Part I: Mergers and Takeovers: Definition
In order to understand the meaning of the terms ‘merger" and ‘acquisition’, we will proceed by a thorough definition. Furthermore to have a holistic and sound legal understanding, the definitions offered by the law in various jurisdictions will also be contrasted.
What is a Merger?
Merger is a financial tool that is used for enhancing long-term profitability by expanding the operations of the two original companies1. Mergers occur when the merging companies have their mutual consent. It is effected either by exchanging shares or alternatively by the formation of a new holding company to which shares or the assets and liabilities of the two original companies.
In the Companies Act 2001 (Mauritius), the term ‘amalgamations’ is used to describe the fusion of different companies. Section 244 of this Act introduces amalgamations as:
‘Two or more companies may amalgamate, and continue to as one company, which may be one of the amalgamating companies, or may be a new company’.
Interestingly the definition of the term ‘merger’ is none to be found in CA 2001 but in Section 47(1) of Competition Act 2007(Mauritius) which reads as follows:
‘For the purposes of this Act and subject to subsection (2), a merger situation means the bringing together under common ownership and control of 2 or more enterprises of which one at least carries its activities, in Mauritius, or through a company incorporated in Mauritius.’
1 Economy Watch, Mergers and Acquisitions - Benefits of Mergers and Acquisitions, International Mergers and Acquisitions, 2010 [online]. Available from: http://www.economywatch.com/mergers-acquisitions/ [18 October 2010].
Section 93(6) of the Companies Act 2006 (UK) defines the term ‘merger’ as follows:
‘There is a proposed merger with another company if one of the companies concerned proposes to acquire all the assets and liabilities of the other in exchange for the issue of its shares or other securities to shareholders of the other (whether or not accompanied by a cash payment).
“Another company" includes any body corporate.’
In fact, while the Mauritian legislation deals with Mergers from the competition or on the antitrust standpoint, the English law addresses the same issue in a more focused and detailed manner instead of generalizing it under the term ‘amalgamations’. However, the essence is consistent in both jurisdictions; the idea of fusion of a minimum of two companies is similar.
What is an Acquisition?
A ‘takeover’ is defined by Weinberg and Blank2 as:
“A transaction or series of transactions whereby a person (individual, group of individuals or company) acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company".
Acquisitions or Takeovers occur between the bidding and the target company. There may be either hostile or friendly Takeovers. A friendly Takeover takes place when the targeted firm agrees to be acquired.
2 Rao, Ramesh K.S, 1989. Fundamental of Financial Management, Theory and Practice: Oxford University Press.
A Takeover is considered "hostile" if the target company's board of directors rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board in advance. Reverse takeover occurs when the target firm is larger than the bidding firm. In the course of acquisitions the bidder may purchase the share or the assets of the target company.
Section 94(2) of the Securities Act defines “takeovers" as:
‘a “takeover" means an offer made by or on behalf of a person (“offeror") to acquire such securities of the offeree which will result in the offeror acquiring effective control of the offeree, either at one time or over a period of time.’
In CA 2006, the definition of ‘takeovers’ is absent but we have an explanation of the term takeover bid’ in Section 943(7) of the aforementioned Act and which is described as:
‘In this section “takeover bid" includes a takeover bid within the meaning of the Takeovers Directive.’
The ‘Directive’ being the City Code on Takeovers and Mergers, address the definition in its introduction section as follows:
‘[…]‘ʻoffersʼʼ means only any public offer (other than by the company itself) made to the holders of the company’s securities to acquire those securities (whether mandatory or voluntary) which follows or has as its objective the acquisition of control of the company concerned.
The Code applies to all the above transactions at whatever stage of their implementation, including possible transactions which have not yet been announced.’
The term ‘takeover’ is not defined on its own, both the Mauritian and the English legislation deals with “takeover" as a negotiating process or proposal and relate it to the bidding between the two parties. Furthermore, we can observe that in dealing with the term “takeover’, both legislations emphasize on the relationship between the offeror and the offeree.
Specific Types of Mergers and Acquisitions
A merger or takeover may be congeneric, horizontal, vertical or conglomerate depending on the nature of the merging companies. A conglomerate takeover involves the acquisition of a company in a totally unrelated line of business. Congeneric mergers and takeovers occur in the same line of business and can be either horizontal or vertical. A horizontal merger or takeover involves the acquisition of a company in the same line of business. By engaging into a horizontal merger, the stronger company survives and simply becomes larger. A clear example in Mauritius is Mauritius Union Assurance merging with La Prudence, the former becomes larger by merging with the later. A vertical takeover or merger involves the acquisition of a target company by another company in the “raw material to ultimate consumer flow". A company acquires a company “upstream" from it, such as its suppliers, and/or “downstream" from it, such as its product distributors.
Nevertheless, the structures of mergers and takeovers depend on the legal framework of the jurisdiction in which such operations are carried out. For instance, under the United States framework new terms arise: “two-party" merger, “multiparty merger", and “forward Subsidiary merger" etc…
The Mauritian legislation does not deal with the structural issues of Mergers or Takeovers albeit on the competition point of view; if a merger menaces fair trade and price stability. In UK, The City Code on Mergers and Takeovers clearly defines the different ways in which Mergers and Takeovers are to be conducted. The same approach is found in the US, where each type of Merger or Takeover has specific legal implications. However, the US legislation, whether federal on for instance in the Delaware General Corporate Law, takes a highly technical approach to Mergers and Takeovers.
Difference between a Merger and an Acquisition
Although Merger and Acquisition are used in the same field and referred as M&A, their definition differs on slight precision.
A Merger requires mutual consent whereas in the case of an acquisition, hostile or friendly takeovers may occur. Furthermore, in an Acquisition, the target company ceases to exist; the buyer swallows the target firm. On the other hand, when there is a Merger, there is the fusion of two companies. In fact, the difference is well put in Economy Watch3:
‘A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another.’
3 Economy Watch, Mergers and Acquisitions - Benefits of Mergers and Acquisitions, International Mergers and Acquisitions, 2010 [online]. Available from: http://www.economywatch.com/mergers-acquisitions/ [18 October 2010].