Mergers and Acquisitions / Completion Certificate

A. Acquisition of Assets

The first question to ask in any acquisition - does the Buyer want to buy the Company, whole of the Business, or just certain assets and liabilities? There are advantages and disadvantages associated with each acquisition process. We will start with the Acquisition of Assets

1. Advantages of Acquisition of Assets

Flexibility - the Buyer may pick the assets it takes on and exclude the liabilities not associated with the target business. 

Contingent Liabilities - to the extent Seller's liabilities or where there is a particularly large contingent liability which cannot be accurately quantified, assets transfer will avoid such liabilities.

Insolvency - if the target company is insolvent, or problems are anticipated with the transfer of shares owned by dead, lost, or difficult minority shareholders, a transfer of assets will generally avoid these. 

Fewer Restrictions - Generally fewer internal/regulatory restrictions than share transfer. Consents may be required from third parties for business transfer, which may be difficult to obtain either at all or within the required time frame.

Taxes - there may be more allowances, less capital gain tax, or rollover relief in relation to taxes in certain jurisdictions. Please consult your local tax advisor.

Stamp duty - applicable to transfer of shares but not assets (except for real property, see below).  

2. Disadvantages of Acquisition of Assets

Identification of Assets - it may be difficult to identify and transfer the main assets that comprise the target business. The acquisition of shares means all the assets of the target company are acquired.

Operational Issues - where some assets are used in other operations, rather than exclusively in the target business. 

Employment - a complication for the buyer of a business changes terms and conditions by dismissing employees and offering them jobs on new terms

Transitional Arrangements - may be needed for IT support and services.

Stamp duty - if it includes the transfer of real property, stamp duty will be payable at a rate higher than for share transfer.

Value Added Tax, Goods and Services Tax, or other similar Sales Tax - may be applicable for assets transfer. 

Tax Losses -  acquisition of shares may be attractive if the Company contains trading losses, which cannot generally be transferred as part of an asset sale.

B. Acquisition of Business

When one decides whether to purchase the Business in addition to purely the assets are likely to be added complexities in the transfer of a variety of assets and liabilities. The Buyer and the Seller are generally free to agree on their own terms. If it is just an asset acquisition without acquiring the Business or its employees and liabilities, the Assets Acquisition Agreement should be relatively simple. Depending on the importance and complexity of the assets being acquired, one may wish to have just a simple Assets Acquisition Agreement https://docpro.com/document-search/simple or follow the more complicated steps in the process (see below).

The rule of caveat emptor (Let the buyer beware) applies to the acquisition of an Asset, Business, or Shares. The Buyers typically have less information about what it is purchasing than the Seller, resulting in 'information asymmetry'. As such, the Buyer would typically seek additional protections:

• Buyers investigating the state of the Asset / Business / Company in a "due diligence" process and finding out as much as they can before committing to the terms of the acquisition;
• Sale agreements setting out in a lot of detail the precise acquisition terms; and
• Buyer requiring contractual warranties or representations.

1. Due Diligence

Due diligence is the term used to describe the investigation of the target Business by the Buyer and its advisers before entering into the sale agreement:

• helps the Buyer's understanding of the business model and identifies potential risks and business challenges. 
• reveals unknown liabilities, problems, or other information which may not be revealed on the financial statements when striking the deal in principle. 
• provides the Buyer with an opportunity to renegotiate terms (price and/or contractual protection).

When the Buyer is acquiring a Business (i.e. assets and liabilities) rather than shares in a company, the investigations tend to be less burdensome as they need only relate to the specific assets and liabilities to be acquired. It starts with the preparation of a list of questions and inquiries to be put to the Seller. Our "Due Diligence Questionnaire on Business Acquisition" is a good starting point but it should be tailored to the business being acquired:

https://docpro.com/doc1037/due-diligence-questionnaire-checklist-business-acquisition

2. Business Acquisition Agreement

A Business acquisition agreement between a Buyer and a Seller. This can include a number of Buyers and Sellers with the Seller's parent or the Buyer's parent as guarantor to the agreement or no guarantor, for example:

https://docpro.com/doc472/business-acquisition-agreement-no-guarantor-neutral

This agreement can be drafted in Neutral Form or in favour of the Buyer / Seller. The Seller's warranties are included in another template (see below).

3. Warranties

In agreeing to acquire the Business, the Buyer will have relied upon various assumptions and representations by the Seller as to the state of the Business:

• to ensure that the Buyer can recover its loss if the various representations and assumptions being relied on are incorrect, they are usually expressly included in the sale agreement as warranties.
• remedy sought by the Buyer if a warranty proves to be incorrect is damages. The contractual measure of damages would place the Buyer in the position in which it would have been had the breach not occurred.
• the Seller makes disclosures against the warranties thereby preventing the Buyer from claiming in respect of the disclosed matter. Disclosures are usually set out in a letter (the disclosure letter) from the Seller to the Buyer with the various disclosures as attachments. 

A Schedule of assets to be purchased should ideally be attached to the Assets Acquisition Agreement with warranties from the Seller to cover the use of such assets and the agreed payment terms. 

https://docpro.com/doc478/business-acquisition-warranties-neutral

4. Transfer of Employees

For a transfer of a trade or business as a going concern, Employees are also important considerations.  Can a Seller retain employees? Are all transferring employees employed by the same company? Employees should be matched up with the Business in which they work by obtaining their agreement to be employed by the relevant group company before the subsequent Business transfer. Are there employees with split duties? Employees may not automatically transfer with the Business even if they perform some of their duties for the Business being transferred. The pre-existing employment arrangements between the Seller and employees may need to be terminated for the employee to be employed by the Buyer. 

5. Assumption of Contracts and Liabilities

For Debtors and Creditors, is the Buyer acquiring all existing contracts or only those on an agreed list? There are various alternatives to dealing with this:

Assignment of debtors to and assumption of liabilities by Buyer - the Seller may want an indemnity in respect of creditors' claims. 
Trade creditors and debtors to remain with the Seller - less common than assigning them, the purchase price can be adjusted to take into consideration

Seller continues to collect on the debts and pays the creditors - Buyer may be concerned about the effect of the Seller suing customers for non-payment. The Buyer will also want the Seller to pay its debts to customers promptly.
Buyer to collect debts and pay creditors as agent for Seller - The Seller may prefer this since it may no longer employ people to administer the process. The Buyer may want to charge a fee for the service.

If taking on all contracts, the Buyer will need to be protected against undisclosed onerous liabilities. What are the key contracts and how will these be transferred? There are two options for transfer:

Novation - transfers assets and liabilities, and requires consent from third parties.
Assignment - can only assign the benefit, not possible where the contract contains an express prohibition against assignment. The legal assignment is necessary if the Buyer wants to be able to enforce a contract in its own name.

In addition, one may need to obtain consent or approvals from third parties (e.g. regulators, major suppliers) for the transfer of business. The above items may need to be included as a condition precedent. 

C. Acquisition of Company

If you buy a company, you purchase the shares in that company. As a legal person, the company itself remains the same. Buying a company means acquiring everything through the shares including assets, liabilities, and tax obligations. Significantly, you also purchase the risk of litigation against the company. This is generally less flexible than acquiring a Business, where the Buyer and the Seller are generally free to agree on their own terms. On the other hand, Company acquisition could be a simpler option since you do not have to deal with the transfer of employees, contracts, assets, liabilities, etc. (see above). 

You need to make sure all due diligence is done and done well since there could be hidden liabilities and legal issues in the Company. You must review all contracts to identify any changes in control clauses. These terms allow parties to decide if they would like to continue the pre-existing business arrangement in the event of a change in ownership. You will need to know what these clauses mean to you.  New employment contracts are not necessary, and the existing employee structure can remain the same.

The following are some of the additional considerations for the acquisition of the Company.

1. Information on the Target Company 

• Is the Target Company a single company or a group of companies?
• Is Target a private, or a public company whose equity share capital has been listed on any Stock Exchange at any time?
• Where is the Target Group located?
• Where is the main value to the Buyer in the Target e.g. material contracts, source of supply, cash flow?
• Are there any particular concerns of the Buyer e.g. loss of existing management, liabilities?
• Will all the shares be sold and, if not, what about minorities/other shareholders?
• Does the industry in which Target operates create particular concerns (e.g. environmental) or require particular consent? Can these be dealt with specifically in the Agreement?
• Organise company search and other relevant searches (eg patent)

2. Structure of the Transaction

• If the Buyer is foreign, what is the best acquisition vehicle? New local company / existing foreign company?
• Is the sale by way of an auction? 
• Will any steps be taken to reduce stamp duties? If so, consider timing.
• Are any assets to be extracted from Target prior to the sale?
• Is there to be a pre-sale dividend? Is it lawful?
• Is there any debt owed by Target to the Seller which is to be repaid? 
• Is Target entering into any transaction as part of the sale arrangements? Does this contravene any financial assistance law?
• How is the acquisition to be financed?
  • available cash
  • borrowings
  • rights issue proceeds 
  • shares as consideration 
• Have the accounting implications of the acquisition been considered?
• Have the tax implications of the disposal/acquisition been considered?

3. Company Acquisition Agreement

DocPro has various forms of company acquisition agreement: between a Buyer and one to three Seller(s). This can include earnout where part of the consideration is calculated by reference to the future performance of the company or business being purchased. This can also include the Seller's parent or the Buyer's parent as guarantor to the agreement or no guarantor. The Seller's warranties are included in another template. This agreement can be drafted in Neutral Form or in favour of the Buyer / Seller(s). For example:

https://docpro.com/doc540/company-acquisition-agreement-with-earnout-neutral

D. Disclosure against Warranties

If you are the Seller of the assets/business/company, you will generally need to give warranties to the Buyer confirming certain statements regarding the assets/business/company is true and accurate.  A disclosure letter is a letter written by the Seller to the Buyer for the principal (but not the only) purpose of qualifying the warranties given. The effect of a disclosure properly made by the Seller and accepted by the Buyer is to pass that risk back to the Buyer in respect of the matter disclosed, as if the warranty had never been given or had been given subject to a qualification in respect of the relevant matter. 

A disclosure letter is usually necessary whenever an agreement contains any substantive warranties (i.e. warranties which go beyond merely formal matters, such as the capacity of the warrantor to enter into the agreement). Accordingly, a disclosure letter is a standard ancillary document in most transactions involving the sale and purchase of shares in a private company or of a business. A disclosure letter may also be relevant in other transactions that involve detailed warranties (for example, share subscriptions and joint ventures).

Completion Certificate

The completion certificate is a certificate issued by the solicitor that certain conditions in relation to the transaction have been fulfilled. Different types of transactions have different requirements for completion certificates. For example, a bank may need to consider whether the certificate meets its operating procedures and loan transaction requirements. The certificate usually contains the confirmation issued by the solicitor on the ownership of the company/property, the satisfaction of certain conditions under the agreement, the bankruptcy/liquidator's bankruptcy/liquidation/company search, and other matters required in the relevant instruction letter. 

E. Purchase of Distressed Company / Assets

Receivership

Buying a business from a receiver is different from any other kind of commercial negotiation. Receivers realise as much as possible. There is always the danger that a Receiver will accept a higher bid right up to the signing of a contract. Time is of the essence because the value of the business is decreasing with each hour of uncertainty. 

Administration

When an administrator is appointed there is a moratorium that prevents actions from being taken against the company or its property. The effect of this is to allow the administrator a little time to run the affairs of the company to effect a sale of a going concern. Often, therefore, there is more time for due diligence. Also, approval of the court/creditors is usually sought to protect the position of the purchaser and the administrators and this takes a little time.

Liquidations

Most purchases from liquidators are of specific assets only because of the lapse of time between insolvency and the appointment of a liquidator. If the company is wound up by the court then any disposal of the assets may require the approval of the court.