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A merger can take many forms, but in its basic essence it involves one or more entities being absorbed into a separate entity. Only the absorbing entity survives while the absorbed entities disappear. Under Texas law, legal entities may follow a straightforward merger path set forth by statute. This type of merger is known as a “statutory merger” because the rules governing how the merger is achieved are fixed in statutory law.
A business entity might choose to pursue a statutory merger for a variety of reasons. One of the primary reasons is usually to obtain preferential tax treatment since statutory mergers may be structured on a tax-free or partially tax-free basis under Internal Revenue Code section 368(a), provided they qualify as a “reorganization” rather than a traditional transaction.
The process of undertaking a statutory merger begins when the board of directors of the corporations involved formally adopt a “plan of merger” document. The plan of merger will state the name of the surviving corporation, the terms and conditions of the merger, the shareholder voting process, and the method of shareholder compensation. If stock will be issued as part of the transaction, federal law provides some anti-fraud and full disclosure protections to any shareholder receiving shares in exchange for their stock.
When considering whether to approve a proposed merger, the board of directors remains subject to fiduciary duties as always, which are designed to prevent self-dealing other behavior that subordinates the best interests of the business to alternate agendas. Once the board of directors has adopted a plan of merger, the plan needs to be distributed to shareholders for their approval. The acquired corporation’s shareholders must always approve in order for the merger to succeed because the merger would alter their interests in the corporation.
Shareholders may not opt out of a merger, but this does not mean that they have no recourse if they disapprove of a proposed merger. Texas law provides some protection, allowing such shareholders who are entitled to vote to cash out and obtain compensation for their shares based on the appraised fair value of their shares.
After receiving approval from the board of directors of all participating corporations, and all required shareholder approval, the plan of merger must be filed with the Texas Secretary of State. Upon review, if all requirements have been satisfied, the Secretary will issue a certificate of merger to the surviving entity.