Question

The Board of Directors of Sanderson Inc. and Gill Corp. reached an agreement in principle to merge the two companies and create a new company called SG Ltd.The basics of the agreement confirmed so far are outlined below:

1. The new company will purchase all of the assets and assume all of the liabilities of Sanderson and Gill by issuing shares.
2. After the sale the two companies will be wound up. Some but not all members of the top management of each company will be retained.
3. The number of SG shares that will be issued has not yet been determined.
4. The founding shareholders of Sanderson Corp., who owned 60% of the voting shares of Sanderson prior to the merger, have rights to veto any sale of patents, which they developed and registered.
5. Some of the other shareholders of Sanderson also owned non-voting preferred shares of Sanderson. These preferred shares were convertible into common shares of Sanderson on a one-for-one basis.

Required: Make an initial post to provide the chair of the merger committee with no more than two pieces of advice as to the accounting implications that will result from this merger, even though many of the details have not yet been ironed out.

Answer 1

1. Convert first the preference shares before they are merged so that the equity is distributed equally in 1: 1 ratio.

2. If the shareholder of sanderson corp. who owned 60 % they can sell their patent right to the new company or they can continue as the share holder for the SG Ltd.