What is a Merger of Equals?

When we think of a merger, we think of two companies coming together to become one, usually larger company. But in most mergers, one of the companies survives, now bigger having subsumed the other, and the other does not.

But there is actually another way to merge companies, sometimes called a merger of equals, which is when both companies merge, but they aren’t really merging–they’re forming a brand new company together, and both the previously existing companies will cease to exist.

In many ways, this can be a much more challenging endeavor; you’re basically starting from scratch, and have to make all the core corporate decisions that you made when you first started your business, all over again.

What About Shareholders?

In many cases, these companies have shareholders, and they can’t just be left holding the bag with nothing. That’s why in a merger of equals, shareholders must agree to give up their shares in the previous company, in return for shares in the yet-to-be formed, new company.

While their interest and shares may not change, their power might change; whereas there were once two separate companies with their own shareholders, now there are two sets of shareholders for the singular new company, and thus, with more shareholders, each individual shareholder may have less of an interest in the company or a smaller say in what happens with the company.

Before any such merger can happen, both the companies which are seeking to disintegrate and become a brand new company, will have to be valued.

Usually, the value of the shareholders’ previously existing shares will be based on the pro rata value of the two companies to each other. So, for example, if Company 1 was worth $400,000 and Company 2 was worth $600,000 the shareholders of Company 2 would have a 60/40 ownership and their shares would be valued accordingly.

Boards of Directors and Officers

Like shareholders, the board of directors of the new company often will just be both boards put together–or if it will be recomposed from scratch, the board will also have the same proportional pro-rata breakup of board members as it does for the shareholders. Some directors may have to be removed from their positions, if there are too many.

Of course, both companies once had their own CEOs and human resource directors and financial officers, among other corporate officers, and now there is only one company.

Corporate officers may need to be reassigned, but in some cases, officers can be split–for example, a CEO of marketing and a CEO of finance instead of one general CEO.

Equal Companies

While legally any two companies can dissolve to become one bigger company, it often works best with companies that are about equal. This avoids one company seeming like the “actual new company,” with the smaller one more seeming like it just dissolved.

And any time people are losing control, as they do when a much bigger company and a smaller one become a new company, it can cause hostility and legal fights.

Call our West Palm Beach commercial litigation attorneys at Pike & Lustig for help with your next corporate merger or acquisition.

Source:

investopedia.com/terms/m/merger_of_equals.asp