Difference between merger and acquisition
In this article we discuss the difference between merger and acquisition in the United States. Here, the most basic change that shareholders (owners) can make in their corporation is to end its existence – at least its exitance as a separate legal entity. Such a termination of corporate exitance can occur as a result of either a merger or a sale of the corporation’s assets followed by a liquidation.
The term “merger” is sometimes confusing, because it can be used either technically or loosely. Strictly speaking, a merger is a transaction by which one corporation (the acquiring firm) purchases the assets and liabilities of another firm (the acquired firm) in return for either its own securities (shares) or cash, or a combination of both. As a result of the merger, the acquired firm is deemed to have been absorbed within the acquiring firm. Sometimes, it is difficult to distinguish the acquiring and acquired firms, because the transaction can be structured so that either firm is the surviving one.
In reality, one corporation can acquire another by one of the three basic techniques: statutory merger, purchase of assets or purchase of stock. Now, the key difference between merger and acquisition are likely to be along the following lines:
- Whether the acquiring firm must assume the liabilities of the acquired firm
- Whether shareholders of both, or either, firm must vote to approve the transaction
- Whether shareholders of the acquired firm receive an appraisal remedy
- Tax treatment of the transaction
In the United States, federal tax law permits an acquirer to choose between these three forms of acquisitions –ie. merger, purchase of stock or purchase of assets – without major difference in tax treatment necessarily resulting. Lawyers often speak of these types of acquisitions as A (statutory merger), B (purchase of stock) or C (purchase of assets) type acquisition because of the subsections of the Internal Revenue Code that cover them.
Each of the three transactions requires a shareholder vote (and in many jurisdictions a supermajority vote of two thirds the voting shares or more). In addition, a merger or a sale of substantially all the corporation’s assets may trigger an appraisal remedy for those shareholders who vote against the transaction and file a formal dissent. Under the appraisal remedy, a shareholder who objects to a merger or sale of assets is entitled to be paid by the corporation in cash an amount equal to the fair market value of his or her shares, determined by agreement or, failing agreement, in a judicial proceeding. The requirement of a shareholder vote reflects the notion that mergers and sales of substantially all of the corporation’s assets are sufficiently fundamental as to be beyond the usual discretion of the board of directors. However, the board of directors must still initiate these transactions and then seek shareholder approval.
As discussed above, the difference between merger and acquisition include:
- Tax treatment based on type of transaction – merger, asset acquisition, stock acquisition
- In a merger and stock acquisition, the acquiring firm assumes the liabilities of the acquired firm. However, in an asset acquisition, the acquiring company is not liable for the selling company’s liabilities.
- In the case of merger or sale of substantially all of the assets, both the board of directors and the shareholders must vote to approve the transactions (sometimes even by a supermajority vote of shares). However, this is not generally the case for stock acquisitions.
- A merger or sale of substantially of all of the assets may trigger an appraisal remedy which is not typically used in the case of stock acquisitions.
Mergers and acquisitions involve a great deal of critical business, legal, financial and deal negotiation issues. Contact us, your international business attorney in Florida to assist you with merger and acquisition transactions.