Legal Merger: Everything You Need to Know
A legal merger is a transaction with a definition that may vary based on the legal situation.3 min read
2. Types of Mergers
3. Corporate Merger Procedures
4. Competitive Merger Concerns
What is a Merger?
The following legal situations are termed as mergers:
- One corporation acquires another, and the surviving corporation retains all of the liabilities and assets.
- In criminal law, it allows a greater offense to take precedence over a less serious one, which the trial of a defendant.
- Combining properties under the ownership of the same individual is also known as a merger in property law.
- Contract law terms a merger as an instance in which a duty is changed or combined with another duty, or the combining of an oral agreement into a written legal agreement.
Mergers can create a beneficial environment for corporations by discouraging unproductive behavior and evaluating underused assets.
To better evaluate whether or not a merger is beneficial, it's necessary to take a look at
The Federal Trade Commission examines mergers, and divides them into two categories.
Compliance with federal law must be ensured to prevent dishonest trading and analyze financial transactions throughout the course of a merger.
Lack of compliance with the law can have adverse effects on the success and reputation of a corporation. Thorough and knowledgeable legal counsel is invaluable to the completion of a successful merger.
Types of Mergers
There are three types of mergers which are as follows:
- A horizontal merger is the acquisition of one company by another that makes and distributes the same or similar products. This type of merger can eliminate competition and lead to a monopoly, depending upon the saturation of that particular market.
- A vertical merger involves the acquisition of a customer or supplier by a corporation who needs their service or product.
- Conglomerate mergers involve transactions between two companies which had no prior relationship, regarding their products and/or geographic market.
Corporate Merger Procedures
Mergers are governed by state statutes and the legalities of a merger include a meeting in which the heads of both corporations determine the names of the companies involved, the name of the merged company, and other legal stipulations.
If the two merging corporations are located in separate states, they must comply with the statutes of both states in order for the merger to be effective. Some states even require that the remaining stocks of shareholders who voted against a merger to be purchased by the remaining company.
Competitive Merger Concerns
Each merger, whether vertical, horizontal, or conglomerate, raises distinct competitive concerns.
For horizontal mergers, the following questions must be asked:
- Does the merger create a monopoly by eliminating competition?
- Would the newly merged company be able to drastically raise prices due to the elimination of competition?
- Would the merger allow remaining market competitors to coordinate pricing?
These benefits must be evaluated when dealing with a vertical whether involving forward or backward integration.
- Positive relationship between the acquirer and the company being acquired
- Internalization of transactions can be improved for smoother workflow and performance?
Conglomerate mergers can take place over a short-term project or a permanent merger of two corporations. These are the aspects of a conglomerate merger that must be considered.
- Reduce capital and overhead costs
- Improve management performance
- Neither reduce or increase competition in a given market
- Provide liquid assets
Successful mergers plan for the future and have well-thought-out plans that will help a company with both short-term and long-term goals.
To complete a successful merger, compliance and risk analysis must be implemented from negotiation through transition.
In the 19th century, Congress passed legislations that would help prevent the creations of monopolies in various markets.
- The Sherman Act prevents monopolies that could be created through the merging of directly competing companies. Th
- The Clayton Act protects the consumer by preventing anticompetitive stock acquisition in Section 7.
- The Federal Trade Commission Act, in Section 5,
- The Hart-Scott-Rodino Antitrust Improvement Acts established a procedure that firms involved in acquisitions and mergers must use to notify courts regarding merger proceedings when profits exceed certain amounts.
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