I saw a great quote on the internet the other day – “If insanity is doing the same thing over and over again and expecting different results, then I guess I should stop cleaning my house!”
While I don’t hate cleaning, I can’t say it’s at the top of my list of fun things to do, and I think that’s true of most of us. But, just as it’s important for health reasons to ensure your house has at least a certain level of cleanliness, it’s important for companies to ensure they are “cleaning up” the public record after a merger filing is completed.
Preparing to merge two companies requires a great deal of effort and activity before and after the acquisition, negotiation, due diligence, filing the merger documents, post-merger re-organization, etc. With everything going on, the important step of “post-merger cleanup”, that is ensuring that the merger is properly reflected in every state where the acquired company was registered to do business, is sometimes forgotten. Neglecting post-merger cleanup can lead to problems for the company at a later date.
Why is Updating the Public Record So Important?
- It is Legally Required: Most states have statutes that require foreign companies registered to do business in their state to update the public record when they undergo a change due to amendment, conversion or merger. For example, Section 372(c) of Delaware’s General Corporation Law states: “Whenever a foreign corporation authorized to transact business in this State ceases to exist because of a statutory merger or consolidation, it shall comply with §381 of this title.” Section 381 outlines the procedures for withdrawal for foreign corporations.
- State Tax and Reporting Obligations Still Apply: Even if a company ceases to exist and files a final return with the IRS, they are not released from their state obligations, such as franchise tax payments and annual report filings until they properly update the public record in that state by filing a Certificate of Withdrawal, Surrender of Authority or otherwise terminate the entity’s foreign registration. The state can impose liens or penalties if these taxes are not paid.
- Missing This Step Causes Confusion: When entities that no longer exist in their home state remain on the public record as existing entities in the states where they are authorized to do business, confusion can result. I recently worked with a company where this occurred. After the merger the survivor had qualified in CA where the merged out entity still existed. The survivor ended up filing the annual reports and franchise tax returns for several years for both entities, not realizing that the registration for the merged out entity was not needed, as the company no longer existed. As CA has an $800 minimum franchise tax, the company spent a fair amount simply because they hadn’t properly done post-merger cleanup.
What Has to Be Done?
Each state varies, but there are three main ways of updating the public record for a company that has merged out of existence.
- File a Certificate that Withdraws the Entity (often called a Certificate of Withdrawal or Certificate of Surrender). If the survivor will be doing business in the state, an Application for Authority to do Business should also be filed.
- File Evidence of the Merger. Many states require that a certified copy or certificate evidencing the merger from the domestic state is filed. In some cases, the certificate can be filed on its own to terminate the existence of the non-survivor, in other cases, it should accompany the Certificate of Withdrawal or Surrender.
- File an Amendment. In Texas, for example, if the survivor of the merger will also be registered to business, the entity can simply amend its registration to show that the survivor is taking over the foreign registration from the non-survivor.
Ensuring the public record is accurate by conducting post-merger cleanup may not be on the top of anyone’s “fun things to do” list, but it is often a legal requirement and can help prevent problems, confusion and unnecessary costs for the company. Still, it can be tedious to determine and comply with all the differing requirements, especially during a time when there are so many other things to think about. If you don’t want to do the cleanup yourself, consider hiring a “maid”, that is an experienced service company that can manage all of this for you.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.