The Union Tool is a Shape Operation, and much like the Combine Tool, it merges two or more existing feature shapes into one feature. The only difference is that any overlapping features on the map will be merged together into one continuous shape.
To use the Union Tool, select two or more features that you wish to union together. Once you have at least two features selected, the Union button will be available to you. Clicking it will open up an attribute window that displays the first feature's data that will be put into the new feature. You have a chance now to edit that data before continuing. Once you are through with your edits, click Save Edits to commit the new shape into your project.