When negotiating and executing a merger of two businesses, there are certain important legal issues you should keep in mind. A few of the legal issues involved are transfers of liability, consent of third parties, and representations and warranties. You and your business should have a lawyer's help to protect your interests.
What Is a Merger?
A merger happens when two or more companies or businesses combine together into one business. After the merger is complete, the two businesses now operate as a single business. They may consolidate operations, close some locations, or let employees go as a result. The owners of one business usually negotiate a purchase price with the owners of the other business. The owners of the acquiring business will buy out the other business's owners or shareholders to gain control of the other business.
Transfer of Liability
Each of the two companies that are merging may have liabilities prior to the sale, such as debts, financial losses, or pending lawsuits. Usually, a merger has the effect of transferring all liabilities to the new entity or surviving entity that continues doing business after the merger. The surviving business “assumes” the liabilities, meaning it takes responsibility for paying all the debts and losses. If the owners of the two businesses that are merging choose, they can negotiate assumption of liabilities. For example, the owners of the company being purchased might agree to retain a particular liability – such as a lawsuit filed before the merger – while the purchasing company assumes all other liabilities.
Consent of Third Parties
When companies merge, the surviving business must take over contracts and obligations previously held by the two merging businesses. Sometimes, these contracts contain provisions that prohibit assignment (allowing another company to take over the contract). If this is the case, the merging companies must negotiate consents from the third parties, who may be vendors or suppliers. If they cannot obtain consents, they may have to find new third parties to work with the surviving business.
Representations and Warranties
Finally, most purchasing companies require the acquired companies to make representations and warranties about their businesses. For example, the legal agreement memorializing the merger may need to include information about capitalization of the acquired business, intellectual property rights, whether taxes have been paid, status of financial statements, compliance with law, employment, and contracts entered into by the business. The acquired company should take care to disclose all relevant information in the course of the merger.