Business combinations: Overview, definition, and example
What are business combinations?
Business combinations refer to the merger, acquisition, consolidation, or transfer of control of one company by another. These transactions are structured to combine resources, expand market reach, or improve financial performance. Business combinations are governed by corporate laws, shareholder agreements, and regulatory approvals.
For example, in a merger, two companies combine to form a single entity, such as when Disney merged with Pixar. Similarly, in an acquisition, one company purchases another, such as when Facebook acquired Instagram.
Why are business combinations important?
Business combinations help increase efficiency, expand market presence, and create financial synergies. However, they must be carefully structured to protect shareholder interests, comply with regulations, and prevent conflicts.
For businesses, business combination clauses in agreements help define transaction terms, set approval processes, and ensure compliance with corporate governance rules. These clauses also protect stakeholders by addressing liability, financial reporting, and shareholder rights.
Understanding business combinations through an example
Imagine a tech startup merging with a larger software company. The merger agreement specifies that the startup’s shareholders will receive equity in the new combined entity. This ensures a smooth transition of ownership and financial benefits for stakeholders.
In another scenario, a retail chain acquires a smaller competitor. The acquisition agreement includes a business combination clause, requiring regulatory approval before the deal is finalized. This ensures compliance with antitrust laws and fair competition practices.
Example of a business combinations clause
Here's an example of how a business combinations clause may look like in a contract:
“No Party shall enter into a business combination, merger, or acquisition without obtaining prior written approval from its Board of Directors and shareholders, as required by applicable laws. Any such transaction shall be subject to regulatory compliance and financial disclosures.”
Conclusion
Business combinations enable growth, expansion, and financial restructuring while ensuring legal and shareholder protections. These transactions must be structured carefully to align with corporate governance rules and regulatory requirements.
By including a business combinations clause in agreements, businesses can clarify approval procedures, protect shareholder rights, and ensure compliance with financial and regulatory obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.