Mergers
§ 19.1Overview of Mergers under Texas Law
Title 1, chapter 10 of the Texas Business Organizations Code (TBOC) allows for one or more domestic entities to combine, or merge, with one or more domestic or foreign entities for a variety of purposes. This merger may take various forms and will result in (1) one or more surviving entities, (2) one or more new entities, or (3) both surviving and new entities. Before beginning the merger process, it is critical to determine which entities will merge, which will survive, and if any new entities will be created as a result of the merger.
PRACTICE TIP: Merger documents cannot be filed using the Texas secretary of state’s electronic filing system (SOSDirect). Although you may mail hard copies of the documents, timeliness usually necessitates faxing the documents to the secretary of state. You may also request expedited handling for a minimal additional fee.
§ 19.2Mergers Governed by Statutes Other than TBOC
Occasionally, a merger transaction will be governed by a statute other than the TBOC, in which case the other statute will govern the form and process of the merger transaction. For example, title 4, chapter 162, of the Texas Utilities Code governs the consolidation or merger of telephone cooperatives.
In general, a merger transaction requires the following steps:
1.Prepare—
a.a certificate of merger (see section 19.4 below);
b.a plan of merger (see section 19.5 below);
c.any formation and organizational documents for new entities created as a result of the merger; and
d.a certificate of amendment (SOS Form 424, form 4-8 in this manual) to effect any amendments to the formation documents of any surviving entity.
2.Have the merger documents authorized by the required number of owners of each entity that is a party to the merger. A merger is a fundamental business transaction; therefore, this authorization must comply with the procedures set forth in the applicable TBOC sections for the specific domestic entity type as well as the requirements of the applicable entity’s governing documents.
3.Obtain a tax clearance letter from the Texas comptroller for any Texas entity that is a party to the merger. This requirement can be sidestepped by certifying in the certificate of merger that one or more of the surviving, acquired, or new entities will be liable for the payment of franchise taxes.
4.For an interstate merger (a merger transaction including any foreign entities), file the Texas merger documents with the Texas secretary of state first. Then, once approved by the Texas secretary of state, file the Texas merger documents in the states where the merging entities previously existed.
PRACTICE TIP: A printout obtained from the Texas comptroller’s online franchise account status search is not sufficient evidence of tax clearance in connection with a merger. If you have not stated that a surviving, acquired, or new entity will be liable for the payment of franchise taxes, you must obtain a certificate of account status from the Texas comptroller (see Texas comptroller form 05-359, available via https://comptroller.texas.gov/forms).
PRACTICE TIP: Mergers with foreign entities entail additional hurdles. Texas, and many other states, requires that the merger processes of both Texas and the foreign entity’s formation state be followed. This may mean the documents required (certificate of merger, plan of merger, and so on) will be slightly different. Many practitioners find it easiest to include the information required by Texas, as well as the other states from the outset, to ensure ease of filing.
§ 19.4Certificate of Merger; Certificate of Formation
Title 1, chapter 10, of the TBOC requires the filing of a certificate of merger when any party to the merger or any entity created pursuant to a plan of merger is a domestic filing entity. The Texas secretary of state provides standard optional certificate of merger forms for various situations, although there is not a form for every possible merger situation. These forms (SOS Forms 621 through 623, forms 19-2 through 19-4 in this manual, respectively) are generally not entity-type-specific but are based on the domesticity of the parties to the merger and whether a parent entity is merging with a subsidiary entity. The exception is a specific form of certificate of merger for a nonprofit corporation (SOS Form 624, form 19-5 in this manual).
The secretary of state also has separate certificates of formation for any entity that will be formed as a result of the merger transaction. These are dependent on the type of entity being formed. See the chapter in this manual on the specific entity type for the related forms. When forming a new domestic entity in conjunction with a merger transaction, you must also comply with the requirements of the TBOC relating to formation of a new domestic entity.
PRACTICE TIP: The certificate of formation for a new entity formed in connection with a merger transaction must contain the additional statement that the entity is being formed pursuant to a plan of merger. Because the Texas secretary of state’s form of certificate of formation does not include this statement, if you are using the secretary of state’s form, insert the statement as additional text in the “Supplemental Provisions/Information” section.
There is no uniform form of a plan of merger, nor is one provided by the secretary of state, although it must in all events conform to the requirements of TBOC sections 10.002 and 10.003. The plan of merger may also include the permissive provisions set out in TBOC section 10.004. The plan of merger can be, but is not required to be, filed with the certificate of merger and, if there is one, the certificate of formation. It is more common to provide the alternative statements set forth in section 19.6 below than to file the plan of merger with the Texas secretary of state.
§ 19.6Alternative to Filing Plan of Merger with Certificate of Merger
The plan of merger must be filed with the certificate of merger unless the certificate of merger includes a statement certifying—
1.the name, organizational form, and jurisdiction of formation of each domestic or foreign entity that is a party to the plan of merger or that will be created as a result of the merger;
2.that the plan of merger has been approved by each party to the merger;
3.any amendments to the certificate of formation, or a statement that no amendments are to be effected by the merger;
4.that the certificate of formation of each new Texas entity to be created as a result of the merger is being filed with the Texas secretary of state as part of the certificate of merger;
5.that an executed plan of merger is on file at the principal place of business of each surviving or new domestic or foreign entity and the address of each principal place of business; and
6.that a copy of the plan of merger will be furnished without cost by each surviving, acquiring, or new domestic or foreign entity to any owner of any domestic entity that is a party to the merger and, for a merger with multiple surviving domestic or foreign entities, to any creditor or obligee of the parties to the merger if a liability or obligation is then outstanding.
See Tex. Bus. Orgs. Code § 10.151. The certificate of merger also must contain a statement that the plan of merger was approved as required by the laws of the jurisdiction of formation of each organization that is a party to the merger and by the governing documents of those organizations. Tex. Bus. Orgs. Code § 10.151.
Providing the alternative certified statements in lieu of the plan of merger is often more cost-efficient and convenient, given the number of pages and attachments that are typically required in a plan of merger.
§ 19.7Special Merger Provisions under TBOC
TBOC sections 10.006 and 10.152 apply to mergers between parent and subsidiary entities and permit a short-form merger of (1) one or more subsidiary entities into a parent, (2) a parent into a subsidiary, or (3) one or more subsidiaries and the parent into another subsidiary. To effect this merger, the parent organization must own “at least 90 percent of the outstanding ownership or membership interests of each class and series of each of one or more subsidiary organizations,” and at least one of the parties to the merger must be a domestic entity. Tex. Bus. Orgs. Code § 10.006(a). A domestic subsidiary organization is not required to take any action to approve a short-form merger, but the governing authority of a surviving parent organization must approve the merger by a resolution. The short-form merger provisions do not apply if a subsidiary organization is a partnership.
§ 19.8Abandonment of Merger; Delayed Effectiveness
TBOC sections 10.201 through 10.203 govern the abandonment of a merger that has been approved but has not yet become effective. A certificate of merger is effective on filing with the secretary of state unless the effectiveness is delayed pursuant to TBOC section 4.052. In instances of delay, the merger is effective either at a time and date specified on the certificate of merger or upon the occurrence of an event (delayed effective condition). If there is a delayed effective condition, the entity is required to submit a statement with the Texas secretary of state within ninety days from the initial filing affirming the effective condition has been either satisfied or waived. The mere failure to file this statement, however, does not result in an abandonment of the filed document.
The abandonment of the merger is subject to any contractual rights and must be abandoned in the manner set forth in the plan of merger. If the plan of merger does not contain a provision regarding the procedures for abandoning the plan of merger, the merger must be abandoned in the manner determined by the governing authority of the party abandoning the merger transaction. An abandonment of a merger need not have the approval of the owners of any of the parties to the merger. If the merger has been filed with the secretary of state, the domestic entity must file a statement of abandonment signed on behalf of each entity that signed the certificate of merger in accordance with TBOC section 4.057.
§ 19.9Common Errors to Avoid in Merger Documents
Generally, the most frequent reason for rejection of a merger document is the failure to set forth all necessary recitations in the certificate of merger or alternative statements.
§ 19.9:1Omission of Authorization Statement
The most frequent omission in a certificate of merger is the authorization statement. Although a merger document drafted to contain the alternative statements certifies that the plan of merger has been approved, the certificate of merger also must include a statement that “the plan of merger has been approved as required by the laws of the jurisdiction of formation of each organization that is a party to the merger and by the governing documents of those organizations.” Tex. Sec’y of State, Form 622—General Information (Certificate of Merger—Combination Merger) 3 (2015) (form 19-3 in this manual).
§ 19.9:2Errors Concerning Effective Date of Merger
The formation and existence of an entity created pursuant to a plan of merger commences on the effectiveness of the merger. Tex. Bus. Orgs. Code § 3.006(b). Consequently, the certificate of formation of an entity created pursuant to the plan of merger cannot have an effective date (or delayed effective date and time) that differs from the effective date of the plan of merger.
§ 19.9:3Restatement of Certificate of Formation Must Be Filed Separately
While TBOC section 10.004 permits a plan of merger to include amendments to the governing documents of a domestic filing entity, a domestic entity may not effect a restatement of its certificate of formation with only a plan of merger. The restatement of a certificate of formation has a different legal effect than an amendment to one. If the surviving entity wants to amend and restate its certificate of formation, it may do so by submitting a separate filing instrument immediately after filing the certificate of merger.
§ 19.10Additional Considerations
§ 19.10:1Withdrawal of Registered Foreign Entities
If a merging entity is a foreign entity that was registered to do business in Texas, it is wise to withdraw that entity’s registration with the Texas secretary of state. See section 21.13 in this manual for guidance on foreign withdrawals.
Although the Texas secretary of state has relaxed the name availability guidelines in recent years, it is still common to run into issues when naming a new domestic entity created as a result of a merger or when changing the name of a surviving entity. For example, if a merging entity is a foreign entity that was registered to do business in Texas and a surviving or new entity wants to use the name previously used by that merging foreign entity, the surviving or new entity cannot use that name until the foreign entity withdraws its registration in Texas. In all events, if a surviving entity wants to change its name or a new entity is created as a result of the merger, you must still conduct a name availability search to ensure the desired name is available.
PRACTICE TIP: If a desired name appears to be unavailable, it is common either to file an assumed name certificate allowing the applicable entity to use a name that is otherwise unavailable or to obtain a consent to use of similar name from the entity that already has the desired name. It is best to run name availability searches (either on SOSDirect or by calling the Texas secretary of state) before beginning the merger process to avoid unnecessary delays caused by name availability issues. You may also file a name reservation to ensure that a currently available name will still be available when you file the merger documents.
§ 19.10:3Updating Governing Documents
It is common to conduct a review of the governing documents of each surviving entity in connection with a merger transaction and to make any necessary revisions and updates. This is especially important when a surviving entity is changing entity type or is otherwise materially changing its structure. You must also ensure that governing documents are prepared for any new entity that is created as a result of the merger transaction.
§ 19.10:4Special Rules for Certain Entities
Note that special provisions in the TBOC apply to partnership mergers (TBOC section 10.009) and nonprofit corporation and nonprofit association mergers (TBOC section 10.010).
Once a merger has been approved by the secretary of state and the merger transaction is complete, then, inter alia—
1.the separate existence of each domestic entity that is a party to the merger, other than a surviving or new domestic entity, ceases;
2.all rights, titles, and interests to all real estate and other property owned by each party to the merger is allocated to and vested in, subject to any existing liens or other encumbrances, one or more of the surviving or new entities as provided in the plan of merger;
3.all liabilities and obligations of each entity that is a party to the merger are allocated to one or more of the surviving or new entities as provided in the plan of merger;
4.any proceeding pending by or against an entity that is a party to the merger may be continued as if the merger did not occur; alternatively, the surviving or new entity that received a liability, obligation, asset, or right under the plan of merger that is associated with the proceeding may be substituted in the proceeding;
5.the governing documents of each surviving domestic entity are amended or restated to the extent provided in the plan of merger; and
6.each new entity whose certificate of formation is included in the plan of merger is formed as a domestic entity under the TBOC as provided in the plan of merger.
See Tex. Bus. Orgs. Code § 10.008(a).