acquiring one through the purchase of stock or assets.