What is a merger?
Mergers and Acquisitions are a key concept within commercial law, underpinning numerous types of transactions linked to the combining of companies or assets.
The term ‘mergers’ is often linked to the idea of companies of a similar size and strength ‘merging’, and subsequently forming a new business. However, this tends not to be the case with the majority of ‘merger’ deals. The bulk of these transactions, in a regular sense, gravitate more towards the idea of a larger and more powerful business engulfing a smaller one. In this sense, the deals tend to be labelled as a ‘merger’ rather than an acquisition, to appear significantly fairer and more equal than the agreement actually is.
In the world of M&A law, there are two commonly found variants, horizontal mergers, and vertical mergers.
- Horizontal mergers are typically found when two rival companies which have a similar USP and business model (usually providing the same goods/services) merge.
- Vertical mergers are usually found when two companies who are in the same supply chain as each other merge.
While these two forms of mergers are the most common within the corporate M&A world, there are others which have significant importance. These include congeneric mergers – where two businesses without a product similarity, however, operate in the same field merge – and conglomerate mergers – where two companies without a product or client similarity merge.
What is an acquisition?
The term ‘acquisition’ refers to the purchase of a company by another company, via an outright payment. This typically means that the company being sold to the purchasing company is of smaller size and power.
When an acquisition takes place, the purchasing company will typically gain all of the assets of the company being sold, or all of its issued share capital.
Is the deal involving the purchase of assets or shares?
Whether the deal involves the purchase of assets or shares from the company being sold depends on numerous factors, including, but not limited to:
- Risk – If the purchasing company is acquiring all of the shares issued by the company being sold, it is therefore obtaining all of the liabilities and assets that come as a part of the transaction. There are things which the purchasing company can do to mitigate these risks, however, it is not the best situation if it is vital to make a warranty claim. Nevertheless, within an asset purchase, the purchasing company can choose which assets they would wish to acquire as part of the deal.
- Ease – If the purchasing company wishes to acquire a certain amount of assets, with particular ones in mind, it is more common for the transaction to be a purchase of shares only. In this form of transaction, the company being sold remains complete, and just the directors and any shareholders will move to the purchasing company.
- Tax – Tax is a key part of any M&A deal, and typically it Is more tax-beneficial for the purchasing company to purchase another company through the means of an asset purchase, rather than a share purchase, however, this is the other way around for the company being sold. This consequently means that tax is a key factor within the purchase/merger of a company, as at least one party in the agreement will have an unfavourable tax factor.
- Distress – In the case that the company being sold has gone through, or is going through liquidation or administration, then typically the merger would wholly be structured as an asset purchase rather than a share purchase, which gives the purchasing company indemnity for taking on unknown responsibilities.
Is an acquisition transaction more straightforward than a merger transaction?
Acquisitional transactions are often seen as being easier to deal with as opposed to mergers since existing staff members and shareholders are on hand to ease the new owners into business practices and ensure a smooth transition.
The process of mergers and acquisitions:
- NDA – After the initial conversations have taken place between the two companies, and both have shown their interest, the involved parties would typically sign a non-disclosure agreement, otherwise known as an NDA. These agreements help to protect the confidential information from being released to uninvolved parties and ensures that the transaction stays on track.
- Due Diligence – After the NDA process, the purchasing company may engage in due diligence against the company being sold or acquired, mainly focused on financial assets.
- Heads of Terms – At this stage, the purchasing company will then be able to put forward an offer to the company being sold or acquired. They will then need to sign heads of terms.
- Complete Due Diligence – After the heads of terms are signed by both parties, the purchasing company will undertake complete due diligence upon the company being sold or acquired. This often involves more detailed legal, financial, and technical due diligence.
- Asset or Share Purchase Agreement – An asset or share purchase agreement often involves much more negotiation from both parties, and this happens based on how the deal is structured (asset purchase or share purchase).
- Shareholder’s Agreement – In the case that the deal is a merger transaction, a holding company is likely to be devised, and a shareholder’s agreement will be agreed upon.
- Ancillary Documents – After the aforementioned steps have undergone, further documents and contracts will need to be completed by, and shared with both parties. This can include warranty agreements or statements, which state that if an untrue warranty arises, it gives the legal right for the purchasing company to sue the company being sold or acquired.
- TUPE – The Transfer of Undertakings (Protection of Employment) Regulations of 2006 is a vital part of the transaction, and if there are employees in the company being sold or acquired, then the purchasing company will have to adhere to this.
- Post Completion – After the completion of the transaction, there are several details which must be undertaken to ensure the deal is wholly complete. These can often include stamp duty being paid, and the stamping of stock transfer forms at HMRC (which only applies to share sales). In a share sale, some or all of the remaining directors from the company being sold or acquired may end up being switched to the appointed executives from the purchasing company.
Timing of M&A Transactions
Typically, M&A transactions can take months to fully complete, and involve an extensive amount of work from both parties and their lawyers.
Administration of M&A Transactions
In the case that the company being sold or acquired is undergoing administration, the purchasing company will usually choose to obtain assets from them. These deals are typically undergone in a fast manner, as they can be a risk for the purchasing company, though it does depend on the trade, and type of assets that the purchasing company wishes to secure.
For further information on this subject, or to receive a quote, email nick.attwell@attwells.com or call 01473 229242
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