Mergers and acquisitions

 

Mergers and acquisitions occur when one business obtains ownership of another.

Sometimes the two companies join together to create a single entity, called a merger, and other times the acquired company retains its identity but is now under the ownership and management of the acquiring company, called an acquisition.

In the UK the term ‘company takeover’ usually refers to the acquisition of a public company by another business - the purchasing company buys as many shares of the public company as it needs to assume ownership and control. Company takeovers will not be covered in this article but you can read more about them in our article ‘company takeovers in the UK’.

Contents:

1) Acquisitions
2) Stock acquisitions
3) Asset acquisitions
4) Mergers
5) How are mergers controlled?
6) Why do mergers and acquisitions take place?
7) Why are commercial solicitors so important in the process?
8) How does the purchase actually take place?


Acquisitions

If the term ‘company takeover’ refers to the purchase of public companies by way of buying their shares, the term ‘private acquisition’ in the UK usually means the acquisition of a private business, which is one that does not list its shares on a public stock exchange.

Stock acquisitions

However, a private company can still be acquired by another purchasing its shares. This type of acquisition is called a ‘stock acquisition’. The acquiring company will need to purchase the shares directly from the selling shareholders, after they have persuaded them to sell.

The acquired company then becomes a subsidiary of the purchasing company and is still a going concern.

Asset acquisitions

An asset acquisition is a different type of acquisition. The purchasing company will not buy the target company’s shares, but instead they will buy the entirety or a portion of the target company’s assets.

The purchased assets could be tangible things such as machinery or property, or they could be intangible, such as intellectual property. The target company will still exist as a separate entity after the asset acquisition and can continue to carry out business or dissolve.

Mergers

A merger is when two companies become one. Both companies can combine to form a new entity with a new identity, or one company (usually the smaller one) can be absorbed into the bigger company. Mergers occur through the acquisition of stock and therefore the new company will have the assets and liabilities of both previous companies.

How are mergers controlled?

Importantly, mergers are conducted under the regulation of the Office of Fair Trading (OFT).

The OFT is responsible for reviewing potential merger situations and referring them to the Competition Commission (CC) if it believes the merger could realistically lessen competition substantially in the UK (called the ‘substantial lessening of competition’ test).

The CC will decide if the merger situation requires investigation and they will determine if the merger does in fact threaten competition in the UK. It has a number of tools available to ensure the merger does not damage competition.

Companies are not required by law to notify the OFT of their intention to merge, however if they think the merger may be referred to the CC for investigation, commercial solicitors may recommend notifying the OFT.

Why do mergers and acquisitions take place?

There are a number of reasons that companies merge or make acquisitions. They could face economic pressure or increased competition, or they may need to become up to date with developments in technology.

In addition, motives for mergers and acquisitions also include wanting to enter a new market or acquire human resources with specific expertise. Mergers and acquisitions also occur when a company is preparing for an Initial Public Offering (offering its shares to the public on a public stock exchange for the first time) or an exit.

Whatever the commercial reason behind the decision to expand by merger or acquisition, a company will need expert advice from commercial solicitors who specialise in mergers and acquisitions.

Why are commercial solicitors so important in the process?

The role of commercial solicitors will start with due diligence, a thorough investigation into the target company in order for the acquiring company to know exactly what they are buying.

This is important because when they become the new owners (if an acquisition) or part of the same company (if a merger), the target company’s incurred liabilities will now become the liabilities of the acquiring company.

Therefore the lawyers need to tell their clients if there are any issues of which they need to be aware, such as ongoing or impending litigation.

The commercial lawyers will also investigate:

  • The corporate structure of the target company (for example does it have any subsidiaries?)
  • Its loan arrangements and its real property, such as freehold properties and leases
  • Any licences held or granted by the target company
  • Any contracts in place, insurance policies, and intellectual property rights
  • Employment matters, in particular any pension scheme in place at the target company
  • An environmental survey will be conducted to ensure there are no potential future liabilities, as environmental issues can be expensive to resolve

In addition, the commercial solicitors will look at the tax implications for their client. Part of their job is to ensure the merger or acquisition is achieved with the maximum tax efficiency possible for their client whilst still observing the relevant rules and regulations.

The acquiring company will also get an accountant to conduct an investigation that will include information on things such as the target company’s accounts, its management and IT systems, any research and development conducted by the company, and the market in which it operates.

How does the purchase actually take place?

Once the acquiring company has all the information it needs to decide to go ahead with the purchase, it can instruct its solicitors to draw up a ‘Heads of Agreement’ which will list what is to be acquired.

It is important that this document is headed ‘subject to contract’ as it may otherwise be taken to be legally binding before it is intended to be.

The purchase price can also now be negotiated. The purchasing company will need to negotiate directly with the company or its shareholders depending on the type of acquisition they are attempting to undertake.

The acquiring company’s commercial lawyers may advise their client to place certain conditions on the completion of the purchase agreement. For example, they may recommend that the contract not be completed until the CC has cleared the merger.

In addition, the lawyers will place a number of restrictive covenants on the sellers in order to protect their client’s new interests. For example, the seller may be required to guarantee that they will not directly compete with the purchasing company or disclose any confidential information to a third party.

Specialist merger and acquisition lawyers are experienced in executing these complex commercial manoeuvres for their clients in an efficient manner whilst minimising risk. Therefore any company thinking of acquiring all or part of another should obtain legal advice straight away.

If you are looking for alternative options to merging your business, please see our information page on joint ventures.

Call us on 0800 1777 162 or complete the web-form above if you need advice or a solicitor to help you with your purchase.

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