Most state laws provide for the merger of corporations, limited liability companies
and other business entities to to merge with and into other business entities.
laws provide specific requirements that generally include a plan of merger
in order to set forth terms and conditions of the merger including the manner
of stock conversion and a statement that the company surviving the merger, known
as the "surviving" corporation or entity, will assume all rights, titles,
assets, debts and liabilities of the merged-out company or companies. If the parties
to the agreement, known as constituent corporations are incorporated
in more than one state, compliance with the laws of each state is necessary.
A parent/subsidiary merger involves the merger of
a parent corporation (defined by state law as a company owning more than 90% of
the stock of the subsidiary corporation) and one or more of its subsidiaries.
The parent may merge with and into the subsidiary or the subsidiary may merge
into the parent. This type of merger is also known as a "short form merger"
because stockholder approval is not usually necessary. Review of the state laws
of the state(s) of incorporation of each party to the merger, known as the constituent
corporations is necessary to determine exact steps to be taken.
NOTE: Stockholder approval is typically required when merger is being done
so that the corporation will be reorganized under the laws of a different jurisdiction
or when the merger results in a change of corporate structure that will affect
long form merger involves companies that are not parent/subsidiary companies.
It is considered a long form because stockholder consents are typically required
by state laws. The "long form" process applies even when the companies
are both subsidiaries of the same parent company.
A domestic/domestic merger is the merger of
two or more companies (corporations, limited liability companies, limited partnerships
or any other business entity) incorporated or otherwise formed, under the laws
of the same state. This type of merger is less complicated because only one set
of state laws is applicable. If the companies are not related as parent/subsidiaries
(where one company owns more than 90% of the stock of a subsidiary), the merger
is said to be a "long form merger".
A foreign/domestic merger is the merger of two or
more companies (corporations, limited liability companies, limited partnerships
or any other business entity) incorporated under the laws of different states.
Foreign/domestic mergers are complicated by the requirement to follow the applicable
state laws of all states involved.
A leveraged buyout (LBO) is the acquisition of a company using
borrowed funds. The assets of the company to be acquired may be used to secure
the funds. An LBO transaction will have three parties; the buyer, seller and lender.
Antitrust Improvements Act of 1976 (HSR) requires that parties to certain
mergers and acquisitions valued over $50 million file premerger notification with
the Federal Trade Commission
(FTC) and Department of Justice
(DOJ). The premerger notification filing provides information for the antitrust
enforcement agencies to determine whether or not the proposed merger or acquisition
violates antitrust laws. Whether or not a company is required to file a Premerger
Notification form is a matter of careful legal analysis.
For more information
see LeapLaw's Premerger
Notification Best Practice Summary.
and Stockholder Consents. Constituent companies must take appropriate directors
and stockholders resolutions in order to authorize the merger agreement and all
Practice Tip: Pursuant to the laws of the states of incorporation of each
constituent company, resolutions are required in order to adopt a plan of merger
and related actions. Generally, director resolutions are required that adopt the
plan of merger, ancillary actions and deem it advisable for stockholder approval.
A majority of vote of stockholders is required unless the merger will not adversely
affect the value of the stock held by stockholders, for instance, in a parent/subsidiary
merger. Resolutions may be taken at a meeting of stockholders and/or directors
or, if provided by the bylaws, by written consent of a majority of directors and
stockholders of record. Only one original signature copy of the consent and/or
minutes to the meeting is required for the minute book. Copies of the resolutions
will suffice for closing documents.
Note: Separate signature
pages from consents. Insert a page break and insert the notation "The remainder
of this page has been intentionally left blank. Signature page follows."
This allows room for insertion of additional resolutions if needed.
Typically a merger vehicle will be formed early in
the transaction. This company will be formed in the target state of jurisdiction
for the surviving entity. It is often a "vanilla" company, meaning that
it is formed with bare basics required by the state. The merger certificate is
used to define the specifics of the surviving entity.
You will need to
form the new company by:
- Consent of incorporator (if applicable
under state law)
- Articles or certificate of formation
consent of directors
- Director and/or stockholder consents for merger
For more information regarding basic incorporation process,
see LeapLaw's Incorporation
Best Practice Summary.
Premerger Filing, if applicable.
SEC filings Form S-4 and Form 8-K
- Proxy statement/prospectus
- Proxy cards
The closing agenda
is drafted from the merger agreement. Reading through the merger agreement will
provide various agreements that have become part of the deal, closing certificates
required, third party approvals, SEC and premerger notification requirements or
approvals. Though deal specifics differ, there will nearly always be certain similar
documents required for a merger closing.
Exhibits provide sample forms for ancillary documents may
be an escrow agreement, employment agreement, stockholders' agreement, registration
rights or other deal specific agreement.
Disclosure schedules provide
documentation that supports the non-compliance of certain claims contained in
the merger agreement. For instance, a provision of an agreement may claim that
the company to be acquired has no pending litigation other than "set forth
in Schedule [A]." Disclosure schedule [A] will then list all material pending
litigation. Disclosure schedules will be listed on the closing agenda and/or checklist.
are those agreements that are incidental to the transaction. The merger agreement
may be the driving agreement. However, an escrow agreement and certain employment
agreements may also be required under the merger agreement and therefore, are
A merger transaction requires that stock or other beneficial
ownership of the merged out company be accounted for by either converting it into
some ratio of stock or beneficial ownership in the surviving entity or declaring
that the stock will be canceled and not converted. Certain steps are taken to
assure that stock ownership is properly tracked and converted:
- Stock certificates to be canceled together with transfer powers.
New stock certificates issued for the surviving company.
- Option certificates
to be canceled, if any.
- Warrant certificates to be canceled, if any.
- Promissory notes to be canceled, if any.
- Receipts or cross receipts.
- IRS Form W-9 (pdf) for each seller.
of Seller of non-foreign status, IRC
Closing certificates are required under primary transaction documents
as part of the closing process and will be listed on the closing agenda. The most
commonly seen form of closing certificate is a secretary's (or clerk's) Certificate
whereby the secretary or clerk of a corporation certifies to certain matters as
explained further below. If a limited liability company has officers, it may also
issue a secretary's certificate, or may instead issue a certificate of the managing
member. A limited partnership will issue a certificate of the general partner
that will certify to matters and documents specific to a limited partnership,
similar to a secretary's certificate. For more information regarding closing certificates
Closing Certificate Best Practice Summary.
For transaction purposes, a certified copy of the charter is
ordered to reflect the current structure of the corporation (or formation documents
in the case of a limited liability company). When ordering certified copies of
the charter for transactional purposes, the charter and amendments will suffice,
as opposed to "everything on file" which would include all changes (i.e.
resident agent) and annual reports. Changes and annual reports do not affect the
structure of the corporation and, therefore, are typically not necessary for closing
"Is restated forward okay?" is a common question
asked by the service companies. Typically for transaction purposes, restated forward
will suffice, however you should check with your responsible attorney. Restated
forward essentially means the service company will retrieve all documents on file
from the date of the restated certificate of incorporation (or equivalent) forward
to the date of the order.
Certified copies may be obtained using
public records researchers, your preferred service
company or by visiting your secretary of state's office for local certified
Some secretaries of state are offering plain copies (sometimes
for free) or the ability to order certified copies online. Colorado, Massachusetts,
North Carolina and Rhode Island already offer online images of some filings and/or
the ability to order certified copies online. Check LeapLaw's Corporate
Connection for quick access to secretaries of state web site developments.
Practice Tip: Certified copies are generally good for 30 days and may be costly.
Be sure to order them within a certain timetable of the closing date.
Good Standing certificates are typically required
from each state where the company and its subsidiaries are incorporated and qualified
to do business.
Practice Tip: Check on the good standing in all states where the company and/or
subsidiaries are qualified or incorporated as soon as practicable. Good standing
certificates are generally only good for no more than 30 days. Ordering the certificates
should not be ordered too early. However, verifying good standing ahead of time
can provide important lead-time. Good standing status may be checked either online
at LeapLaw's Corporate
Connection or through your preferred service
A long form will provide a list of all documents
on file, thereby providing verification that all certified charter documents have
Tax Good Standing Certificates
Some states include tax good standing in good standing certificates issued
by the Secretary of State (i.e. Delaware). Other states issue tax good standing
certificates through the Department of Revenue (or equivalent) which require a
letter from an officer of the company requesting such a certificate. See LeapLaw's
Good Standing Best Practice Summary for more information.
Practice Tip: Tax Good Standing Certificates may take months to obtain. Verifying
how long it will take provides a heads up that the tax good standing certificate
may become a post-closing matter.
A merger certificate is required to be filed in each state where
constituent companies are formed. Forms may be found at your preferred service
company or at LeapLaw's Corporate
can be an important step in assuring that the merger certificates will be filed
without a problem when the "green light" is given. All states do not
provide pre-clearance services. Your preferred service company may provide some
expertise and assurance in those states that do not provide pre-clearance.
Stock may be converted as a
part of a merger where the stockholders of the merged out corporation receive
a certain portion of stock in the surviving company as part of the merger consideration.
The surviving corporation may also convert stock ownership of its current stockholders
as a result of the merger agreement. The stock conversion will be contemplated
in the merger agreement.
Prepare stock certificates
that evidence the conversion of the stock pursuant to the merger.
Third party consents may be required
in a merger transaction when the merger effectively results in a change of control
of the party to the lease or other business contract. Consents may be required
pursuant to licensing agreements, leases and any other business agreement. Determining
what consents are necessary is a large part of the due diligence that is performed
at the very beginning of the transaction process and may become a deal breaker
if the lease or agreement is important enough to the day-to-day business and the
third party will not provide consent on reasonable terms.
Assignment of intellectual property may be part of
may be any proprietary information such as client lists, internal computer programs
and anything that provides great value to a business.
A search should be done for current and existing patents that may affect
the most important products or services of the target company to determine the
"right to use". A preliminary search may be performed online at LeapLaw's
Connection with the U.S. Patent Trademark Office (USPTO). It is important
to note that the USPTO grants secrecy to patent applications for the first 18
months. Therefore, although a thorough search may be performed, obtaining certain
information is nearly impossible. An Assignment
of Application is available through the USPTO.
Trademarks do not have to be registered with the USPTO in order
for an owner to have a valid claim of ownership. Trademark registrations may also
be filed at the state level. Most importantly, trademark rights arise from the
use of the mark, in "common law" and not from the registration of any
kind. Therefore, simply checking the USPTO listing of registered trademarks does
not guarantee a trademark is free from potential infringement. The best possible
search is a "full trademark search" that can be conducted using a trademark
search company. The results of a full trademark search will provide a plethora
of information including common law usage for legal analysis. Additional information
regarding trademark and service mark issues may be found at LeapLaw's Intellectual
Once trademarks are determined, they may need
to be transferred to the surviving company. Trademarks are assigned by filing
of Trademarks with the USPTO.
Transactions will require that indebtedness
be discharged. Evidence of the discharge is provided as part of the closing process.
The debt may be a mortgage, a credit agreement or other financing arrangement
or a security agreement. The evidence of discharge may be a payoff letter to a
lender, a satisfaction of mortgage or UCC termination statements. There will typically
be a section for discharge of indebtedness on the closing agenda.