What is a Statutory Merger?

Explanation

A statutory merger is a type of merger where one of the companies gets to keep its legal entity even after the merger. For example, A Co. and B Co. enter 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.read more is just like an acquisition. A company acquires another company, and still, the acquirer keeps its legal entity, and the acquired one loses its identity.

Why Statutory Merger?

source: ft.com

The above snapshot is a statutory merger example. TDC has offered $2.5 billion to buy TV Station Viasat and other entertainment assets from Sweden’s Modern Times Group, creating a group with combined revenue of $5.2 billion.

There are many reasons why organizations consider such a merger. Here are the few most important ones: –

  • Firstly, suppose an organization feels that going for a merger will benefit them financially. In that case, the organization will try to seek a partner ready for such a merger.Secondly, if an organization wants to improve the efficiencies of its business processes, improve its core competenciesCore CompetenciesThe core competencies in business refer to its resources and unique fundamental capabilities that distinguish it from market competitors. It is an essential component of marketing strategy leading to brand recognition and business growth. The concept serves to be useful for companies focusing on multiple product lines and operating more than one business unit at a time.
  • read more or reduce costs, it can consider such a merger.Thirdly, a company’s most important reason for such a merger is to beat a close competitor in market share or core strengths.

If we think from the company’s point of view that it would lose its identity, we would see that there are other reasons for merging 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 more than independently running it. But, since the purpose of a business is to maximize the shareholders’ value, 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 is not true).

Unless both parties agree to such a merger, it cannot happen.

So now, let us look at the legal requirements and procedures.

  • Before statutory mergers can happen, corporate law sets conditional laws for the mergers. And each party in the merger must adhere to the regulations set by the corporate law.Secondly, each company’s 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.
  • read more must approve the merger before it 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 happen.Finally, the authorities give final approval when they have taken all approvals. That is 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. For example, it can happen between a parent company Parent 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.read more and its subsidiary. Before going for this more concise form, one should do its due diligence carefully and thoroughly.

We need to pay heed to another aspect in case of such a merger. It is the objection of shareholders against an extraordinary transaction.

They can use their appraisal rights and demand that –

  • They should appraise the shares of the corporation before the merger.Before the merger ever happens, the shareholder/s must give the fair market value of the shares she/he/they own in the company.In short, a statutory merger must adhere to the well-being of both 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 the other merges into the other by losing its entity. Both legal entities cease to exist when two parties create a new identity in a statutory consolidation.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, both companies’ assets and liabilities become the larger company’s assets and liabilities formed after consolidation.In 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 is a guide to Statutory Merger. We discuss a statutory merger example, work, legal requirements, and differences with statutory consolidation. You may also have a look at these recommended M&A articles: –

  • What is Amalgamation?Types of Synergies in Mergers and AcquisitionsSuccessful Mergers and AcquisitionsBear Hug