The Difference Between a Merger and an Acquisition

What is the difference between a merger and an acquisition?  The terms “merger” and “acquisition” are common business terms, but they are often inappropriately used interchangeably, when in fact the two transactions are rather different. If you are planning to combine or purchase assets from another company it is imperative that  you understand the benefits and drawbacks of each.

Merger

In a merger, usually two or more businesses wind down as separate entities, and then a new entity is formed – that is, two entities merge into one new entity. The assets and liabilities of both the original businesses are often carried over to the new company.

Recently, mergers have been especially prevalent in the healthcare and airline industries. For example, one of the biggest mergers has been American Airlines and U.S. Airways. Final steps of the 2010 merger, such as a single reservation system and consolidating frequent flyer programs, are still not complete because of the size of this operation.

Acquisition

In an acquisition, usually one business purchases all or part of another business. As in a merger, most acquisitions involve lengthy negotiations, due diligence, and portfolio transfers. In addition, sellers are generally required to provide information about its’ or their finances, personnel, business opportunities, marketing practices, insurance, and legal status.

Acquisitions are unique and fact-specific.  For example, a seller may finance part of the sale in one transaction, or complete an acquisition using a transfer of stock or cash or both.

Examples of major acquisitions just this year include AT&T’s $69.8 billion purchase of DirectTV and Comcast’s $45 billion acquisition of Time Warner Cable.

If you are considering an acquisition or merger it is always best to consult with an attorney who can help find the most advantageous transaction in light of all the factors and issues in your particular case.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

What is a Director’s Duty of Care?

Generally, a corporation’s articles may limit directors’ personal liability for money damages to a corporation or to its shareholders for actions taken or for failure to take action. However, the articles may not eliminate liability for a director’s breach of duties owed to the corporation. For example a corporation’s articles cannot eliminate liability for receiving financial benefits to which the director is not entitled, intentionally inflicting harm on the corporation or its shareholders, unlawful corporate distributions, or an intentionally violating criminal law.

Duty of Care

Every director owes the corporation a duty of care. This means that he or she must manage the corporation to the best of his or her ability, act in good faith, and do what a prudent person would do with regard to his or her own business.

An example of acting in good faith includes diligently obtaining and reviewing financial statements when the corporation is in the process of purchasing a new business or business assets. The directors must review the new business or assets thoroughly before voting to proceed with the purchase or acquisition.

The directors may rely on the assurances of another director, committee, or professional advisor’s that the new business is financially sound. However, in the event that the transaction goes through but the new business was not financially sound, a court may determine that  the directors have breached their duty of care if a prudent director would have made further inquiry than the sole reliance upon another director, a committee, or an advisor’s assurances.  This duty of inquiry is part of the duty of care.

To avoid personal liability, directors guiding a corporation in a corporate transaction should exercise due diligence to avoid being found liable for any corporate losses because of their breach of duty of care.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

What is a Fiduciary Duty?

A fiduciary relationship is about trust and confidence; it exists where one or more parties are bound to act in good faith toward and for the benefit of one or more other parties.  A fiduciary relationship is often comprised of the duties of care, loyalty, confidentiality, and obedience, i.e., fiduciary duties to the parties in the relationship.

Before a person can be charged with a fiduciary obligation, he or she or it must either knowingly undertake an agreement on behalf of and for the benefit of another, or enter into a relationship which imposes a fiduciary duty as a matter of law. Some of the relationships in which a fiduciary duty arises as a matter of law include:

  • principals and agents
  • business partnerships
  • attorneys and clients
  • joint venturers
  • corporate officers/directors and corporations
  • corporations and shareholders
  • controlling shareholders and minority shareholders

An example of where a fiduciary relationship exists under California law is the duty of loyalty that prohibits an agent, during the course of his or her or its agency, from undertaking activities adverse to the interests of his or her or its principal.  Similarly, a director also owes a duty of care that requires him or her to manage an entity, its property, or subject matter of the relationship with due care.  The duty of obedience requires a fiduciary’s actions to be consistent with the organization’s articles of incorporation, bylaws, mission statement, and tax-exemption documents, where applicable.  In other circumstances, a fiduciary owes the client an utmost duty of confidentiality, such as the fiduciary relationship between attorneys and their clients.

Generally, a breach of a fiduciary duty will entail a breach of the duty of care, loyalty, obedience, and/or confidence. To establish such a breach, a plaintiff will have to prove the existence of a fiduciary duty, show that the duty was breached, and establish what damages were suffered as a result of that breach; such damages may simply be all profits that were earned as a result of the breach.  Intentional wrongs such as fraud and negligent misrepresentation also may constitute a breach of fiduciary duty.  The measure and types of damage or other relief available in breach of fiduciary claims depend on the nature of the breach. In certain egregious cases, punitive damages may be available to a plaintiff.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.