"General" merger
In a merger, the target entity merges into the acquiring party in a deal effectuated under the general merger statutes. This merger type is general in the sense that it is not specific and can potentially apply to all mergers.
Any merger can be effectuated under the general merger statutes, even where specific or specialty types of mergers may apply. Interest holders in the non-surviving entity usually retain interests in the surviving entity.
General merger approval requirements
Corporations, LLC, LP, GP, and LLP laws all contain merger statutes. Merger requirements vary by entity type and state but have the following elements.
Corporation
- Approval by boards of each constituent
- Approval by shareholders of merged corporation(s)
- Shareholders of the survivor usually do not have to approve
- Shareholder approval may be required under certain circumstances
Ex. Situations where shareholders’ interests are substantially affected
Limited Liability Company (LLC)
- Requirements may be set forth in the operating agreement
- Statutory default rule may require majority or unanimous approval
Limited Partnership (LP)
- As provided in the partnership agreement or statutory default rule
General Partnership (GP), Limited Liability Partnership (LP)
(and other entities that may be involved in the merger)
- As provided in the partnership agreement or statutory default rule
Parent-subsidiary merger
Parent-subsidiary mergers are the most frequently used type of specialty merger. Once statutory conditions are met, a shortened process or short-form procedure can be used.
Parent-subsidiary (upstream merger)
A parent-subsidiary upstream merger is a merger of a subsidiary business entity into its parent business entity, with the parent business entity surviving.
In order to simplify the procedure when there are no, or almost no minority shareholders, business corporation statutes authorize what is called a short-form merger. In general, only mergers where a parent corporation owns at least 90% of each class of voting stock of a subsidiary corporation may be effected using the short-form procedure. Only a few statutes provide for short-form mergers involving unincorporated entities.
Typically, in a short-form merger, only the parent’s board of directors has to approve the plan of merger. The subsidiary’s board does not have to approve. In addition, neither the parent’s shareholders nor the subsidiary’s shareholders have to approve of the plan. Approval of the subsidiary’s shareholders is considered unnecessary because the parent owns enough shares to ensure approval. Approval of the parent’s shareholders is unnecessary because the transaction will not materially change their interests.
Parent-subsidiary (downstream merger)
A parent-subsidiary downstream merger is a merger of a parent into its subsidiary. The subsidiary survives and the parent disappears. Some corporation statutes provide that where the parent owns at least 90% of the voting stock of the subsidiary, the subsidiary’s board of directors is not required to approve the plan of merger.
However, when the parent disappears, approval of the merger by the parent’s shareholders will be required.
Triangular merger
A triangular merger involves three business entities: a parent (the acquirer), its subsidiary, and the entity to be acquired (the target). This merger type involves the creation of a wholly-owned subsidiary of the acquiring company in order to facilitate a share exchange between the buyer and the seller. In a triangular merger, the merger is between the subsidiary and the target. The acquirer is not a constituent to the merger. Triangular mergers are conducted under the General Merger Statute. There are two kinds of triangular mergers – forward and reverse.
Forward triangular merger
In a forward triangular merger, the target and subsidiary merge, with the subsidiary surviving and the target disappearing. The result of the transaction is that the target becomes a wholly-owned subsidiary of the acquirer. Because the merger was between the target and the subsidiary, the acquirer does not assume the target’s liabilities. Had the acquirer directly merged with the target, the acquirer would, by operation of law, have received its liabilities. This is the main reason for entering into a forward triangular merger — to allow the acquiring entity to acquire the target without assuming its liabilities.
Reverse triangular merger
In a reverse triangular merger, the subsidiary merges into the target, with the target surviving and the subsidiary disappearing. The acquirer receives all of the target’s ownership interests and the target becomes a wholly-owned subsidiary of the acquirer. Both the acquiring and acquired business entities remain in existence and the acquirer does not assume the target’s liabilities.
Multi-entity merger
A multi-entity merger is a merger that involves at least two different types of business entities. This type of merger is also referred to as a cross-entity merger, inter-entity merger, or an interspecies merger. Multi-entity mergers can be more complex because they can involve different business entity statutes and different kinds of ownership interests.
Any of the above mergers — general, parent-subsidiary, and triangular — may involve more than one entity type.
