Mergers and Acquisitions
Business Mergers & Acquisitions Law
Business mergers and acquisitions are a small part of the virtually limitless world of corporate change. The
Department of Justice (DOJ) has established and published guidelines for defining markets, classifying mergers,
analyzing market impact, and assessing proposed mergers. However, the DOJ itself is quick to warn that because
the guidelines are applied to such a vast range of factual circumstances, each proposed corporate change is
handled differently from the last. Corporate change always has economic and legal implications. Many forms of
corporate change also have tax implications, although it is possible to structure a tax-free reorganization. The area
of corporate change is so complex and detailed that every proposal is a new challenge that is best handled by a
professional familiar with the ramifications of any decision that might be made.
Classical Mergers
Generally speaking, a classical merger begins with an agreement between two corporations to merge together,
resulting in the exchange of the transferor corporation's securities to the surviving corporation's control. Usually,
after negotiations are completed, representatives from each corporation sign a preliminary agreement or letter of
intent. If the merger is approved by the board and shareholders of each corporation, the articles of merger are filed
with the Secretary of State. Upon acceptance of the filing, the surviving corporation has all the rights, privileges,
franchises, and assets of the transferor corporation. Other than in exceptions such as the small-scale merger and
the short-form merger, most classical mergers require approval by a two-thirds vote of the outstanding shares of
each corporation as well as appraisal rights for the shareholders of each corporation. Upon completion of the
merger, the transferor corporation loses its identity, which is fused into the surviving corporation.
Forms of Corporate Change Compared
Mergers and acquisitions are an important part of corporate change. Some terms for corporate change are
erroneously used interchangeably, but the reality is that the subtle differences have grave legal implications. The
following is a brief list of terms relevant to corporate change and the appropriate definition for each.
Acquisition: An acquisition is the acquiring of control of one corporation by another. An acquisition may be by
agreement or it may be the result of a hostile takeover. The acquisition may be in the form of cash, stock, or other
assets.
Consolidation: Consolidation occurs when two or more organizations are combined into one new legal entity.
Typically, a consolidation is a friendly, cooperative deal in which the new entity takes the "best" of the former
corporations. Presumably, under a consolidation each former corporation enters into the new venture on equal
footing.
Divestiture: Divestiture is the disposition of all or part of a business. A divestiture may take the form of a selloff (for
cash) or a spinoff (for shares) and is often a tool used in creating a joint venture.
Hostile takeover: A hostile takeover develops when the directors of the target corporation concede that the target
company's sale is inevitable. Hostile takeovers are regulated by the federal Williams Act, state takeover statutes,
and common law principles of target management duties.
Initial public offering: An initial public offering is the sale of newly issued stock to the public for the purpose of
raising capital for future corporate development. Often, the initial public offering is the first stage in the creation of a
new publicly held corporation.
Leveraged buyout: A leveraged buyout is the acquisition of a business through the use of borrowed funds, which
are repaid later from the business' profits or sale of assets. Usually there is a complete restructuring of the
corporation's balance sheet with the transfer of ownership. The so-called "leveraging" of the corporation's balance
sheet is what distinguishes a leveraged buyout from a traditional acquisition.
Liquidation: A liquidation is the conversion of assets into cash with the intent of paying off creditors and distributing
the balance to corporate owners.
Merger: A merger is the combination of two or more entities by direct acquisition of all assets by one corporation.
Typically, a merger includes the exchange of stock, resulting in a surviving corporation. A merger is distinguished
from a consolidation in that one of the corporations survives the others.
Recapitalization: Recapitalization is the adjustment of a corporation's capital stock. For example, a corporation may
exchange its stock for debt securities, resulting in a leverage against its capitalization.
Reorganization: A corporate reorganization is the adjustment of the corporation's capital structure. Often
reorganization is used in conjunction with Chapter 11 bankruptcy to allow the corporation to stay in business.
Restructuring: A corporate restructuring is used to maximize corporate assets. Restructuring may occur in
conjunction with divestiture, spinoff, recapitalization, or acquisition.
Business mergers and acquisitions are a small part of the virtually limitless world of corporate change. The
Department of Justice (DOJ) has established and published guidelines for defining markets, classifying mergers,
analyzing market impact, and assessing proposed mergers. However, the DOJ itself is quick to warn that because
the guidelines are applied to such a vast range of factual circumstances, each proposed corporate change is
handled differently from the last. Corporate change always has economic and legal implications. Many forms of
corporate change also have tax implications, although it is possible to structure a tax-free reorganization. The area
of corporate change is so complex and detailed that every proposal is a new challenge that is best handled by a
professional familiar with the ramifications of any decision that might be made.
Classical Mergers
Generally speaking, a classical merger begins with an agreement between two corporations to merge together,
resulting in the exchange of the transferor corporation's securities to the surviving corporation's control. Usually,
after negotiations are completed, representatives from each corporation sign a preliminary agreement or letter of
intent. If the merger is approved by the board and shareholders of each corporation, the articles of merger are filed
with the Secretary of State. Upon acceptance of the filing, the surviving corporation has all the rights, privileges,
franchises, and assets of the transferor corporation. Other than in exceptions such as the small-scale merger and
the short-form merger, most classical mergers require approval by a two-thirds vote of the outstanding shares of
each corporation as well as appraisal rights for the shareholders of each corporation. Upon completion of the
merger, the transferor corporation loses its identity, which is fused into the surviving corporation.
Forms of Corporate Change Compared
Mergers and acquisitions are an important part of corporate change. Some terms for corporate change are
erroneously used interchangeably, but the reality is that the subtle differences have grave legal implications. The
following is a brief list of terms relevant to corporate change and the appropriate definition for each.
Acquisition: An acquisition is the acquiring of control of one corporation by another. An acquisition may be by
agreement or it may be the result of a hostile takeover. The acquisition may be in the form of cash, stock, or other
assets.
Consolidation: Consolidation occurs when two or more organizations are combined into one new legal entity.
Typically, a consolidation is a friendly, cooperative deal in which the new entity takes the "best" of the former
corporations. Presumably, under a consolidation each former corporation enters into the new venture on equal
footing.
Divestiture: Divestiture is the disposition of all or part of a business. A divestiture may take the form of a selloff (for
cash) or a spinoff (for shares) and is often a tool used in creating a joint venture.
Hostile takeover: A hostile takeover develops when the directors of the target corporation concede that the target
company's sale is inevitable. Hostile takeovers are regulated by the federal Williams Act, state takeover statutes,
and common law principles of target management duties.
Initial public offering: An initial public offering is the sale of newly issued stock to the public for the purpose of
raising capital for future corporate development. Often, the initial public offering is the first stage in the creation of a
new publicly held corporation.
Leveraged buyout: A leveraged buyout is the acquisition of a business through the use of borrowed funds, which
are repaid later from the business' profits or sale of assets. Usually there is a complete restructuring of the
corporation's balance sheet with the transfer of ownership. The so-called "leveraging" of the corporation's balance
sheet is what distinguishes a leveraged buyout from a traditional acquisition.
Liquidation: A liquidation is the conversion of assets into cash with the intent of paying off creditors and distributing
the balance to corporate owners.
Merger: A merger is the combination of two or more entities by direct acquisition of all assets by one corporation.
Typically, a merger includes the exchange of stock, resulting in a surviving corporation. A merger is distinguished
from a consolidation in that one of the corporations survives the others.
Recapitalization: Recapitalization is the adjustment of a corporation's capital stock. For example, a corporation may
exchange its stock for debt securities, resulting in a leverage against its capitalization.
Reorganization: A corporate reorganization is the adjustment of the corporation's capital structure. Often
reorganization is used in conjunction with Chapter 11 bankruptcy to allow the corporation to stay in business.
Restructuring: A corporate restructuring is used to maximize corporate assets. Restructuring may occur in
conjunction with divestiture, spinoff, recapitalization, or acquisition.
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Law Offices of Christopher J. Shellito, Esq., LLC
5510 Pearl Road, Suite 300
Parma, Ohio 44129
(440) 885-LAWS (5297)
(440) 885-5318 Facsimile
E-Mail: chris@shellitolaw.com
5510 Pearl Road, Suite 300
Parma, Ohio 44129
(440) 885-LAWS (5297)
(440) 885-5318 Facsimile
E-Mail: chris@shellitolaw.com