The success or failure of any merger hinges on post-merger integration.
However, an often overlooked component of this stage is corporate legal compliance. There are many critical post-merger steps that your organization must address to comply with global, state, and local compliance regulations. Any missteps can create serious issues for your company, including fines, penalties, and the potential loss of status with the state, courts, and more.
At its core, post-merger risk management centers on ensuring that public records reflect what happened to the surviving and non-surviving entity (or entities) of the merger.
In this article, we cover what you should prepare for after the merger is filed and how to ensure a smooth, post-merger risk management process.
Filing your merger is an exciting moment, but it’s just the tip of the iceberg. Lurking under the surface are myriad hazards in the form of post-merger compliance steps. If unaddressed, these could create problems for your company that may include the following scenarios.
- Unable to use the course system – Non-compliance and subsequent loss of good standing may preclude your business from bringing a lawsuit in the state in which it operates until good standing is restored.
- Unmet statutory requirements – After a merger, global and local authorities will continue to enforce requirements for both surviving and non-surviving entities. For instance, failing to qualify a business, withdraw a company, update business licenses, or notify regulatory bodies of change can lead to serious repercussions.
- Fines and penalties – These pose a real danger to businesses because they accrue over time and can result in personal liability for officers and directors, tax liens, and costly future transactions.
- Inability to conduct business – Oversights can even lead to administrative dissolution and loss of authority to do business. They can also put transactions, financing, name rights, and more at risk – not to mention potential work-site closures, revenue loss, public relations issues, and other risks.
The non-surviving entity: what needs to be completed post-merger
First and foremost, the non-surviving entity must be removed from the records of the state where it was qualified to do business. Depending on the state and whether the survivor was formed or qualified in that foreign state, this may be done by filing a withdrawal document or a certified copy of the merger filing.
Some business entity statutes will have a provision stating that a foreign entity must make a filing upon its being dissolved or merged out of existence. A failure to do so is considered a violation of that statute and can result in a state-enforced penalty. Even in the absence of a specific statutory provision, removing the non-survivor from foreign states should be part of the merger process. If this is overlooked, the entity may continue to be required to file annual reports and pay taxes — for which the survivor can then be liable.
Finally, leaving an inactive business entity on the records of the state makes it vulnerable to business identity thieves.
The surviving entity: what must be done post-merger depends on what changed
Many of the business decisions made post-merger will impact the compliance steps you need to adhere to for the surviving entity. Let’s look at the regulatory requirements associated with common post-merger scenarios:
- Doing business in new states – Will your newly merged entity be doing business in new states? If so, it must qualify in these new foreign states. You will also need to obtain the necessary business licenses. Doing business without authority or the right licenses can lead to monetary penalties, loss of access to the courts and, in some cases, personal liability for debts incurred during the period of non-compliance.
- Name change – Many mergers result in a change in name for the new entity. If this is the case, the previous business name listed on the public record must be updated. This is often required by statute and a failure to do so could result in penalties.
- Ceasing business in certain states – If the surviving entity stops doing business in certain states where it was previously qualified you must withdraw that foreign qualification. If you miss this step the entity will remain on the records and will be liable for annual reports and taxes, with penalties for non-compliance. It will also stand out as a vulnerable target for business identity theft.
- Expanded product line – Will the newly merged entity offer an expanded product line? If so, it may need to obtain new business licenses.
- Selling products in new states – If you plan to sell products in new states (whether remotely or through a physical location) or employ people living or working in new states, you must register with that state’s tax department, collect and remit sales tax, and/or withhold income taxes, FICA, and more.
- Change of location – Will you move the principal place of business? If so, you must update the entity’s address where it is listed on the public record. This will ensure that important notices are sent to the correct address.
- Change of registered agent or office – If there is a change of registered agent or office in the home or foreign state, you must update the public record or face administrative dissolution or revocation of authority. A failure to do so can also lead to default judgments should the company be sued and the registered agent can’t be located.
- Change of entity type or jurisdiction of formation – A merger can result in a change in the entity type, such as an LLC to a corporation, and the formation jurisdiction. If so, the public records where it is listed as the original entity type or as being formed in the original jurisdiction must be updated. Again, depending on the governing statute, a failure to do so could result in penalties.
- New DBA name – If the merged entity will do business as a new assumed or “doing business as” (DBA) name, that name must be registered or the company risks monetary penalties, loss of access to the courts, and personal liability.
Note: If the acquisition occurred through triangular mergers, with the target surviving, the public records where the target is on file must be updated to reflect the changes to it. In these cases, there are likely fewer changes that impact the acquirer.
Staying compliant post-merger
As you can see, after the long cycle of completing a merger there is still so much to do once the transaction is complete. Oftentimes, the compliance requirements associated with the surviving and non-surviving entities are the last items to make the list — if at all. Most companies, of all sizes, aren't fully aware of what's needed beyond receipt of the merger evidence. It is a critical series of activities and not completing the steps poses short- and long-term risks.
Failing to plan is planning to fail. To ensure nothing falls through the cracks, gather your complete pre-and post-merger corporate structure from outside counsel, create a project plan, and define roles and responsibilities.
Learn how to manage your post-merger activity and make sure all steps are taken in a timely and effective manner. Contact a representative at (844) 701-2064 (toll-free US).