What is Statutory Merger?
A statutory merger is a type of merger where one of the companies in the merger gets to keep its own legal entity even after the merger. For example, let’s say that Company A and Company B enters into a statutory merger. Now, as per the rules of such merger, one company of these two will keep its legal entity intact. And another will cease to exist. This type of merger 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.
However, a statutory merger is completely different than a statutory consolidation. In a statutory consolidation, when two companies are merging, they lose their own identities. And a new successor is being created that will represent a combined version of both of these entities. For example, if Company C and Company D come together into a statutory consolidation, Company C, and Company D both will lose their existence and new successor Company E will be born that will represent a combination of Company C and Company D.
In a statutory merger, the parties involved need to adhere to the corporate laws of the state and not doing so will be perceived as illegal. In a statutory merger, the company that retains its legal entity acquires all the assets and liabilities of another company. As a result, the other company becomes defunct completely under its original name.
But the question still remains – why go for a statutory merger?
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 under a statutory merger, which would create a group having combined revenue of $5.2bn.
There are many reasons for which organizations consider such merger. Here are the few most important ones
- First of all, if an organization feels that going for such merger will benefit them financially, the organization will try to seek a partner that would be ready for such 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 merger.
- Thirdly, the most important reasons for which a company goes for such 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 few reasons –
- The company may feel that merging with another bigger company would benefit their shareholders than running the company on their own. Since the purpose of a business is to maximize the value of the shareholders, this can be a decent move.
- 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 merger, it can’t happen.
Now, let’s look at the legal requirements and procedures.
Legal Requirements and Procedures of a Statutory Merger
Here are the legal requirements 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 important that the board of directors of each company approve of the merger before it ever takes place.
- Thirdly, the most difficult part of the such merger is to take the approval of the shareholders of each company. The shareholders need to use their voting rights and approve the such 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 company and its subsidiary. Before going for this shorter form of statutory merger, one should do its due diligence carefully and thoroughly.
There is another aspect that we need to pay heed to in case of such 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
The basic differences between a statutory merger and a statutory consolidation are –
- 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 merger 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 has been a guide to What is Statutory Merger? Here we discuss reasons for statutory mergers, its legal requirements and differences between the statutory merger and statutory consolidation. You may also have a look at these recommended M&A articles –
- What is Amalgamation?
- Mergers and Acquisitions Course
- Types of Synergies in Mergers and Acquisitions
- Successful Mergers and Acquisitions