#15687 - Methods Of Acquiring A Business - Mergers and Acquisitions (Private Acquisitions)

• 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.

• 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

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.

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:

1. target sells some or all of Business/assets required by B to newco (usually set up as a wholly-owned subsidiary of target).

2. 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.

• 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

1. Selling shareholders will own XYZ plc but it will most probably be an empty shell.

2. Newco 1 will become a wholly-owned subsidiary of ABC plc.

Positive

• 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.

Negative

• BUT.... the nature of a SS means B requires wide protections in SPA, such as:

1. warranties as to State of co

2. disclosure of problems/liabilities

3. indemnities/guarantees against undisclosed liabilities

However.... may be possible to limit these warranties/indemnities/guarantees (e.g. time restrictions, minimum amount, maximum amount)

• 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.

Negative

• 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

Positive

• 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

• 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.

Positive

• 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.

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

• 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").

Positive

• FSMA not applicable

• FSMA not applicable