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In what types of transactions or sectors are share or asset sales more prevalent, and what are the different considerations for each sale type?
Recently, M&A markets have shown a tendency towards prudent and cautious execution of major acquisition deals. Against the backdrop of a worldwide financial crisis even large multicorporate enterprises cannot allow themselves to take excessive risks for questionable benefits.
Asset deals allow potent market players to strategically expand their business. By acquiring those assets on the market required to implement concrete growth plans, tedious and expensive reorganizations or demergers, aimed at the establishment of new business branches, can be evaded. Moreover, asset deals allow for the acquisition of profitable parts of undertakings without forcing the purchaser to take over all obligations and liabilities of the target. Especially in cases in which the target is in distress this aspect can be of great importance. Probably for those reasons the number of asset deals has been steadily rising over the last years.
Irrespective of the above, however, there is no general answer to the question whether share deals or asset deals are more prevalent in specific transactions or market sectors since the choice of the individual deal structure used in a single case always depends on various legal implications and considerations. For a long time, share deals seemed to be the more popular sale type on the M&A market. This is probably due to the fact that the acquisition of shares rather than individual company assets allows for the employment of simplified agreement structures, which is especially advantageous for the sale of big enterprises with a large number of assets, including numerous contractual relationships. Whether this fact is about to change before the background of current market developments cannot be clearly ascertained.
The decision on the employment of an asset or share deal structure in the course of an endeavour relating to the acquisition of an undertaking usually depends on a whole series of different legal considerations. The most important include the extent of purchaser´s liability for company related obligations, the continuity of already existing legal relationships between the company and third parties and the specific requirements for the transfer of property in the company assets. In addition, tax implications, labour law aspects, the question of the appropriate agreement structure, the requirement of internal approvals by competent boards and the costs of the respective transaction play a dominant role in the given context.
If an undertaking is acquired by means of an asset deal, all its material and immaterial assets (such as, its movables, immovables, contractual relationships, patents, licenses, trademarks and so on) and thus the undertaking itself (including, in general, all accessories and belongings legally attached thereto) constitute the object of purchase. As a result, each company asset needs to be individually transferred from seller to purchaser in accordance with applicable rules of law to properly effect the deal meaning that tangible assets need to be handed over, rights need to be assigned to the purchaser and so forth. The purchaser, by acquiring the company assets, becomes their new proprietor so that the asset deal leads to a change in the ownership of the undertaking. The big advantage of this deal structure lies in the possibility of the purchaser acquiring only those company assets which are of use and value to him and to especially exclude the transfer of obligations and liabilities. It has to be pointed out, though, that in case of the acquisition and continuation of a whole undertaking (not only of individual assets thereof) such exclusion is subject to the special provisions of section 38 of the Austrian Commercial Code (Commercial Code) and section 1409 of the Austrian Civil Code (Civil Code).
Section 38 of the Commercial Code provides for the assumption by the purchaser of all company related legal relationships between the seller and third parties. Any exclusion of the transfer of specific liabilities pursuant hereto requires proper announcement by the purchaser, meaning, that if he seeks to prevent the assumption of seller´s obligations and contracts with effect to third parties, he from the perspective of those parties has to clearly and evidently proclaim such intent. Proper announcement is deemed to have been made, among others, if the purchaser induces registration of his agreement with the seller regarding the non-assumption of existing liabilities with the competent register of companies. If, on the other hand, the purchaser actually intends to assume all legal relationships between the seller and third parties, section 38 of the Commercial Code serves him as an effective legal instrument to quickly and relatively easily do so.
Pursuant to section 1409 of the Civil Code, the purchaser of an undertaking automatically assumes liability for all company related obligations of whose existence he was or ought to have been aware as of execution of the acquisition. Hence, in contrast to section 38 of the Commercial Code, section 1409 of the Civil Code does not provide for an automatic transfer of all legal relationships from seller to purchaser but stipulates joint liability of seller and purchaser for company debts. Purchaser´s liability, however, is capped with the value of the acquired undertaking, hence, with the aggregate value of all acquired assets. Joint liability of seller and purchaser pursuant to section 1409 of the Civil Code may not be waived by the parties to the detriment of third creditors.
In case of a share deal, the purchaser does not acquire the individual assets of the undertaking to be sold but rather the shares in the legal entity owning such undertaking. By doing so, the purchaser assumes control over the company´s proprietor in order to become the economic owner of the company. Technically, there is no change in the ownership of the company itself and no transfer of assets takes place. Rights and obligations already existent between the undertaking and third parties continue to be in full force. This fact, however, can also constitute a disadvantage, since it deprives the purchaser of the possibility to exclude the transfer of burdensome and hardly calculable obligations and liabilities attaching to the company.
What conditions precedent, including approvals, are typical in a sale and purchase agreement?
The following conditions precedent are commonly used in sale and purchase agreements:
- Granting of Antitrust clearance by competent authorities;
- Payment of agreed escrow amount to escrow account;v
- Delivery of specific documents to the other party;
- Execution and/or termination of specific agreements (transitional services agreements, umbrella agreements and so on);
- Approval of the respective transaction by the competent boards or committees (for example, management of the parent company);
- Resignation of incumbent managing directors of the target company;
- No material adverse change in the target company (meaning, that the target may not, between signing and closing of an acquisition, suffer a considerable change in its value, its financial results, its rights and obligations, the conduct of its business operations or in any other respects deemed material by the parties leading to a frustration of purpose of the acquisition agreement);
- Performance of due diligence procedure by purchaser to purchaser´s satisfaction and/or compliance of seller with purchaser´s requests in connection with due diligence findings;
- No violation of R&W as of Closing;
- No claim of the buyer arising from a covenant breach and no claim having occurred which has resulted (or is reasonably likely to result) in an aggregate adverse impact in a specific amount;
- Obtainment of specific documents and/or declarations by third parties or competent boards (for example, waivers, consents, confirmations, shareholder resolutions and so on);
- Procurement of debt financing means by seller or purchaser to ensure fulfilment of either party´s obligations under the respective agreement;
- Provision of the other party with documents and/or information relating to the respective acquisition (for example, correspondence and decisions by competent authorities, third party declarations, project documentation and so on) either forthwith or within a reasonable period of time;
- The bearing of all costs incurred in relation to specific correspondence with competent authorities; and,
- The obligation of one party to obtain any and all permits and other legal clearances necessary for the consummation of the respective acquisition.
Describe the types of deal protections allowed and commonly used in acquisition agreements?
Consideration needs to be given as to who will bear the costs for example for the lawyer or other costs related to the undertaking.
The Seller has to notify all the relevant third parties who are debtors in relation to the transferred accounts receivable and will ensure such third parties duly pay the accounts receivable to the buyer. They will also notify all relevant third parties creditors in relation to the assumed liabilities.
The seller shall at all times use all of its respective best efforts to keep any and all confidential information related to the business and to the buyer. It shall also procure that neither it nor its affiliates shall disclose any such information except.
Voting Protections enable a seller to bank a high percentage of the shareholders' votes in favour of the agreed upon transaction prior to an actual shareholder vote. A seller can ensure the success of its preferred transaction by securing voting agreements from stockholders holding a majority of the shares or voting power.
Exclusivity measures prevent selling boards from considering or negotiating with a potential rival acquirer. No-shop and no-talk provisions are the most common variants of exclusivity measures. No-shop, or no-solicitation, measures restrict selling boards from actively seeking an alternative buyer. No-shop provisions allow a seller to respond to an unsolicited bid but do not allow a seller to initiate discussions with a potential bidder or use a signed agreement to actively shop a target.
Rights of first refusal, or matching rights, are another type of exclusivity measure. A right of first refusal provides that in the event that a subsequent bid is made, the buyer with a right of first refusal has the right to match the subsequent bid. The presence of rights of first refusal can be a strong deterrent against subsequent bids and is therefore a potentially potent protective measure in the non-Revlon context. A subsequent bidder faces a real risk of incurring the expense of evaluating a target and making a bid only to see the initial bidder exercise its right of first refusal and buy the company.
The final general category of deal protection devices are compensatory devices. Stock lockups, termination fees, and topping fees are all intended both to compensate bidders in the event of an unsuccessful bid and to deter third party bids. A stock lockup is an option granted to the initial buyer to purchase shares of the seller's stock upon the occurrence of a triggering event, such as the seller's termination of the initial merger agreement in order to pursue an alternative transaction. A termination fee is a cash payment to the initial buyer in the event the merger agreement with the seller is terminated due to a triggering event. A topping fee is a cash payment made to the initial buyer by the seller in the event the seller terminates the initial buyer's transaction in order to accept a topping bid. The size of the fee is equal to a percentage of the difference between the price offered by the initial buyer and the topping bid. An asset lockup is an option issued to the initial bidder to purchase a division or other asset of the seller; such an asset may be the 'crown jewel' of the seller or may involve assets that are of particular interest to the non-preferred bidder.
Describe customary post-closing arrangements, including transitional service agreements, between buyer and seller?
Issuing a joint press release is a method of advice for the suppliers and the customers. The information should be provided to the suppliers, customers and the public in general in a very sensitive way. It is important to involve the employee representatives as early as possible, to keep the good reputation of the company.
A good way of integration of the target company is to involve them in the IT structures or the cash-management of the purchaser.
After enforcement, as the case may be, a credible enforcement record is needed which has to be exposed on the day of enforcement. Based on this record there could be an agreed adjustment of the purchase price.
For the purchaser it is not always easy to continue separate divisions of the company. Maybe they do not have the required infrastructure at disposal, but certain services should still be provided to the buyer. Under transitional service agreements (TSAs), the seller agrees to provide certain services to support the acquired business for a period of time in return for compensation. The execution of those contracts should be a condition of the purchase from the side of the purchaser. TSAs are most often used in carve-outs where the buyer lacks the necessary IT capabilities or capacity to support the business on its own. For instance, many private equity firms rely on TSAs until they can identify and engage an IT outsourcing vendor. TSAs are also often necessary when the deal closes faster than the buyer's IT organization can respond. Advantages are reducing transition costs and providing for a faster close, allowing for a cleaner break for the divested business, and potentially giving the acquirer an opportunity to more effectively assimilate the acquired business.
Disadvantages of poorly conceived and executed transition services agreements include a drawn out transition process, distractions for the seller as it has to continue to provide support to an outside entity in potentially unfamiliar ways, and the possibility that the TSA is used to put off difficult decisions by the buyer.
Sellers will work to avoid lengthy obligations under a transition services agreement, and will generally only do the minimum required to get the deal done.