Mergers and Acquisitions LPC Notes (2022) - High distinction/92% attained I obtained a grade of 92% using these notes and resources ONLY. Includes notes, workshop tasks and notes and more. Please let me know if you have any questions before purchasing! Suitable for the University of Law and BPP Uni...
The term ‘acquisition’ is used to describe a wide variety of transactions involving the SALE AND PURCHASE of either
the underlying assets of an operational business, or the ownership and control of a corporate entity that operates
a business. We are considering ACQUIRING THE BUSINESS AS A GOING CONCERN i.e., buying an entire business.
Buyer – Fundamentally wants to ensure it acquires exactly what it wants (and no more than that) for the best
possible price
Seller – Fundamentally wants to minimise its continuing obligations whilst aiming for the highest realistic price
The TWO MOST COMMON types of acquisition are:
1. The sale and purchase of the underlying assets of an operational business (an asset acquisition); and
2. The sale and purchase of a private company (the ‘target company’) by share transfer (a share acquisition).
Share sale Asset sale
Buyer pays consideration to the shareholders Buyer pays consideration to the target company
Shares transferred to buyer Assets (and liabilities) transferred to buyer
Target co becomes wholly owned subsidiary of buyer Buyer owns the business apart from the tax liability
• Buyer acquires all or the majority of the shares in the • In an asset acquisition the buyer acquires the
target; it is the ownership of the company itself underlying assets needed to carry on the business
which is transferred (and potentially certain agreed liabilities)
• Target company remains in the same shape – i.e. all • Can be tangible or intangible assets and includes
assets, rights, obligations and ongoing liabilities are premises, plant and machinery, contracts and IP
transferred • Each of these assets will be transferred in their
• Target company still owns and runs the business required form e.g. conveyance for land
• If target is a wholly owned subsidiary • Part of the purchase price will be attributable to
o If one company effectively controls over half goodwill which usually includes customer details and
the voting rights in another company (s1159 CA the right to use the business’s trading name. (Seller
2006) company may be required to change their name).
o Sale of the controlling shareholding would • Where sale by co with one division – sell assets,
transfer effective control to the buyer distribute proceeds to SHs through dividends (or
o But buyer will usually want to acquire the liquidation) and dissolve the shell co.
entire issued share capital of the company so • Where sale by co with numerous divisions
holding company will be seller alongside the o Be careful when choosing assets to transfer
other remaining shareholders o Once sold co will decide whether to distribute the
• Seller shareholders may be a mix of corporate, proceeds of sale to the SHs or reinvest then in
individual and trusts new projects within the company.
• If target co has a subsidiary, then ownership of that • Is sale of assets represents a transfer ‘of an economic
will transfer along with the other assets entity which retains its identity’ then TUPE will apply.
• Generally, share sales require more work and See WS6. Rights and obligations of the employees
subject to more regulation remain the same but are automatically transferred to
the buyer
• Because specific assets and liabilities are chosen it is
possible to avoid hidden or unwanted liabilities
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, OTHER: Legal Mergers (background information)
• In certain jurisdictions it is possible to effect an acquisition by way of a legal merger between
different corporate entities through the use of a statutory procedure.
1. Merger by absorption - where the assets and liabilities of one corporate entity are absorbed
into another. The transferor company is formally dissolved and on its dissolution it transfers all
of its assets and liabilities to the transferee company.
2. Merger by formation - where a new company is formed which absorbs the assets and liabilities
of the different companies. Here two or more companies are each dissolved and transfer all
their assets and liabilities to a transferee company formed for the purpose of the merger.
• All assets and liabilities automatically transfer to the merged entity (if absorption) or to the
newly formed company (if formation) but the corporate shell does not transfer as the shares in
the remaining empty shell are cancelled. The merger creates a single enlarged corporate entity.
Reasons for an Acquisition
(a) Changing Business Strategy
(b) Repositioning in the market
(c) Entering new markets
(d) Expanding
(e) Benefitting from economies of scale
Factors Affecting Choice
Where a business is owned and operated by a company, the parties CAN CHOOSE whether to transfer the business
either by transferring all of the shares in the company, or by transferring the underlying assets that comprise the
business.
→ The parties may have opposing views on the form that the acquisition should take.
o Generally, the owners of a company will often prefer to sell their shares, whereas a buyer will often
prefer to acquire the assets of the business from the company.
▪ In these circumstances, the relative bargaining power of the parties is likely to dictate the
outcome.
→ There will be situations where the choice may not realistically be available to the parties.
o This will be the case if, for example, a company has a number of different businesses (perhaps run as
separate ‘divisions’), only one of which the buyer wishes to buy.
→ Some of the main factors affecting choice include tax considerations; finance and access to money
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, Considerations for a BUYER Apply to facts – what do they want?
Factor Advantage Disadvantage
Share sale
✓ Lack of disruption to the trade. From Any change of control clauses in the existing
outsiders’ POV, very little will have appeared contracts (contract will terminate upon
to change, and customers and supplier will change of control).
be happy to continue dealing with company, Third party consent to change may be
subject to (see disadvantages) … required (material change clause)
Also ensure any third parties that deal with
company are not contractually obliged to do
so will still deal with it after it changes
ownership.
Asset sale
Privity of contract applies - can only assign the
benefit of a contract not the burden
EXISTING CONTRACTS need to be ASSIGNED
(benefit can be assigned, unless contract has
prohibition)/NOVATED (terms stay same,
change names) separately (PRIVITY)
o Problem: if you cannot find out if the
3rd party is willing to assign/novate the
contract without revealing the deal to
Trade them (confidentiality issues) and third
continuity party usually wants payment to novate
or may seek to renegotiate terms
If not novating contracts, then may put
undertaking and indemnity into SPA in
relation to burden of contract – buyer
promises to perform seller’s obligations and
N/A
indemnify if seller is sued
Customers and suppliers may be prompted to
review their dealings with the new owner,
who may have to work hard to build up good
relationships in order to enjoy the same
benefits as the previous company
If there is a LEASEHOLD PROPERTY, usually
necessary to assign lease and so gain consent
from the LL – can delay or require the BYR to
enter into a guarantee of performance with
the LL. LL will want to know BYR is not riskier
and may require buyer to arrange suitable
guarantees
All of the above may be time consuming and
may result in additional costs.
Share sale
Choice of ✓ Much more extensive warranties Take on all assets (i.e., you CANNOT CHERRY
assets and
available/usual – perhaps more certainty PICK) unless use hive down procedure
liabilities
than asset sale
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, o This is the process whereby the target
company sells some or all of its assets to
a brand new company, usually set up as
a wholly owned subsidiary of the target
company. The buyer then acquires the
shares of this new company
Take on ALL LIABILITIES and so the
requirement for extensive warranties and
indemnities entered into by the seller to
protect the buyer – despite this may not
actually fully protect the buyer
Asset sale
✓ Buyer CAN PICK AND CHOOSE THE ASSETS IT
WISHES TO BUY
✓ Buyer can PACKAGE AND ACCEPT ONLY
THOSE LIABILITIES IT WISHES to take on
(subject to some statutory liabilities such as
regarding employment). Buyer can avoid the
risks associated with unknown liabilities. N/A
✓ Going concern: Doesn’t matter if leave stuff
behind – as long as functions as business.
Will generally want to take on all historic
contracts. (In exam, assume you are
acquiring a business as a going concern)
Share sale
Due to (see choice of assets and liabilities
section) … more EXTENSIVE DD process with
extensive need for warranties/indemnities
N/A
and increased time, costs and risks to
confidentiality.
Due diligence
Asset sale
✓ Due diligence process LIMITED to the assets
being acquired, therefore likely to be less
disruptive to the continued trading of target
N/A
co. May also be lighter warranty and
indemnity protection
Share sale AND Asset sale
Integration Depends entirely on the current group structure and how easily the new company or its assets would
be integrated. Key issue. Stand-alone new company or incorporation into current business?
Share sale
If buying shares in a plc, the co being bought
cannot provide security/assistance for any
Financing N/A loan being used to purchase the shares
options (esp
if target is (Financial Assistance under the CA)
plc)
Asset sale
✓ If company acquiring assets, the buyer could
N/A
use the assets as security for any loan
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