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Exam Ready Notes for the optional module 'Mergers & Acquisitions'....
, Preliminary Matters
Methods of Acquisition (Background)
Share Transfer of ownership and control of Target
Purchase o May involve pre-sale restructuring before the share purchase (e.g. hiving down
Acquisition desired assets to a NewCo, for that NewCo to then be acquired by share
purchase)
Agreement between Buyer and individual Shareholders (Sellers)
Target remains untouched, it retains whatever assets, liabilities, rights and obligations it
had prior to the acquisition
If Target is a wholly-owned subsidiary, you need only acquire 50%+1 of Target’s HoldCo
in order for Target to be considered your subsidiary (s1159 CA2006)
o Although desirable, it isn’t necessary to purchase all shares, only enough to give
control
Target still owns and runs the business
Asset Transfer of specific Target assets
Purchase Each asset is transferred in the required way (TR1 for Land, STF for Shares, etc)
Acquisition This is most commonly used for the acquisition of an unincorporated seller’s (Sole
Trader/Partnership) business
Asset Purchase Acquisition gets complex when you wish to purchase a particular
division of Target – you must target the specific assets of the desired division
o Example: Energex operates Energex Gas and Energex Electric – you are only
interested in Energex Electric
Legal Merger There are two main types of legal merger:
(US & EU Merger by absorption
only, not UK) o The assets and liabilities of X are absorbed into Y. X is formally dissolved
and, on its dissolution, it transfers all of its assets and liabilities to Y
Merger by formation
o X is incorporated and absorbs the assets and liabilities of Y and Z. On their
dissolution, Y and Z transfer all their assets and liabilities to X.
The difference between Legal Merger and Share Purchase Acquisition is that:
Share Acquisition = transfer of the corporate shell, Legal Merger = the corporate
shell is dissolved, and its assets absorbed
o At the end of the Legal Merger, there is only one corporate shell, with a
Share Acquisition there remains two
Generally, Sellers will want Share Purchase Acquisitions, and Buyers will want Asset Purchase Acquisitions
because Share Acquisitions acquire Liabilities as well as Assets
Acting for the Buyer – Share Purchase Acquisition – Pros & Cons
Buyer Trade continuity Process is much quicker than an asset sale
Advantages Hardly any disruption to trade
(SPA) From an outsider’s perspective, very little will have happened
to Target
Most contracts continue unaffected (legally speaking) unless
they contain Change of Ownership clauses which allow for
termination
Choice of assets Far more extensive warranties are available to the Buyer when
and liabilities seeking warranties re: a particular asset, this keeps the Seller
on the hook if shit hits the fan
Due diligence Due diligence required for Share Purchase acquisition is far
more thorough than Asset Specific due diligence, meaning
there is more chance to identify problems
2
, Integration Share Purchase Acquisition may be more suited to the Buyer,
apply to the current group structure of the Buyer
Mechanics of The Transfer of ownership (STF) is very simple, and cheaper (in
acquisition terms of the legal fees required to execute)
o Although the process overall (namely due diligence) is
probably more complex than this
Tax See below
Buyer Trade continuity Relationship with 3rd parties who are contractually obliged to
Disadvantages deal with the new owners may not like this – deterioration in
(SPA) relationship
Change of Control and Material Change clauses in Target’s
existing contracts may be triggered – allowing third parties to
terminate those contracts
Choices of assets Buyer is purchasing the entirety of Target, meaning he cannot
and liabilities cherry-pick, unless a hive-down procedure is used first
All liabilities are taken on by the Buyer which is risky, even if
there are extensive warranties and indemnities in place
Unless there are extensive warranties given by the Seller, the
Seller is freed from liability, leaving the Buyer to his own
devices if shit hits the fan
Due diligence Because the entirety of Target is acquired, due diligence is
more expensive and time-consuming (even if Target is
forthcoming) and
Integration Share Purchase Acquisition may not be suited to the Buyer,
apply to the current group structure of the Buyer
Integrating Target’s entire company culture into the Buyer’s
company group may prove more problematic than simply
buying Target’s assets
Restructuring may be necessary to fully integrate Target
Securing finance If Target = PLC, Target cannot provide security/assistance for
any loan being used to purchase its shares (Financial Assistance
under s678 CA2006 is prohibited)
o Note: same disadvantage does not apply to Private
Companies
Employees Buyer becomes liable for employee contracts, which may not
be in line with Buyer’s plans for the Target
Tax See below
Acting for the Buyer – Asset Purchase Acquisition – Pros & Cons
Buyer Choice of assets Buyer can cherry-pick the assets desired
Advantages and liabilities Buyer can choose to accept only the liabilities he wishes,
(APA) avoiding the risks associated with unknown liabilities
Due diligence Due diligence is limited to the assets being acquired, causing
less disruption to the Buyer given that it is less onerous
Integration Asset Purchase Acquisition may be more suited to the Buyer,
apply to the current group structure of the Buyer
Securing finance The assets being purchased from Target can be used as security
for a loan to fund the Asset Purchase Acquisition (no Financial
Assistance)
Appointment of The Buyer can apportion the purchase price consideration in
the purchase such a way (within reason) which benefits him the most. For
consideration example, weighting the consideration in relation to:
o Plant & Machinery for Capital Allowances
3
, o Trading Stock for Deductible Expenses
Employees Buyer can decide not to purchase the contracts of the
employees and buy physical assets of trade only – this affords
flexibility if the Buyer to continue running Target, or to simply
sell on Target’s assets
Tax See below
Buyer Trade continuity All existing contracts need to be assigned/novated, which gives
Disadvantages rise to confidentiality issues since these third parties will
(APA) become aware that an acquisition is taking place
Customers and suppliers may review their dealings with the
Buyer, who may have to work to build relationships from
scratch
Leaseholds require Consent to Assign from LL, which can delay
acquisition (note – further confidentiality issues)
o All the above can be costly and time consuming
Integration Asset Purchase Acquisition may not be suited to the Buyer,
apply to the current group structure of the Buyer
Tax See below
Acting for the Seller – Share Purchase Acquisition – Pros & Cons
Seller Clean break from Seller loses connection with the Target. The liabilities of Target
Advantages business continue to exist, separate to the Seller
(SPA)
Mechanics of Mechanics of transfer are simple (Stock Transfer Form)
transfer
Employees The Employees’ employer (Target) does not change, and thus
there is no risk of any potential claims by employees against
the Seller – potential claims are brought against Target, not the
Seller
Tax See below
Seller Clean break from Clean break may not be as clean as thought – Buyer will
Disadvantages business conduct detailed investigations and seek wide protections
(SPA) (warranties/indemnities) from the Seller
Buyer will ensure that it has right of comeback against the
Seller if Target is riddled with undisclosed issues
Personal guarantees made (e.g. can prevent a clean break,
unless the Seller can negotiate releases from these obligations
on completion.
Scope of More extensive warranties will be demanded by Buyer, more
warranties and onerous on Seller
due diligence Wider due diligence and investigation since entirety of Target is
being sold, more onerous on Seller
Financial Services FSMA involvement is onerous with share transfer.
and Markets Act o s21 restrictions the issue of ‘an invitation or
2000 inducement to engage in investment activity’ (includes
the sale of shares)
Breach of s21 renders the sale unenforceable
– so, the use of authorised persons like
investment banks is required to avoid this
Note: there are exceptions under
s62 FSMA
Tax See below
4
, Acting for the Seller – Asset Purchase Acquisition – Pros & Cons
Seller Scope of Less extensive due diligence limited only to the assets being
Advantages warranties and acquired
(APA) due diligence There is no need for complex taxation warranties and
indemnities since tax liabilities remain with Target
Mechanics of Some assets are transferrable by delivery, which is simple
transfer
FSMA FSMA doesn’t apply to asset sales, thus the regulatory
requirements are less onerous on the Seller
o Note: many Asset Purchase Acquisitions start their life
as a Share Purchase Acquisition, so compliance to
FSMA may be necessary in the beginning
Employee liability Transfer of assets does not terminate contracts of employment
(TUPE2006) it the sale represents ‘a transfer of an economic
entity which retains its identity’, meaning the Buyer takes
responsibility of the employees from Target
o Seller will have no employee responsibility, unless
warranties are given
Tax See below
Seller Clean break from Legal liability remains with Target, meaning if Target is an
Disadvantages business unincorporated business, liability remains with the Seller
(APA) Even where Buyer has contracted to assume certain liabilities in
the acquisition agreement, this will not affect third parties who
may still pursue the Seller
o Note: indemnities apply, but these are not of value if
the Buyer is insolvent
Mechanics of Other assets (Land/IP Rights) require a formal process to be
transfer followed, which can be complex
Each individual asset must be transferred, which can give rise
to complications if third-party consent is required (e.g. Consent
to Assign given by LL may cause delays)
Employee liability If TUPE2006 does not apply, then Seller will retain the
employees and so any liability to them, as well as claims for
dismissal and redundancy
Tax See below
Tax Specific Pros & Cons – Both Buyer/Seller – Both Methods of Acquisition
Buyer – Share Purchase Acquisition Seller – Share Purchase Acquisition
Buyer acquires the tax position of the Target Direct receipt of consideration by individual
o Beneficial if the Target is making losses shareholders
as Buyer can use carry-forward relief If, pre-acquisition, Target is owned by a
(s45 CTA) company then capital gains realised by selling
o Here, the Buyer will view Target’s Target may be exempt from corporation tax
losses as an asset under the Substantial Shareholdings Exception
Buyer acquires the benefit of Target’s existing (Finance Act 2002)
tax credits o Subject to certain conditions being met
If Buyer borrower’s money to finance the SPA, If, as consideration for the sale of shares in
there will be tax relief on interest payments Target, the Seller receives shares in another
made on the loan under Finance Act 1996 company, he might be eligible for roll-over relief
No VAT is payable, because this is a share sale on a share-for-share exchange (s135 TCGA)
If the aim of the transaction was to acquire meaning no CGT is paid on the gain realised by
Land (which Target was owner of) no SDLT will Target’s sale
o Subject to clearance by HMRC
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