Business sales and combinations can take a variety of forms, and there is no standard method by which businesses are purchased or acquired. Each transaction is unique, with the form of the transaction dependent upon the goals of the parties, the existing legal structures of the parties, and the tax consequences resulting from the transaction. The terms “merger” and “acquisition” are often used interchangeably in reference to the sale and combination of two business entities, but each term has a distinct legal meaning. The purpose of this article is to differentiate between the two terms – not to analyze the benefits and disadvantages of each type of transaction.
A true “merger” occurs when two business entities legally combine into a single business entity. This can be a newly formed legal entity, in which case the separate legal existence of the merging entities will terminate upon the consummation of the merger. Alternatively, one of the entities (the “surviving entity”) can survive the merger, in which case the separate legal existence of the other entity will terminate upon consummation of the merger. In Virginia, the merging entities are required to file a Plan of Merger and Articles of Merger with the Virginia State Corporation Commission that describes how the entities are being merged, how the merged entity will be capitalized, and how the merged entity will be managed. Typically, the owners of both entities will receive an ownership interest in the single entity that results from the merger.
An “acquisition” occurs when one business entity purchases either the assets or the equity of the other business entity, and both entities retain their separate legal existence. In an asset sale, the purchasing entity acquires some or all of the assets of the selling entity, but usually does not assume any of the liabilities of the selling entity. In cases where all assets of the selling entity are purchased, the selling entity typically terminates its existence shortly after the consummation of the sale and winding up of its affairs. In an equity sale, the purchasing entity acquires an ownership interest in the selling entity from the owners of the selling entity, and the selling entity becomes a subsidiary of the purchasing entity. The selling entity continues to exist and retains all of its assets and liabilities.
In practice, it is less common for two entities to legally merge than it is for one entity to acquire another entity. There are a lot of reasons for this, the most obvious of which is that it can be difficult for the two entities to jointly agree upon the future management of new entity when both sides retain an ownership interest in the entity. After all, the new entity can only have one President or CEO. In addition, a business combination usually only happens when the ownership of the selling entity desires to leave the business (not to continue in a joint business endeavor with the buyer). It is very common, however, for the purchasing entity to continue to operate the purchased business with existing personnel and in accordance with historical practices. This is one of the reasons why the word “merger” is oftentimes used incorrectly to describe an acquisition.
Gross, Romanick, Dean & DeSimone, P.C.
3975 University Drive
Suite 410
Fairfax, Virginia 22030
Areas We Serve
Virginia
Fairfax VA | Virginia | Commonwealth of Virginia | City of Fairfax | Fairfax County | Prince William County | Manassas | Loudoun County | Leesburg | Arlington County | Arlington | City of Alexandria | Alexandria | Vienna | Herndon | Centreville | Chantilly | Dulles | Tysons Corner | Falls Church | McLean | Springfield | Burke | Clifton | Oakton | Great Falls | Sterling, Northern Virginia
Maryland
Maryland | State of Maryland | Montgomery County | Silver Spring | Rockville | Germantown | Bethesda | Gaithersburg | Potomac | Prince George’s County | City of Baltimore
District of Columbia
District of Columbia | Washington DC | DC
