Business Organization & Transactions Newsletter
Mergers, Acquisitions and Divestitures
As many companies evolve, they see potential for growth or improved operations by combining their efforts with other businesses. In some instances, seizing these opportunities invokes a legal requirement to spin off certain productive assets. Mergers, acquisitions and divestitures all involve a structural change to an underlying business form of at least one company through the purchase or sale of an entire company or its parts. These procedures may occur with the acquiescence of both parties or may involve the absorption of an unwilling business. In either case, federal law governs transactions that affect public shareholders’ interests.
In a merger, one corporation acquires another corporation in such a way that the acquired company is extinguished as a legal entity. The purchasing corporation assumes all of the rights, privileges and obligations of the merged company. Acquisitions are any combination of two companies in which one corporation is completely absorbed by another. The acquired company ceases to exist independently, and becomes part of the acquiring corporation.
A hostile takeover is a type of merger in which one corporation acquires a publicly held corporation against the wishes of the acquired company’s management. Typically, the acquisition occurs through a cash offer by the bidding company (sometimes called a “raider”). In some states, stringent regulations require disclosures by any company making a cash bid for more than five percent of another company’s shares, and would-be bidders must disclose the source of the funds and the purpose of the purchase. These regulations aim to balance the interests of bidders, shareholders and management by making larger transactions as transparent as possible.
Federal and state laws govern companies involved in mergers and acquisitions. Since corporate consolidation means that consumers end up with fewer choices in the marketplace, many of these laws seek to limit anticompetitive effects and monopolies. Proposed mergers and acquisitions receive careful review by the government to guard against increased prices or decreased quality due to reduced competition. Typically, the boards of directors and shareholders of both corporations must approve the merger. The Securities and Exchange Commission (SEC) may also play a role in overseeing the process. If a merger or acquisition will have more anticompetitive effects than benefits, then the merging corporations may face antitrust obstacles.
Divestitures are the flip side of corporate growth involving mergers and acquisitions. Divestiture involves a corporation’s sale of one or more of its constituent parts (i.e., a branch, subsidiary or facility) or some or all of its productive assets in an effort to reduce its size. A court may require a divestiture in a merger to avoid monopolization or other antitrust violations. Likewise, court-ordered divestitures may arise when a corporation is a sole defendant in an antitrust suit.
The corporate changes that result from mergers and acquisitions involve complex issues of state and federal law and regulation; therefore, businesses should not proceed without legal assistance from an experienced attorney.
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