LEGAL VIEWPOINT: Mergers & Acquisitions Part Two – By Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

There is a worldwide move towards establishing bigger companies to face competition and benefit the shareholders. Existing companies may opt for this through amalgamation process. Most companies are joining forces to prepare themselves to meet the new globalization policies that are widely prevalent. Legally speaking, a company could align with another or a group of companies of the same or even of another type.

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However, this activity mostly takes place between companies of the same type. Simply, it is easier and there many examples such as those between the communications entities or those in engineering, automobile manufacturing, or in the services industry. In all cases, amalgamation takes place by one of the two following methods:

The 1st is that by acquisition and this type means, from legal perspective, the dissolution of one or more companies and thereafter to transfer their assets and liabilities to an existing company.

The 2nd type of amalgamation is that type taking place through merger, which means the dissolution of two or more companies and, thereafter, to take the steps for the incorporation of a new one “new company” to which all the assets and liabilities of the dissolved companies would be transferred.

Having stated the above, we believe that it would be highly important to highlight the differences between the two methods, i.e. the acquisition and the merger processes. Regarding acquisition, the companies shall first be dissolved. After dissolution takes place, the assets and liabilities of such companies shall be transferred to an existing one.

We could say that the existing company acquires the dissolved company or companies and therefore it becomes the owner of their property. Whereas in relation to mergers, the companies shall be dissolved first, and thereafter a new company to be incorporated and after that all the assets and liabilities shall be transferred. In some instances, mergers take place through the fusion or absorption of one into another. This happens in cases where one of the parties is of less importance than the other. However, what is very important, regarding mergers is that the law requires the dissolution of existing companies and the incorporation of anew company to take their place.

The formation or incorporation of a new company is not a requirement in case of acquisition because the assets and liabilities of the dissolved companies shall be transferred to or absorbed. There are certain procedures that should be followed in relation to amalgamation of companies. That is to say, the resolution regarding amalgamation shall be adopted by agreement between the companies. This agreement shall take place according to the procedures specified for the amendment of the memorandum or articles of association of the company. The resolution shall not be effective unless approved by the competent authority specified in the law. The approval is required because in some cases there are certain legal requirements that should be satisfied before mergers take place. This, mostly, applies in relation to banks operating in the country wherein the approval of the central bank is mandatory.

In certain countries the law requires the approval of the government before mergers become effective. This is needed to control monopoly of certain companies and protect consumers from malpractice that could happen due to monopolization and unfair competition. Free trade rules, require fair competition that should be measured carefully for the betterment of consumers.