MA 1 - MA Basics

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Questions and Answers

What does company B acquire when it purchases shares of target company C?

100% ownership including all assets and liabilities of target company C (correct)

A minority stake along with some assets of the target company

Exclusively the liabilities of target company C

Only the business operations of target company C

What is a common reason why a buyer may choose to acquire specific assets instead of shares in a company?

To have full control over the target company's corporate structure

To gain more shares in the target company

To avoid taking on unwanted liabilities (correct)

To ensure they acquire the company's debts

Which of the following questions is NOT relevant when determining the acquisition structure?

What is the target's corporate structure?

What are the consents and approvals required?

What is the target company’s market share? (correct)

Does the buyer want all, none, or some liabilities?

Why is it important to determine the acquisition structure at an early stage of the transaction?

It impacts the mechanical and documentation process of the transaction. Signup and view all the answers

In an acquisition where a buyer acquires a business rather than shares, what remains unchanged?

The shareholder structure of the target company Signup and view all the answers

What is one potential consequence of structuring an acquisition as a sale of shares?

The buyer automatically assumes all liabilities of the target company. Signup and view all the answers

Which factor is least likely to influence the decision between a sale of assets versus a sale of shares?

The social reputation of the target company's executives Signup and view all the answers

What is a key reason a business acquisition might experience disruption compared to a share acquisition?

In a business acquisition, multiple assets are involved. Signup and view all the answers

Why might a client prefer a share acquisition over a business acquisition?

Share acquisitions typically execute and complete faster. Signup and view all the answers

In a share sale method, who receives the proceeds from the acquisition?

The selling shareholder receives the consideration directly. Signup and view all the answers

What step must a target company take if it wishes to distribute acquisition proceeds to its shareholders?

Undertake a capital reduction process. Signup and view all the answers

What is a critical outcome for minority shareholders in a business acquisition scenario?

They can be compelled to sell if majority shareholders agree. Signup and view all the answers

Which is true if Target Company C is partially owned and wishes to sell?

Minority shareholders can block the sale unless previously agreed rights exist. Signup and view all the answers

Which of the following factors is most likely to extend the timeline of a business acquisition?

Complications involving multiple asset transfers. Signup and view all the answers

What type of acquisition typically leads to quicker execution and completion?

Share acquisitions. Signup and view all the answers

What primary consideration may affect the decision-making process regarding the distribution of sale proceeds?

The potential for regulatory compliance in capital maintenance. Signup and view all the answers

Which method is NOT typically associated with a share acquisition scenario?

Asset liquidation prior to acquisition completion. Signup and view all the answers

What is a significant advantage for a buyer in a business sale concerning the assets?

The buyer can cherry pick specific lines of business they are interested in. Signup and view all the answers

What might deter a buyer from purchasing the shares of a target company?

Potential liabilities associated with the other line of business. Signup and view all the answers

Which of the following statements is true regarding the transfer of assets in a business acquisition?

Not all assets, liabilities, and contracts need to be transferred in an acquisition. Signup and view all the answers

What is a main challenge that could arise from the transfer of assets, liabilities, and contracts?

There is a risk of counterparties renegotiating contracts. Signup and view all the answers

In the context of a business sale, what could a buyer avoid by structuring the acquisition as a purchase of a specified asset?

Taking on all tax liabilities connected to the target company. Signup and view all the answers

What does the term 'execution risk' refer to in the context of transferring contracts during a business acquisition?

The risk that counterparties may refuse to transfer agreements. Signup and view all the answers

Why is a business transfer by selling only a specific line of business considered more suitable for a buyer interested in one segment?

It restricts the buyer's exposure to non-viable parts of the business. Signup and view all the answers

What could potentially complicate the acquisition process regarding assets in a business sale?

The need for extensive documentation for each asset. Signup and view all the answers

Which of the following best describes a buyer's intent when acquiring a specific business segment?

To focus solely on the profitable aspects of the business. Signup and view all the answers

What is a common pricing mechanism in a share deal?

Lock-to-box mechanism Signup and view all the answers

Earn-out payments are typically structured to be paid based on what?

Achievement of predetermined financial milestones Signup and view all the answers

When determining the amount of consideration to be paid, buyers often consider which aspect of the target business?

Potential future upside Signup and view all the answers

What typically triggers post-purchase price adjustments?

Shortfall or excess in working capital Signup and view all the answers

Which valuation method is commonly used to determine consideration in a private M&A transaction?

Multiple of net asset value Signup and view all the answers

In the context of business acquisitions, what is a significant risk tied to projections of future business performance?

Future performance is inherently uncertain Signup and view all the answers

What is typically NOT included in determining the fixed amount of consideration paid in a deal?

Post-completion adjustments for cash flow Signup and view all the answers

Why do sellers price in the potential upside of their business in a transaction?

To enhance buyer interest by showing potential growth Signup and view all the answers

What is the simplest pricing mechanism discussed in business transactions?

Single fixed consideration amount Signup and view all the answers

What impacts the buyer's willingness to pay for projected future earnings?

Agreement on specific financial milestones Signup and view all the answers

What is the primary reason termination rights for breach are usually only granted?

Breach must be very material or lead to a substantive adverse outcome. Signup and view all the answers

Which aspect is least likely to influence the negotiations of warranties in a sale and purchase agreement (SPA)?

Statutory protections benefiting the buyer. Signup and view all the answers

What is the dual purpose of including warranties in a SPA?

To engineer discovery and apportion risk. Signup and view all the answers

As a buyer's lawyer, what should you focus on regarding warranties?

Creating a detailed and tailored first draft of warranties. Signup and view all the answers

Why might a buyer expect to pay a lower price regarding warranties?

If the purchaser assumes risks for pre-closing issues. Signup and view all the answers

Study Notes

Acquisitions Methods

Two common methods exist: purchasing target company shares or assets directly.
Acquisition method depends on client objectives and factors like assets, liabilities, and corporate structure.

M&A Process

Confidentiality agreements and due diligence important for protecting information and assessing target company's legal, financial, and operational state.
Warranties and indemnities used to allocate risk between buyer and seller. Liability limitations negotiated.
Completion involves share or asset transfer, ancillary agreements, and updated member registers.

Mergers and Acquisitions (M&A) for Private Companies

Two common acquisition methods: shares acquisition and business acquisition.
Share Acquisition: Buyer acquires shares from shareholders; target company structure remains the same.
Business Acquisition: Buyer acquires assets or business directly from target company. No change to the ownership structure of the target company. Potential benefits: avoids target liabilities and allows for selective acquisition; increased legal and operational complications.

Pre-acquisition Stages

Identifying a target company.
Initial commercial terms negotiation (why, price, consideration).
Confidentiality agreement and letter of intent/memorandum of understanding (MOU).
Due diligence (fact-finding exercise on the target company).
Sale and Purchase Agreement (S&PA).
Consideration (purchase price): based on financial modeling and initial agreement.

Key Provisions in S&PA

Contains the legally binding agreement to sell (or buy in case of the target company) the target company.
Accompanied by a disclosure letter or schedule explaining the target’s situation that needs to be read together with the S&PA.
Conditions precedent (CP), such as regulatory approvals or fulfillment of financial targets to trigger completion of the transaction.
Split signing and completion: Completion is staggered, dependent on CPs.
Termination rights, and breaches of warranties or covenants.
Warranties for seller against any breaches.

Consideration Structure

Typically, a fixed consideration amount.
Potential Upside: can be factored in through earn-out payments after completion
Post-completion adjustments (e.g., for shortfall/excess in working capital), which occur after the completion date.
Time Limit: for claims against the seller for liabilities, breaches of warranties, etc.
- Six years for contractual claims
- 18-36 months for warranties.

Employee Transfers

If shares are acquired, the employment terms of the target company employees typically remain unchanged when the sale is completed.
If business is acquired, employees need to be transferred to the buyer.
Section 18A of Employment Act (Singapore) specifies provisions for transfer.

Confidentiality Agreements (CAs)

Negotiated to protect information.
Clauses stipulate permitted use, duration, and return/destruction of information.

Other

Due Diligence: assessing, financial, operational, and legal aspects to reduce acquisition risks.
Conditions precedent (CPs): acts of completion required to trigger the acquisition.
Non-solicitation covenants for preventing potential buyers to poach key personnel.
Consideration structure specifics, which includes fixed and variable amounts, and how payment is structured regarding the circumstances of the parties.

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Description

This quiz explores the methods and processes involved in mergers and acquisitions, focusing on both share and asset acquisition techniques. It highlights key factors such as confidentiality agreements, due diligence, and risk allocation. Test your understanding of M&A strategies to enhance your knowledge in corporate transactions.