Question

The Board of Directors of Sanderson Inc. and Gill Corp. reached an agreement in principle to merge the two companies and create a new company called SG Ltd.The basics of the agreement confirmed so far are outlined below: The new company will purchase all of the assets and assume all of the liabilities of Sanderson and Gill by issuing shares. After the sale the two companies will be wound up. Some but not all members of the top management of each company will be retained. The number of SG shares that will be issued has not yet been determined. The founding shareholders of Sanderson Corp., who owned 60% of the voting shares of Sanderson prior to the merger, have rights to veto any sale of patents, which they developed and registered. Some of the other shareholders of Sanderson also owned non-voting preferred shares of Sanderson. These preferred shares were convertible into common shares of Sanderson on a one-for-one basis. Required: Make an initial post to provide the chair of the merger committee with no more than two pieces of advice as to the accounting implications that will result from this merger, even though many of the details have not yet been ironed out.

Answer 1

Merger implications:

• Apart from the regular common shares, some of the shareholders in Sanderson own preferred non-voting shares which are convertible to equity shares on one to one basis. To qualify as a merger the proposed merged entity could issue only equity shares and cash partly for fractional shares if any for discharging the merger consideration. Hence to qualify as a merger even preferred stock with convertible option should be converted into equity shares even prior to merger in Sanderson balance sheet and then shares in the new merged company should be allotted to the shareholders. The share issue ratio should be determined post the above conversion.
• The second situation need to be considered in the proposed merger is that the rights for selling the patents are being vested only the founders of Sanderson and the new entity is not getting any rights on one of the patents. As per the merger rules all the assets including patents and intellectual property will be carried to the new merged entity and the ownership vests with all the shareholders of the proposed merged entity and not only with some group of shareholders. This type of allocation of rights do not take place in merger process. Hence the accounting treatment might itself vary as if any acquisition of a company and not as a merger.