The statutory merger of two or more business entities is an extensive process involving due diligence, planning, and filing activities. This article highlights key actions that should be taken in the pre-merger stage, the primary merger document filing stage, and the post-merger stage to ensure all public filing requirements are met.
Merger essentials: Public records filings for companies entering into statutory mergers
Planning the public record filing process
Once a merger agreement has been reached and approved by the merging entities’ owners, the merging entities face the complex process of completing the public records filings that will make the statutory merger legally binding. They must also make sure the records in the relevant states of domestic organization and foreign qualification accurately reflect all of the changes to the business entities caused by the statutory merger.
Neglecting to file any required document or failing to take one of the many other steps involved in this process can result in serious consequences. Incomplete filings may delay the effective date of the merger, cause the surviving entity to lose its naming rights, result in penalties for doing business without authority, or subject the entities to additional tax liability.
However, with good planning and organization, you can complete a successful statutory merger. The goals of planning are to:
- Eliminate risks of rejected filings that could delay the merger date
- Manage the timing of required filings to preserve the target merger date
- Avoid missed or overlooked filings to help ensure that the merger is legally binding
- Make sure the records of the state filing offices accurately reflect the changes made by the statutory merger
Use a pre-merger entities checklist
Know your starting and endpoints. Establish a clear vision of what the business entity is before the merger, and what will happen to it as a result of the merger. To help understand this, use a checklist that asks and answers the following questions:
- What is the entity’s state of formation? This state’s law will govern the procedure for effecting the merger. Filings will always be required here.
- Which entity will be the surviving or disappearing entity in the statutory merger? Different documents must be filed and steps taken depending upon which entity will continue to exist or not.
- In which states is the entity currently qualified to do business as a foreign business entity? All states keep public records of their foreign business entities. When the information on file changes because of a statutory merger, appropriate steps must be taken.
- In which states will the post-merger entity be doing business? If the answer includes states different from those listed in the question above, additional actions must be taken.
- Will the surviving entity change its name following the merger? If the answer is yes, then you will have to obtain and protect the entity’s right to the desired name.
Three manageable phases of the statutory merger filing process
Break down the merger into the following three manageable parts and analyze what must be done at each stage in the merger process.
- Pre-merger planning: Steps that must be taken before the articles of merger or certificates of merger are filed.
- Primary filings: Actions to take to effect the statutory merger.
- Post-merger clean-up: Actions that must be taken after the statutory merger is effective.
Actions to take in the pre-merger stage
Among the actions that must, or should, be taken before the articles of merger or certificate of merger is filed, are:
- Confirm good standing status. Virtually all states will reject filings for business entities that are not in good standing. Therefore, always verify if the entity is in good standing in its formation state and in each state in which it is qualified to conduct business as a foreign business entity. If the entity is not in good standing, take any necessary steps to restore its good-standing status.
- Check tax status and determine if tax clearance is required. The parties to a merger must be up-to-date in their tax payments. This is particularly true for the discontinuing entity, as states will not allow businesses to withdraw or dissolve while still owing taxes. Some states require a tax clearance, which can take a long time to obtain. Determine if one is necessary well in advance, as failure to do so can delay the merger filing.
- Search for name conflicts if the survivor’s name will change or it will be doing business in new foreign states. States will reject documents that would result in a domestic or qualified foreign entity having a name that conflicts with a name already on record with the state’s filing office. Check if the desired new name is available in its state of formation, in each state in which it will be qualified, and any new states the survivor will qualify to do business in, post-merger.
- Reserve a name. An available name should be reserved by filing an application for reservation with the appropriate domestic and foreign states. This will protect against having another business entity take the name before the merger documents are filed. Reservation periods are typically no more than 120 days and not all states allow renewals. Be mindful of timing the reservation filing so that the reservation period does not expire before the effective date of the merger.
- Qualify the surviving entity. If the surviving entity will be transacting business in new states after the merger, it will have to qualify to do business in those states. Qualifications can be made before the merger, timed to go into effect at the same time as the merger, or in some cases, after the merger.
Qualifying generally requires filing an application for authority, which usually has to be accompanied by a certificate of good standing from the formation state. In many states, the certificate of good standing cannot be dated for more than a short period of time before the date that the application for authority is filed. Therefore, take care not to order this certificate too far in advance.
- Withdraw the non-survivor and/or survivor. Following the merger, if either business entity will no longer conduct business in one or more states where it had been qualified, they will have to be withdrawn from those states. This can be done before the merger as long as the business entity will not be doing business after the withdrawal filing is effective. Taking care of this in the pre-merger stage protects the entity from being subject to franchise tax and annual reporting requirements once the business entity withdraws.
Filing the articles of merger or certificate of merger
Ensure accurate articles of merger or certificates of merger
After the management and ownership of each business entity involved in the merger approves the plan of merger, a document — generally called articles of merger or a certificate of merger — is filed in the state or states of formation of the merging entities. This filing makes the statutory merger effective.
The required content of the articles of merger or certificate of merger depends upon a number of factors, including:
- State of formation
- Type of entity
- Whether the merger involves only domestic entities or domestic and foreign entities
- Whether it involves only like entity types or different entity types
- Whether the survivor will be a domestic or foreign entity
- Whether a parent and a subsidiary are involved
Be sure to use the proper merger forms otherwise the filing will be rejected. Some states provide official merger forms that must, or may, be filed. In other states, the articles or certificate of merger must be drafted based on the statutory provisions.
Manage the effective date
The merger will become effective upon the filing of the articles of merger or certificate of merger unless a delayed effective date is used. Most states allow merger documents to set forth a date and time in the future when the merger will go into effect. The time period is generally limited to 90 days or fewer.
The use of a future effective date can be beneficial in order to:
- Make sure the merger will be effective on the same day in all the different states in which the articles of merger are filed
- Determine when pre-merger actions, such as reserving a name or ordering a certificate of good standing, must be taken
- Avoid unexpected delays in the effective date due to filing office backlogs
Use a post-merger entities checklist
After the merger documents have been filed, a few “clean-up” filings remain. Use a merging entities checklist to make sure you don’t neglect any of these filings. These filings include the following.
Name change filings
If the surviving entity’s name has changed, make filings to change its name on the records of the states in which it had qualified under the old name. This typically requires an amended application for authority or a certificate of change of name. A certificate from the formation state evidencing the name change will probably have to be ordered, as many states require this to be submitted as well.
As for the state of formation, in most cases, the name change will be set forth in the articles of merger or certificate of merger. If so, no further action would be necessary there. However, if the change is not set forth in the merger document, the formation document would have to be amended.
The surviving entity can qualify after the merger becomes effective as long as it does not start doing business before then. Some entities prefer to wait until the post-merger stage in case the deal falls through, which would make the qualification unnecessary.
Withdrawals can also be handled post-merger. No penalty would be assessed on the survivor for remaining qualified after it stopped doing business. Nevertheless, you will probably want to withdraw the entity as soon as possible so that it will no longer be subject to the requirements imposed on qualified entities.
The discontinuing business entity may be withdrawn post-merger. Consult the state statute because some laws require the withdrawal of a merged entity to be made within a certain period of time after the effective date of the merger.
As you can see, completing a statutory merger involves numerous steps. Many forms must be drafted and filed, many documents must be ordered, much information must be gathered, and much more. However, by organizing the merger into manageable parts, and using a merging entities’ checklist, the merging entities can make sure all steps are taken in a timely and effective manner.
This information is not intended to provide legal advice or serve as a substitute for legal research to address specific situations.