ACQ1
Preliminary Matters
Types of acquisition
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.
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
Shares sold Assets and liabilities sold
Money goes to shareholders directly Money goes to company, then to SH
Buyer acquires all or the majority of the shares in the (via dividends income or liquidation)
target, it is the ownership of the company itself which In an asset acquisition the buyer acquires the underlying
is transferred assets needed to carry on the business (tax does not)
Target company remains in the same shape Each of these assets will be transferred in their required
Company still owns and runs the business form i.e. conveyance for land, assignment for lease etc
If target wholly owned subsidiary Where sale to co with one division – sell assets, distribute
o Buy of the holding co, doesn’t need to own all of it proceeds by dividend and dissolve the shell co.
for a co to be a wholly owned subsid, if halve over Where sale to co with numerous divisions
half the voting rights then considered holding co o Be careful with assets choose to transfer under sale
under CA 2006, as buyer will usually want to and purchase agreement.
acquire all the shares then the holding co will be o Once sold co will decide whether to distribute the
joined by other sellers proceeds of sale to the shareholders or reinvest
If target co has a subsid then ownership of that will then in new projects within the company.
transfer along with the other assets IF sale of assets represents a transfer ‘of an economic
Generally, require more work and subject to more entity which retains its identity then TUPE will apply. See
regulation WS6 for more details, but basically maintains employee
rights. The responsibility of the employees will pass to the
buyer
Because specific assets and liabilities are chosen it is
possible to avoid hidden or unwanted liabilities
OTHER: Legal merger
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.
Most common in the United States (US) where acquisitions by a corporate entity are often undertaken by
way of a statutory merger.
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 on dissolution
transfer all their assets and liabilities to a transferee company formed for the purpose of the
merger.
1
,ACQ1
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 Although this is very much a generalisation, 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.
BUYER Apply to facts – what do they want?
Factor Advantage Disadvantage
Trade Share sale
continuity Lack of disruption to the trade. From outsiders’ Any change of control clauses in the existing
point of view, very little will have appeared to contracts.
change and customers and supplier will be Also ensure any third parties that deal with
happy to continue dealing with company, company, but are not contractually obliged to
subject to (see disadvantage)… do so will deal with it after it changes
ownership.
Asset sale
N/A PRIVITY OF CONTRACT - All EXISTING
CONTRACTS (only major) need to be ASSIGNED
(benefit can be assigned, unless contract has
prohibition)/NOVATED (terms stay same,
change names) separately
o Problem: if you cannot find out if the 3rd
party is willing to assign/novate the
contract without revealing the deal to
them (confidentiality issues) and third
party usually wants payment to novate
If not assigning contracts, then may put
undertaking and indemnity into SPA – buyer in
relation to burden of contract
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 Co.
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
All of the above is potentially time consuming
2
, ACQ1
and may result in additional cost.
Share sale
Much more extensive warranties Take on all assets (i.e. you CANNOT CHERRY
available/usual – perhaps more certainty than PICK the parts you like) unless use hive down
asset sale procedure
o This is the process whereby the target
company sells some or all of its assets and
undertaking 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
Choice of Take on all liabilities and so the requirement for
assets and extensive warranties and indemnities entered
liabilities into by the SLR to protect the BYR – despite this
may not actually fully protect the BYR
Asset sale
Buyer can PACKAGE AND ACCEPT ONLY THOSE
LIABILITIES IT WISHES to take on (subject to
some statutory liabilities such as regarding
employment). Thus BYR 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
Share sale
Due to (see choice of assets and liabiltiies
section) … More EXTENSIVE DD process with
extensive need for warranties/ indems and
N/A
increased time, costs and risks to
Due confidentiality.
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.
Share sale
Depends entirely on the current group structure and how easily the new co or its assets would be
integrated. Key issue.
Integration
Asset sale
Depends entirely on the current group structure and how easily the new co or its assets would be
integrated. Key issue.
Financing Share sale
options (esp If buying shares in a plc, the co being bought
if target is cannot provide security/assistance for any loan
plc) N/A being used to purchase the shares (Financial
Assistance under the CA)
Asset sale
3
Preliminary Matters
Types of acquisition
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.
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
Shares sold Assets and liabilities sold
Money goes to shareholders directly Money goes to company, then to SH
Buyer acquires all or the majority of the shares in the (via dividends income or liquidation)
target, it is the ownership of the company itself which In an asset acquisition the buyer acquires the underlying
is transferred assets needed to carry on the business (tax does not)
Target company remains in the same shape Each of these assets will be transferred in their required
Company still owns and runs the business form i.e. conveyance for land, assignment for lease etc
If target wholly owned subsidiary Where sale to co with one division – sell assets, distribute
o Buy of the holding co, doesn’t need to own all of it proceeds by dividend and dissolve the shell co.
for a co to be a wholly owned subsid, if halve over Where sale to co with numerous divisions
half the voting rights then considered holding co o Be careful with assets choose to transfer under sale
under CA 2006, as buyer will usually want to and purchase agreement.
acquire all the shares then the holding co will be o Once sold co will decide whether to distribute the
joined by other sellers proceeds of sale to the shareholders or reinvest
If target co has a subsid then ownership of that will then in new projects within the company.
transfer along with the other assets IF sale of assets represents a transfer ‘of an economic
Generally, require more work and subject to more entity which retains its identity then TUPE will apply. See
regulation WS6 for more details, but basically maintains employee
rights. The responsibility of the employees will pass to the
buyer
Because specific assets and liabilities are chosen it is
possible to avoid hidden or unwanted liabilities
OTHER: Legal merger
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.
Most common in the United States (US) where acquisitions by a corporate entity are often undertaken by
way of a statutory merger.
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 on dissolution
transfer all their assets and liabilities to a transferee company formed for the purpose of the
merger.
1
,ACQ1
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 Although this is very much a generalisation, 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.
BUYER Apply to facts – what do they want?
Factor Advantage Disadvantage
Trade Share sale
continuity Lack of disruption to the trade. From outsiders’ Any change of control clauses in the existing
point of view, very little will have appeared to contracts.
change and customers and supplier will be Also ensure any third parties that deal with
happy to continue dealing with company, company, but are not contractually obliged to
subject to (see disadvantage)… do so will deal with it after it changes
ownership.
Asset sale
N/A PRIVITY OF CONTRACT - All EXISTING
CONTRACTS (only major) need to be ASSIGNED
(benefit can be assigned, unless contract has
prohibition)/NOVATED (terms stay same,
change names) separately
o Problem: if you cannot find out if the 3rd
party is willing to assign/novate the
contract without revealing the deal to
them (confidentiality issues) and third
party usually wants payment to novate
If not assigning contracts, then may put
undertaking and indemnity into SPA – buyer in
relation to burden of contract
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 Co.
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
All of the above is potentially time consuming
2
, ACQ1
and may result in additional cost.
Share sale
Much more extensive warranties Take on all assets (i.e. you CANNOT CHERRY
available/usual – perhaps more certainty than PICK the parts you like) unless use hive down
asset sale procedure
o This is the process whereby the target
company sells some or all of its assets and
undertaking 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
Choice of Take on all liabilities and so the requirement for
assets and extensive warranties and indemnities entered
liabilities into by the SLR to protect the BYR – despite this
may not actually fully protect the BYR
Asset sale
Buyer can PACKAGE AND ACCEPT ONLY THOSE
LIABILITIES IT WISHES to take on (subject to
some statutory liabilities such as regarding
employment). Thus BYR 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
Share sale
Due to (see choice of assets and liabiltiies
section) … More EXTENSIVE DD process with
extensive need for warranties/ indems and
N/A
increased time, costs and risks to
Due confidentiality.
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.
Share sale
Depends entirely on the current group structure and how easily the new co or its assets would be
integrated. Key issue.
Integration
Asset sale
Depends entirely on the current group structure and how easily the new co or its assets would be
integrated. Key issue.
Financing Share sale
options (esp If buying shares in a plc, the co being bought
if target is cannot provide security/assistance for any loan
plc) N/A being used to purchase the shares (Financial
Assistance under the CA)
Asset sale
3
