In a merger, two or more corporations combine and one of them survives, absorbing the others, which cease to exist. In a consolidation, the constituent corporations unite to form a wholly new corporation, and all of the old ones cease to exist. Both require a plan of merger or consolidation approved by the board and ratified by the stockholders (generally by a two-thirds vote), followed by the filing and approval of articles of merger or consolidation with the SEC, which issues a certificate that makes it effective. Once effective, the surviving or consolidated corporation automatically acquires all the rights, assets, and properties of the constituents and, importantly, assumes all their liabilities — creditors' claims are not extinguished by the combination.
Companies combine for scale, synergy, or survival. The two legal vehicles are merger and consolidation — related, but not the same.
Merger vs. Consolidation
The difference is about who survives:
- In a merger, two or more corporations combine and one of them survives, absorbing the others. The absorbed corporations cease to exist; the survivor continues. (A + B → A); and
- In a consolidation, the constituent corporations unite to form a wholly new corporation, and all of the old ones cease to exist. (A + B → C).
The Process
Both follow a similar path:
- The board of each corporation approves a plan of merger or consolidation;
- The plan is submitted to the stockholders (or members) and ratified, generally by a two-thirds vote of the outstanding capital stock;
- Articles of merger or consolidation are executed and filed with the SEC; and
- The SEC issues a certificate approving it, which is what makes the merger or consolidation effective.
Dissenting stockholders may have an appraisal right to be paid the fair value of their shares.
Effect on Assets
Once effective, the surviving or consolidated corporation automatically acquires all the rights, privileges, assets, and properties of the constituent corporations — there is no need for separate deeds of conveyance for each asset. The combination effects the transfer by operation of law.
Effect on Liabilities: Creditors Are Protected
Crucially, the surviving or consolidated corporation assumes all the liabilities and obligations of the constituents, just as if it had incurred them itself. Creditors are not prejudiced — their claims survive and can be enforced against the survivor. A company cannot escape its debts merely by merging.
Why It Matters
For counterparties and creditors, this means a merger or consolidation does not wipe out existing contracts or obligations. For the combining companies, it means proper due diligence on the other side's liabilities is essential — you inherit them.
Practical Takeaways
- Merger: one corporation survives and absorbs the others; consolidation: a new corporation replaces them all;
- Both need board approval, a two-thirds stockholder vote, and SEC approval to take effect;
- The survivor automatically gets the assets and assumes all liabilities — creditors' claims are preserved.
Frequently Asked Questions
What is the difference between a merger and a consolidation? In a merger, one of the combining corporations survives and absorbs the others, which cease to exist. In a consolidation, all constituents unite to form a wholly new corporation, and the old ones all cease to exist.
What approvals are needed? A plan of merger or consolidation approved by each board and ratified by the stockholders, generally by a two-thirds vote, followed by filing articles of merger or consolidation with the SEC, which issues the certificate making it effective.
What happens to the assets? Once effective, the surviving or consolidated corporation automatically acquires all the rights, assets, and properties of the constituents by operation of law, without separate deeds of conveyance.
Do the debts disappear after a merger? No. The surviving or consolidated corporation assumes all the liabilities and obligations of the constituents. Creditors are protected and their claims survive, so a company cannot escape its debts by merging.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
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