In the world of capitalism, businesses can gain tremendous value by participating in a merger & acquisition (M&A). This is a term that many people are familiar with but very few understand. Some individuals think that the two words are synonymous when in actuality they have different meanings.
Palm Springs mergers and acquisitions lawyers inform us that when companies merge they are actually combining their resources to create a new entity that is commonly referred to as the “survivor” company. The process of merging companies involves the issuance of new shares by the survivor company to its existing stockholders from the shares of the less dominant company.
What does a business acquire from the other business in an M&A?
Acquisitions represent the process of a buyer, also known as the “successor,” purchasing the stock or assets of a seller. The major factor that separates acquisitions from mergers are the legal parameters that define the rules of engagement as it pertains to liability, debt, privileges and rights. Under federal and state law, acquisitions are required to document the status of the outstanding debt and assets for the company that is being acquired.
One of the stipulated acquisition rules states that a buyer is not obligated to take ownership of the seller’s debts and preexisting liabilities. In some cases, a buyer and seller may agree to alternate arrangements, which may include:
- A buyer electing to acquire a portion or the total of the seller’s debt in return for a reduced sale price.
- A buyer and seller can agree to circumvent state merger laws and form a “de facto” merger, which bypasses approval from shareholders.
- A sale is deemed to be fraudulent, and the seller is not properly compensated and unable to pay-off existing creditors.
- A “continuation” of the selling party, which means that the existing management, executive staff and shareholders remain unchanged after the acquisition is complete.
- A purchaser does not honor the “bulk sale law” that requires the buyer to inform the selling company’s debt holders of a pending acquisition.
Palm Springs mergers and acquisitions lawyers state that asset acquisition protocols do not stipulate the consent of a purchaser’s stockholders in order to complete a sale. However, company’s that are selling assets are required to gain the approval of its stockholders. If the stockholders do not approve of an asset sale, then they have the right to order an appraisal of their stock, by a third party source.