An acquisition is when one company purchases another business (known as the ‘target company’). This contrasts a merger transaction, which is the combination of two or more businesses to form a single entity, also known as ‘consolidation’.
An acquisition purchase may vary:
- In size – a business may acquire 100%, or close to 100%, of another business
- In structure – a business may pursue an asset purchase, or a share purchase
The factors that dictate the structure of a transaction are often contingent on what the buyer hopes to achieve regarding their acquisition:
- A share purchase enables the buyer to take over the entire target company, including its assets, liabilities, rights and obligations. It is the shares that change hands in this case and this is covered by share purchase agreement. In a share purchase sale, TUPE does not apply since there is no transfer of employment.
- An asset purchase instead transfers only the assets and liabilities as specified in the sale and purchase agreement. These assets will include the premises, equipment, stock and IP rights. Any assets not covered in the sale will remain with the seller. In an asset sale, TUPE applies.
As such, a share purchase may be carried out when the target company is considered a ‘going concern’, meaning assets like employee and supplier contracts will remain unchanged and under the control of the target company (albeit now owned by the acquirer). On the other hand, an asset purchase is more likely to occur where the buyer wishes to acquire only a specific division of a company, which is not in of itself a separate legal entity.
An acquisition is public when it involves a company whose shares are traded on a public stock exchange - sometimes called takeovers. On the other hand, a private acquisition involves a transfer of shares owned by private individuals or companies.
The difference between public and private acquisitions is an important one, as the rules and regulations governing public purchases are significantly more stringent than private ones. The City Code on Takeovers is the key piece of regulation regarding public acquisitions, and exists (non-exhaustively) to ensure:
- Shareholders receive fair and equal treatment
- Shareholders are given adequate information and the opportunity to decide the merits of the takeover
- The target company is not hindered in its operations for an unreasonable amount of time
However, for all acquisitions, the target company’s articles of association and any existing shareholder agreement should be considered. These important, and often highly bespoke, documents can dictate the rights and obligations shareholders have regarding the transfer of shares.
A friendly acquisition regards a purchase where the two companies (the buyer and the target company) cooperate in negotiations. On the other hand, a hostile acquisition happens when the target company’s board are either:
- Uncooperative and unwilling to be bought
- Have no prior knowledge of the offer
Acquisitions can take varying amounts of time to complete, with an expected length of four to six months. The process also varies depending on whether the acquisition is a public or private one, given the differing regulatory conditions.
The typical acquisition will involve three key stages:
- A letter of intent
- A binding purchase agreement
A binding purchase agreement will tend to focus on five key areas:
- Conditions that must be satisfied before closing, such as regulatory approvals
- Representations and warranties made by the seller regarding the target company, which includesthe value of the target’s net working capital
- Covenants controlling the conduct of the parties, for example, restriction of business operations
- Termination rights, such as breach of contract
- An indemnity covering any losses incurred by a breach of contractual obligations
Alternatively, the acquisition process may happen via an auction, which usually takes place where there is interest from multiple buyers and/or the client is open to selling to more than one buyer. Here, the successful bidder will embark on forming a binding purchase agreement with the target company.
Prior to making an offer or bid, the acquiring party will undertake a due diligence investigation of the target company. This is an important step that allows the buyer to identify any strengths or weaknesses in the target company so that they can determine any risk and correctly value the target.
Acquisitions are one of the most important strategic decisions that can be taken by a business. However, the reasons for an acquisition can vary and include:
- Enabling entry into a foreign market
- Gaining new skills or technology
- Allowing for growth of the acquiring company
- Improving the performance of the target company
- Giving the target company greater market access
- Reducing competition
This list is non-exhaustive, but whatever the reasons for an acquisition, they typically form complex and transformational transactions. Because of this, it is recommended that you seek expert advice. Our Corporate team at Vardags have extensive expertise in advising clients in relation to all aspects of mergers and acquisitions.
The information on this website is intended as a guide and does not constitute legal advice. Vardags do not accept liability for any errors in the information on this website, nor any losses stemming from reliance upon the statements made herein. All articles and pages aim to reflect the legal position at time they were published, and may have been rendered obsolete by subsequent developments in the law. Should you require specialist advice, tailored to your situation, please see how Vardags can help you.