One of the most perplexing situations that
credit professionals deal with on a regular basis is the change in ownership of
their customers. Once change in ownership has been discovered the question the
credit professional is often faced with is who is responsible for payment of our
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
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
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
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
An example is that Compaq is now a division
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.
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.