Mergers & Acquisitions
Overview
Mergers and acquisitions (M&A) refers to the consolidation of companies or assets. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, purchase of assets and management acquisitions.
There are several reasons why companies merge with or acquire other companies, including but not limited to the following reasons:
- Synergy
- Growth
- Diversification of Business and Industries
- Eliminate Competition
- Increase Supply-Chain Pricing Power
Practical Guidance
What is a Merger and Acquisition?
Merger means that two or more merged companies shall cease to exist as a corporate legal entity and shall result in a new company / legal entity which absorbs all the rights, liabilities and obligations of the merged companies. The new resulting company out of such merger shall be the legal successor of the merged companies.
Acquisition means a company either purchases part of the shares or assets of another company or the entire shares and assets of the other company (i.e. a take-over of the other company in this case).
The Advantages and Disadvantages Acquisitions
Advantage of a Share Purchase
The main advantage of a share purchase is that the target / acquired company remains as is, with control simply transferring to the new owner / shareholder. There is no need to transfer the underlying assets and liabilities of the company. Subject to any third party (that is, customer, supplier, landlord or bank) or relevant authorities’ approvals required, the process of transferring shares is generally a more straightforward process.
Advantage of an Asset Purchase
The main advantage of an asset purchase is that a buyer can pick the assets and liabilities it wants. This can help to avoid potential unknown liabilities.
Disadvantage of Share Purchase
The main disadvantage of a share purchase is that all assets and liabilities remain with the business unless specifically carved out in the relevant sale and purchase documentation. Therefore, the buyer must rely on contractual protections, typically in the form of warranties and indemnities.
Disadvantage of Asset Purchase
The main disadvantage of an asset purchase is that the assets must be transferred individually. For example, this includes real estate, licences, commercial contracts, loans and employees. The transfer of employees is a significant disadvantage to asset purchases.
Assignment / transfer rights must be clearly mentioned in the contracts and government and banks’ approvals must be obtained for transfer of real estates and loans.
ACQUISTION LIFE CYCLE
Preliminary Agreements
Such agreements are usually made between the seller and the buyer before signing the asset / share sale and purchase agreement (and the official asset / share sale agreement which need to be registered with the government).
- Non-Disclosure and Confidentiality Agreement
In a asset / share sale and purchase, the seller discloses to the buyer sensitive information about the target company and its business / assets, etc… to enable the buyer to conduct its legal and financial due diligence. The seller will want to ensure the information is kept secret and is protected from further disclosure and from misuse by the buyer (who may also be a competitor) or other persons to whom such information is disclosed.
The non-disclosure or confidentiality agreement is put in place to oblige the buyer and persons to whom confidential information may be disclosed (such as employees of the target company, agents, external auditors, lawyers, etc…) to keep the information safe, not to disclose it to third parties, and not to forbid the buyer from using such information other than for its due diligence and evaluation of the target company.
- Head of Terms, Letter of Intent or a Term Sheet
Head of Terms which are also called (letter of intent, memoranda of understanding or terms sheet) usually set out the key commercial terms of a proposed sale and purchase (whether shares or assets or both). These may include price, the shares or assets to be purchased, exclusivity of negotiations during the due diligence process, conditions precedent or subsequent, proposed due diligence process and timeframes.
Major Agreements and Ancillary Documents
- A sale and purchase agreement (for assets and/or shares) between the sellers and the buyers which must include condition precedents, representations, consideration, mechanism of completion and closing deliverable, closing dates, completion dates, etc…
- A disclosure letter, the purpose of the disclosure letter is to disclose all matters affecting the target company which contradict or conflict with the warranties provided by the seller in the share / assets sale & purchase agreement.
iii. A share transfer document and amendment to the company’s memorandum of association and assets / business sale agreement signed in the presence of a notary public.
- Board or shareholders’ resolutions authorizing the sale and purchase of shares and/or assets.
- Powers of attorney signed in the presence of a notary public.
- A shareholders’ agreement in case of a share sale in the target company.
vii. An assets’ sale agreement in case of assets’ sale.
viii. Assignment agreements for employees, suppliers, customers and real estate. ix. Management agreement for transitional period during which the sale formalities are taking place.
For further information and assistance on advising on a merger and/or acquisition or sale of assets and drafting the above agreements, please email us to info@ambitionlc.com
