In general, a business merger is a transaction that occurs when one company acquires another company to join the two businesses together and establish a new company. This concept is often associated with a specific type of business merger, called simply a merger, that involves two completed separate corporations combining together in order to form a single unified corporation.
When mergers involve the joining of two corporations, the separate forms of these entities will dissolve each of its respective assets and cease to operate. Any liabilities that remain may carry over to the newly established corporate entity.
Although this may sound similar to a standard business merger, the simplified term merger only applies to corporate entities. Other examples of business mergers that individuals may encounter under basic commercial or business laws include:
- Partnerships;
- Joint ventures;
- Takeovers; and
- Strategic alliances.
Partnerships are businesses that are co-owned by a group of individuals. A partnership is primarily formed in one of two ways, either as a general partnership or as a limited partnership.
Regardless of the type of partnership formed, partnership business structures are legally different from two merged corporations because a partnership is not one single entity. Instead, it is a group of individuals working towards a common business goal alongside one another.
Joint ventures arise when two businesses contract to work on specific projects to generate revenue for both companies. A merger, in contrast, will join the two corporate entities to form a new corporation that may last as long as the parties desire.
A takeover occurs when one company agrees to purchase another company. The difference between takeover transactions and mergers is that with takeovers, no new companies are formed. Instead, the purchased company will still exist, but it will be operated under the guidance of the board that purchased it.
Strategic alliances are when two businesses link up to form a partnership in pursuit of an ongoing mission, for example, purchasing a certain product to reduce the costs for both companies or making a product so that both companies will profit. The distinguishing factor between this business merger and a merger between two corporations is that the business within the partnership will remain separate entities.
Strategic alliances are in direct contrast to the corporations involved in mergers, which come together to create a unified corporate entity.
Are there Special Rules for Merging Different Types of Businesses?
Yes, in addition to the various legal procedures and laws that govern business mergers, the parties to a business merger will also have to make sure that the types of business structures that they are trying to merge do not have any special rules attached to them, or the merger may fail.
For example, if an individual is a member of a limited liability company (LLC) and they want to merge with a C corporation, they should examine all of the advantages and disadvantages that are associated with C corporations. Otherwise, the individual may be surprised when they have to pay their taxes and discover that they will be forced to pay taxes both as a corporation and as an individual.
These types of taxes are not imposed under an LLC. It is important to know that the laws governing business mergers may be complex and confusing.
Because of this, consulting with a local business lawyer or commercial attorney who can oversee the business merger process may be helpful. The parties to a business merger should ensure that they retain their own separate representation.
This will help ensure that the interests of the parties on both sides will be represented when negotiating and drafting the final terms of the contract. In addition, business lawyers can recommend the best ways for an individual to achieve their business goals.
This type of legal advice may be very useful for an individual who does not know all the intricacies of all the available business models.
How is a Merger Executed Legally?
When a company is considering acquiring or merging with another company, the companies must be aware that the new, combined company may dominate the market, preventing competition, or that the changed market structure will encourage collusion among the remaining competitors.
What is Gun-Jumping When Two Companies Merge?
Mergers, as noted above, occur when two or more companies merge to form a new company. Typically, a merger involves one company acquiring a competitor.
During this time, the companies involved in the merger must still function as competitors until the merger has been closed. In other words, the companies are not permitted to begin strategizing together as though they were one company while the merger deal is still being worked out.
The companies must legally be single before they can act as one company. Gun-jumping occurs when the two companies begin strategizing together and no longer act as competitors before the merger has been completed.
Gun-jumping is considered a violation of the Sherman Antitrust Act and the Hart-Scott-Rodino Act. The companies that engage in this type of conduct may be subject to civil penalties and, perhaps, even criminal antitrust enforcement by the United States Department of Justice and the Federal Trade Commission.
What Kind of Conduct Qualifies as Gun-Jumping?
One of the most obvious examples of conduct by merging companies that would qualify as gun-jumping would be any conduct that would amount to price fixing. In other words, if the two companies start coordinating regarding what prices will be placed on products offered to customers or if the companies try to plan any customer allocation before the merger deal has been closed, this would qualify as gun-jumping and would be a violation of federal law.
Although there have not been any cases in which acts of companies qualified as gun-jumping by a federal court, there have been settlements between companies and the Department of Justice for conduct the DOJ determined qualified as gun-jumping.
Examples of conduct that the DOJ has seen as gun-jumping include:
- Moving the actual locations of operations of one company to the facilities of the other company;
- One company controlling the pricing of the products of the other company;
- One company trying to settle disputes between a union and the other company; and
- The merging companies agree to shut down competing operations.
What Should I Do if My Company has been Accused of Gun-Jumping while Merging with Another Business?
There are numerous complex legal requirements and rules that businesses have to comply with when merging or acquiring another company. These can often be difficult to understand and subject to change. A business attorney in your area with experience handling mergers and acquisitions can guide the different types of rules and business models that may be available.
If you own a business and have decided to merge your business with another business, but you are accused of gun-jumping by the DOJ or the FTC, you should consult with an attorney as soon as possible. Your attorney can advise you regarding your company’s options and any possible defenses you may be able to present.
Lastly, your attorney can provide you with updates regarding your legal rights and options if there are any changes to business laws that might affect your case.
