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METHODS OF ACQUIRING A BUSINESS Acquisitions Share Acquisition
?? ? ?Parties: B and owner of the assets of Business
?? ? ?Ownership of identified assets used in Business is transferred (and any agreed liabilities).
?? ? ?Each asset must be transferred in accordance with Specific form of transfer required for that asset (e.g. a conveyance for land).
?? ? ?After the acquisition, B will own Business and will continue to operate it using the assets acquired or absolve the company and absorb its assets into its own company.
?? ? ?The company itself remains (as an empty shell) and will either be dissolved?
Parties: B and shareholders Ownership of the corporate entity (and its subsidiaries) is transferred to B through the purchase of all or the majority of the target company's shares All assets and liabilities are automatically transferred. There is no change in the ownership of Business, which will continue to operate with all its assets, obligations and ongoing liabilities.
Scheme of Arrangement (England and Wales)
What is a Scheme of Arrangement?
? In England and Wales there is no formal procedure for a legal merger, but a merger can be achieved through the use of a "scheme of arrangement" (Pt 26 & Pt 27 CA 2006)
? The target company agrees with its shareholders (a majority in number representing not less than 75% in value of Shareholders present) that Shares in the target company be cancelled in consideration for shares to be issued by B. Those shares are then sold on the market to convert Shares to a cash price.
Pre-sale restructuring - "Hive Down"
Why use a scheme of arrangement?
? As Shares are cancelled, no SDLT is payable on the transfer of shares by B.
? However, the complexity of the court procedure and the time required to achieve a result which is Same as a share acquisition means its use remains limited.
? It will only really be viable in high value mergers (i.e. where SDLT will be exceptionally high compared with the cost of the court process).
Combination of both an asset and share sale. Where B does not want to proceed with SS of target (e.g. for tax and commercial reasons), this can be circumvented by: (i) target sells some or all of Business/assets required by B to newco (usually set up as a wholly-owned subsidiary of target). (ii) B then acquires Shares of newco instead. Allows B to obtain only the assets and liabilities which it wishes to buy and to acquire a 'clean' company with no history.
(2) ABC acquires Newco 1 through a acquiring 100% of its shares.
XYZ transfers assets/business required by B to Newco
Newco 1 (XYZ plc = 100%
shareholder)ABC plc wishes to acquire XYZ plc, but for commercial/tax reasons is reluctant to do so via a share sale (e.g. XYZ has liabilities it does not want to take on).XYZ will 'hive down' the assets/business required by ABC into Newco 1.ABC will then acquire Newco 1 through a share acquisition.After Share acquisition
(i) Selling shareholders will own XYZ plc but it will most probably be an empty shell. (ii) Newco 1 will become a wholly-owned subsidiary of ABC plc.
ADVANTAGES /DISADVANTAGES SELLER Share
? Clean break
? Entrepreneurs' Relief - 10%
? Easy transfer
? No consents
? No double tax
? TUPE - employees
? FSMA definitely doesn't apply
? Warranties and indemnities more extensive
? Joint and several liability
? Tax deed of covenant
? More DD
? Change of control clauses
?? ? ?SMA - advertising/soliciting
? Transfer by proper forms
- more complex
- more time
- time = money
?? ? ?Cherry pick assets and liabilities - may be left with odds and sods with little to no value.
?? ? ?Potential double taxation
?? ? ?More need for consent - S remains liable for burden (unless novated)
SELLER - factors affecting choice of acquisition Factors
Clean break from business
? S will lose all connection with Business. Co's assets/liabilities remain with the target and are transferred automatically to B. Those liabilities will become enforceable against B not S.
? Only certain assets and agreed liabilities are acquired by B, and so S may retain residual assets which are difficult to get rid of for value.
? S may also remain liable for liabilities of Business which B does not wish to acquire
? BUT.... the nature of a SS means B requires wide protections in SPA, such as: (i) warranties as to State of co (ii) disclosure of problems/liabilities (iii)indemnities/guarantees against undisclosed liabilities However.... may be possible to limit these warranties/indemnities/guarantees (e.g. time restrictions, minimum amount, maximum amount)Transfer of title &
If S has guaranteed obligations of the target company (e.g. a personal guarantee on bank lending) then a clean break will only be possible if S can negotiate a release from such obligations on completion.
Positive Mechanics of transfer are quicker and easier
? simple signing of stock transfer forms to transfer the title.
? BUT.... consider DD Negative
? Terms of contracts should still be checked for change of control, or need for third party consents
DD of B
? B may be willing to take on the liabilities of the company (e.g. trade debts) as leaving them in the hands of S has the potential to damage relations with suppliers etc should S not pay. Third parties
? Debts and obligations owed to third parties, even where B has agreed to take responsibility for them, can still be enforced by the third party against S (unless they have expressly released S from liability).
? possible to have indemnity from B, but this may be difficult to enforce - particularly if B is insolvent. Negative
? May be longer and more onerous as each asset must be transferred in the appropriate way (e.g. a deed of conveyance for land, assigning patents, physical delivery for some assets, etc).problematic and cause problems where third party consents are required which may delay the transaction (e.g. for assigning a lease).
(length of time)As B is taking on all the assets/liabilities of target, the DD may take longer in order to ascertain any hidden liabilities and Sale may therefore longer than under an asset acquisition.DD will be quicker on an asset acquisition, because it will only be required for the assets and liabilities which both parties have agreed will be transferred. It will therefore focus on less issues.
Factors Advertisin g/
Share Acquisition Negative
? share purchase qualifies as 'investment' under FSMA 2000. Lawyers must ensure compliance with FSMA if carrying out regulated activity or see if transaction falls under exclusion (e.g. 'takeover exclusion').
? Soliciting offers - It is a criminal offence for any person other than an authorised person to 'communicate an invitation or inducement to engage in investment activity' unless its contents have been approved by an authorised person
Asset Acquisition Positive
? FSMA not applicableFSMA not applicable
? note there is an exemption for Sale of business under Art 62 FSMA 2000 where it would result in B owning 50% or more of the company's voting shares ("takeover exclusion"). Employee s
? There is no change of employer employment contracts transfer automatically to B and so the target company remains the employer both before and after Sale. This means that it will be B (as the new owner of the company) who will be liable for any liabilities and obligations of the target company in relation to the employees.
? TUPE is not applicable - which renders certain dismissals automatically unfair and for which there is no defence for B. Negative
? BUT.... B will require warranties from S in relation to employment contracts (e.g. that there are no potential claims/liabilities, no breach of employment contract, etc.)
? If Sale represents a transfer of an 'economic entity which retains its identity' (i.e. an identifiable business will continue by B in essentially same form) then TUPE 2006 will be applicable. Employment contracts will be transferred automatically and the asset sale will not operate to terminate contracts of employment. Negative
? If Sale does not represent a transfer of an 'economic entity which retains its identity' (i.e. an identifiable business will continue by B in essentially same form) then TUPE 2006 will not be applicable and the obligations and rights of employees remain with S.If the employment contracts do remain with S and it can no longer
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