In any given industry there is always going to be a competitor. This is not just a fact of life but a fact of the law. According to federal anti-trust laws, competition is necessary is any given industry to avoid creating a monopoly, which could drive up prices and negatively affect consumers.

But did you know that there are situations in which it’s acceptable for two businesses to come together, thus reducing the pool of competitors in a given market? Called a business merger, this practice is not only legal but necessary in some situations.

The reasons why two companies may agree to merge can vary depending on circumstances. It may be because one company is struggling financially but may still hold value for a competing business or because both businesses agree that they are a stronger competitor together than they are as separate competitors. Whatever the reason, as suggested above, companies need to make sure that they are following the applicable state and federal laws before moving forward with a merger.

The first and most important things that merging companies need to consider is whether the merger will result in a monopoly. These are prohibited by federal law and can lead to serious litigation and steep fines under the Sherman Act of 1890.

Another thing to consider are the business and contract laws in the state where the merger is taking place. Here in California, these laws are specific about which corporations are allowed to enter into a merger, what needs to be included in a merger agreement and how to file such an agreement in accordance with the law.

Because making a mistake while drafting a merger agreement can lead to costly litigation down the road, most companies obtain legal help from a skilled attorney who is well-versed in the applicable laws. If the legality of the merger is called into question later on, the attorney may be called upon again to help resolve the possible litigation that could follow as well.

Source: The Houston Chronicle, “What Happens When a Company Merges?” George Lawrence, Accessed Nov. 6, 2014