Statutory Merger

Legal merger of two or more companies

Overview of a Statutory Merger

In a statutory merger between two companies (where company A merges with company B), one of the two companies will continue to survive after the transaction has completed. This is a common form of combination in the mergers and acquisitions process.

For example, Company B may lose its independent identity and begin to operate under the name of Company A. The whole operation of a statutory merger takes place in accordance with the provisions of corporate laws of the state. Any contravention whatsoever is considered illegal. The surviving company acquires the assets and liabilities of the merged entity. This causes the merged entity to become defunct.

A merger and an acquisition are similar in nature and the difference between the two is sometimes very subtle.

Benefits out of a Statutory Merger

Organizations may consider a statutory merger with other organizations to maximize financial and organizational efficiencies, or sometimes to gain an advantage over competitors. Mergers often come with conflicts but the benefits can override initial difficulties. The shareholders of both the companies which have undergone the M&A process are compensated for their assent to the process. The shareholders either are (a) paid for their shares or (b) receive shares of the merged company.

Legal Requirements, Procedures & Conditions

First, conditional laws for a statutory merger are set by state corporate law. Second, the board of directors of each corporation must give their approval for the merger. Third, the shareholders of each company must approve the merger through their voting rights. Finally, after all legal formalities are concluded, mergers are approved by the appropriate regulatory authorities. The whole process may take months.

A shorter form is possible in the case of a merger between a parent company and a subsidiary. Additionally, proper due diligence should be carried out to avoid unanticipated material liability.

The shareholders can also exercise their appraisal rights. This is a legal right of a dissenting shareholder who might object to an extraordinary transaction and want:

• To have his shares of the Pre-merger Corporation appraised; or,
• To be paid the fair market value of his or her shares by the pre-merger corporation.

A statutory merger may have been carried out for the best interest of either the entities, their members, or other constituencies.

More Reading

Thank you for reading CFI’s explanation of a statutory merger. To further advance your financial education, see the following CFI resources:

• What is a Stock?
• Investment Banking
• Debt Schedule
• Quid Pro Quo
• Exchange Traded Funds
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