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  • Writer's pictureRic Armstrong

Business Mergers in Texas

Texas has an excellent system of business statutory laws enabling business owners to have great flexibility in planning and structuring their companies. The state's statutes are generally progressive and clear, enabling Texas businesses to be operated and managed efficiently. Texas has made great strides in recent years updating its business statutes, bringing the Texas codes to the forefront of business statutes nationwide.

Overview of Mergers

A merger is an absorption of one or more business entities by another in which the absorbed companies cease to exist as legal entities. One straightforward way in which corporations can merge is through a "statutory merger", so called because the rules by which the merger is achieved are governed by state statute. While many states are similar in a number of respects, laws do vary from state to state. These state laws govern whether or not shareholders have a right to vote on the transaction and whether or not a dissenting shareholder will have the right to cash out of the deal if the transaction proceeds.

In a statutory merger, the acquiring corporation (Company A) completely absorbs another (Company B), acquiring all of Company B's assets and liabilities. It is also substituted for Company B in any pending litigation. Company B ceases to exist and the shareholders of Company B either receive cash or shares in Company A. In another kind of statutory merger, sometimes called a "combination", Company A and Company B may combine to create a completely new entity with the existing business entities disappearing following the merger.

A statutory merger between two corporations is initiated when the board of directors of the corporations which desire to merge adopt a document known as the "plan of merger". This document must set forth the name of the surviving corporation, the terms and conditions of the merger, including how the shareholders will vote on the merger, and the manner in which the shareholders will be compensated for their interests in the merged company.

In approving the merger, the board of directors is bound by its fiduciary duties to the shareholders to act in the best interests of the company. If the transaction is one in which stock will be issued, shareholders receiving shares for their stock are entitled to additional disclosure and anti-fraud protection under federal law.

Submitting to Shareholders for Approval

After the board of directors adopts a plan of merger, the plan must usually be submitted to the shareholders of each corporation for approval. Approval of the acquired corporation's shareholders is always required because the merger fundamentally changes their interests. On the other hand, the effect on the acquiring corporation may or may not be significant. When a large corporation acquires a small corporation, the effect may be so minimal as to make the cost of a shareholder vote not worthwhile.

Many states have guidelines for determining when an acquiring corporation must get shareholder approval. Because shareholders cannot opt out of a merger, usually states provide that shareholders who are entitled to vote and who disapprove of the merger, have the right to cash out of the transaction and receive the appraised fair value for their shares. Texas is one of the states with this sort of provision.


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