A short form merger, also known as a parent-subsidiary merger, is the combination of a parent company and a subsidiary (previously the target firm) that is not necessarily wholly owned by the parent. Although not available in all states, state statutes will typically mandate that the parent entity owns at least 90% of the subsidiary before a short form merger can be enacted. This action usually follows a successful tender offer with the practice of completing a takeover without the need of an additional shareholder vote.
If a buyer acquires less than 100% (but generally at least 90%) of a target company’s outstanding stock, it will generally be able to use a short-form merger to acquire the remaining minority interests. This may also be referred to as a squeeze out. The merger allows the buyer to acquire those interests without a stockholder vote, thereby purchasing all of the target company’s stock and successfully consummate the takeover. By this point however, most traders will have sold their target stock position to the acquirer and moved on to the next merger arbitrage investment opportunity. If this is not the case, the trader may choose to pursue dissenters rights although this is usually a course of action open to professional investors only.
Short Form Merger in a Legal Context
In his article “The Cost of Supermajority Target Shareholder Approval” Audra Boone writes,
Acquisitions via a tender offer can be significantly faster than a traditional merger, but this benefit is only available if the bidder can conduct a short-form merger following the tender, which avoids the need for a proxy statement filing and formal shareholder vote. Until recently this structure was only available if the bidder could convince a supermajority (90%) of shareholders to participate in the tender offer.
In addition to this, August 2013, Delaware’s legislature passed a new code provision of the Delaware General Corporation Law (the DGCL), that
allows bidders of targets incorporated in Delaware to conduct a short-form merger after achieving only 50% ownership as opposed to 90% that is required in almost all other states.
