Although the terms merger and acquisition (M&A) are often used interchangeably, merging your business with another to form a new company is completely different from a takeover.
Shareholders will be impacted by a merger and as a business owner, you need to be prepared to manage the situation. To assist you, we’ve set out how a merger affects a company’s shareholders.
What is a merger?
A merger is when two companies agree to join together to form one company. There are several reasons for creating a merger, including to:
- Expand each company’s expertise
- Reach new markets
- Gain market share
Mergers are generally perceived as being of a more ‘friendly’ nature than acquisitions in that the parties join with a common purpose, rather than one acquiring something from the other.
In the case of private companies, acquisitions are far more common than mergers. Typically someone wants to sell their company or business, they find a willing buyer and the acquisition will be completed.
In some situations, whilst arguably an acquisition, a transaction may look a lot like a merger.
If Company A acquires Company B’s shares or assets, but under the terms of the transaction, Company B’s seller acquires a 50% shareholding in Company A, they’ll end up owning half of the overall combined business. Commercially speaking this looks very much like a merger.
Even if technically an acquisition, there may be presentational reasons why the parties prefer to loosely refer to a transaction as a merger (sounding a bit more ‘friendly’, inclusive and collaborative).
For instance, the companies involved may be continuing to work together and prefer to give the impression that they do so as ‘equals’, or feel that it will be less unsettling to customers and employees to call it a merger.
It is essential to understand the reasons for merging and be able to articulate these to shareholders and employees. To ensure a smooth transition, the goals and expectations of each company need to be given equal weight.
Do mergers require shareholder approval?
Not necessarily. There is limited regulation governing small private companies when it comes to mergers and acquisitions. However, if your company has been publicly listed within the last ten years before the merger, the Code on Takeovers and Mergers (the “Code”) will apply and shareholder approval may be required. It is essential, therefore, that you seek legal advice on this issue.
How does a merger affect share price?
Mergers can affect the share price of both companies. The smaller company’s shares are likely to rise in value and shares in the larger company may dip. However, it is common for the shares in the newly formed company to be higher in value than those of the two original businesses.
How does a merger impact shareholder voting power?
The new company's shareholders will have less voting power than they had in the parent companies. This can lead to disputes and talented shareholders leaving the business. To mitigate this risk, it is important to communicate the benefits of the merger and ensure all shareholders understand how their influence will be impacted.
Get legal assistance from LawBite
Our friendly team can assist you with your M&A strategy and help you achieve your long-term goals. Working with LawBite will allow you to concentrate on the business aspects of a merger or acquisition, confident that all the legal matters are being expertly taken care of.
LawBite has helped thousands of businesses achieve their commercial ambitions. To find out how we can help you on all matters concerning mergers and acquisitions, book a free 15 minute consultation or call us on 020 3808 8314.