The massive Microsoft-Activision deal has brought mergers to national attention. While the $69 billion plan has made the news for its sheer size, many other mergers and acquisitions happen every year between companies large and small. A well-designed merger agreement benefits everyone involved, from stakeholders to customers.
However, mergers are heavily regulated by the Federal Trade Commission. If you’re considering a merger agreement for your Florida business, it’s crucial to understand what these deals entail.
Understanding Merger Agreements
A merger agreement is a contract between two businesses agreeing to come together and form a single legal entity. There are two types of mergers under the Internal Revenue Code:
- Mergers, in which one company acquires another and merges its assets into itself while the acquired entity ceases to exist
- Consolidations, in which two or more corporations combine to form a new entity.
Consolidations are sometimes called true mergers when they involve two equal companies fully combining all resources and staff, including CEOs. True mergers are rare since it is uncommon for all resources and staff to be retained. A deal may still be colloquially referred to as a merger even if it creates a new legal entity.
Mergers agreements shape the course of these acquisitions. They are usually structured as one business buying the other, using its shares, resources, or financing to compensate stakeholders of the acquired company. The agreement will explain details like:
- The value and assets of each company: How much the companies are worth and their total assets and liabilities.
- Exchange ratios: How the stakeholders will be compensated, usually by exchanging stock of the old company for shares of the new company at a set ratio.
- Representations and warranties: Facts and guarantees about the companies and their intended behavior during the deal.
- Covenants: Rules requiring or prohibiting behavior before or after the deal is final, such as barring layoffs or requiring the payment in full of certain debts.
- Termination, indemnification, and material adverse change and effect clauses: Clauses providing penalties and protecting each party from liability if the deal cannot go through for some reason.
The Role of the Federal Trade Commission (FTC)
Because of heavy FTC regulation, drafting a comprehensive and legally binding merger agreement in Florida is a complex process. The FTC is the federal agency in charge of protecting consumers and companies from unfair business practices. It is specifically responsible for enforcing the Clayton Act, which prohibits mergers whose effects “may be substantially to lessen competition, or to tend to create a monopoly.” In other words, it aims to ensure mergers can’t be used to create monopolies that would harm consumers.
As such, the FTC sets strict reporting requirements for all mergers. In addition, any deal valued over $101 million must be individually reviewed by the FTC and the Department of Justice.
The FTC also plays an active role in setting regulations for mergers and acquisitions. In fact, the Microsoft-Activision deal has prompted the agency to work with the White House to draft new, stricter rules for all mergers that may take effect in the next year. As such, getting expert legal guidance for your merger to ensure it abides by changing FTC regulations is crucial.
Navigating Merger Agreement Compliance
A successful agreement must address so many concerns that it can be hundreds of pages long. However, if you’re a small business owner, there are some questions you can ask yourself to determine if your agreement is likely compliant with Florida and federal regulations. These include:
- Are you sure you understand the impact of the merger on your organization and the other company?
- Does the agreement account for the risks of merging?
- Have you fulfilled state and federal public filing requirements?
- Are you confident that the deal will not be considered anti-competitive?
The best way to ensure your deal complies with state and federal laws is to work with experienced Florida corporate attorneys. Your legal team will help you review the contract to ensure it meets all necessary standards and compliance requirements. They will also represent your company if the FTC investigates the deal for possible anti-competitive practices. If you believe a merger or acquisition may be in the future for your small business, talk to the experts at EPGD Business Law. Our law firm is dedicated to assisting clients with complex business matters like merger agreements in Florida, Washington D.C., and nationwide. Learn more about how we can support your company’s successful merger by scheduling your consultation today.