Retention of Merger and Acquisition Records and Information.

The past two decades have seen an enormous increase in merger and acquisition activities by commercial organizations. Many industries -- finance, banking, manufacturing, telecommunications, and others -- have seen extensive consolidation. Some mergers and acquisitions have resulted in conglomerates with activities in several spheres of commercial enterprise; others have produced multinational organizations with operations in many countries. The effect has been a dramatic shift in the face of business worldwide.

Information Management Issues

On many levels, consolidations pose enormous issues for the organizations involved; financial and personnel systems must be merged, and conflicts in everything from organizational cultures to motor pools must be resolved so that the new organization functions smoothly.

The merger of records and information is among these issues. A merger or takeover involving two large commercial organizations involves harmonizing large amounts of information. Effective integration and management of the combined information set is critical to the well-being of the surviving or new organization. Unfortunately, this issue is typically overlooked in negotiations, contracts, and other merger-related activities. Consequently, problems with the resulting information set are often the norm after completion of a merger or acquisition.

These problems have several causes. Often, the organization fails to realize that the information sets of the two entities must be merged, so there is a lack of planning and preparation for what is, under the best of circumstances, a formidable task. Staff reductions and reassignments are often by-products of merger activity. Information management personnel in an acquired organization may have already left, or if still employed, may face elimination of their jobs. They may have little incentive to ensure that the information in their charge is handed over to their successors in good order, or to effectively assist in its integration into the data set of the new organization.

The result is that the surviving organization often finds itself with large amounts of information -- paper records, microforms, and digital information -- in disastrously disorganized condition, inherited from the acquired entity. The holdings may be warehouses full of poorly organized boxes, crates of unsorted microfiche or non-indexed reels of computer tape. In addition, there may be a very substantial body of information related to the merger or acquisition itself, such as due diligence files, contract documentation, inventory lists, and much more.

This body of information and its management imposes substantial responsibilities on various parties, depending upon the circumstances of the consolidation. These different circumstances will be examined in order.

The Corporation as a Legal Entity

The key to where liability resides after an asset purchase, acquisition, or merger is understanding the legal status of a corporation. A corporation is, legally, a kind of fictional "person," separate and distinct from the people who own shares or other ownership rights in it. It has its own rights and responsibilities and, in general, is treated by the law as if it were a real person.

Thus, a corporation may sue others in its own name; it may be sued in its own name; it is responsible for obeying laws; and it may be sanctioned for breaking them. It may own, buy, and sell property and enter into contracts and other legal obligations. Although the corporation's officers and employees may have legally mandated duties of their own, those duties are separate and distinct from those of the corporation.

This concept of a corporation as a kind of person delineates the scope of its legal liabilities. Just as a natural person cannot merely pass his or her legal responsibilities onto another person -- such as performance under a contract or responsibility for a debt -- a corporation cannot do so either. In addition, if a corporation "dies," (e.g., is dissolved or absorbed), those duties may remain with it or may pass along to a successor.

Dissolution of a Corporation

When people die their legal responsibilities do not end. Rather, those persons, through their estate, remains responsible for payment of debts and other matters. If necessary, the estate, and thereby the deceased, may be sued or otherwise subject to legal process to enforce those obligations.

A similar situation holds true for corporations. After dissolution, a corporation may be sued for a period of several years (which varies according to the relevant statute of limitation, but is generally under six years). Directors of the dissolved organization also retain liability for their actions for a similar period and may be sued for their actions as directors during that period.

This ongoing liability extends to the organization's information assets for several reasons. Since the organization may still be sued, it has all the customary information needs and duties attendant upon that reality, such as the need to respond to discovery, the need to produce information to defend itself, and the like. In addition, since the organization retains ongoing legal viability for a period beyond its dissolution, it has a continuing duty to retain for a period of years the information it was formerly required to retain by law. In some cases, there are legal requirements that, upon dissolution, transfer some types of information to a government agency or other body for continued maintenance.

These duties are not mere fictions whose breach cannot be addressed. Under the typical corporation statute, some officer of the organization, typically the secretary, has the duty of maintaining the corporation's records and information after the organization's dissolution for the period specified by law. This person retains personal liability for whatever duties are imposed upon the organization's information assets after dissolution; failure to maintain the information may therefore place them at risk of legal sanction. Failure to fulfill these duties may also interfere with the final distribution of the corporation's assets to shareholders.

Asset Purchase

Mere sale or purchase of assets does not transfer legal liability or responsibility. For example, if A owns a house and B is injured on a faulty stairway, and A then sells the house to C, A remains liable to B.

This principle holds true for corporations as well. Preexisting responsibilities and liabilities remain with the originally liable party. If consolidation was structured purely as an asset purchase (e.g., the sale of plants, machinery, accounts receivable, or other tangible assets by one corporation to another), the selling organization generally retains any preexisting legal liabilities that it incurred, even if the sale involved 100 percent of the selling corporation's assets.

If the transferred assets are a type that might have intrinsic liabilities (e.g., inventory that is subject to product liability considerations), such liabilities may attach to the purchasing organization; but other general legal liability, such as contract performance, shareholder liabilities, and remain in the original organization.

These liabilities and responsibilities are equally applicable to information issues. An organization's responsibility to maintain information does not generally end merely because it has disposed of some or all of its assets. If the transferred asset inherently has a legally significant information set (e.g., a parcel of land with pollution issues), the new owner may have information responsibilities of its own; but the original owner's information management responsibility under law generally remains undiminished for whatever period of time the law specifies. Asset transfer does not eliminate it.

In practice, acquisition of another organization is often structured as an asset purchase in which 100 percent of an organization's assets are purchased, and 100 percent of its employees hired, with the intent of reducing liability for the purchasing organization. This allows the purchasing entity to buy what is effectively an ongoing business without acquiring any preexisting liabilities. Although creditors and ongoing litigation may require the selling entity to settle known liabilities prior to the sale's consummation, future liabilities that might arise remain the responsibility of the seller, which, at that point, has few or no assets at risk.

Acquisition or Merger of Ongoing Entities

A somewhat different situation prevails when the consolidation is structured so that the acquired organization remains a viable entity. When an organization acquires another as an ongoing enterprise or two organizations merge to form a new entity, the responsibilities and liabilities of the old or acquired organization do not simply go away. Rather, they are transferred to the new entity, along with the assets, good will, and other particulars of the business.

The new or surviving entity may therefore be sued for performance of contracts entered into by the predecessor organization, is liable for its torts and other wrongs, and generally is responsible for all acts, omissions, and duties of the predecessor organization. An illustrative, if imperfect, analogy to a merger is a marriage between two natural persons. Since neither is "dissolved" and both remain viable, ongoing concerns, the liabilities of both remain and are assumed by the newly formed entity of the two partners.

Thus, if the consolidation's form was a merger or acquisition, the new organization inherits responsibility for the acquired organization's information assets, including whatever liabilities attach to them.

Issues in Mergers and Acquisitions

A corporation which acquires another organization or its assets often finds that, as part of that acquisition, it winds up in possession of large volumes of paper records, computer tapes, microfilm, and other items of uncertain origin and value. The first question that commonly arises is, who is responsible for these records? The nature of the purchase transaction dictates the answer.

If the transaction was an asset purchase and large amounts of non asset-related records were transferred, it may be that the selling organization simply used the transaction as an excuse to unload large volumes of old records on an unsuspecting party. If the transaction was the acquisition of a going concern, the records may now be the responsibility of the acquiring organization. If so, the question of retention for the newly acquired records arises.

Records Retention

Generally, records retention periods need not change upon merger or acquisition. If, for example, a document had a six-year retention period prior to the acquisition, it can remain so, provided that the chosen period was adequate in the first place. If the retention period was partially completed, it need not restart; the record in question need only be kept for a total of six years, not six years after the merger. Any preexisting retention schedules applicable to the newly acquired records are therefore still viable. Given the volume of records that often changes hands during a merger, this is a significant consideration.

Incorporating New Records into Existing Retention Schedules

The acquiring organization may have its own preexisting schedules, which differ from those used by the acquired company, or the schedules of the former organization may not be available. The question then arises whether the acquiring organization may properly substitute its own schedules for those of the former organization or incorporate the newly acquired records into its own schedules.

Analytically, records retention schedules are sets of policies and procedures. Like any policies and procedures, they may be changed from time to time provided that the changes are not undertaken for illegal or improper reasons, and that the new versions conform to applicable law.

In view of these considerations, substituting the schedules of the acquiring organization for the old ones, or incorporating newly acquired records into a preexisting schedule is a perfectly appropriate practice. The law does not forbid this in any way; rather, records retention laws only require that the records in question be retained for some stated period of time, and, in some cases, in some prescribed manner or medium. So long as these requirements are met, the particular schedule that serves as the instrument of compliance is legally irrelevant.

What if the new retention periods are substantially different from the old periods? Again, this is not an impediment, provided only that the new periods comply with applicable law and are otherwise reasonable. It may be wise to document the changes and the reasons for them, but if the changes are themselves proper, this documentation is merely for audit and evidentiary purposes. It is not, in and of itself, required.

Records of the Merger or Acquisition Itself

In addition to the normal business records acquired in a merger or acquisition, the transaction may itself generate a considerable quantity of records. Typically, these include contracts and related documentation and due diligence files. Due diligence files are an assortment of things, compiled to allow the acquiring organization to determine the value and condition of the acquired entity. They may encompass asset lists and valuations, accounting records, intellectual property files, and the like. Retention for due diligence files is not generally governed by statute. Therefore, retention for them is determined by considering their use and legal significance.

The purpose and legal significance of due diligence files is to evaluate and assess the acquired entity's general condition to ensure that the acquiring organization's shareholders or other owners are being fairly treated and that the transaction is properly beneficial to them. If it turns out to be otherwise, an aggrieved party might proceed under such legally straightforward theories as breach of contract, breach of fiduciary duty, negligence, etc. Therefore, due diligence file retention is governed by analysis of the statutes of limitation for these various causes of action. As with most statutes of limitation, the periods for likely lawsuits over due diligence files are fairly short, and retention periods for due diligence files can be developed accordingly.

Although mergers and acquisitions pose a variety of information management problems, most are amenable to the information management principles applicable to more ordinary circumstances. Few novel legal situations or legal theories are involved, and straightforward scheduling and disposition should be the norm rather than the exception.

John C. Montana, J. D., is an attorney and records management consultant based in Landenberg, Pennsylvania. He may be reached at montana@csdnet.