Merger: Definition, Types and Laws
A merger is a legal process by which two companies merge into a single company. The merger can be a friendly union or a forceful union. Reasons for initiating mergers are plenty. It could be for bridging the gap between the various fragmented products or services in the same customer pool or for financial reasons.
Types
- Horizontal: Two direct competitors serving the same customer pool merge with one another.
- Conglomeration: Two companies with no related product or customer pool merge. This could be for financial reasons or for diversification.
- Vertical: This happens when a merger takes place between the supplier and the manufacturer. This merger could be proving very cost effective for the manufacturer and hence the step.
- Product extension merger: The two companies might be producing related products and serving a common customer market. This way they can bridge the gap between the two related products.
- Market extension merger: When two competitors producing the exact same product serving the exact same customer pool merge, it called market extension as the sole purpose of the merger is just that, extending the market of the product.
UK Laws for Merger
In the UK mergers are governed by Companies act of 2006, labour law and competition law.
Companies act of 2006 and Merger
In the Companies Act of 2006, part 27 states that merger can be applied in a situation which is defined as ‘a compromise or arrangement’ proposed between a public company and its creditors or members for purposes of reconstruction of amalgamation of 2 or more companies. This scheme is called merger.
It also states that merger cannot take place in case any of the company has been declared bankrupt. This merger should be voted in approval by 75% of existing members of both the companies represented by representatives.
Labour Law
The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) is the part of UK labour law which protects the employment of the employee during mergers and acquisition. According to TUPE regulations, the new employer cannot dismiss the old employee unless there are fair reasons to do so. Even when dismissed, the employee should get all the benefits entitled as before.
Competition law
The Office of Fair Trading and Competition Commission's jurisdiction play an important role in giving the green signal for merger. This is the merger control, which prevents concentration of power. This in other words prevents monopolisation. It forbids any mergers which might significantly reduce competition. The deal cannot be closed unless the law has given the clearance.
Impacts of mergers
Typically after a merger the outlook and business deals, policies, agreements, stakes, etc change. There may be layoffs. But employees are protected against that. The shareholders will be asked to surrender their shares and asked to buy the shares of the new companies whose stocks and shares will be evaluated by business evaluators.
Mergers are serious legal processes. Hiring the right attorney is the buzzword.
