Divisional Merger Potential Solution in Asset-Sale Transactions
April 27, 2012
I was recently involved in a large asset-sale transaction faced with an issue where one of the assets being sold was an interest in a joint venture (JV) in which our client owned a limited partner interest through a wholly owned subsidiary (Holdco). The other partner in the JV had the right to consent to an assignment, conveyance or transfer of Holdco’s interest in the JV. The partner in the JV, who was recently acquired by another company, tried to use the request for consent as leverage for its desire to buy Holdco out of the JV. Not only was Holdco not interested in selling the interest, the price offered by the other partner was unacceptable.
After trying unsuccessfully to resolve the issues (which was delaying the much larger asset transaction), we investigated merging Holdco into a new buyer entity; however, Holdco also owned an interest in another JV (JV2) that was not part of the assets going to the buyer and which was prohibited from being transferred by the terms of its governing documents without the consent of the other partners in JV2. Like the partners in JV, the JV2 partners had been trying to buy-out Holdco’s interest in JV2 for some time but had not made any acceptable offers to Holdco. After careful consideration, we determined that we could accomplish our client’s objectives by using a divisional merger.
In addition to the more traditional forms of merger, where all of the assets and liabilities of the merging entity become the assets and liabilities of the surviving entity, Section 1.001(55)(A) of the Texas Business Organizations Code (TBOC) also defines “merger” as “…the division of a domestic entity into two or more new domestic entities or into a surviving domestic entity and one or more new domestic or foreign entities…”. Furthermore, Section 10.008(a)(2)(C) of the TBOC states “when a merger takes effect, all rights, title and interests to all…property owned by each organization that is a party to the merger is allocated to and vested…in one or more of the surviving or new organizations as provided in the plan of merger without:…(C) any transfer or assignment having occurred…”.
By using these provisions, and absent any other language in the company agreement of the JV expressly deeming any merger as a prohibited assignment, we were able to merge the assets and liabilities that we wanted to move (including the interest in JV) into a new domestic entity owned by the buyer and to leave behind in Holdco the assets and liabilities that Holdco was prohibited from assigning (including the interest in JV2). Since the statute states by its terms that the merger is not an “assignment or transfer,” no violation of the company agreement of JV occurred.
The divisional merger was a useful tool to deal with our situation; however, whether or not a divisional merger is useful depends on the specific facts and circumstances one is dealing with. It is critical to pay particular attention to the language in the governing documents regarding assignability, transfer and conveyance of interests in determining whether the divisional merger can accomplish your goals.