Stock Swap Statutory Merger by Denver Business Attorney

How do businesses merge, or how does one business acquire another business?  Maybe you have read of mergers and acquisitions in the Wall Street Journal, or maybe you hear about them on the news.  But, how do these mergers or acquisitions actually occur internally in terms of corporate ownership?  There are multiple ways for one corporation to acquire another corporation or for entities to merge.  One very common form of merger is the Stock Swap Statutory Merger.  From a tax perspective, this is a tax free merger and commonly referred to as an “A Reorganization.”

A Stock Swap Statutory Merger would likely involve two corporations (we will say Corporation J and Corporation S) and these corporations would start as separate legal entities with separate legal owners, the owners being the corporate shareholders.  In our example, Corporation S will merge into Corporation J, and thus Corporation J will be considered the survivor or the surviving corporation.  Of course, Corporation J could merge into Corporation S or Corporation J and Corporation S could merge into a completely new corporation that was formed for the transaction, say Corporation JS, which would be a consolidation.

Through this type of merger, Corporation S shareholders have their stock cancelled and they receive consideration in the form of Corporation J shares.  Thus, this is a stock for stock merger, or a stock swap merger.  Corporation J will absorb the assets and liabilities of Corporation S as a matter of law (this is a statutory merger, and you must think about successor liability issues).

After the merger, we now only have one corporation, which is Corporation J.  You could think of this like a prize fight- after the fight there is only one boxer or fighter standing.  Not that every merger or acquisition is hostile, and of course you could think of this as a marriage, the union of two corporations into one corporation!  As stated above, only Corporation J will survive and Corporation S is extinguished.  The shareholders of Corporation J will continue to hold their stock as they did before the merger, but the shareholders of Corporation S will receive newly issued additional Corporation J stock.  Thus, the ownership interests of Corporation J and Corporation S will be pooled in Corporation J.  Corporation J now has the assets and liabilities of Corporation S and of course Corporation J’s original assets and liabilities.

In short, you can consider the transaction to have three stages, which will be stated below and significantly simplified:

Stage 1: The shareholders of Corporation J and Corporation S will need to vote and ratify the merger.

Stage 2: Corporation S shares are cancelled, Corporation J shares are issued to Corporation S shareholders, the assets and liabilities of Corporation S are transferred to Corporation J and Corporation S is extinguished.

Stage 3: The shareholders of Corporation J are the “original” shareholders of Corporation J (those pre-merger) and the “old” shareholders of Corporation S.  The assets and liabilities of Corporation J are those of “old” Corporation J (prior to merger) and Corporation S.

The above merger is an example of only one type of merger.  To speak with a Denver business attorney or tax attorney, please contact The McGuire Law Firm.

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