Changes in ownership typically fall under three broad general categories, acquisitions, consolidations, and mergers.

An acquisition is sometime referred to as a purchase of asset. One company may acquire control of another by purchasing the principal assets of that company. The extent to which one corporation purchases the assets of another can vary widely. For instance: They can purchase selected assets such as inventory; or purchase all of the assets but none of the liabilities; or purchase assets and some of the liabilities; or purchase all assets and liabilities. Usually the acquiring company will purchases assets and liabilities based on its purpose behind the acquisition.

For example when AMR the parent of American Airlines acquired Reno Air it purchased all of the assets and liabilities and eventually absorbed Reno Air into its American Airlines subsidiary operations. However, when it acquired TWA assets through the bankruptcy court it only acquired specific assets and liabilities and then operated TWA as a division of American Airlines.

A consolidation is when two or more corporations dissolve to form a new corporation. The new corporation is then known as the consolidated corporation and this new corporation is responsible for the debts of all the previous corporations. For example in the oil industry there have been major consolidations in the past three years: Exxon-Mobil, Chevron-Texaco and Citgo-Conoco. All three of these new corporations are responsible for the debts of the previous respective consolidated companies.

A merger is when one company acquires another company and absorbs all of its assets and liabilities, and one of the companies fades away and the other is known as the surviving company. The surviving company is responsible for any indebtedness incurred by any of the previous corporations that were party to the merger. For example the recent merger of Hewlett-Packard and Compaq Computer. Hewlett-Packard considered the surviving company of the merger is responsible for all the debts of Compaq Computer.

A subsidiary company is a separate legal entity that is controlled by another corporation. A corporation that controls another corporation is known as the “parent”. Control is determined by the amount of outstanding capital stock owned by the parent. If the parent owns 100% of the stock then the controlled corporation is known as wholly owned. In order for a corporation to be a “parent” they must own at least 50% of the outstanding capital stock of the subsidiary company.

An example would be American Airlines and American Eagle. Both of these airlines are wholly owned subsidiaries of AMR Corporation.

Unlike a subsidiary, a division is not a separate legal entity. A division is a “convenience of management”. There is no legal separation of assets and liabilities of the division from those of the entire corporation. The corporation is responsible for the debts of the division.

An example is that Compaq is now a division of Hewlett-Packard.

When corporations acquire other companies the credit professional must understand the circumstances of the acquisition in order to determine the status of assets and liabilities. When a corporation acquires another company it has the option to operate the acquired company as a subsidiary; or operate the acquired company as a division; or absorb the acquired company into its operations and the acquired company disappears.

Knowing the legal composition of the customer and who ultimately is responsible for payment can make the difference in being paid promptly!

I wish you well.  

This information is provided as information only and not legal advice. Legal advice should be obtained from a competent, licensed attorney, in good standing with the state bar association.