This document includes full notes on units 1-9 mergers and acquisitions course at the University of Law: preliminary matters, due diligence, price and payment, risk allocation, conditional contracts and completion, asset acquisition, private equity, takeovers public offers, schemes of arrangement. ...
Acquisition
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 as a business.
Reasons for acquisitions: changing business strategy, releasing funds, expansion, repositioning
yourself in the market, breaking into new markets, economies of scale, funds for resources for new
projects.
Typical structure in a private company acquisition:
1. Pre-contract: heads of terms (make sure aspects such as price not legally binding).
Confidentiality agreement drafted by seller. Buyer due diligence at pre-contract stage –
investigate target, due diligence questionnaire.
2. Contract: main document of transfer of shares or assets. Sale of purchase agreement,
contractual protection, disclosure letter produced by seller.
3. Completion: timing – simultaneous exchange and completion. Conditional contracts.
4. Post-completion: buyer change certain aspects of business. Tailor business to buyer’s needs.
Post completion formalities.
BUYER – Advantages and Disadvantages of a share sale
Trade continuity
Ad: Lacks disruption to trade. To customers, suppliers and others very little will appear to have
changed, therefore highly likely will continue dealing with company.
Disad: Any changes of control clauses in contract? Also need to make sure any 3 rd parties that deal
with company now and not obliged to do so after change ownership will continue to deal with them.
Choice of assets and liabilities
,Ad: More certainty to what they will get.
Disad: Take on all assets (cannot cherry pick) unless use hive down procedure. Take on all liabilities.
May result in unnecessary assets being acquired, ie duplicate plant and machinery.
Solution of this is a ‘hive-down’: transfer specific assets which the buyer wants to acquire to a new
company (a subsidiary “Newco”), then buyer conducts share acquisition of Newco.
Due diligence
Ad: carry out all DD.
Disad: More extensive DD needed compared to asset sale, with extensive need for
warranties/indemnities and increased time, costs and risk to confidentiality.
Integration
Depends entirely on group structure and how easily it would be for assets/new company to be
integrated.
Mechanics
Ad: Easier with share purchase as can execute stock transfer form so can potentially be simpler and
cheaper in terms of legal fees.
Taxation/CGT
Ad: N/A
Disad: when assets of company are sold there is a deferred tax liability (pay more tax) in which a
prudent buyer should seek a discount on the price of the shares. Query whether target has assets
that will constitute taxable disposal and how many/how much.
Acquiring the tax position of the company
Ad: May be able to tax advantage any tax credits of the company eg s45 CTA 2010 allows trading
losses of company to be carried forward and set against trading profits of the same in the future.
Good if buyer can turn company around and set previous losses against future profits.
Disad: Tax position of company continues after acquisition, so buyer may need indemnities from
seller against any tax liabilities from before sale, can be done by tax deed of covenant.
Stamp Duty
Ad: N/A
Disad: Due on 0.5% of purchase price rounded to nearest £5.
SELLER – Advantages and Disadvantages of a share sale
Clean Break
Ad: Seller loses its connection with the company. Liabilities continue to be enforceable against the
company which still exists.
Disad: Buyer will make detailed investigations about the company and seek wide protections
(warranties and indemnities). Buyer will make sure it has a right of comeback if company has
problems. If seller given personal guarantees to loan, clean break only possible if able to negotiate
releases from these on completion.
Due Diligence
Ad: N/A.
Disad: subject to much wider DD and investigations. Seller required to provide much more extensive
warranties.
Transfer of title
Ad: Simple. Stock transfer form.
Disad: check company contracts for change of control clauses, eg is 3 rd party consent needed?
FSMA
Ad: N/A
Disad: s21 FSMA 2000 restricts the use of an invitation or inducement to engage in investment
activity, includes sale of shares. Breach of restriction offence rendering the sale unenforceable. To
avoid, route via authorised person. Solicitors also make sure carry out FSMA requirements to carry
out regulated activity.
,Employees
Ad: Target company is employer so no change in employer. No direct effects on contracts of
employment, so no possibility of potential claims from employees.
Disad: Unless golden parachute clause.
Tax
Ad: CGT relief, ER if individual shareholder disposing of shares.
BUYER – Advantages and disadvantages of asset sale
Trade continuity
Ad: N/A.
Disad: Privity of contract – all major contracts need to be assigned. Confidentiality issues to find out
if 3rd party willing to assign without revealing the deal to them. If not assigning contracts then may
put undertaking/indemnity into SPA. Customers and suppliers may review their dealings with new
owner who may have to work hard to build good relationship. This is because existing contracts will
not be transferred automatically; they must be assigned or novated, which generally requires the
consent of the other party to the contract.
Any leasehold properties will need assigning and consent from LL. Time consuming.
Choice of assets and liabilities
Ad: Buyer can package and accept only those assets it wishes. Buyer can avoid risks of unknown
liabilities.
Due diligence
Ad: DD process limited to the assets being acquired, likely to be less disruptive to continued trade of
target company.
Integration
Depends entirely on the entire group structure and how easily the new company or its assets would
be integrated.
Financing
Ad: Acquiring assets buyer could use assets as security for any loan required.
Mechanics
Disad: Each asset transferred into their acquired form, ie conveyance for land, assignment for lease
etc – more time consuming and more expensive in terms of legal fees.
CGT
Ad: Chargeable assets such as land will have higher base rates (lower gain, less tax) for CGT purposes
on their subsequent disposal. Buyer acquire at market value and when comes to dispose of in future
will be charged to capital tax, based on any increase in value since it acquired the asset.
Capital allowances
Ad: Purchase of certain assets such as plant and machinery will enable buyer to obtain tax relief in
form of writing down allowance.
Disad: disadvantage if price paid exceeds written down value, in that case seller will be subject to a
balancing charge.
Apportionment of purchase consideration
Ad: Necessary to apportion total consideration between various assets acquired – spread tax in
favourable way. In buyer’s interest to weight the consideration between – plant and machinery
qualifying for capital allowances, trading stock, capital items qualifying for capital tax roll over relief
on replacement of business assets.
Roll over relief
Disad: carry forward of losses not available for asset purchase. Only available for qualifying
replacement assets when new replacement assets purchased.
VAT
Ad: No VAT if structured as transfer as a going concern.
, Disad: May arise on sale of assets alone unless disposal is of sufficient assets to enable the business
to continue.
Stamp duty
Disad: Pay SD on dutiable assets such as land and shares.
SELLER – Advantages and disadvantages of asset sale
Clean break
Disad: Legal liability for 3rd parties from debts and obligations of business remains, 3 rd parties can still
take action. May be able to seek indemnity from buyer but this will be difficult.
Even if the buyer contractually agrees to assume responsibility for liabilities, this will not bind third
parties who may seek to enforce against the seller.
Due diligence
Ad: Much less extensive DD. No need for complex taxation warranties and indemnities, most tax
liabilities remain will seller.
Transfer of title
Disad: Each separate asset of the business must be transferred, can involve complications where
consents required from 3rd parties. Leasehold properties LL consent to assign required and can delay
transaction.
FSMA
Ad: Does not extend to sale of assets of business.
Employees
Ad: Effect of TUPE 2006 is that transfer does not operate to terminate contracts of employment.
Rights and obligations of employees transfers to buyer who takes on responsibility for those
employees.
Disad: If TUPE does not apply then the seller will retain the employees and so any liability of them,
claims for dismissal/redundancy.
Tax
Ad: Can benefit from roll over relief on replacement of qualifying assets.
Disad: substantial shareholding exemption not available so corporation tax will arise on top of
chargeable gains. May suffer double taxation – 1. Corporation tax paid by seller on sale of assets, 2.
Further charge when proceeds of sale are distributed to SHs.
Letter of Intent/ Heads of Terms
Statement/guidelines about deal.
The parties may wish to record the main points on which they have agreed and the basis on which
they are prepared to proceed with the transaction.
Legally binding? – the buyer will not want to be fully committed until it has carried out its full
investigations and is satisfied that adequate protections by way of warranties and indemnities are
included in the main agreement.
If not legally binding, letter of intent should be marked “subject to contract”.
Amendments to letter of intent:
State the clause number that needs amending.
Is company’s name and address at top of letter? All director’s names and addresses also
need to be on top of letter.
Is the price of the agreement correct?
Should give full names of all people in agreement eg ‘senior management’ amended to who
they are/their names. Is management being retained? Make sure agreement states this.
Are they taking over company or group? Make sure correct name stated. The agreement
should be with the sellers and not the target company.
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