mergers and acquisitions part2
7. Shares for Cash
In Shares for Cash deal structure the bidder buys and the shareholders of the target sells all or a certain amount of target’s shares, therefore the ownership of those shares of the target is transferred from the target’s shareholders to the bidder company. However, the target company remains to exist and becomes a subsidiary of the bidder company. [1]
This structure can be used when the bidder does not need or want, or is not able to acquire 100% of the target or does not want a target to merge into the bidder. This may be because it is only seeking an equity investment in the target to share in the profit or to increased market share or improve efficiencies, or there are some problems with dissenting shareholders or unwanted liabilities. In this structure the target remains to be a separate legal entity, an in this way is separated from the bidder by the rule of limited liability. Depending on the nature of the target and the amount of purchase shares in the result of such structure the bidder may or may not obtain a control in the target.
As was mentioned above, share acquisition is conceptually easier to implement, comparing with asset, because only asset which is being bought is the target’s shares. However, there also a problem with the number of contracting parties, i.e. target’s shareholders can arise.
The employer in this structure remains the same, therefore there is no problem with retaining of employees.
From the point of view of the retaining of customers and suppliers, in share purchase structure the contracting parties remain the same, so there will be generally no need in novation or assignment of them as in the asset purchase structure. However, there is so-called “change of control” provision that can be found in some contracts, according to which in the event of the substantial changes in the control of any party the validity and some terms of the contract still has to be confirmed by the other party. [2]
8. Shares Exchange
In the Shares Exchange deal structure the bidder exchanges its shares for the shares of the target with target’s shareholders. In the result of such deal the bidder company becomes a shareholder of the target, those shareholders who have exchanged their shares become shareholders of the bidder, and those who have not exchange remain shareholders of the target. The target becomes a subsidiary of the bidder and the bidder obtains a possibility to appoint its directors on the board of directors of the target. [3]
The reasons of employing this deal structure are mostly the same as of the shares for cash structure. However, considering that the consideration in this structure is shares, there are all advantages and disadvantages of using this type of consideration stated above.
9. Forward Triangular Merger
In the Forward Triangular Merger the bidder creates its new subsidiary to be used in the merger and transfers to it a certain amount of bidder’s shares. Then the subsidiary transfer bidder’s shares to target’s shareholders and the target merges into a subsidiary. In the result of this merger the target ceases to exist, therefore target’s assets and liabilities are transferred to the bidder’s subsidiary, and shareholders of the target become the shareholders of the bidder.
The main advantage of this structure is that the parent company (the bidder) acquires the control of the target, but does not inherit its liabilities, since the liabilities of the target are contained in the subsidiary. There are also advantages and disadvantages of share purchase by using shares as a consideration can be applied to this structure.
10. Cash Triangular Merger
In the Cash Triangular Merger likewise in the Forward Triangular Merger the bidder also creates its subsidiary but transfers to it a certain amount of cash. Then the subsidiary transfer cash for their shares to the target’s shareholders. In the result of this merger the target ceases to exist through the merging into the bidder’s subsidiary, therefore target’s assets and liabilities are transferred to the bidder’s subsidiary, and shareholders of the target do not become the shareholders of the bidder. [4]
The Cash Triangular Merger has the same advantages as the forward triangular merger structure, besides it allows to avoid the disadvantages of using shares as a consideration. However, this structure has the same disadvantages as any cash structure.
11. Reverse Triangular Merger
In the Reverse Triangular Merger likewise in the Forward Triangular Merger the bidder creates its subsidiary to be used in the merger and transfers to it a certain amount of bidder’s shares. Then the subsidiary transfer bidder’s shares to target’s shareholders and merge into the target. In the result of this merger the bidder’s subsidiary ceases to exist and the target becomes a bidder’s wholly-owned subsidiary. The shares of the subsidiary (which all are owned by the bidder) are converted into shares of the target and shareholders of the target become the shareholders of the bidder. [5]
The reverse triangular merger is mainly used as a way by which a private company may go public by merging with an already public company. The bidder might be interested in this merger when it has a fast-growing business and need to become public in a quicker and less expensive way. The combination in the result of this structure allows him to issue shares without starting an initial public offer, thus quicker, cheaper, and easier. The public company is often not active or a corporate shell, so it is also interested in a merger. [6]
This structure can also be used by a foreign listed company to obtain a “second” listing on the stock exchange in the UK. [7]
There are advantages and disadvantages of buying shares and using shares as a consideration in this structure, which described above.
12. Reverse Triangular Merger for Cash
In the Reverse Triangular Merger for Cash likewise in the Reverse Triangular Merger the bidder creates its subsidiary to be used in the merger but transfers to it a certain amount of cash. Then the subsidiary buys target’s shares from its shareholders and merges into the target. In the result of this merger the bidder’s subsidiary ceases to exist, the shares of the subsidiary (which all are owned by the bidder) are converted into shares of the target and the target becomes a bidder’s wholly-owned subsidiary, but shareholders of the target do not become the shareholders of the bidder. [8]
This structure is used for the same purposes as a reverse triangular merger and there are advantages and disadvantages of buying shares and using cash as a consideration as examined above.
13. Squeeze Out (Cash)
If the bidder wants to increase its ownership of target’s shares to 100% it may want to remove all minority target’s shareholders. According to section 979 of the Companies Act 2006, a squeeze out is a compulsory acquisition of shares, when the bidder under a traditional takeover offer has a right compulsory to buy out remaining shares of the target without their consent, subject to condition that his offer has been previously accepted by holders of 90% or more of target’s shares to which the offer was made. This procedure has to be implemented within a maximum of three months from the end of the offer period. [9]
It is worth mentioning, that in addition to squeeze out, there is also the “sell out” provision in Companies Act, according to which minority shareholders have a right to force the bidder to buy out their shares subject to the same conditions as for a squeeze out. [10]
Alternative way to buy out compulsory shares of minority shareholders is through a scheme of arrangement following a takeover. However, the approval of 75% of minority shareholders is required to implement such scheme. [11]
Summing up, there are a number of different M&A deal structures which can be used in different circumstances depending on the wishes and facilities of the bidder and the target. In addition the requirements of companies’ articles and legal provisions have to be fulfilled. There are a lot of advantages and disadvantages, which every structure has. Sometimes the advantage of some structure for the bidder can be the disadvantage for the target and vice versa. Therefore a rigorous analysis of both parties’ wishes, requirements, facilities and circumstances is required to make a right choice.
BIBLIOGRAPHY
BOOKS
Andenas, M. and Wooldridge, F. (2009) “European Comparative Company Law”, Cambridge University Press, New York.
Bainbridge, S. M. (2003) Merges and Acquisitions, Foundation Press, New York.
Barrett, P.J., Raphael, B.W. and Oswitt, J.N. (2006) “Structuring, Negotiating, and Consummating an M&A Transaction”, Aspatore authors, M&A Negotiations: Leading Lawyers on Negotiating Deals: Structuring Contracts and Resolving Merger and Acquisition Disputes, Aspatore Books, Boston.
Bismarck, N. (2004) “United Kingdom”, Begg, P.F.C. (ed.), Corporate Acquisitions and Mergers, Kluwer Law International BV, Netherlands.
Borghese, R.J. and Borgese, P. (2001) M & A from planning to integration: executing acquisitions and increasing shareholder value, McGraw-Hill; US.
Brown, M. (2004) “United States. Acquiring US Business in Negotiated and Hostile Transactions”, Begg, P.F.C. (ed.), Corporate Acquisitions and Mergers, Kluwer Law International BV, Netherlands.
DePamphilis, D. (2010) Mergers, Acquisitions and Other Restructuring Activities, 5th edition, Elseiver Academic Press, USA.
Gaughan, P.A. (2007) Mergers, acquisitions, and corporate restructurings, 4th edition, John Wiley and Sons, New York.
Ginsburg, M. D., Levin, J. S. (2006) Mergers, Acquisitions and Buyouts, Aspen Publishers, New York.
Hunt, P. (2003) Structuring Mergers and Acquisitions: A Guide to Creating Shareholder Value, Aspen Publishers, New York.
Kenyon-Slade, S. (2004) Mergers and Takeovers in the US and UK, Oxford University Press, Oxford.
Lajoux, A.R. and Nesvold, P.H. (2004) The Art of M&A Structuring: Techniques for Mitigating Financial, Tax and Legal Risk, McGrow-Hill, New York.
Oesterle, D.A. (2006) Mergers and Acquisitions in a Nutshell, 3d edition, West Publishing, St. Paul, MN.
Sealy, L. and Worthington, S. (2008) “Cases and Materials in Company Law”, 8th edition, Oxford University Press, Oxford.
Speechley, T. (2008) Acquisition Finance, Tottel Publishing, UK.
Stilton, A. (2006) Sale of Shares & Business: Law, Practice and Agreements, Sweet & Maxwell, London.
Stilton, A. (2008) Sale of Shares & Business: Law, Practice and Agreements. Supplement to the First Edition, Sweet & Maxwell, London.
ARTICLES AND OTHER PAPERS
2006 Companies Act
Avery, D.R. and Getschman, G.J. (2002) “Comparing M&A Structures. Choice of Deal Structure”, Goulston & Storrs publications, available at http://www.goulstonstorrs.com/NewsEvents/PublicationsMentions?find=25535, visited 17 April 2010.
Cleaver, C. (2009) “United Kingdom - Takeovers Guide”, Slaughter and May publications, available at
http://www.google.com/url?sa=t&source=web&ct=res&cd=1&ved=0CAYQFjAA&url=http%3A%2F%2Fwww.ibanet.org%2FDocument%2FDefault.aspx%3FDocumentUid%3D4AB94473-FCCE-448A-AF06-1D876876B47C&rct=j&q=%22statutory+merger+in+the+UK%22&ei=Z4jRS6meB93bsAaOrpS2Dg&usg=AFQjCNGCGvIcPkqP3sifs2vobRxoQmAsBA, visited 17 April 2010.
DLA Piper (2008) “Mergers & Acquisitions in Europe: Some Key Issues”, booklet, available at www.dlapiper.com visited 17 April 2010.
Jamieson, B. (2008) “Structuring a successful M&A deal”, Colin NG & Partners presentation, available at http://www.cnplaw.com/en/files/articles/2008/Structuring_a_successful_deal.pdf, visited 17 April 2010.
Kamya, B. and Thompson, M. (2010) “Schemes of Arrangement in Takeovers”, Steptoe & Johnson LLP publications, available at http://www.steptoe.com/publications-6643.html, visited 17 April 2010.
Lombers, M., Bardell, M. and Radford, A. (2008) “More than a stamp duty saving”, 27(4) International Financial Law Review,105-108.
Lombers, M. and Radford, A. (2007) “London's Scheming - The UK Takeover Panel Takes a Flexible Approach to Schemes of Arrangement”, 26(7) International Financial Law Review 46-49.
Ventoruzzo, M. (2010) “Freeze-Outs: Transcontinental Analysis and Reform Proposals”, 50 (4) Virginia Journal of International Law; Working Paper No. 137/2009, available at SSRN: http://ssrn.com/abstract=1505485, visited 17 April 2010.
Ventoruzzo, M. (2008) “Takeover Regulation as a Wolf in Sheep’s Clothing: Taking U.K. Rules to Continental Europe”, 11 University of Pennsylvania Journal of Business Law, 135-173.
[1] Kenyon-Slade, S. (2004), supra note 2; DePamphilis, D. (2010), supra note 6.
[2] Stilton, A. (2006), supra note 1.
[3] Kenyon-Slade, S. (2004), supra note 2; DePamphilis, D. (2010), supra note 6.
[4] DePamphilis, D. (2010), supra note 6.
[5] DePamphilis, D. (2010), supra note 6.
[6] Gaughan, P.A. (2007), supra note 14.
[7] Jamieson, B. (2008), supra note 8.
[8] DePamphilis, D. (2010), supra note 6.
[9] s.980(2)(a) Companies Act 2006, DePamphilis, D. (2010), supra note 6.
[10] s.983 Companies Act 2006.
[11] DePamphilis, D. (2010), supra note 6.
In Shares for Cash deal structure the bidder buys and the shareholders of the target sells all or a certain amount of target’s shares, therefore the ownership of those shares of the target is transferred from the target’s shareholders to the bidder company. However, the target company remains to exist and becomes a subsidiary of the bidder company. [1]
This structure can be used when the bidder does not need or want, or is not able to acquire 100% of the target or does not want a target to merge into the bidder. This may be because it is only seeking an equity investment in the target to share in the profit or to increased market share or improve efficiencies, or there are some problems with dissenting shareholders or unwanted liabilities. In this structure the target remains to be a separate legal entity, an in this way is separated from the bidder by the rule of limited liability. Depending on the nature of the target and the amount of purchase shares in the result of such structure the bidder may or may not obtain a control in the target.
As was mentioned above, share acquisition is conceptually easier to implement, comparing with asset, because only asset which is being bought is the target’s shares. However, there also a problem with the number of contracting parties, i.e. target’s shareholders can arise.
The employer in this structure remains the same, therefore there is no problem with retaining of employees.
From the point of view of the retaining of customers and suppliers, in share purchase structure the contracting parties remain the same, so there will be generally no need in novation or assignment of them as in the asset purchase structure. However, there is so-called “change of control” provision that can be found in some contracts, according to which in the event of the substantial changes in the control of any party the validity and some terms of the contract still has to be confirmed by the other party. [2]
8. Shares Exchange
In the Shares Exchange deal structure the bidder exchanges its shares for the shares of the target with target’s shareholders. In the result of such deal the bidder company becomes a shareholder of the target, those shareholders who have exchanged their shares become shareholders of the bidder, and those who have not exchange remain shareholders of the target. The target becomes a subsidiary of the bidder and the bidder obtains a possibility to appoint its directors on the board of directors of the target. [3]
The reasons of employing this deal structure are mostly the same as of the shares for cash structure. However, considering that the consideration in this structure is shares, there are all advantages and disadvantages of using this type of consideration stated above.
9. Forward Triangular Merger
In the Forward Triangular Merger the bidder creates its new subsidiary to be used in the merger and transfers to it a certain amount of bidder’s shares. Then the subsidiary transfer bidder’s shares to target’s shareholders and the target merges into a subsidiary. In the result of this merger the target ceases to exist, therefore target’s assets and liabilities are transferred to the bidder’s subsidiary, and shareholders of the target become the shareholders of the bidder.
The main advantage of this structure is that the parent company (the bidder) acquires the control of the target, but does not inherit its liabilities, since the liabilities of the target are contained in the subsidiary. There are also advantages and disadvantages of share purchase by using shares as a consideration can be applied to this structure.
10. Cash Triangular Merger
In the Cash Triangular Merger likewise in the Forward Triangular Merger the bidder also creates its subsidiary but transfers to it a certain amount of cash. Then the subsidiary transfer cash for their shares to the target’s shareholders. In the result of this merger the target ceases to exist through the merging into the bidder’s subsidiary, therefore target’s assets and liabilities are transferred to the bidder’s subsidiary, and shareholders of the target do not become the shareholders of the bidder. [4]
The Cash Triangular Merger has the same advantages as the forward triangular merger structure, besides it allows to avoid the disadvantages of using shares as a consideration. However, this structure has the same disadvantages as any cash structure.
11. Reverse Triangular Merger
In the Reverse Triangular Merger likewise in the Forward Triangular Merger the bidder creates its subsidiary to be used in the merger and transfers to it a certain amount of bidder’s shares. Then the subsidiary transfer bidder’s shares to target’s shareholders and merge into the target. In the result of this merger the bidder’s subsidiary ceases to exist and the target becomes a bidder’s wholly-owned subsidiary. The shares of the subsidiary (which all are owned by the bidder) are converted into shares of the target and shareholders of the target become the shareholders of the bidder. [5]
The reverse triangular merger is mainly used as a way by which a private company may go public by merging with an already public company. The bidder might be interested in this merger when it has a fast-growing business and need to become public in a quicker and less expensive way. The combination in the result of this structure allows him to issue shares without starting an initial public offer, thus quicker, cheaper, and easier. The public company is often not active or a corporate shell, so it is also interested in a merger. [6]
This structure can also be used by a foreign listed company to obtain a “second” listing on the stock exchange in the UK. [7]
There are advantages and disadvantages of buying shares and using shares as a consideration in this structure, which described above.
12. Reverse Triangular Merger for Cash
In the Reverse Triangular Merger for Cash likewise in the Reverse Triangular Merger the bidder creates its subsidiary to be used in the merger but transfers to it a certain amount of cash. Then the subsidiary buys target’s shares from its shareholders and merges into the target. In the result of this merger the bidder’s subsidiary ceases to exist, the shares of the subsidiary (which all are owned by the bidder) are converted into shares of the target and the target becomes a bidder’s wholly-owned subsidiary, but shareholders of the target do not become the shareholders of the bidder. [8]
This structure is used for the same purposes as a reverse triangular merger and there are advantages and disadvantages of buying shares and using cash as a consideration as examined above.
13. Squeeze Out (Cash)
If the bidder wants to increase its ownership of target’s shares to 100% it may want to remove all minority target’s shareholders. According to section 979 of the Companies Act 2006, a squeeze out is a compulsory acquisition of shares, when the bidder under a traditional takeover offer has a right compulsory to buy out remaining shares of the target without their consent, subject to condition that his offer has been previously accepted by holders of 90% or more of target’s shares to which the offer was made. This procedure has to be implemented within a maximum of three months from the end of the offer period. [9]
It is worth mentioning, that in addition to squeeze out, there is also the “sell out” provision in Companies Act, according to which minority shareholders have a right to force the bidder to buy out their shares subject to the same conditions as for a squeeze out. [10]
Alternative way to buy out compulsory shares of minority shareholders is through a scheme of arrangement following a takeover. However, the approval of 75% of minority shareholders is required to implement such scheme. [11]
Summing up, there are a number of different M&A deal structures which can be used in different circumstances depending on the wishes and facilities of the bidder and the target. In addition the requirements of companies’ articles and legal provisions have to be fulfilled. There are a lot of advantages and disadvantages, which every structure has. Sometimes the advantage of some structure for the bidder can be the disadvantage for the target and vice versa. Therefore a rigorous analysis of both parties’ wishes, requirements, facilities and circumstances is required to make a right choice.
BIBLIOGRAPHY
BOOKS
Andenas, M. and Wooldridge, F. (2009) “European Comparative Company Law”, Cambridge University Press, New York.
Bainbridge, S. M. (2003) Merges and Acquisitions, Foundation Press, New York.
Barrett, P.J., Raphael, B.W. and Oswitt, J.N. (2006) “Structuring, Negotiating, and Consummating an M&A Transaction”, Aspatore authors, M&A Negotiations: Leading Lawyers on Negotiating Deals: Structuring Contracts and Resolving Merger and Acquisition Disputes, Aspatore Books, Boston.
Bismarck, N. (2004) “United Kingdom”, Begg, P.F.C. (ed.), Corporate Acquisitions and Mergers, Kluwer Law International BV, Netherlands.
Borghese, R.J. and Borgese, P. (2001) M & A from planning to integration: executing acquisitions and increasing shareholder value, McGraw-Hill; US.
Brown, M. (2004) “United States. Acquiring US Business in Negotiated and Hostile Transactions”, Begg, P.F.C. (ed.), Corporate Acquisitions and Mergers, Kluwer Law International BV, Netherlands.
DePamphilis, D. (2010) Mergers, Acquisitions and Other Restructuring Activities, 5th edition, Elseiver Academic Press, USA.
Gaughan, P.A. (2007) Mergers, acquisitions, and corporate restructurings, 4th edition, John Wiley and Sons, New York.
Ginsburg, M. D., Levin, J. S. (2006) Mergers, Acquisitions and Buyouts, Aspen Publishers, New York.
Hunt, P. (2003) Structuring Mergers and Acquisitions: A Guide to Creating Shareholder Value, Aspen Publishers, New York.
Kenyon-Slade, S. (2004) Mergers and Takeovers in the US and UK, Oxford University Press, Oxford.
Lajoux, A.R. and Nesvold, P.H. (2004) The Art of M&A Structuring: Techniques for Mitigating Financial, Tax and Legal Risk, McGrow-Hill, New York.
Oesterle, D.A. (2006) Mergers and Acquisitions in a Nutshell, 3d edition, West Publishing, St. Paul, MN.
Sealy, L. and Worthington, S. (2008) “Cases and Materials in Company Law”, 8th edition, Oxford University Press, Oxford.
Speechley, T. (2008) Acquisition Finance, Tottel Publishing, UK.
Stilton, A. (2006) Sale of Shares & Business: Law, Practice and Agreements, Sweet & Maxwell, London.
Stilton, A. (2008) Sale of Shares & Business: Law, Practice and Agreements. Supplement to the First Edition, Sweet & Maxwell, London.
ARTICLES AND OTHER PAPERS
2006 Companies Act
Avery, D.R. and Getschman, G.J. (2002) “Comparing M&A Structures. Choice of Deal Structure”, Goulston & Storrs publications, available at http://www.goulstonstorrs.com/NewsEvents/PublicationsMentions?find=25535, visited 17 April 2010.
Cleaver, C. (2009) “United Kingdom - Takeovers Guide”, Slaughter and May publications, available at
http://www.google.com/url?sa=t&source=web&ct=res&cd=1&ved=0CAYQFjAA&url=http%3A%2F%2Fwww.ibanet.org%2FDocument%2FDefault.aspx%3FDocumentUid%3D4AB94473-FCCE-448A-AF06-1D876876B47C&rct=j&q=%22statutory+merger+in+the+UK%22&ei=Z4jRS6meB93bsAaOrpS2Dg&usg=AFQjCNGCGvIcPkqP3sifs2vobRxoQmAsBA, visited 17 April 2010.
DLA Piper (2008) “Mergers & Acquisitions in Europe: Some Key Issues”, booklet, available at www.dlapiper.com visited 17 April 2010.
Jamieson, B. (2008) “Structuring a successful M&A deal”, Colin NG & Partners presentation, available at http://www.cnplaw.com/en/files/articles/2008/Structuring_a_successful_deal.pdf, visited 17 April 2010.
Kamya, B. and Thompson, M. (2010) “Schemes of Arrangement in Takeovers”, Steptoe & Johnson LLP publications, available at http://www.steptoe.com/publications-6643.html, visited 17 April 2010.
Lombers, M., Bardell, M. and Radford, A. (2008) “More than a stamp duty saving”, 27(4) International Financial Law Review,105-108.
Lombers, M. and Radford, A. (2007) “London's Scheming - The UK Takeover Panel Takes a Flexible Approach to Schemes of Arrangement”, 26(7) International Financial Law Review 46-49.
Ventoruzzo, M. (2010) “Freeze-Outs: Transcontinental Analysis and Reform Proposals”, 50 (4) Virginia Journal of International Law; Working Paper No. 137/2009, available at SSRN: http://ssrn.com/abstract=1505485, visited 17 April 2010.
Ventoruzzo, M. (2008) “Takeover Regulation as a Wolf in Sheep’s Clothing: Taking U.K. Rules to Continental Europe”, 11 University of Pennsylvania Journal of Business Law, 135-173.
[1] Kenyon-Slade, S. (2004), supra note 2; DePamphilis, D. (2010), supra note 6.
[2] Stilton, A. (2006), supra note 1.
[3] Kenyon-Slade, S. (2004), supra note 2; DePamphilis, D. (2010), supra note 6.
[4] DePamphilis, D. (2010), supra note 6.
[5] DePamphilis, D. (2010), supra note 6.
[6] Gaughan, P.A. (2007), supra note 14.
[7] Jamieson, B. (2008), supra note 8.
[8] DePamphilis, D. (2010), supra note 6.
[9] s.980(2)(a) Companies Act 2006, DePamphilis, D. (2010), supra note 6.
[10] s.983 Companies Act 2006.
[11] DePamphilis, D. (2010), supra note 6.