Can companies merge without formally merging?

Question

Suppose the government blocked a big company from acquiring a small company. I don't think it would be illegal for the big company to advise the small company on what decisions to make and what staff to hire or fire. And I don't think it would be illegal for the small company to gift all its profits to the big company. If they did both of these things at once, the big company would have all the benefits of a merge without a formal merge Am I wrong? Does anything in the law prevent this?

Answer 1

Anti-trust and anti-monopoly restrictions can arise even outside of a merger.

Details will, of course, depend on the jurisdiction.

But the usual reasons to block a merger are competition, anti-trust, and anti-monopoly concerns. If such considerations apply, then by talking about business strategies or pricing, the companies would be in violation of anti-trust laws.

Answer 2

As a general rule, if you think you found a loophole around government regulation that nobody has thought of before, you probably just found an existing crime. I wouldn't try this at home.

Exactly what crimes and torts would be committed would be highly dependent on what is happening exactly, and of course on the local jurisdiction. It is perfectly legal for instance to give advice for money, that's called consulting. Getting advice from a direct competitor in exchange for all profits though sounds less like consulting and more like racketeering or a cartel-like arrangement.

"Advis[ing] the small company on what decisions to make" could amount to or result in price fixing, insider trading, various forms of illegal conflicts of interest, or just big ol' fraud (particularly in the case of purposefully bad advice).

"Gift[ing] all its profits to the big company" could amount to some kind of accounting fraud or tax evasion. It might also be accompanied with lying to investors, which is another kind of fraud, and most likely a violation of fiduciary duties.

The potential for impropriety in the scenario you describe is so absurdly high, you'd figure that's a reason why we have laws regulating mergers and acquisitions. To avoid such obviously sketchy schemes.

Answer 3

And I don't think it would be illegal for the small company to gift all its profits to the big company.

If you are talking about a public company, there are laws that would prevent that. The board of a company is supposed to act in the interests of the shareholders. Those profits belong to the shareholders. Handing them over to another company would be extremely hard to justify as benefitting shareholders.

If the leadership of the company were doing this for their own personal gain (and I'm not sure what other reason they would have for doing this) then they could be criminally charged. It might look like something along the lines of this.

Answer 4

You seem to have this backwards in a sense. The government has rules about companies working too closely together. For instance, if all the grocery stores in a city get together and agree to not sell milk for less that $10/gallon, that would violate anti-trust laws.

If the government determines that a proposed merger would result in too anti-competitive a situation, then it will block the merger. The whole point is to prevent that anti-competitive situation. The government block the merger to stop the collusion, so imagining the government stopping the collusion to keep the companies from effectively merging is kinda backwards.

Companies doing what you describe would get them in more trouble than merging. You question is like saying "What if a business owner is denied a license to open a restaurant, so instead they just give food to people, and those people give them money?"

Additionally, what makes mergers so dangerous to competition is that they make coordination much easier. In my example above, each grocery is going to have an incentive to renege on the deal. If one grocery sells milk for $9/gallon, they're going to get most of the business in the city. But if all the grocery stores are owned by the same company, then that incentive goes away.

If we imagine that WalMart is prohibited from buying a local grocery store, your scenario of WalMart telling the grocery store what to do and the grocery store giving their money to WalMart involves both parties acting against their interests. Why should WalMart give advice to the grocery store? Sure, the grocery store could give money to WalMart, but how is WalMart going to enforce that? Are they going to draw up a contract? Signing a contract saying that you agree to violate anti-trust laws is not a smart idea.

Answer 5

The first shareholder call of small company giving all its profits to large company:

Shareholders: WTF!!!! We want dividends! You're fired! Also, we're suing you and the large company!

Answer 6

Frame Challenge:

As stated, your hypothetical will be construed as money laundering and/or breach of fiduciary duty and prosecuted as such.

Verbal agreements can be broken with little consequence. Your hypothetical requires to many moving parts, and keeps so much unsaid, that any of the parties could screw the other over.

That's the reason we have to use notarized contracts for these big transactions, and they are regulated by the government, on anti-trust concerns.

I don't think it would be illegal for the big company to advise the small company on what decisions to make and what staff to hire or fire.

Not quite illegal but very suspicious. And why would the big company offer free consultation? And what forces the little one to accept and implement the suggestions? Just goodwill?

For this to work as you envision, the two agreements have to be separate. Otherwise they would be construed as a full transaction and an attempt to commit fraud by selling the company under the rug. Not that a prosecutor couldn't add two and two and drag both companies to court.

Public traded companies are subject to a level of scrutiny and audit that sometimes feel as if the cops have a permanent search warrant for your house. I work for a big multinational company and we provide a lot of data to external audit companies and the government on a regular basis.

Someone would sniff the "free advise" and shout wolf sooner rather than later.

The board of directors and the CEO have a fiduciary duty to provide as much value to the shareholders. Gifting the profits to the big company goes directly against this. The board could face lawsuits and even jail time for stealing from the company. And an agreement to gift the profits would be taxed, leading to even more issues and scrutiny.

And I don't think it would be illegal for the small company to gift all its profits to the big company.

Hey, it's not illegal to gift all your profits to the Red Cross, or even to me. Again, why do that?

If they did both of these things at once, the big company would have all the benefits of a merge without a formal merge

Not wrong, but you are missing a lot of things here. They would not have all the benefits of a merge. They would not even have most.

The big company would not have total control of the small company's assets. Decisions to make and staff to hire/sack are just two of a myriad of things you can do with a company to fully control them.

And there are limitations on gifting. If this happened in real life, everyone involved could be accused of money laundering.

You can't gift millions of dollars without the banks reporting.

Financial institutions were required to report cash deposits of more than $10,000, collect identifiable information of financial account owners, and maintain records of transactions. [ref]

And making frequent deposits lower than 10k will get you reported all the same, for structuring.

One common form of money laundering is called smurfing (also known as “structuring”). This is where the criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts, to avoid detection. [ref]

Am I wrong? Does anything in the law prevent this?

As shown above, yes. Your hypothetical would land everyone big and small in jail. Most likely for money laundering.