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Mergers: The Texas One-Step

Mergers can be accomplished in a variety of ways, but the basic forms allow for either a one step deal or a two step process. Traditionally, one step mergers have been the favored method for acquiring public companies. The target, acquiring company, and a subsidiary of the acquiring company execute a merger agreement that contains various listed conditions. When those conditions are satisfied, the subsidiary merges with the target company, and the target becomes a wholly owned subsidiary of the acquiring company. In cash-only deal, the avoidance of finance processes often means the entire merger process can conclude within a few months of the signing of the merger agreement; the main factor that decides the total length of the deal timeline is the degree of review by the SEC.

On the sell side, the target must prove compliance with proxy regulations that govern the solicitation of proxies in order to garner stockholder approval of the merger. These regulations are unavoidable because state corporate law will require the target to secure stockholder approval of the merger. The main delay in the one-step merger stems from obtaining SEC approval of the proxy statement before it is sent to stockholders. After the merger proxy statement is filed in preliminary form with the SEC, there is a 10 day inspection period that allows the SEC to determine whether it will review the proxy statement. Typically the SEC does elect to review the statement, which stops the target from beginning the solicitation process or mailing definitive proxy materials until SEC clearance is issued.

Once the solicitation period begins, depending on state corporate law and other laws, there is a waiting period of approximately 30 days. Once stockholder approval is secured, the merger can be immediately consummated, provided waiver or other conditions have been satisfied. If part of the consideration for the transaction includes the acquirer's securities, the parties must complete and submit a Form S-4 Registration Statement to the SEC for review and comment. This additional review can add delays of up to a few months. After the proxy materials are cleared and the Form S-4 made effective, the solicitation process can start.

Two-step mergers are not subject to the proxy review period by the SEC, which shaves weeks or even months off of the time needed to complete the transaction. Despite the process being longer than a two-step merger, one-step mergers may be preferable when there are regulatory approvals that will take substantial time to attain, as is the case with banking or healthcare mergers. And when bridge financing is not available for acquiror-financed deals, the one-step structure presents a smoother process. When the deal is not cash-only, the shortened timeframe in two-step mergers becomes far less relevant because the transaction likely cannot be consummated from a finance standpoint as quickly as the law otherwise allows. Finally, if a change of control will accelerate outstanding debt held by the target, it will be more difficult for the acquiror to refinance the debt when it does not own 100 percent of the target, as will be the case in a two-step merger. So unless an acceptable solution can be contractually agreed before entering a tender offer, the acquirer may be better served by a one-step merger.

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