Mergers & Acquisitions
Why Divisive Mergers Are Gaining Popularity and How They Can Be Structured to Mitigate Risk
Although spin-offs and asset sales are the traditional means of separating business lines, divisive mergers provide an attractive option for companies looking to achieve contractual continuity and a clean separation of assets and liabilities. A divisive merger is a statutory mechanism that divides a company’s assets, liabilities and operations among two or more recipient entities, functioning in the reverse direction of a traditional merger. A key advantage is that divisive mergers allow complex businesses to avoid individually assigning each contract and obligation as required in traditional asset sales. However, this flexibility comes with unique risks of fraudulent transfer challenges and remedies.
Certain states, including Texas and Delaware, have statutory schemes that allow for divisive mergers. Texas first codified divisive mergers by broadening its definition of “merger” to include the division of one domestic entity into two or more organizations. Under Texas law, all types of corporate entities (including corporations, partnerships and limited liability companies) may undergo a divisive merger, and the resulting entities may take any corporate form, even one different from that of the original entity. Delaware, by contrast, allows only limited liability companies, limited partnerships and limited liability limited partnerships to effect divisive mergers, and the resulting entities must be of the same form as the original dividing entity. Corporate entities may first undergo a change of corporate form in order to take advantage of the Delaware divisive merger statutes. In both states, divisive mergers are not considered assignments of assets or liabilities, potentially allowing companies to avoid triggering anti-assignment provisions, reduce transaction costs and bypass third-party waivers or consents.
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