General auction conditions

1. “Amalgamation occurs when two or more companies are going to form a third entity or one is absorbed into or blended with another.” – Explain and Illustrate

June 2006 was one of the busiest periods in merger history. In a span of less than 100 hours, amalgamation (mergers) and acquisitions totaling about $ 110 billion were finalized around the world in various industries.

The term “amalgamation” or “merger” means combining of two commercial companies into one and merging of two or more business concerns into one respectively. Merger is a fusion between two or more enterprises, whereby the identity of one or more is lost and the result is a single enterprise whereas ‘Amalgamation’ signifies blending of two or more existing undertakings into one undertaking, the blended companies losing their identities and forming themselves into a separate legal identity. Sometimes mergers are also confused with a term acquisition. However, acquisition is the generic term that is used to describe a transfer of ownership whereas merger is a technical term for a particular legal procedure wherein two separate entities merge and only one legal entity survives the merger. Thus, strictly speaking, acquisition will include mergers as well. In financial terms, Merger is restricted to a case where the assets and liabilities of the companies get vested in another company, the company which is merged losing its identity and its shareholders becoming shareholders of the other company. On the other hand, amalgamation is an arrangement, whereby the assets and liabilities of two or more companies become vested in another company (which may or may not be one of the original companies) and which would have as its shareholders substantially, all the shareholders of the amalgamating companies. In a merger a new entity is created from the assets of two companies and new stock is issued. Mergers are more common when the parties have similar size and power. A merger suggests mutuality. For the merging of schools or regiments the term amalgamation is used.

Different Forms of Merger:

There are different forms of mergers depending upon the financial structure, the shareholding pattern of the firms, etc. They are:-

Horizontal merger: A horizontal merger is a merger between business competitors, such as manufacturers of the same type of products or distributors selling competing products in the same market area.

Vertical merger: A vertical merger is a merger between two companies where one of the two companies is an actual or potential supplier of goods or services to the other so that the two companies are both engaged in the manufacture or provision of the same goods or services but at different stages in the supply route.

Earn-outs mergers: An earn-out is an agreement by the buyer of the assets or a business to make future payments to its target company or its shareholders contingent up on the satisfaction or achievement of specific milestones. Well-structured and carefully drafted earn-out can bridge potential impasse on valuation between the buyer and the seller and result in a deal which otherwise would have been none.

Conglomerate merger: A conglomerate merger is one where two companies which are in two different industries, merge together.

Cash merger: It is a merger in which some of the shareholders of one of the merging entities receive cash as consideration for them transferring their share in that merging entity.

Triangular merger: It is a merger of two companies by which the disappearing company is merged into a subsidiary of the surviving company and the shareholders of the disappearing company receive shares in the surviving company.

Reverse triangular merger: In a reverse triangular merger the subsidiary of the surviving company is merged into the disappearing company so that it becomes a wholly owned subsidiary of the surviving company.

Amalgamation Methods:

There are two methods of amalgamation:-

1. Standard Amalgamation Procedure

The key document to prepare for an amalgamation is an amalgamation proposal, which sets out the terms of the amalgamation and the details of the amalgamated body corporate. An amalgamation proposal must include the name of the amalgamated body corporate, the type of company it will be, its registered office and its directors’ particulars.

If the amalgamated body corporate is to have a share capital, the amalgamation proposal should include:

  • the number of shares issued;
  • the aggregate value of those shares;
  • the amounts paid or unpaid; and
  • the rights, privileges, limitations and conditions attached to those shares.

If the body corporate has more than one class of share capital, then it is necessary to distinguish between each class of share.

An amalgamation proposal should state the manner in which the interests and liabilities of each member of the amalgamating body corporate are to be converted into those of the amalgamated body corporate. If they are not to be converted, it should state the consideration that the members will receive. The proposal should also state:

  • any other payment to be made to any member or director;
  • the details of any arrangements necessary to complete the amalgamation; and
  • the date on which the amalgamation is intended to become effective.

If shares of one of the amalgamating companies are held by or on behalf of another of the amalgamating companies, the amalgamation proposal must provide for the cancellation of those shares without payment and must not provide for the conversion of those shares into shares of the amalgamated company.

Directors’ Resolution and Certificate

The directors of each amalgamating company must resolve that, in their opinion, the amalgamation is in the best interests of the company and that they are satisfied on reasonable grounds that the amalgamated company will, immediately after the amalgamation becomes effective, satisfy the solvency test, as set out under the law. The solvency test requires that the company be able to pay its debts as they become due and that the value of the company’s assets exceed the value of its liabilities.

The directors who vote in favor of a resolution must also sign a certificate stating that, in their opinion, the amalgamation is in the best interests of the company and that the amalgamated company will satisfy the solvency test.

Notice to Members and Creditors

Each amalgamating company must provide each of its members with a copy of the amalgamation proposal, copies of the directors’ certificates and a copy of the memorandum and articles of the amalgamated company not less than 28 days before the amalgamation is proposed to take effect.

Each member must also be provided with a statement of any material interests of the directors or other officers in the proposal and any further information and explanation necessary to enable a reasonable member to understand the implications of the proposed amalgamation for the company and its members.

Notice to Creditors

The directors of each amalgamating company must give written notice of the proposed amalgamation to every creditor of the company not less than 28 days before the day on which the amalgamation is proposed to take effect.

The directors of each amalgamating body must ensure that copies of the amalgamation proposal are available for inspection by any creditor or any other person to which an amalgamating company is under any obligation or liability at the registered offices of the amalgamating companies during normal business hours.

Special Resolution

The amalgamation proposal must be approved by a special resolution of each amalgamating company (or its equivalent in the case of an overseas company), as certified by the Guernsey Financial Services Commission (GFSC). In addition, if any provision in the amalgamation proposal would (if contained in an amendment to an amalgamating company’s memorandum or articles) require the approval of any particular class of members, the proposal must be approved by a special resolution of that class.

2. Short-form Amalgamation Procedure

There is provision for a short-form amalgamation procedure whereby a holding company and a wholly owned subsidiary (or two wholly owned subsidiaries of the same company) may be amalgamated without the need for an amalgamation proposal. Each amalgamating company must be limited by shares.

A short-form amalgamation must be approved by a resolution of the directors of each amalgamating company. The directors who vote in favour of the resolution must sign a certificate stating that, in their opinion, the company will satisfy the solvency test and must state the grounds for that opinion.

The directors of each amalgamating company must give written notice to every creditor of the company not less than 28 days before the day on which the short-form amalgamation is proposed to take effect. The directors must also ensure that copies of the resolution are available for inspection by any member or creditor (or any other person to which an amalgamating company is under any obligation or liability) at the registered offices of the amalgamating companies during normal business hours.

Advantages of Amalgamation

According to researchers, the following are the main advantages and for a concern to indulge amalgamation:

(i) Synergy in operating economies: When two or more undertakings combine their resources and efforts they may with combined efforts produce better results than two separate undertakings because of the savings in operating costs viz. combined sales offices, staff, staff facilities, plant management etc. Synergy is also possible in areas of production, finance, technology etc.

(ii) Taxation advantages: Mergers take place to have benefits of tax laws and        company having accumulated losses may merge with profit earning company that will shield the income from taxation.

(iii) Other advantages: Mergers and Amalgamations also offer other advantages like Growth, Diversification, Production capacity reduction, Operating efficiencies, Procurement of supplies, Financial Strength.

Disadvantages of Amalgamation

One of the disadvantages is that a merger must be approved by votes of the stockholders of each firm. Typically, two-thirds (or even more) of the share votes are required for approval. Obtaining the necessary votes can be time-consuming and difficult. Furthermore, the cooperation of the target firm existing management is almost a necessity for a merger. This cooperation may not be easily or cheaply obtained.

Moreover, the diseconomies of scale occur if a business becomes too large which leads to higher unit costs. It will also create clashes of culture between different types of business. Thus this reduces the effectiveness of the integration.

A merger may be also creating a conflict of objective between different businesses, meaning decisions are more difficult to make and causing disruption in running of the business.
It also results in dissatisfaction among current staffs as positions will be limited and the management has to decide which staffs to hold the position after the transaction has taken place.

Even though amalgamation has both, advantages and disadvantages, I think that the benefits outweigh the disadvantages. Organization merger would provide loads of benefits to both parties. All they need to do is that, each party has to ensure that the transaction made benefits are not biased to either party before the deal is sealed.

BIBLIOGRAPHY

  • See Wikipedia [www.wikipedia.com]
  • See Oxford Online Dictionary [www. oxforddictionaries.com]
  • See Linked – In Answers [http://www.linkedin.com/answers/finance-accounting]
  • Reasons for Mergers and Amalgamation, Xomba, [online, retrieved on 19/02/10], available at http://www.xomba.com

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