A Short Form Merger Explained
A "short form" merger refers to a simplified corporate consolidation procedure available under certain corporate statutes. In most U.S. states and the District of Columbia, a wholly-owned subsidiary corporation may merge with its wholly-owned parent corporation under the short form procedure if no such merger is opposed by the parent, and provided that state law requirements are satisfied. All of the related corporate formalities are satisfied and legal significance results from the short form merger without requiring any shareholder vote . A short form merger is generally not available in business combinations with parent or subsidiary corporations, other than when a wholly-owned subsidiary merges with its wholly-owned parent corporation.
Short form mergers are generally utilized when one parent corporation owns a 100 percent equity interest in a subsidiary corporation, and the two corporations desire to effectuate a merger without the necessity of convening shareholder meetings and obtaining shareholder approvals. In such instances, the parent corporation typically desires to simplistically consolidate ownership of the target subsidiary corporation, and to effectuate a simple legal process to achieve this end under applicable state law provisions.
Criteria for a Short Form Merger
As noted above, assuming the Companies hold 90% of the outstanding shares of the subsidiary, the legal requirements for a short-form merger to take place will vary from jurisdiction to jurisdiction. The following jurisdictions provide for a statutory "short form merger" or "short-form consolidation":
Delaware Section 253 of the DGCL provides that where a parent corporation owns 90% of the outstanding shares of another corporation, then the parent may merge into itself, or with the subsidiary, and without the need for stockholder authorization, the surviving corporation succeeding to all of the assets, liabilities, rights and obligations of the subsidiary, employing the same procedure and principles as under Section 251 of the DGCL, except that the payment of cash or shares of the surviving corporation is also permitted with respect to dissenters. This Section further provides that the articles of merger need not set forth a statement as to the percentage of ownership necessary for the merger. Generally, the "short form merger" requires that all shareholder rights in the merged corporation are extinguished, with dissenters’ appraisal rights allowed to minority shareholders. Only one filing with the Secretary of State is required.
Oregon Under Section 60.308 of the Oregon Business Corporation Act, a parent corporation owning 90% or more of the outstanding shares of a subsidiary may merge with the subsidiary, converting the outstanding shares of the subsidiary into the right to receive the same consideration per share being paid to the shareholders of the parent, or cash in lieu of fractional shares. Dissenting shareholders’ rights are provided as in 80% stockholder approval mergers if the shares are excluded from the merger under ORS 60.551(3)(b) or (d) (managerial control companies or companies with fewer than 1,000 shareholders).
Tennessee As in many short form merger statutes, the Tennessee Business Corporation Act at T.C.A. § 48-21-105(a) permits a parent corporation owning at least 90% of the outstanding shares of a subsidiary corporation to merge into itself as long as it obtains the written consent of the shareholders of that subsidiary. Under subsection (b) similar consent is required of the owners of the outstanding securities of the subsidiary in the nature of a share exchange or if the merger would otherwise require shareholder approval. Dissenters’ rights are required as found in Tennessee’s shareholder appraisal statute.
Virginia Virginia’s short-form merger statute, at Section 13.1-718.1, permits a parent corporation owning at least 90% of the outstanding shares of a subsidiary to merge with the subsidiary as long as it obtains the written consent of the shareholders of the subsidiary owning 90% of the outstanding shares. Under Section 13.1-722, dissenting shareholder appraisal rights are available except where the transaction involves a listed company.
Wisconsin Section 180.110 of the Wisconsin Statutes provides that a corporation owning 90% or more of the outstanding shares of a subsidiary corporation may merge with that subsidiary without stockholder approval, if the merger agreement contains the provisions required by Section 180.110(2) governing the requirements of Articles of Merger. Section 180.110(3) provides that dissenters’ rights are available only to shareholders of the subsidiary who receive other than common stock, stock of the acquiring corporation or the consideration stated in that section.
Benefits of Short Form Mergers
The primary advantage of a short form merger over a standard merger is that the process is far more efficient. Short form mergers allow for quick and inexpensive consolidation of companies as an alternative to a standard merger. Shareholders do not have a say in the process, effectively eliminating the time-consuming steps typically associated with standard mergers. A short-form merger can take place in as little time as 15 days – or faster in some cases – whereas a standard merger can take up months to complete. In addition to offering the speed advantage of a typical asset acquisition – with which short form mergers have much in common – short form mergers also significantly reduce the cost associated with the deal. For small businesses looking for an efficient way to consolidate, the reduced costs of a short form merger make it an appealing option. The cost of a short-form merger is often less than half that of a standard merger. Moreover, transactions involving cash, stock or other consideration are also less expensive.
Process of Completing a Short Form Merger
As with most transactions, the process of executing a short form merger will require careful planning and a number of different steps to successful completion. However, because of the streamlined process available for short-form mergers, many of the steps of a standard merger may not be required. The following are typical steps involved in the execution of a short form merger:
1. Plan the Transaction and Determine the Ideal Structure. This will usually be performed by the primary shareholders of the parent company, in conjunction with tax advisors and legal counsel. Planning considerations should include an analysis of the terms of the merger and accompanying documentation, timing, capital requirements (if any), tax implications, etc. It is important at this stage to confirm that the necessary statutory conditions are met.
2. Approval of the Short Form Merger. As mentioned above, a share exchange agreement and a plan of merger are essential for all mergers, even short form mergers. While short form mergers do not require the approval of the shareholders of the parent company, the board of directors of each constituent corporation must approve the transaction. If the short form merger involves entities formed under Canadian federal or Ontario corporate legislation, pursuant to the CBCA or OBCA, the articles of each entity must be amended to change the name of the company to the name of the surviving corporation or, in some cases, to a new name. Approval of the corporation’s articles of incorporation may require shareholder approval. If shareholder approval is required to amend the articles of incorporation, it may be obtained following completion of the transaction, provided the articles of incorporation are amended consistent with the plan of merger and the articles of incorporation amend the name of the surviving corporation to the name of the surviving corporation as set out in the articles of incorporation. Articles of incorporation can also be amended subsequently upon approval of the board of directors and the shareholders without approval of the court if the appropriate provisions have been included. Articles can also be amended by special resolution of the shareholders if such an amendment is required due to issue of shares by that entity or the extension of the life of the entity.
The following information must be included as part of the articles of incorporation:
• the name of the surviving corporation
• the name of the predecessor corporation
• the identity of the surviving corporation as a corporation, incorporated under the act and laws of its founding jurisdiction
• the business numbers of each corporation
• the effective date of the progenitor entity’s amalgamation
• the attributable number of shares of each share class of predecessor corporation to the share classes of the surviving corporation in the amalgamation
• the amount of equity, if any, the predecessors’ shareholders contributed to the amalgamation
• the amount of paid-up capital of each class of share capital of each predecessor corporation
3. Documentation. After shareholder and board of directors approval is obtained, or if such approval is not required, then the parties must proceed to prepare the following documentation:
• Notice of articles of incorporation and articles of incorporation of the surviving corporation
• Certificate of amalgamation. Section 187(5) of the BCA specifies the information that must be contained in a certificate of amalgamation.
• Articles of amalgamation approved by the appropriate board of directors and shareholders.
4. Regulatory requirements. In addition to the documentation above, the parent company will have to file certain documents with securities regulators and stock exchanges.
Obstacles and Issues in Understanding Short Form Mergers
While short form mergers are generally a simpler and quicker process than traditional mergers and consolidations, certain states have retained various rules and procedures that may affect the company’s decision to pursue a short form merger (or whether a short form merger is appropriate). For example, in Delaware, although a majority of the issued and outstanding shares of capital stock is required to eliminate the appraisal rights of minority shareholders with respect to a parent corporation in a short form merger, minority shareholders of the subsidiary will be entitled to a judicial appraisal of their shares. Another consideration is that parties to a statutory short form merger typically will not be able to structure the transaction to include a seller liability indemnification.
Other issues may include , in some states, the lack of pre- or post-closing announcement requirements or D&O liability insurance requirements. In addition, if the merger would not otherwise qualify as a tax-free transaction, for federal and, in some states, state tax purposes, the receipt by the shareholder of the parent corporation of the capital stock of the surviving or resulting corporation in exchange for its capital stock of the subsidiary may result in a taxable corporate-level gain.
Owing to the wide variation in states’ statutory provisions on short-form mergers, the state laws governing the specific short-form transaction require careful consideration before including a short-form merger in the transaction.
Short Form Mergers: Exploring Case Studies
The use of short form mergers has been a subject of discussion in prominent corporate mergers in both Canada and the United States. For instance, Talisman Energy Inc. and Petro-Canada used the process to merge in 2009. The transaction involved Talisman Energy merging with Petro-Canada by way of a short form amalgamation under the Business Corporations Act (British Columbia). The benefits to the parties included the elimination of the long-arm provisions applicable where shareholders of a target corporation have the right to dissent or object and to receive "fair value", which involves a determination as to whether the dissenting shareholders will be fairly compensated for their interest in the target corporation. In this case, no shareholders of either company were eligible or did dissent. As another example, Microsoft recently took advantage of a short form merger (though not called as such) to acquire Nokia’s mobile devices and services business for $5 billion. Microsoft was able to carry out the acquisition on a relatively quick basis and avoid significant transaction costs. A judgement of the Supreme Court of Ontario in Re Bombardier Inc. includes a warning for directors to be entirely honest in a short form merger. Under the short form merger, Bombardier acquired all of the outstanding common shares of Bombardier Capital, a subsidiary held 75.13% by Bombardier Inc. In order for the short form merger to be approved, a 2/3rds vote of the minority shareholders was required on the special resolution approving the merger. At the meeting of shareholders, Bombardier Inc. voted all of its shares in favour of the merger plan with Bombardier Capital. 96.07 percent of the minority shareholders voted in favour of the transaction. The remaining 3.93% of the minority shareholders called for an appraisal of their shares to be conducted pursuant to the Business Corporations Act (Ontario) (the Act) and brought the action in relation to the valuation of the shares of Bombardier Capital. The minority shareholders relying on Section 185 of the Act objected to the short form merger on the grounds that it failed to accurately reflect the fair value of the shares of Capital, and so Bombardier Capital should buy back the minority shareholders’ shares at fair value. The Appraiser found that the fair value of Bombardier Capital’s shares was less than the merger consideration offered to the minority shareholders.
Final Thoughts on Short Form Mergers
If history tells us anything, the continued use of short form mergers will likely be dictated by the same justifications that have been previously used by companies and their business lawyers. There is a certain degree of efficiency in short form mergers as they provide companies with a streamlined and simplified option to consolidation. In the right set of circumstances, short form mergers can provide the speed at which some transactions need to be effectuated. Additionally, businesses value predictable and high levels of certainty and this has historically been found in the ability of companies to use short form mergers in meaningful and impactful ways.
However, for the greater good of its shareholders, the Delaware courts may look to maximize the protections afforded to shareholders as Delaware courts have historically done. As it has been noted specifically in the 2011 Delaware Supreme Court decision of M.G. Capital Management v. Raindancer Corporation , those protections will likely not be increased without a statistically demonstrable showing of widespread abuse. Therefore, barring an increase in judicial activism or an unforeseen circumstance that warrants changes to the protections afforded to shareholders, the current framework that exists for the use of short form mergers will likely continue to be the framework for the foreseeable future.
The short form merger is a powerful tool in the business acquisition toolbox. When used correctly, short form mergers can provide a company with an efficient and effective means to consolidate operations and take control of target companies. If you or the company you represent are in search for a way to streamline their processes and dispose of waste, look no further than a short form merger.