What is a merger? Differences from acquisitions, types, benefits, and corporate examples explained
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M&A (Mergers and Acquisitions) refers to the merger and acquisition of companies, with "Mergers" specifically indicating mergers as introduced here. This article provides an overview of mergers, differences from acquisitions, advantages and disadvantages, and necessary procedures.
1.What is a merger?
A merger refers to the legal consolidation of multiple organizations or companies into one entity.
Like other M&A methods, mergers are conducted with the aim of enhancing the growth potential of companies. In practice, after becoming a wholly-owned subsidiary, mergers are often carried out after a certain period of time.
2.Between Mergers and Acquisitions
Acquisition refers to obtaining the business or management rights of another company. On the other hand, a merger involves multiple companies merging into one entity, leading to the dissolution of one of the legal entities. In an acquisition, only the shareholders change, while each legal entity remains intact.
3.Latest Examples of Mergers
Here are some recent examples of corporate mergers.
Z Holdings (hereinafter referred to as ZHD) announced on April 28, 2023, that it will merge ZHD and its core subsidiaries LINE and Yahoo on October 1, 2023.
The surviving company will be ZHD, and the new company name will be "LINE Yahoo Corporation" (LY Corporation in English), leveraging the high brand recognition for a fresh start.
In October 2019, ZHD transitioned to a holding company structure through a company split from Yahoo, and its core entities LINE and Yahoo have been enhancing cooperation within the group through business integration. With this merger, they aim to strengthen service collaboration, promote integration, and accelerate synergy.
4. M&A type (type of mergers):
4.1. Absorption Merger
Mergers are divided into two types: "absorption merger" and "establishment merger."
An absorption merger refers to a merger where one company absorbs another company, and all the rights and obligations of the disappearing company are transferred to the surviving company after the merger (Company Law Article 2, Clause 27). In an absorption merger, only the legal entity of the surviving company remains, and the legal entity of the absorbed company disappears.
In an absorption merger, it is possible to inherit permits, approvals, or licenses granted to the disappearing company. Therefore, it becomes easier to enter new businesses requiring permits, approvals, or licenses. Additionally, compared to establishment mergers where all legal entities disappear, the procedural burden is reduced in absorption mergers.
It is worth noting that in cases of absorption mergers such as simplified mergers or abbreviated mergers, there may be no need to obtain merger approval at a general shareholders' meeting.
4.2. Establishment Merger
An establishment merger refers to a merger involving two or more companies, where all the rights and obligations of the disappearing companies are transferred to a newly established company through the merger (Company Law Article 2, Clause 28). In an establishment merger, the legal entities of all companies before the merger disappear, and all assets and liabilities are transferred to the newly established company.
Unlike absorption mergers, where all companies before the merger disappear, establishment mergers are considered equal mergers and are more likely to project a positive image externally.
However, newly established companies cannot inherit permits, approvals, or licenses, necessitating obtaining them anew. Additionally, procedures and costs are higher compared to absorption mergers, as creditor protection procedures and special resolutions at general shareholders' meetings need to be carried out. Moreover, it is expected to take time and effort to establish rules in the case of equal mergers.
5.Benefits of merger
The main benefits of mergers are as follows:
5.1. Speedy Integration Effect:
In the case of acquisitions, after acquiring the target company, it is necessary to enter into employment contracts again with the acquiring company. However, in the case of absorption mergers, all rights and obligations, including the debts and credits of the disappearing company, are transferred to the surviving company, enabling quick integration without such procedures.
Moreover, compared to schemes such as stock transfers where each entity continues to operate independently after integration, mergers consolidate into one company, facilitating shared management policies, visions, and advancing integration at the same pace, making it easier to generate synergy.
5.2. M&A Implementation without Extensive Fundraising:
In mergers, not only cash but also stocks or equity transfers are permitted as consideration to the shareholders of the disappearing company. Being able to use own stocks as consideration eliminates the need for efforts and hassles in fundraising, as required in acquisitions.
5.3. Ability to Appeal as an Equal Position M&A:
Mergers are advantageous in presenting an impression of M&A from an equal standpoint compared to stock transfers or business transfers where one company acquires management rights or businesses. If positive images can be projected externally through M&A, it also contributes to enhancing the company's image, resulting in instilling confidence and trust in customers and suppliers.
6. Disadvantages of merger
Challenges in Mergers
6.1. Heavy Procedural Burden
Mergers involve more procedures compared to other M&A schemes. While there are methods like simplified mergers or abbreviated mergers to reduce procedures, typically, various processes such as pre- and post-disclosure requirements, creditor protection procedures, and special resolutions at shareholders' meetings are necessary.
As a result, mergers require considerable time, effort, and costs before completion.
6.2. Risks Regarding Stock Prices
When new shares are issued as consideration in mergers, the value of existing shares may dilute depending on the number of issued shares, potentially leading to a decline in stock prices.
Since new shares are issued as payment, the surviving company issues new shares to shareholders of the disappearing company. Consequently, depending on the number of shares issued, there's a risk of diluting the value of existing shares (i.e., the primary stock price of the surviving company), potentially causing a decline in stock prices.
Moreover, while mergers attract investor attention, there's a need for caution regarding stock price movements due to the possibility of harsh judgments based on post-merger performance.
6.3. Challenges of Post-Merger Integration (PMI)
Post-Merger Integration (PMI) refers to the process of establishing cooperation, organizational structure, and operational processes to maximize synergy resulting from M&A.
Integrating into one company requires not only systemic integration but also sharing management strategies and visions for the future. By aligning stakeholders' vectors, the aim is to maximize the benefits of the merger through synergy.
As mergers involve consolidating different companies into one, the burden of integration tasks tends to be heavier compared to other M&A schemes. Starting planning for integration from the early stages of the merger, with the involvement of specialists, contributes to a smoother integration process.
7. Flow of Procedures Required for Mergers
While the sequence may vary depending on individual circumstances, the general flow of procedures for mergers is as follows:
7.1. Signing the Merger Agreement
The companies intending to merge engage in discussions and reach a basic agreement once conditions are settled. Subsequently, after obtaining approval from the board of directors of each company, the merger agreement is signed (Company Law Articles 748 and 749).
Signing the merger agreement marks the initial step towards the merger. The items required to be included in the merger agreement as stipulated by the Company Law are as follows:
| - Headquarters, trade name, etc., of the surviving and disappearing companies- Allocation of consideration to shareholders or employees of the disappearing company (in the case mentioned above)- Matters related to the issuance of new stock subscription rights by the disappearing company and the allocation of new stock subscription rights or money by the surviving company to the holders of such rights- Allocation of consideration to holders of new stock subscription rights of the disappearing company (in the case mentioned above)- Effective date of absorption merger |
Additionally, the main items that may be optionally included are as follows:
| - Articles of incorporation of the surviving company- Appointment of directors of the surviving company- Changes in the asset status until the effective date of the merger- Succession of assets of the disappearing company |
7.2. Preparation of Pre-Disclosure Documents
When conducting a merger, certain documents or electronic records containing the contents of the merger agreement and other specified matters must be prepared and kept at the head office for a certain period before the effective date of the merger (Company Law Articles 782 and 794). These documents prepared prior to the merger are referred to as "pre-disclosure documents" or "preparation documents."
Pre-disclosure documents must be prepared from the earliest of the following dates:
| - Two weeks before the resolution date of the general meeting of shareholders if approval of the absorption merger, etc., is required at such general meeting- The proposal date to shareholders if deemed resolution is conducted- The notification date of the name and address of the partner company to shareholders or the date of public notice, whichever is earlier- The notification date of the name and address of the partner company to holders of new stock subscription rights or the date of public notice, whichever is earlier- The date of public notice or notification in creditor protection procedures, or the date of reminder, whichever is earlier- In other cases, two weeks after the conclusion of the absorption split agreement or stock exchange agreement |
Pre-disclosure documents must be kept for six months from the effective date of the merger. However, in the case of an absorption merger, since the disappearing company ceases to exist, it is until the effective date of the merger.
7.3. Perform procedures to protect stakeholders
When a merger is carried out, the fact of the merger will be disclosed to interested parties (shareholders, creditors, etc.) of the surviving company and the dissolving company. In order to protect that right, we will carry out procedures for filing objections to the merger (Articles 789 and 799 of the Companies Act).
The procedures for protecting interested parties are as follows.
| Publicize in the official gazette | It publicizes the merger, as well as the other party's trade name, address, financial statements, etc., and also indicates the period during which interested parties can file objections. |
| Individual reminder | In addition to public notices in the official gazette, the same content as in the official gazette will be communicated individually to interested parties. However, this procedure is not necessary when publishing newspaper or electronic public notices. |
| Stakeholder significance procedures | Interested parties who have objections to the merger will file their complaints within the period announced in the official gazette. If no objection is filed within the period, it will be deemed that there was no objection. |
| Procedures for submitting stock certificates | If the dissolving company has issued stock certificates, a public notice to submit stock certificates, etc. will be made at least one month before the effective date of the merger. |
7.4. Proceed with stock purchase requests from shareholders who oppose the merger
If there are shareholders who oppose the merger, we will notify them or give a public notice at least 20 days before the effective date of the merger. The relevant shares must be purchased at a fair price by the day before the effective date of the merger (Articles 785 and 797 of the Companies Act).
If the company is listed, there is a market price, so the purchase price of the shares is basically determined based on the market price. On the other hand, for unlisted companies, there is no market price. Request a stock price appraisal and calculate the stock price. Please note that appraisal costs are to be borne by each party unless otherwise specified (Article 26, Paragraph 1 of the Non-Content Procedures Act).
7.5. Convene and approve a general meeting of shareholders
The surviving company and the dissolving company must obtain approval for the merger agreement at a general meeting of shareholders by the day before the merger takes effect (Articles 783 and 795 of the Companies Act). The merger is a special resolution. In order for a merger to be approved at a general meeting of shareholders, shareholders with a majority of voting rights must be present and at least two-thirds of the shareholders in attendance must approve (Article 309, Paragraph 2 of the Companies Act).
7.6. Effective date
The assets, liabilities, and assets of the dissolving company will be taken over on the effective date of the merger as specified in the merger agreement. In this way, all rights and obligations of the extinguished company are succeeded to the surviving company, and the extinguished company ceases to exist.
7.7.Perform change registration and dissolution registration
The merger will be registered within two weeks from the effective date of the merger (Article 921 of the Companies Act). The merging company will register changes related to the merger, and the dissolving company will register dissolution. *For details and documents required for merger registration, please check the latest information from the Legal Affairs Bureau.
8. Qualified Merger
A qualified merger refers to a merger that meets specific conditions and qualifies for special treatment under tax law.
In principle, a merger is considered as a transfer of assets from the disappearing company to the surviving company at fair market value. Therefore, if a capital gain arises, corporate tax will be imposed. However, with a qualified merger, the assets and liabilities transferred can be inherited at book value, thus avoiding the occurrence of capital gains.
Furthermore, in the case of a qualified merger, the carried forward tax losses of the disappearing company are treated as losses of the surviving company and are carried forward to the surviving company.
9. Conclusion
Above, we have introduced mergers. While mergers may have drawbacks such as complex procedures and a heavy burden of integration work, there are benefits such as the ability to achieve integration quickly. Therefore, it is recommended to consider mergers according to the situation of your company.