Mergers & Acquisitions – Choosing the Structure: Private Share Purchases and Business Acquisitions
The structure chosen for a specific M&A deal depends on the goals of the transaction and on various legal, tax, and commercial considerations. Commercial risks, liabilities to be assumed, legal aspects related to the assets and agreements, and the ownership structure of the target may also be relevant when considering various structures.
This three part article series will present the considerations involved when choosing the structure for an M&A deal. The first two parts will describe certain alternative structures for M&A transactions and present the advantages and disadvantages of each structure. Part three, in turn, will describe the practice of due diligence in M&A.
Share and Asset Sales
Share and asset (“business”) sales are the most common transaction structures. Structures involving corporate law aspects, such as mergers and demergers, may be beneficial in certain circumstances but are rather slow to implement due to mandatory notification and application procedures, including a three (3) month creditor notice period. Joint ventures and license agreements are both useful in their own characteristic usage areas, involving two or more cooperating parties. A public takeover is often the only feasible alternative when targeting a publicly listed company.
A major advantage of share transactions is the fact that such a structure is the easiest way to secure ownership of all relevant assets, such as intellectual property rights, without too many formalities. Also, third party contracts, such as purchase, license and lease agreements, stay unchanged despite the transfer (save to the extent that the agreements contain a specific change-of-control provision) and are transferred as part of the target.
A key advantage of business transactions is that the parties can choose the assets and liabilities to be transferred and leave the remaining assets and liabilities with the selling company, with certain exceptions as to employee related liabilities. Therefore, the purchaser may be able to avoid taking responsibility for unknown liabilities that would automatically be transferred in connection with a share transaction. On the other hand, the major disadvantage is that all assets have to be specifically identified and properly transferred. Further, many such transfers require consents from third parties, such as suppliers or licensors, which can be time consuming and burdensome to obtain.
Given the Finnish tax laws, sellers may often favor share transactions, at least when they expect to make capital gains from the transaction. Capital gains from share deals are tax exempt for Finnish enterprises, provided that the following three conditions are met: (i) the shares are included in the fixed assets of the seller, (ii) the seller controls at least ten (10) percent of the total number of the shares in the target, and (iii) the seller has owned the shares for at least a year.
Private Share Purchase
Perhaps the most common deal structure is the private share purchase, under which all the assets and liabilities of the target remain with the company and only the shares of the target transfer to the purchaser. Consequently, the private share purchase is often the most simple transaction method as there is no need to agree on the transfer of individual assets, liabilities, contracts or employees between the seller and the purchaser.
The documentation in a cross-border acquisition commonly follows the framework of Anglo-American agreements, with certain amendments to better fit the Nordic legal environment. A typical cross-border acquisition is conducted in two phases: a conditional Share Purchase Agreement (the “SPA”) is signed and the acquisition is subsequently consummated at an agreed date (i.e. closing), provided that the conditions precedent have been fulfilled or duly waived. The conclusion of a definitive purchase agreement between the parties may be preceded by a letter of intent that outlines the contemplated acquisition and that by nature is not binding upon the parties. Confidentiality agreements are also commonly used during the due diligence and negotiation phases to enable sufficient disclosure of information to the potential purchaser without risk of harming the business operations of the target.
The main provisions of a typical Finnish SPA include the following:
- Definition of the object, i.e. the shares to be sold;
- Purchase price and its adjustments (if any), often calculated based upon so called locked-box accounts or closing accounts;
- Closing date and conditions precedent for closing, often including, inter alia, competition authority approvals, consents from essential third parties and so-called MAC (material adverse change) clauses;
- Representations and warranties of both the seller and the purchaser, which are usually fairly detailed ranging from title to shares to environmental liabilities, and related indemnification;
- Remedy, possible escrow accounts and procedures for settlement of claims
- Provisions regarding warranty & indemnity insurance (the “W&I Insurance”); and
- Specific indemnities for risks identified by the purchaser in the due diligence or during the negotiations.
While there are no general limitations related to private share purchases, the Articles of a private limited liability company may contain specific requirements, such as redemption clauses for the benefit of existing shareholders or a consent clause according to which a consent by the board of directors is required prior to the consummation of the transaction, both such clauses may be of particular relevance in a purchase of less than one hundred (100) percent of the target’s shares.
The purpose of a business acquisition is generally to acquire a certain business operation and/or assets, while limiting the purchaser’s assumption of risk. On the other hand, it is important for the purchaser to ensure that the business operations acquired will be sufficient for uninterrupted conduct of business after completion of the transaction. It is therefore generally in the purchaser’s interest to carry out a comprehensive due diligence to identify the assets and rights of the target that should be transferred and to identify the liabilities to be assumed and those that should be left outside the acquisition. Detailed due diligence will also enable the purchaser to assess the transferability of, inter alia, material agreements and licenses necessary for the continued conduct of business.
The documentation of the business transaction generally follows the guidelines described above in connection with a share purchase, the main exception being the need to identify assets, liabilities and employees to be transferred. The Business Purchase Agreement usually also includes a condition precedent that consent for the transfer of the most important third party agreements have been obtained prior to the completion of the transaction.
When a business transfer (as defined by relevant labor laws) is implemented, the employees of the acquired company are by law automatically transferred to the receiving company along with the business. Neither the transferor nor the transferee has the right to terminate any employment contracts solely based on the transfer. To terminate an employee there must be either an individual reason (related to the employee’s person) or a collective reason (related to financial, production or reorganization causes). A business transfer is not such a reason. The central statutes related to employees and employee benefits are the Employment Contracts Act and the Act on Co-operation within Undertakings. The latter Act applies to companies employing at least twenty (20) employees and imposes, in a business transfer, obligations on both the transferor and the transferee. One such obligation is the obligation to inform the employees of the reasons for and the (planned) date of the acquisition, as well as the legal, economic and social consequences of the transfer to the employees. If terminations, lay-offs or reorganizations are expected as a consequence of the business transfer, the transferor or the transferee, as the case may be, must fulfill the codetermination negotiation obligations provided for in the Act. If the employer has deliberately or by gross negligence failed to fulfill the codetermination negotiation obligation, the employees may be entitled to compensation of up to EUR 30,000. A failure to comply with the codetermination obligation may also constitute a criminal act. The rules on co-operation with the employees apply also in case of mergers and de-mergers.
In part two, alternative transaction structures as well as restrictions for foreign acquirers will be presented and examined.