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Structuring and managing modern M&A transactions can be difficult and highly complex – especially in multi-jurisdictional deals. There are generally two methods available, an asset purchase or a share purchase and in this article we explore some of the commercial reasons why one structure might be preferred over another.
In most cases cross-border private company acquisitions are made by a share purchase (often of a local holding company, or local trading subsidiary). However, there may be particular circumstances that make an asset purchase more appropriate.
ASSET OR SHARE PURCHASE?
- Liabilities. Unlike a share purchase, an asset purchase generally allows the buyer to specify which (if any) liabilities it will take on. There are limited exceptions to this, such as:
- The transfer of employee related liabilities under transfer of undertakings provisions in the EU.
- Environmental liabilities associated with land acquired.
- Tax liabilities in certain jurisdictions.
- Assets. In an asset purchase, only those assets specifically identified will generally transfer, whereas in a share purchase all of the assets (together with liabilities) will transfer with the company. Despite broad drafting, acquisition by asset purchase can lead to assets being omitted from the acquisition where the record keeping in the target is inadequate.
- Third-party consents. The transfer of assets is likely to require a greater range of third-party consents, such as from the counterparties to the target's contracts. Where the bulk of the value in the target lies in such contracts, it may be a less risky option to acquire the company as a whole (although change of control provisions in those contracts still need to be checked).
- Financial assistance. In many countries the target company is precluded from giving a charge over its assets to secure finance for the acquisition of its shares, whereas a purchaser of assets can use them as security for the acquisition finance.
- Pre-emption rights. An asset sale generally only requires simple majority support from the seller's board. In a share sale, in many jurisdictions the target company's articles of association, bye-laws or shareholders' agreement will include pre-emption provisions requiring, as appropriate:
- 100% shareholder approval of the proposed sale.
- The need to exhaust pre-emption, drag-along or squeeze-out provisions.
- A court approved scheme of arrangement.
- Regulatory. In most regulated sectors licences, permissions and consents are not readily transferable, and it is usual to acquire the shares of most regulated entities (with regulatory change of control approval as required)
- Multiple transfer documents. Many categories of asset (for example, land, intellectual property, benefit of contracts and licences, vehicles and so on) may require separate transfer documents and formalities, making an asset transfer far more complicated than a share transfer.
- Tax. Tax losses and reliefs can generally best be preserved by a share purchase. It may be appropriate for the buyer to raise finance and acquire the target shares through an existing or new vehicle in the target's jurisdiction, enabling the purchase vehicle's losses from financing costs to be set against the target's profits. Specialist tax advice in all jurisdictions affected should be taken at an early stage.
In a cross-border transaction, it may make sense to combine share purchases of certain target subsidiaries in parts of the seller group with asset purchases of other parts.
- Pre-sale reorganisation. The seller might transfer target assets into a newco (a hive out) so the buyer can make a more straightforward purchase of shares. Tax advice should be taken on:
- The value at which assets are transferred to newco and on the tax implications of the hive out.
- Any distribution in specie (in kind) which may form part of the hive-out.
- Subsequent distribution of the sale proceeds by the seller to its own shareholders.
- Dividend. in specie. Depending on the jurisdiction, advice should be taken as to whether a distribution in specie (in kind rather than cash) is achievable or whether an alternative route should be found.
- More complex jurisdiction specific structures. There are also more complex legal structures which may be suitable depending on the jurisdiction and the circumstances, including:
- Legal mergers.
- Two step acquisitions and triangular mergers.
- Income access and twin holding company.
- Post-sale reorganisation. Assuming the buyer used a company in the target's jurisdiction to make the share purchase, it is often appropriate for the target company's business and assets to be transferred to the purchase vehicle (hive up). However, the hurdles to an asset transfer will apply, albeit now between members of the same group.
This insight formed part of a larger article on "Structuring and managing cross-border private acquisitions", published in Practical Law.