Private Mergers and Acquisition (M&A)

The most most common type of entity involved in private M&A is the Private Limited Company. But others like Sole Proprietorships, Partnerships and public limited companies can also engage in M&A activities. In some cases, even a private subsidiary of a public limited company could be used as a vehicle to acquire another private entity.

Common Structures

Some of the common Structures of M&A among private companies take the form of 

• an acquisition of shares with voting rights by way of a sale and purchase agreement
• an acquisition of a business or assets by way of a business or an asset purchase agreement, or
• a joint venture whereby two or more entities cooperate for a particular common business goal either by participating in an incorporated or registered vehicle or by way of an unincorporated arrangement.

Here is an overview of the key aspects involved in share and asset acquisition.

Preliminary Agreements

Letter of Intent (LoI)

An LoI is drafted and endorsed jointly by the parties to confirm the key points of the transaction. The LoI is a non-binding agreement and covers the following:

• Parties to the agreement
• Consideration – cash sum or the valuation procedure
• Nature of the deal – Share or asset acquisition
• Exclusivity period, if any
• Financing required
• Timeline for execution
• Any conditions and preconditions
• Representations and warranties.
• Costs and expenses
• Governing law and dispute resolution
• Confidentiality provisions

Exclusivity Agreement

This is to ensure that the seller does not solicit or consider offers from potential competitive bidders. M&As are resource and time intensive. Therefore, buyers would prefer to lock out other potential buyers from the target company to maximise the success of the bid. The exclusivity agreement has a limited validity, and it cannot be perpetual as the target companies would also prefer not to be locked out of other lucrative offers.

The seller is under no obligation, on account of the exclusivity agreement, to accept the offer or enter into discussion with the offering party to conclude the transaction. Any breach of the agreement by the seller could draw legal action from the buyer who could claim damages for the time and expenses incurred.

Non-Disclosure Agreements (NDA)

NDA is an agreement to be concluded in the early stage of the transaction prior to sharing of confidential business details and business information. This usually takes place prior to the commencement of due diligence process as most of the information exchange happens at this stage.

Learn more about the essential tasks involved in a financial due diligence before proceeding with an M&A deal.

The parties must define what constitutes confidential information and the purposes for which such information can be used.  The agreement should also list out with whom such information can be shared and if the information should be returned or destroyed if the deal does not go through.

The buyer must undertake to maintain confidentiality in exchange for the information. Damages can be claimed in the event of a breach and an injunction can be sought to prevent any further unauthorised disclosure.

Share Acquisition vs Asset Acquisition

Share acquisition can be effected through a simple share sale agreement and a transfer form. In contrast, asset acquisition is tedious as all the assets must be individually identified, assessed and transferred separately and some asset transfers may require third-party consent.

Asset transfer would require legal warranties and indemnities to be negotiated and agreed between the buyers and seller. Yet the minority shareholders of the target company may have to be identified, engaged and negotiated with to conclude the acquisition and this can be onerous for the buyer.

In the asset acquisition, the buyer can be selective on what assets to buy, and he can filter out those with entailing liabilities, litigations and encumbrances. Such a facility to choose is not available in a share acquisition, in which all assets, liabilities and encumbrances of the seller are transferred in entirety.

Share acquisition has nil or minimal impact on contracts concluded by the seller with third parties such as customer and suppliers. The contracts will be ongoing and binding even after the acquisition. However, the buyer must diligently scrutinise the contracts for a ‘change of control’ clause that may confer the counterparty with the right to terminate the contract if there is an ownership change. 

However, the contractual rights and obligations may not be conveyed to the buyer in the case of asset acquisition. Although the buyer can selectively seek some of the contracts to be novated or assigned, in some cases, these may have to be renegotiated and new contracts signed between the buyer and the counterparty.

Share acquisition has minimum impact on the employees of the seller. The employment contract concluded by the seller continues to be in effect and valid under the buyer after the transfer. The buyer should examine the terms of the employment and may need to renegotiate to retain key employees or to redefine the terms. In the case of asset acquisition that involves a transfer of a business undertaking the seller must consult the affected employees as well as the trade unions, where relevant, before effecting the transfer.

Unabsorbed losses of the acquired company might be available to be carried forward in the case of a share acquisition for set-off against future income, subject to the shareholders’ continuity test. Even if there is a substantial change in shareholders, the buyer may still be able to carry forward the unabsorbed losses if a waiver is obtained from the Ministry of Finance. There is no such access to the unabsorbed losses of the seller in the case of asset acquisition. Moreover, GST may be charged on the sale of the assets while there is no GST charge on the sale of shares. 

Share transfer is a clean departure for the seller but the asset transfer will still require the seller to liquidate and strike off the company, and this would cost the seller additional time and money.

Share transfer will cost stamp duty of 0.2% on the higher of the consideration paid or value of the shares. However, asset transfer will require a stamp duty of up to 3% to be paid on the value of the assets. Seller’s stamp duty may be due on certain disposals of residential and industrial immovable property. Additional buyer’s stamp duty may also be due on the purchase of a residential immovable property. 

Share Acquisition

Key Documents

The following key documents are involved in share acquisitions:

• Share purchase agreement typically prepared by the buyer
• Disclosure letter, prepared by the seller
• Share transfer form: a simple, one-page document
• Resolution of the board of the seller and buyer approving the transaction
• Other documents, such as board or shareholder resolutions, stamp duty documents and any ancillary side agreements

The share purchase agreement will include conditions to be satisfied as precedent to completion of the transfer and failure to meet the conditions within the agreed time would void the agreement. Some conditions that are typically included are as follows:

• Anti-trust and competition clearances
• Regulatory clearances from relevant authorities
• Third party consents, such as key customer and supplier change of control approvals
• Shareholder approvals
• No material adverse change in the target business
• Financing consents

Typically, the Share Purchase Agreement will include the following clauses:

• Parties to the agreement
• Operative provision for the sale and purchase of the shares/assets
• Purchase price and any adjustment mechanism
• Precedent conditions
• Pre-completion undertakings that govern business continuity between signing and completion
• Signing and completion mechanics and obligations
• Warranties and representations
• Any indemnities or tax covenants
• Any limitations on the seller’s liability
• Post-completion obligations such as non-compete and non-solicitation
• Parent company guarantee, if applicable
• Confidentiality/announcement provisions
• Governing law and jurisdiction

The following documents are produced at the time of singing and completion:

• Share transfer form in respect of the shares being sold in the target company
• Existing share certificates in respect of the shares being sold
• Any third-party consents, regulatory consents or competition clearances
• Board resolutions of the target company covering all closing actions
• Letters from existing shareholders in the target company, waiving any pre-emption rights to the shares being transferred
• New employment agreements for any key management personnel of the target company if they continue to remain employed with the buyer
• A banker’s draft or similar document evidencing the transfer of the completion monies from the buyer to the seller
• Signed letters of resignation from the relevant directors and secretaries of the target company
• Signed forms of appointment for the new directors/secretaries to be appointed
• The books and registers of the target company
• Where applicable, evidence of the target company’s loan repayments and the discharge of any security attaching to the target company shares or undertaking

Get a quick overview of the dos and don’ts on maintaining accounting records.

Consideration

Consideration may take the form of cash, shares in the company of the buyer, loans or a combination of all or some depending on the availability of finance, liquidity of the buyer’s shares, tax implication and leverage ratio of the seller.

Asset Acquisition

Key Documents

• Asset purchase agreement
• Novation or Assignment agreements (as applicable)

Although each asset must be transferred separately, the asset agreement will govern the overarching terms and any contractual protections. Shareholder approval is mandatory. The asset purchase agreement will include the following:

• The purchase price ascribed to each asset or class of asset
• Apportionment of liabilities towards wages, creditors, debtors and contract payments for the pre-completion period and the post-completion period
• Details of whether a class of asset is being assigned, novated or transferred by delivery
• Details of those assets not being transferred

Warranties and Indemnity

The Warranties and Indemnity clause is included in the purchase agreement of both share acquisition and asset acquisition. In general, both the seller and the buyer will give fundamental warranties confirming their capacity to enter into the transaction, their due incorporation, validity, and solvency.

The seller will also give fundamental warranties in relation to its title and ownership of the shares or assets. Specific and general liabilities can be included for known obligations and breaches leading to the loss.

Warranties will be subject to disclosure hence no claims can be made against the seller for losses arising from matters already disclosed to the buyer. The time limit to claim under warranties, usually, a maximum of 24 months, must be negotiated and agreed between the parties and claim is usually the loss or damage suffered.