What is Statutory Merger?
Statutory merger is the kind of merger where there two merged companies need to follow statutory laws and compliance and therefore, one of the company from the two merged companies keep the same legal identity that it has before the merger and the other company loses its identity.
A statutory merger is a type of merger where one of the companies in the merger gets to keep its legal entity even after the merger. For example, let’s say that Company A and Company B enters into a statutory merger. As per the rules of such a merger, one company of these two will keep its legal entity intact. And another will cease to exist. This type of mergerType Of MergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm. is just like an acquisition. Where a company acquires another company, and still, the acquirer keeps its legal entity, and the acquired one loses its identity.
Why Statutory Merger?
The above snapshot is a Statutory Merger example. TDC has offered $2.5 bn to buy TV Station Viasat and other entertainment assets from Sweden’s Modern Times Grop, which would create a group having a combined revenue of $5.2bn.
There are many reasons for which organizations consider such a merger. Here are the few most important ones
- First of all, if an organization feels that going for such a merger will benefit them financially, the organization will try to seek a partner that would be ready for such a merger.
- Secondly, if an organization wants to improve the efficiencies of its business processes or improve its core competencies or to reduce costs, it can consider such a merger.
- Thirdly, the most important reason a company goes for such a merger is to beat a close competitor in market share or core strengths.
If we think from the point of view of the company that would lose its identity, we would see that there are other reasons for which the company would merge with another bigger or better company. Here are a few reasons –
- The company may feel that merging with another bigger company would benefit its shareholders than running the company independently. Since the purpose of a business is to maximize the value of the shareholders, this can be a decent movie.
- Secondly, the company may feel that by merging with another company, there would be little/almost no conflict of interest in operations (though, in most cases, it’s isn’t true).
Until and unless both parties agree to such a merger, it can’t happen.
Now, let’s look at the legal requirements and procedures.
Legal Requirements and Procedures of a Statutory Merger
- Before the statutory mergers can happen, conditional laws for the mergers are set by the corporate law. And each party in the merger must adhere to the laws set by the corporate law.
- Secondly, it’s crucial that the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. of each company approve of the merger before it ever takes place.
- Thirdly, the most challenging part of such a merger is to take the approval of the shareholders of each company. The shareholders need to use their voting rights and approve such a merger before it can ever happen.
- Finally, when all approvals are taken, the final approval is given by the authorities. That’s why the whole process of the statutory merger is tedious and takes months and months of time, patience, and effort.
However, a shorter form of the statutory merger is possible too. It can happen between a parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. and its subsidiary. Before going for this shorter form, one should do its due diligence carefully and thoroughly.
There is another aspect that we need to pay heed to in case of such a merger. It’s the objection of shareholders against an extraordinary transaction.
They can use their appraisal rights and demand that –
- The shares of the corporation should be appraised before the merger.
- Before the merger ever happens, the shareholder/s should be given the fair market value of the shares she/he/they own in the company.
In short, a statutory merger needs to adhere to the well-being of both of the parties, shareholders, and business.
Differences Between Statutory Merger and Statutory Consolidation
- In a statutory merger, one of the two parties retains its entity, and another party merges into the other by losing its entity. In a statutory consolidation, when two parties come together, both of their legal entities cease to exist, and a new identity is created.
- In a merger, the assets and liabilities of the merging company (one that loses its identity after the merger) become the property of the acquiring company (one that retains its identity intact even after the merger). In a consolidation, the assets and liabilities of both of the companies become the assets and liabilities of the larger company that is formed after consolidation.
- In both mergers and consolidation, the federal and state government can stop the process of merger or consolidation by using anti-trust laws if they find that by merger or consolidation, a company (new or old) gets an unfair advantage over others or can affect the market by becoming a monopoly.
This article has been a guide to What is Statutory Merger and its definition. Here we discuss how statutory merger works and its reasons, legal requirements, and differences with statutory consolidation. You may also have a look at these recommended M&A articles –