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Virtual Merger Agreements – the way forward?

Cape Town – February 6, 2020

I recently had the opportunity to work with a client who wanted to establish an integrated alliance between his company and other entities which would benefit all partners in the alliance. This involved smaller separate companies and entities joining forces with my client’s company, with the goal of sharing each of the companies’ respective skill sets to increase their respective profit margins.

This model is similar to mergers between two or more companies; the only difference being that this merger is virtual.

The concept of ‘Virtual Merger’ is a relatively new one: companies enter into contractual arrangements which copycat the business model and function of a traditional merger, but without being legally equivalent to an actual merger.

Interestingly, although the companies in a Virtual Merger will execute a Virtual Merger Agreement which governs the relationship of the parties, each company remains legally independent.

A sample of a provision in the Virtual Merger Agreement giving effect to the latter would be “The Parties understand that in a Virtual Merger there is no transfer of ownership or shares between the Parties, who shall remain legally independent, each with their own directors, officers and shareholders.”

Furthermore, from a legal perspective, while the requirements and obligations imposed on companies in respect of corporate governance are prevalent and extremely detailed in conventional mergers, in the case of virtual mergers such obligations remain unclear, mainly due to the fact that the companies taking part in this integrated alliance remain legally independent after the Virtual Merger.

Therefore, why should a company consider participating in a Virtual Merger?

The purpose of a Virtual Merger is to reduce the high costs associated with the due diligence process conducted before conventional mergers and acquisitions, providing each company within the Virtual Merger with the opportunity “to test out the waters” and ascertain whether this type of corporate structure would be beneficial to the growth of each company’s business.

It is important to point out again that a Virtual Merger DOES NOT bring about the creation of a new entity: the companies operate collectively under the Virtual Merger umbrella and may also partake in other separate business projects/ventures similar to that of the virtual alliance.

As a result, the companies are also free to terminate the Virtual Merger at any time especially if the goals of the Virtual Merger have not be attained.

However such termination must be made in accordance with the terms and conditions of the Virtual Merger Agreement.

For these reasons, the overriding benefit of a Virtual Merger is that companies are able to maintain their respective leadership roles and shareholding, while reaping the rewards stemming from the combined operations, shared technology and know-how of the Virtual Merger, without bearing the financial burden of a traditional merger.

If you wish to learn more about Virtual Mergers and related subjects, please do not hesitate to contact us! We will reply within 24 hours.

Dr. Rushmina Murtuza