Many people wonder what is the difference between a merger and an acquisition mainly because the terms can be sometimes confusing and used interchangeably
To complicate matters further, the terms “merger” and “acquisition” can be used technically or loosely. The article discusses the difference between a merger and an acquisition in the United States from a technical standpoint. The legal practitioners and lawyers often speak about three different types of acquisition, A, B, or C and we explore them separately.
However, before going into detail about each of the three types of mergers it is important to understand what a merger and an acquisition is. A merger is a transaction by which one corporation or company (the acquiring firm) purchases the assets and liabilities of another corporation or company (the acquired firm) in return for its own securities or cash, or a combination of both. The result of the transaction is that the acquired firm is absorbed within the acquiring firm. An acquisition is a transaction by which one company purchases most or all of another’s company shares or business assets.
An A-type merger is accomplished pursuant to procedures prescribed in state law and is called a statutory merger
To illustrate, let us say we have a small company Alpha and large company Beta and Beta is acquiring Alpha. Typically, with a statutory merger, Alpha disappears, and Beta survives, but it can go vice versa. The Alpha shareholders may receive cash or Beta securities for their Alpha shares or a combination of both. The statutory merger is a flexible transaction.
The B-type acquisitions are sometimes called informal or practical mergers, meaning that they are independent of the processes for amalgamation specified by state law. In the B-type acquisition, Beta acquires for cash or for its shares or both enough shares of Alpha to give it control of Alpha. As a result, Alpha becomes a subsidiary of Beta. Therefore, the merger or amalgamation results formally from transactions between Beta and the individual shareholders of Alpha without any formal involvement of Alpha as a corporation – no action by the board of directors, no shareholder vote, no transfer of title of assets, among others.
A C-type acquisition is also known to be an informal merger
In the C-type acquisition, Beta acquires the assets of Alpha for cash or for its securities or a combination of the two. The advantage of C-type acquisition is that Beta may be able to avoid assuming the liabilities of Alpha. Alpha winds up holding the cash or the Beta securities and then, most often, it liquidates and distributes these assets to its shareholders.
Formally, in this type of acquisition, there is no transaction between Beta and the Alpha shareholders although state law may require a shareholder vote by the Alpha shareholders because of the sale of substantially all its assets. Depending on state law, Alpha shareholders may or may not have an appraisal remedy.
Corporate legal consequences vary with the form of a transaction and that is why it is important to understand what is the difference between a merger and an acquisition and the various types of mergers and acquisitions in the United States.
Malescu Law P.A. – Business & Corporate Lawyers