Notes on Mergers and acquisitions for the LPC at University of Law.
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INTRODUCTION 4.
clauses giving rise to lawful termination by the other side.
Integration: Target’s company culture may be difficult to
integrate into the culture of Buyer’s group. If culture is likely to
TYPES OF ACQUISITIONS: be an issue, asset purchase is easier.
5. Buyer will be liable for employee contracts – maybe not what the
In general, Sellers will prefer Share purchase acquisitions while Buyers Buyer wants?
prefer Asset purchase acquisitions as share purchase acquisitions also
transfer the liabilities to the buyer. 6. Securing loans:
If the Target is a plc: s.678 CA 2006 Target cannot give security
Share purchase acquisitions: for a loan – this would be financial assistance.
1. Ownership and control of the Target company will transfer, but If Target is not a plc but a private company: this doesn’t apply.
Target will continue to own and run the business.
2. Involves an agreement between buyer and Sellers (individual Cons from a tax standpoint:
shareholders) • Higher CGT liability if Buyer plans to sell the asset: Buyer will
3. The Target will retain its assets, liabilities, rights and obligations. pay CGT from the point when the Target originally acquired the
4. s.1159 CA 2006 If Target is a wholly-owned subsidiary: Buyer asset until when he disposes of the asset. Not an issue if Buyer
only need to acquire more than 50% of Target’s holding company doesn’t sell the asset.
for the Target to be considered Buyer’s subsidiary. – but it is • Buyer must pay Stamp Duty for the shares purchased in Target
beneficial to purchase all the shares. which is 0.5% of the amount paid (round up to the nearest £5)
Asset purchase acquisitions: Pros for the Seller:
1. Ownership of specific assets in the target company will transfer.
2. Each asset will have its own way of transfer. STF for shares and 1. Clean break: Target company’s liabilities will exist separate from
TR1 for land) the Seller and Seller need not concern itself with the Target.
3. Most common where the Seller is an unincorporated business – 2. Transfer mechanism is simple (Stock Transfer Form)
i.e. sole trader or partnership 3. The employees remain employed by the Target so any potential
4. Complicated when only purchasing a division of the Target claims will be brought against the Target.
company as you will need to cherry-pick the assets relating to
that division from the whole. – i.e. if you are purchasing Tesla’s Pros from a tax standpoint:
robotics division but not it’s car division, you will need to • Shareholders receive the money directly and may claim
separate the assets of the robotics division from the assets of the Entrepreneur’s Relief
car division. • If, as consideration for the acquisition, Seller gets shares in
another company, Seller could apply roll-over relief on a share-
US and EU Legal Merger (not UK): for-share exchange so no CGT is payable for the acquisition –
s.135 Taxation on Chargeable Gains Act 1992
Share Acquisition = transferring the company’s shares so there are two • Substantial Shareholdings Exception: If pre-acquisition Target
companies remaining at the end of the process was owned by a company, then the gains earned by selling
Legal Merger = the company is dissolved and its assets will be absorbed Target could be exempt from corporation tax – Finance Act 2002
by the other company so there is only one company remaining.
Cons for the Seller:
Types of legal merger
Merger by absorption Merger by formation 1. Clean break: Clean break may not go smoothly. Buyer should
conduct investigations and seek warranties/indemnities from
the Seller. Any existing personal guarantees can also prevent a
Old co absorbs New co. New co will be New co is incorporated and absorbs clean break, unless Seller negotiates release from these
formally dissolved and will transfer its A co and B co. Both companies obligations once the sale is completed.
assets and liabilities to Old co on transfer their assets and liabilities
dissolution. on dissolution. 2. Must take care not to breach FSMA:
s.21 Financial Services and Markets Act 2000 Unauthorised
persons cannot issue an invitation/inducement to engage in
SHARE PURCHASE ACQUISITIONS: investment activity – this includes selling shares. If s.21 is
breached, the sale will become unenforceable. Instruct
Pros for the Buyer: authorised persons (eg. investment bankers) for these types of
sales.
1. Choice of assets and liabilities: Buyer can get extensive
warranties for a selected asset. 3. Warranties and due diligence: for Share purchase acquisitions,
2. Thorough due diligence: This will allow the Buyer to identify Buyers usually expect more extensive warranties which will be
problems before opting to go ahead with the purchase. onerous for the Seller. Wider due diligence and investigations
3. Trade continuity: Quicker process than asset sale with little are likely as the entirety of the Target will be sold.
disruption to trade. No changes to the Target from an outsider’s
perspective. Contracts also continue to be unaffected – except if ASSET PURCHASE ACQUISITIONS:
they have a Change of Ownership clause in which case the
contract may be terminated.
4. Process: Transfer of Ownership (STF) is simple and cost less in Pros for the Buyer:
legal fees. The only complexity is the due diligence process.
5. Easy integration in the Buyer’s group structure 1. Simple transaction: many assets will be transferrable by delivery.
2. Integration: Buyer can maintain its current group structure – key
Pros from a tax standpoint: advantage.
• Buyer acquires the Target’s tax position. Buyer can use this to 3. Choice of assets and liabilities: Buyer can select which assets
carry over relief from previous year so useful if making Target and liabilities to purchase. This avoids the risk of unknown
was making losses – s.45 Corporate Transparency Act liabilities.
• Buyer acquires the Target’s existing tax credits. 4. Securing loan: the assets purchased can be used as security for
• If Buyer borrowed money to pay for the SPA, Buyer would loans to fund further asset purchase.
benefit from tax relief on interest payments paid on the loan. 5. Apportionment of purchase price consideration: Purchase price
• VAT will not apply to the sale. consideration can be apportioned in a way to benefit the Buyer.
• If Land was acquired through the Target, no SDLT is payable.
• Seller offers warranties to the Buyer as to Target’s tax position Pros from a tax standpoint:
using a Tax Deed of Covenant doc. • The Buyer will pay lower CGT when he sells the asset.
• Purchasing Plant and Machinery enables Buyer to obtain tax
Cons for the Buyer: relief.
• Work in Progress/Stock is a deductible expense so Buyer can use
1. Choice of assets and liabilities: Buyer cannot cherry-pick which these to lower their Corporation Tax/Income Tax
assets they want to purchase unless uses a hive-down • If Buyer takes out a loan for the acquisition, there will be tax
procedure. Liabilities of the Sellers become the liabilities of the relief on interest payments made on the loan.
Buyer which can be risky. Use extensive warranties and • If the transfer is as a going concern, no VAT will be charged on
indemnities to reduce risk for the Buyer. the sale of the assets.
2. Expensive and time consuming diligence
3. Trade continuity: May destroy relationships with third parties as Cons for the Buyer:
parties to company contracts may not want like the change of
having to deal with new partner/contractor. Some existing 1. Trade continuity: Existing contracts will need to be
contracts may have Change of Control and/or Material Change assigned/novated but then third parties will learn that the
Mergers and Acquisitions – All chapters – Revision Notes | Page 1 of 23
, acquisition has taken place. Customers/suppliers may decide not Jurisdiction:
to go ahead with the contract and thus Buyer may need to build If the acquisition has an international dimension, specify the jurisdiction
new relationships. To assign a lease, Landlord must sign Consent used for dispute resolution.
to Assign which may lengthen the acquisition process.
Exclusivity clause:
Cons from a tax standpoint: * The clause must specify that the Seller will not negotiate with
• Buyer must pay Stamp Duty on dutiable assets other companies, it should not state that it will negotiate with
• If Target is not sold as a going concern, Buyer will have to pay Buyer.
VAT on the stock and capital assets of Target * Must include a time-limit.
• Buyer doesn’t receive Target’s tax position, and this may be * Must include a remedy in the event of breach – eg. the recovery
something that the Buyer wanted of costs incurred during the acquisition process.
* Buyer must provide consideration – eg. Buyer’s commitment to
Pros for the Seller: pay for the due diligence investigation.
1. Limited due diligence: process may cost less. Any due diligence Other issues:
will only be carried out in relation to the acquired assets. * Look out for spelling mistakes and clauses that are
2. FSMA doesn’t apply so less regulatory requirements. But if the inconsistent with the facts.
Asset purchase acquisition started out as a Share purchase * Also check to whom the Letters of Intent are addressed: for
acquisition, the Buyer will still need to comply with the FSMA as APA, this should be the Company or for SPA, this should be the
relevant to Share purchase acquisitions. Shareholders.
3. Employees: Buyer can elect to not purchase employee contract
and only buy physical assets. Buyer has a choice to continue Confidentiality Agreement:
running the business or sell the assets.
TUPE 2006 However transfer of assets will not terminate existing Drafted by the Seller.
employment contracts if the sale amounts to a “transfer of an
economic entity which retains its identity”. In this case, Seller will Confidentiality Agreement = document preventing the Buyer misusing
have no responsibility for employees unless he gives out the information the Seller discloses to it during the due diligence
warranties. process.
Pros from a tax standpoint: Parties’ objectives:
• Target can use roll-over relief on the replacement of a qualifying
asset if the money received in consideration of the assets are
used to purchase a replacement asset. Seller and Target will both Seller wants to Buyer wants to
have a lower CGT bill after the acquisition.
• Sale of assets for which capital allowances have been claimed 1. keep info confidential and 1. reduce limitations (especially so
will trigger a balancing allowance if those assets are sold for less 2. set out procedures for the if those costs money)
than their tax written down value. use/safe-keeping of that info 2. achieve a narrow definition of
‘Confidential Information’ and
3. for the restrictions to apply only
Cons for the Seller: to the most sensitive info
1. Clean break: If Target is an unincorporated business, liability
remains with the Seller. Even if Buyer agreed to take on certain Mandatory inclusions – should not be missing:
liabilities, the third parties may simply pursue the Seller. Also, • A definition for Confidential Information
indemnities made by the Buyer will become unenforceable if the • The Buyer’s obligation not to disclose/use Confidential
Buyer goes insolvent. Information except as consented to by the Seller.
2. Mechanics of transfer: Must follow a formal process to transfer
Land and IP rights. Each asset must be transferred separately – Possibly also include here:
complex process, especially if third parties must give consent 1. List of authorised persons entitled to receive the info
(Consent to Assign by Landlords) 2. Buyer not to solicit Seller’s customers/suppliers/
3. Employees: If TUPE 2006 is not triggered, Seller will keep all employees for a specified period
employees and any claims for dismissal/redundancy.
• The Buyer’s undertaking to return/destroy such info (including
Cons from a tax standpoint: copies) if the acquisition doesn’t proceed. Also include here:
• Double taxation: Seller must pay Corporation Tax on the sale of the parties agree that they will not, without consent from the
the assets. Sale of asset for which capital allowances have been other, make public their negotiations.
claimed will trigger a balancing charge if those assets are sold for
more than their tax written down value. Shareholders then pay
CGT/Income Tax when the sale proceeds are distributed to them MERGER CONTROL:
as dividend.
STEP 1 – When would the EU Merger Regulation apply?
PRE-CONTRACTUAL DOC: *POPULAR EXAM Q* If the below is met, then EU Merger Reg will override EA 2002 and you
Letter of Intent/Heads of Agreement: will not need to go to STEP 2 but end your analysis with this step.
This doc sets out parties’ intents and fundamental terms. – Question If the below is not met, then the EA 2002 applies instead of the EU
will usually ask you to re-draft or correct mistakes in the doc. Merger Reg and you need to go to STEP 2 and 3.
This document must contain provisions: The merger must be held to be a ‘concentration’:
1. that it is to be legally binding
2. which jurisdiction the contract will fall under Art. 3 EU Merger Reg This is where a lasting change of control occurs
AND due to:
3. grant exclusivity of negotiation 1. The merger of 2 or more independent undertakings; or
2. The acquisition/control of an undertaking
Other useful provisions to add:
1. Seller’s obligation not to enter into negotiations with others Control = a decisive influence, may be as little as a 25% shareholding,
2. Seller’s obligation not to discuss the sale with others may be direct/indirect.
Legally binding clause: The merger must have a ‘union dimension’:
There is a list in the Letter of Intent of which causes are intended to be
binding: a clause which is not on the list will not be binding. – usually A concentration will have a ‘union dimension’ if:
Confidentiality, Exclusivity and Abortive Costs clauses.
Art. 1(2) EU Merger Reg First criteria:
This clause is used as it would be disadvantageous for the Buyer if the * The combined total worldwide turnover of all the undertakings
whole Letter of Intent was binding. – what if he finds out something exceeds 500 million euros
during due diligence or wants to renegotiate the price later on? AND
* The total Union-wide turnover of at least 2 of the undertakings
If you see ‘subject to contract’ in this document: delete it and replace it exceeds 250 million euros
with a ‘legally binding clause’ as it is outdated.
Mergers and Acquisitions – All chapters – Revision Notes | Page 2 of 23
, Art. 1(3) Second criteria: merger will not lead to lessening of competition.
* The combined total worldwide turnover of all the undertakings 4. Phase 2: If the merger is likely to pose a real prospect of a
exceeds 2500 million euros; and substantial lessening of competition, CMA then refers the case
* In at least 3 Member States, the total turnover of all the to an inquiry group. A decision must be made within 24 weeks
undertakings is more than 100 million euros with a discretionary 8 week extension.
* In at least 3 Member States, the total turnover of at least 2 of
the undertakings is more than 25 million euros
AND MERGER REGULATION IN THE TAKEOVER CODE:
* The total Union-wide turnover of at least two of the
undertakings concerned is more than 100 million euros. Merger control rules may apply to a takeover.
Transaction will have a union dimension if either the first or the second STEP 1 – When would the EU Merger Regulation apply?
criteria is satisfied. In this case, the EU Merger Reg will override the EA
2002. If the below is met, then EU Merger Reg will override EA 2002 and you
will not need to go to STEP 2 but end your analysis with this step.
Other rules to see if a merger has a union dimension:
If the below is not met, then the EA 2002 applies instead of the EU
If more than 2/3 of the turnover comes from one Member State, the Merger Reg and you need to go to STEP 2 and 3.
concentration will not have a union dimension.
Rule 12.1 Takeover Code Compulsory term the offeror must include in
Relevant undertakings include: the takeover offer: term stating that offer will lapse/be withdrawn if:
* Buyer and Target 1. Have not been accepted in a way to enable the acceptance
* Any of Buyer’s Parent/Subsidiary companies (More 50% needed) condition(s) to be satisfied, or
* If the Buyer is in a joint venture, only the percentage owned by 2. If CMA investigation is required, regulatory clearance has not
the Buyer will be taken into account – Eg. if A Ltd owns 30% of a been granted/waived.
joint venture, only 30% of the joint venture’s turnover will be
part of the calculation. The takeover must be held to be a ‘concentration’:
Calculate turnover: Art. 3 EU Merger Reg This is where a lasting change of control occurs
Turnover = revenue minus sales rebates and turnover-related taxes (VAT due to:
and other taxes) – Use previous year’s figures for your calculations 1. The merger of 2 or more independent undertakings; or
2. The acquisition/control of an undertaking
You could use the below format to help calculate total turnover:
Control = a decisive influence, may be as little as a 25% shareholding,
UK France Poland USA Total may be direct/indirect.
A Ltd
B Ltd The merger must have a ‘community dimension’:
Total Art. 1(2) EU Merger Reg First criteria:
* The combined total worldwide turnover of all the parties
Even if a merger does not have a union dimension: exceeds 500 million euros
* notification may still be required under the national merger AND
regime. * The total Union-wide turnover of at least 2 of the parties exceeds
* if the merger is capable of being reviewed under the national law 250 million euros
of three Member States, the parties may request that the
European Commission to take jurisdiction over the transaction. Second criteria:
* The combined total worldwide turnover of all the undertakings
STEP 2 – When does the EU 2002 apply? exceeds 2500 million euros; and
* Aggregate Community-wide turnover of at least 2 parties is more
If the EU Merger Reg applies (previous step), you don’t need to look than 100 million euros
at this step. * In at least 3 Member States, the total national turnover of at
least 2 of the parties is more than 25 million euros
Enterprise Act 2002 The act regulating mergers in the UK. AND
* The total national turnover of at least all parties is more than 100
million euros.
EA 2002 applies to a merger if:
1. The EU Merger Reg doesn’t apply BUT If more than 2/3 of the turnover comes from one Member State,
2. The 4 month time limit for a reference to the Competition and the concentration will not have a community dimension.
Markets Authority (CMA) has not yet expired.
Takeover will have a community dimension if either the first or the
3. Two or more enterprises cease to be distinct: second criteria is satisfied unless the two-thirds rule applies. In this
* s.129(1) EA 2002 Enterprise = business case, the EU Merger Reg will override the EA 2002.
* Cease to be distinct = they are brought under
common ownership or one of the enterprises stops The EU merger control regime:
operations.
Notification:
AND * If the takeover amounts to a concentration with Community
dimension, then the parties must notify the European
4. One of the below tests is fulfilled: Commission prior to completion.
* Market Share test: The merger will result in at least 25% * The takeover cannot be completed until granted clearance by
of X goods/services being supplied by or to the same the European Commission.
person/company/group. (If this was already the case * The notification must answer the questionnaire and Form CO
prior to the merger, then the test is that the merger will (these require detailed info re parties and transaction).
lead to a 25% increase).
OR Phase I:
* Turnover test: The Target’s annual UK turnover exceeds * Art. 10 EU Merger Reg The Commission has 25 working days
£70 million. from notification make a decision that it:
1. Does not have jurisdiction, if offer is not within its scope.
STEP 3 – The EU 2002 procedure (UK merger control): 2. Will offer clearance
3. Will allow the offer to proceed subject to conditions.
There is a voluntary merger notification regime under the EA2002 which 4. Will make further investigations
will likely cause delay in the acquisition process. 5. Art. 9 Will refer offer back to a Member State, if offer
may significantly affect competition in a distinct market
Procedure for notification: within that state.
1. Pre-Notification: Parties serve Merger Notice to CMA
2. Phase 1: CMA will investigate if the acquisition is likely to raise * This time limit can be extended to 35 working days in some
competition concerns within 40 working days cases. – eg. where remedies are offered, or if a Member State
3. CMA may give clearance to the transaction or impose makes an Art. 9 request.
conditions. In this case, Phase 2 will not go ahead. – Eg. * Rule 12.1 Takeover Code If the Commission decides on option 4
clearance may be conditional on the Buyer giving certain or 5 above, the offer will lapse.
undertakings such as the Target will be sold post-acquisition so the
Mergers and Acquisitions – All chapters – Revision Notes | Page 3 of 23
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