Business Combinations in Corporate Structures

Business Combinations in Corporate Structures

Acquisitions and mergers are primarily undertaken to realize commercial synergies and enhance shareholder value. When two or more entities cooperate and interact, a combined effect is often created. If this combined effect exceeds the sum of the effects that each entity could achieve independently, synergy occurs. The first wave of mergers and acquisitions occurred between 1893 and 1904. Commercial and economic activities have played a significant role in national development, and the modern corporate structure for such activities was initially developed in France.

In Iran, commercial and economic activities are conducted through commercial companies pursuant to Article 20 of the Commercial Code of 1932, the Amendment to the Commercial Code of 1968, and civil contractual frameworks such as Mudarabah, Muzara’ah, and Musaqat. Furthermore, Article 107 of the Fifth Five-Year Development Plan Act of 2010 recognizes economic groups with common interests.

Structural Developments in the Corporate Life Cycle

The formation of an economic group with common interests may be established through cooperation between two or more natural or legal persons for the purpose of facilitating and expanding economic and commercial activities. Such cooperation must be established for a limited period, based on a written agreement, and registered with the Companies Registration Authority as a civil partnership subject to relevant regulations. The formation of such groups must also comply with Islamic legal principles, including prohibitions on causing harm to others and engaging in monopolistic practices.

This provision provides a legal basis for the formation of economic groups with shared interests. Although the legal framework remains incomplete, it is recognized within the domestic legal system. Across jurisdictions, business growth is generally encouraged until it becomes excessive, thereby undermining coordination and organizational efficiency. Consequently, corporate expansion through mergers, holding structures, and inter-unit synergies via shareholdings and corporate integration is considered an effective mechanism for improving performance and entering global markets.

Methods of Combining Business Enterprises

Business and economic enterprises may be combined through three principal methods:

• Horizontal Combination: Integration of enterprises operating within the same industry or a similar line of business.
• Vertical Combination: Integration of complementary enterprises within a production or service supply chain.
• Conglomerate Combination: Integration of large multinational corporations operating across diverse industries to gain access to new markets.

Types of Business Combinations

Business combinations refer to contractual arrangements between two or more commercial companies that may result in the dissolution or continuation of the legal personality of one or more participating companies.

Merger

A merger is the combination of two or more companies, whereby all companies except one are dissolved, and their assets and liabilities are transferred to the surviving company. The surviving company may acquire the net assets of the merged companies by cash payment or by issuing new shares.

Consolidation

Consolidation occurs when two or more companies combine to create a new economic and commercial entity. The principal distinction between merger and consolidation is that consolidation results in the formation of a new business entity, whereas a merger preserves one existing company.

Acquisition

Acquisition occurs when a parent company directly or indirectly obtains control of another business entity, typically through ownership of more than half of the voting shares, without dissolving any of the entities involved. Even when ownership is equal to or less than fifty percent, effective control may still exist if one entity exercises managerial authority. Key characteristics of acquisition include:

• Control over a majority of voting rights through an agreement with other shareholders.
• Direction of financial and commercial policies through law or contractual arrangements.
• Authority to appoint or remove the majority of board members.

Temporary Alliances

Large corporations may voluntarily form alliances in which each participating entity maintains a degree of operational independence while cooperating for specific objectives.

Investment Companies

Investment companies are institutions that collect public savings through share issuance and invest those funds in corporate bonds, corporate shares, and government securities.

Joint Venture Arrangements

A joint venture represents a commercial commitment between two or more parties. Upon completion of the agreed activity and distribution of profits and losses, the arrangement is typically terminated.

Pyramidal Structures

Pyramidal corporate structures arise when a parent company acquires subsidiaries that, in turn, control additional subsidiaries, thereby creating a multi-tiered ownership structure.

Frequently Asked Questions Regarding Business Combinations in Corporate Structures