Introduction

The statutory merger, generally, is a simple, straightforward and effective procedure through which two or more companies may merge by agreement, with the approval of the prescribed majority of their shareholders, and without the need for any court approval. This article examines the power to undertake the merger as well as the effect, procedure, advantages and disadvantages of a merger.

Definition of a Statutory Merger

The COBE defines a statutory merger as either an amalgamation or consolidation. An amalgamation is defined as merger in which one or more existing companies merge into another existing company; while a consolidation is defined as a merger in which two or more companies are consolidated into a new company. Thus, the technical difference between an amalgamation and a consolidation is that an amalgamation results in the fusion of one constituent company into the other, but a consolidation results in the fusion of all the constituent companies into a new company. The new company is incorporated in terms of the consolidation agreement itself.

In simple terms, in an amalgamation of an acquiring company (Company A) and a target company (Company T) Company A survives and continues in existence while Company T is the disappearing company and is dissolved or deregistered. Whereas, in a consolidation between Company A and Company T, both Companies A and T are dissolved and a new company (Company N) is created.

Power to undertake mergers

 A private or public company or cooperative company may undertake and complete a merger at any time as provided by the Tariff and Competition Act [Chapter 14:20].[1] Additionally, two or more public companies or any combination of companies consisting of at least one public company and at least one private company may also undertake a merger.[2]

Effect of a Statutory Merger

The purpose and effect of a statutory merger was rightly explained in R v Black & Decker Manufacturing Co[3]:

“The purpose is economic: to build, to consolidate, perhaps to diversify, existing businesses; so that through union there will be enhanced strength… It is a joining of forces and resources in order to perform better in the economic field. If that be so, …. The end result is to coalesce to create a homogenous whole.”

The effect of a merger is also explained in the COBE[4];

• The companies that are parties to the merger will become one single company which will be the new or surviving company named in its constitutive documents filed with the Registrar, and the separate existence of all such companies except the surviving or new company shall terminate on the date of filing;
• The surviving or new company will own all of the assets and claims by each company that was a party to the merger, in each case of every kind, whether in contract, delict or otherwise and whether known or unknown, and will owe all of the debts, liabilities and obligations of and be subject to and responsible for all of the claims by any person against each company that was a party to the merger, in each case of every kind, whether in contact, delict or otherwise and whether known or unknown;
• All legal actions or other claims against any company that was a party to the merger may be continued against the surviving or new company, which will be substituted in the lawsuit or claim for the company whose existence has terminated;
• The constitutive documents of the surviving or new company shall be the constitutive documents as set forth in or together with the contract;
• The shares of each company that was a party to the merger are converted into shares, other securities, debt, other obligations or the right to receive money of the surviving or new company, and the former holders of such shares shall be entitled only to the rights provided in the contract of merger.

The Merger Procedure

The merger procedure in terms of Section 228 of the COBE is divided into four steps.

Step 1

The merging companies must enter into a provisional contract for a merger. The terms of contract must include the name of the registered office and company secretary of each company that will merge and of the surviving or new company into which each company plans to merge; and the terms and conditions of the proposed merger, which include;

1. The manner and basis of converting the shares of each merging company into cash, other property, shares, other securities, debt or other obligations of the surviving or new company or of any shareholder of the surviving company; and
2. The full text of the constitutive documents of the surviving or new company as it will be in effect immediately following the merger; and
3. The date from which the transactions of each non-surviving company shall be treated for accounting purposes as being those of the surviving or new company; and
4. The rights conferred by the surviving or new company on the holders of securities other than shares, or the measures proposed concerning them; and
5. Any provisions under which the proposed merger can be abandoned before its completion; and
6. Other provisions relating to the merger including but not limited to a possible provision that payment will not be made for any converted shares until after the merger has become effective.

Step 2

The merging companies must publish notice of the proposed merger in the Gazette and in a daily newspaper circulating in the district in which the registered office of the company is situated, making mention of the names of the merging companies[5];

Step 3

Each merging company must give notice of the provisional contract of merger to their shareholders. The notice must be in accordance with the requirements for a special resolution and shall be accompanied by[6];

1. a copy of the contract for merger together with an explanation which describes the legal and economic grounds for the merger; and
2. any recommendation of the board of directors on the proposed merger and the reasons for the recommendation; and
3. a copy of an opinion of an independent financial adviser on the terms of the contract for merger and the proposed merger, in which the adviser must provide an analysis and an explanation of all the terms of the contract for merger, including the method or methods used to arrive at any proposed share exchange ratio and the values arrived at using each method.  The adviser must also provide an opinion as to the fairness of the merger to the shareholders and, if there is more than one type or class of shareholders, to each type or class of shareholders and creditors of the merging companies.
4.  The annual financial statements of all the companies which are parties to the merger for the previous three years or any shorter time of the company’s existence, and
5. A notice that in the event that the merger is approved by the majority shareholders in the merging companies, dissenting shareholders are entitled to appraisal rights.

Step 4

Within fourteen days after the approval of the merger by the last shareholder meeting to approve it, the merging companies must file the contract for merger with the Registrar. Once registered the merger shall become effective. The merging companies must also publish notice of the merger in the Gazette and in a daily newspaper circulating in the district in which the registered office of the company is situated, making mention of the names of the merging companies.[7]

Advantages of Statutory Merger

• The statutory merger consequently provides for simplicity and efficiency, with a savings of costs and time, and for the acquiring company to obtain full ownership of the target company or disappearing company. Additionally, a parent company may merge with one of its subsidiary companies if it owns 90% of the shareholding without seeking approval from the board of directors or minority shareholders of the subsidiary company.
• The merger procedure provides protection for shareholders by requiring shareholder approval of the merger agreement, coupled with the appraisal right for dissenting shareholders.
• Since the vesting of the assets and liabilities in the surviving company occurs automatically by operation of law, there is no need for compliance with any of the legal formalities associated with transfer, such as delivery, cession, assignment, novation or delegation, nor any need for a court order effectuating transfer.

Disadvantages of Statutory Merger

• The new company or surviving company assumes all legal actions or other claims against the disappearing company.
• The acquiring company is, conversely, also automatically liable for all the obligations and liabilities of the disappearing company, including unliquidated and contingent liabilities, and even, it seems, for liabilities of which the acquiring company was unaware.
• The COBE does not make mention of cross border merges as statutory mergers are only limited to a private or public or cooperative company registered in Zimbabwe. This means that foreign companies cannot merge with domestic companies through the statutory merger.

Conclusion

It is evident that the introduction of the statutory merger in the new Companies Act (the COBE) signifies a substantial liberalisation of policy on the part of the Legislature between the conflicting values of, on the one hand, conducting the restructuring of companies in the interests of economic growth and, on the other hand, the interests of shareholders in retaining their investments in companies together with the protection of minority shareholders from discrimination at the hands of the majority.

If your company is considering embarking on a statutory merger? At JPLP, a qualified team of lawyers ready to guide you through the process. Send us an email at admin@jplp.co.zw.

[1] Section 227 of the COBE Act.

[2] 227 of the COBE Act.

[3] [1975] 1 SCR 411 (SCC) at 422.

[4] 231 of the COBE Act.

[5] Section 228 (b) COBE Act

[6] Section 228 (c) COBE ACT

[7] Section 228 (d) COBE ACT