Continuity of Perfection Following a Merger

Continuity of Perfection Following a Merger

 
Professor James P. Nehf discusses the way Article 9 handles corporate mergers and the steps creditors must take to remain continuously perfected in a debtors assets after the merger occurs by addressing. Ensuring that a security interest remains perfected after a corporate merger depends on the identity of the surviving company, the survivor’s name, and the survivor’s state of incorporation.
 
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Overview. Maintaining perfection after a debtor has consummated a merger can be confusing. The correct course of action (amend a financing statement, file a new one or do nothing) depends on several factors, including the identity of the surviving corporation, the state of its incorporation, and the importance of after-acquired property in the transaction. Different rules apply: if the survivor is the original debtor corporation or a different entity; if the survivor is incorporated in a different state than the original debtor; and if the secured creditor is concerned about maintaining perfection in property acquired by the survivor after the merger occurs.

Analysis. When a corporate debtor merges with another company, the debtors secured lender will want to ensure that it remains perfected in the collateral after the merger takes place. Should the financing statement be amended to include the merged company as a debtor? Should a new filing be made against the new entity? When a merger occurs, there are several possible courses of action: amend the original financing statement to reflect the company’s new name (if the name has changed); amend the financing statement to add the merged company as a new debtor; file a new initial financing statement against the merged entity in the same state where the original filing was made; file a new initial financing statement against the merged entity in the state where the surviving company is located; or do nothing and rely on the original filing to maintain perfection after the merger. The correct approach will vary depending on the way the merger was structured and the collateral securing the loan. Several scenarios can arise:

Survivor is the same corporate debtor with the same name. If the surviving corporation is the same debtor that initially signed the security agreement (i.e., the other company is absorbed into the debtor corporation), and the merger does not result in a change in the debtors name, then no amendment or new filing is necessary. The debtor is the same legal entity that created the security interest (albeit with more assets after the merger), the debtor is located in the same jurisdiction, and the debtors name has not changed. In this situation, searchers under the debtors name will find the secured lenders financing statement after the merger takes place, so no new filing or amendment is needed. The lender remains perfected in all collateral that the debtor owned before the merger, and if the security agreement covers after-acquired property, the lender will be perfected in collateral that the debtor acquires after the merger.