“Mergers & Acquisitions” is a phrase commonly used to describe a series of transactions involving the sale and purchase of either (a) the underlying assets of a business, or (b) the ownership and control of a company.
In all acquisitions the parties’ major concerns are common. The seller, beyond seeking the highest price, will seek to minimise its exposure to any risks post the transaction’s completion. The buyer, on the other hand, will seek to acquire what it wants at the lowest possible price and it will also seek to avoid any hidden risks and liabilities that the target company may carry on its shoulders.
The two most common ways available for effecting an acquisition are (a) through an asset acquisition, which involves the sale and purchase of certain assets/liabilities of a business (tangible and intangible), and (b) through a share acquisition which involves the sale and purchase of a private company by way of share transfer.
In an asset acquisition the underlying agreement is made between the buyer and the owner of the assets i.e. the company. Accordingly, post the acquisition’s completion the buyer will be the new owner of the acquired assets (and liabilities) and will carry on the business’s operation by using the said assets. Depending on the agreement between the parties, the seller may also continue the operation of a separate part of the business (usually under a different name) by using any remaining assets. The seller may also be responsible for those liabilities which were not transferred to the buyer under the acquisition.
In a share acquisition the underlying agreement is made between the buyer and the company shareholders. Accordingly, the ownership of the company passes to the buyer along with all the company assets and ongoing liabilities. However, strictly speaking, there is no change in ownership of the business since all the business assets and liabilities are retained by the company being acquired.
Which way the parties will follow in an acquisition is a commercially driven decision, one that is heavily influenced by the bargaining power of each party. Generally, while a buyer will often prefer to acquire the assets of the business from the company rather than the shares in such a company, the seller will prefer a clear cut share sale. Set out below are certain legal and commercial factors that may influence the parties’ decisions:
A. Assets and Liabilities
Under a share acquisition all the company assets and liabilities will be indirectly transferred to the buyer. On the other hand, under an asset acquisition, the buyer can cherry pick the assets it wants and identify liabilities it will accept (except to those in relation to employees and subject to certain limitations).
B. Clean Break from Business
Under a share acquisition since the buyer will assume all the business liabilities by acquiring the company, the business liabilities will not be enforceable against the seller post completion. Rather such liabilities will fall with the buyer. This may give rise to hidden liabilities, unknown to the buyer, which will be transferred to the buyer on completion and which the buyer will seek to limit by seeking certain warranties, indemnities and guarantees from the sellers.
On the other hand, under an asset acquisition the buyer will only acquire agreed liabilities, and therefore, there will be a reduced risk of unknown liabilities being transferred to the buyer on completion. Liabilities against any third parties will remain with the seller and as such the seller will seek indemnities and guaranties from the buyer against any such claims.
In limited companies, it is common for company directors to provide personal guarantees to certain company liabilities (i.e. loans). Such guarantees will remain enforceable against such company directors irrespective of the method that the acquisition will be effected.
Under a share acquisition there is no change of employer (only change the company’s ownership), and since no contracts of employment are transferred employees’ claims are unlikely to arise. Any changes to the employees’ contracts or any redundancies will be the buyer’s concern.
Under an asset acquisition, however, applicable laws may automatically transfer any rights and obligations to each employee from the seller to the buyer irrespective of the parties’ intentions and as such the buyer may be liable for payments to any claims that the company employees may have.
D. Due Diligence
As it emerges from above, in a share acquisition, since all aspects of the company must be examined, a more extensive due diligence of the company being acquired will be required. This will involve more extensive warranties and indemnities from the seller. In contrast, in an asset acquisition the due diligence to be carried out will be limited to those assets and liabilities being acquired.
Under a share acquisition the buyer may keep the business being acquired as a separate business or it may absorb such in existing operations. However, under an asset acquisition, assets may be more readily absorbed into an existing corporate structure.
F. Practicality, Time, and Efforts
Under a share acquisition there will be little disruption to trade. The actual transfer process is simple as it simply involves the transfer of title to the company shares. However, “change of control” clauses in certain major existing company contracts may hinder the transfer process.
An asset acquisition may be longer and more onerous, since each individual asset and each individual liability must be separately transferred from the seller to the buyer. This can lead to further complications particularly when dealing with a large number of assets. The consent of third parties may also be required in the transfer of assets and liabilities which will also hinder completion.
Depending on the circumstances of each acquisition, different tax considerations will apply which the parties will need to asses in detail. It is important to note, however, that in the Republic of Cyprus the sale of shares is exempted from all taxes (unless the sale of shares concerns a Cyprus company which owns immovable property).
Depending on the circumstances, consideration must also be given to other applicable legislation and in particular to competition law.
In case you require legal advice on a potential merger or acquisition, please refer at the Mergers & Acquisitions section of this website.