M&A Basics PDF

Takeaways There are two commonly used methods of acquisitions: purchasing shares in the target company or purchasing the underlying business or assets directly from the target company. The determination of the acquisition method depends on the client\'s objectives and factors such as the desired a...

Takeaways There are two commonly used methods of acquisitions: purchasing shares in the target company or purchasing the underlying business or assets directly from the target company. The determination of the acquisition method depends on the client\'s objectives and factors such as the desired assets, liabilities, and corporate structure. Confidentiality agreements and due diligence exercises are important in the M&A process to protect information and assess the target company\'s legal, financial, and operational state. Warranties and indemnities are used to allocate risk between the buyer and seller, and limitations of liability are negotiated to protect the parties. The completion process involves the transfer of shares or assets, execution of ancillary agreements, and updating the electronic register of members. Andrew Yip (00:00.77) Hi there, thank you very much for listening into this lecture where we will cover the basic structural considerations of mergers and acquisitions or &A for short relating to private companies. In this lecture, I will start by covering the two most commonly used methods of acquisitions and the differences between them before moving on to discuss the typical preparatory stages of an &A transaction. And then finally, I will talk through some of the key provisions that can be found in the Sale and Purchase Agreement, which is a definitive document for an &A transaction. By the end of this lecture, I hope you will have a useful roadmap if you ever have to advise clients on an &A transaction. As a start, I would like to outline the broad stages of an &A transaction. The first thing that happens is, well, there must be a business opportunity to acquire a target company on the left. Once the target company is identified, the buyer\'s commercial team will work out the initial commercial terms of acquisition. These include why the buyer is interested in the target, what is the consideration of purchase price that the buyer is prepared to offer, what assumptions underpin the financial model drawn up by the buyer in coming to the purchase price amount, etc. Assuming that there is an initial agreement between the buyer and the seller to move ahead with the transaction, certain preliminary documentation, such as a confidentiality agreement and a letter of intent or memorandum of understanding, would be entered into to set the stage, so to speak, for a more formal process of investigations. negotiations and discussions to commence. At the pre -acquisition stage, it is also very common to undertake a due diligence exercise, which is a fact -finding exercise in relation to the target company. Thereafter, assuming all goes well and there are no showstoppers which arise during the due diligence exercise, the buyer and the seller will negotiate and sign the Sale and Purchase Agreement, or SBA for short. Andrew Yip (02:12.824) This will set out the legally binding contractual agreement on the part of the seller to sell the target company and the buyer to purchase the target company. The SBA is customarily accompanied by a disclosure letter or schedule that is issued by the seller to the buyer and which is to be read together with the SBA to qualify the warranties that are provided in the SBA. If there are certain conditions precedent to be satisfied under the SBA, Completion of the sale and purchase of the target company, which is the actual legal transfer of the target company, will not take place at the time of signing of the SPA. Instead, there will be a split signing and completion whereby completion will only take place after the conditions precedent are satisfied or waived in accordance with the SPA. If of course there are no conditions precedent, then signing and completion, which are the third and fourth boxes here in this slide, can occur simultaneously. In this slide and the next, we are going to talk about the two most commonly used private &A deal structures. These are that the buyer may either purchase the shares in the target company from its shareholders or purchase the underlying business or assets directly from the target company. There are also other acquisition methods such as a long -form amalgamation in accordance with the prescribed procedures set out in the Companies if both the target and the buyer companies are Singapore and copyrighted companies. However, this is still a less common acquisition method in Singapore, and so we will not cover that in this lecture. Looking first at the share, sell and purchase structure, I have set out in this slide a very simple basic structure of a company, target company C, which is 100 % owned by company A, its shareholder. Andrew Yip (04:11.278) The target company in turn operates its target business, which is illustrated by the green oval shape in this slide. In a share sale that purchase, company B, which is the buyer, will acquire all the shares of the target company C from company A as the seller. And post acquisition of all of those shares, company B becomes the 100 % shareholder of target company But say for that change of shareholder at the top level, there is actually no other change that happens at target company level. Target company C will continue to operate and run and own its target business. Essentially, a transfer of shares in target company C also transfers all of the targets, assets and liabilities and business to company B as the buyer, lock stock and barrel. Andrew Yip (05:09.453) Contrast what we just discussed with this next slide on an acquisition of business or assets. Similarly, company A is the 100 % shareholder of target company C. Target company C in turn operates its target business. In this construct, company B, who is the buyer, will acquire the target business directly from target company C as the seller. And this is because such investors may prefer to purchase specific assets in a target company as opposed to shares in the top core. There is no change at the shareholder level of target company C in this particular acquisition structure. So why do people decide one way or the other? In what situations do you structure a transaction as a sale of shares? And in what situations do you structure it by way of a sale of business instead? The determination of the acquisition method is something that comes up on almost every &A transaction. It is very important to understand clearly what the client wants, what the client hopes to achieve, and then advise accordingly as to which of the acquisition structures works better for the client\'s objectives. It is also important to determine the acquisition structure at an early stage of the transaction, as this will impact various aspects of the transaction going forward, whether in terms of mechanics of transfers, documentation, or the timeline. So some of the questions that you may wish to ask the client in order to evaluate in determining the appropriate deal structure are set up here in this slide. Does the buyer to acquire only selected assets? Does it want to take on all, none, or only some of the target\'s liabilities? In fact, actually, what are the target\'s and contingent liabilities to begin with? What is the target\'s corporate structure? Does it have multiple lines of business within one particular legal entity? What are the consents and approvals required, as well as the execution risks? Andrew Yip (07:23.051) In this slide, we will talk through some of the key features arising from the structuring questions set out in the earlier slide. The first reason is that in a business sale, the buyer is able to cherry pick. So for example, imagine that the target company in the previous slide, in fact, operates two main lines of businesses. For example, it has both a ship owning business as well as a ship repair business. If company B, the buyer, is only interested in one line of business, say, the ship repair business, it would not make sense for company B to buy the shares of target company, as this would effectively mean that both businesses would be transferred to company B and not only the ship repair business in which company B is interested. In this situation, a business transfer by target company C as the seller of only its ship repair business as a going concern would be the more suitable transaction structure. So post -acquisition, company A will still own 100 % of shares of target company C, which will still have the ship owning business, while company B will then own the ship repair business, which it had acquired from the target company. This could also be relevant if the buyer finds that the target company has certain liabilities, such as unusual tax liabilities or where the target company is in a substantial dispute. The purchase of a business or specified assets will enable the buyer to avoid those liabilities to the target company by excluding them from the acquisition and allowing it to cherry pick only the viable parts of the business. Secondly, a business acquisition requires the transfer of each and every single asset, liability and contract from the target company to the buyer. by way of different conveyances, assignments, and transfers. Depending on the assets, liabilities, and contracts included as part of the &A transaction, this could be a very voluminous and cumbersome exercise. The target company\'s assets could include owned real estate, short -term tenancy agreements, stock, book debts, receivables, intellectual property rights, customer contracts, supplier contracts, Andrew Yip (09:44.469) employees, shares in other entities, plant and machinery, There is execution risk here in that it could open up the contracts to renegotiation by counterparties as condition for agreeing to transfer the contract or for counterparties to decline to provide its agreements to transfer that relevant contract or asset. Contrast this with a share acquisition where technically the only asset being transferred are shares in the target company which are owned by the selling shareholder. For this reason, there is likely to be some level of business disruption in a business acquisition structure compared to a share acquisition structure. Another related consideration is impact on the timeline. Typically, share acquisitions are quicker to execute and complete, whilst business acquisitions have a longer completion timeline depending on the volume and amount of time required to undertake all transfers and conveyances. So if time is of the essence for the client, then perhaps the share acquisition route would be more suitable. The third point of feature is to whom the acquisition proceeds flow. In the share sale method, the seller is the shareholder and thus the shareholders directly receive the consideration minus. Contrast this to the business sale scenario. where it is the target company who is the seller and who thus receives the concentration monies from the buyer. This may be okay if the target company intends to utilize the concentration monies received, for example, to reinvest into its remaining business. However, if the intention is for shareholders of the target company to be the final recipient of the concentration monies paid to the target company, The target company must then undertake additional steps in compliance with the Singapore company\'s requirements of capital maintenance to upstream the sale proceeds to its shareholders, for example, by way of dividends, their profits, or by way of capital reduction, etc. A fourth consideration is if Target Company C is not 100 % owned by Company A but has several minority shareholders. Andrew Yip (12:07.341) In this situation, if the minority shareholders do not agree to the sale, if company B wishes to acquire 100 % of the shares of target company C, nobody can compel the minority shareholders to sell their shares unless certain contractual drug -along rights have been pre -agreed with company A as a major shareholder to allow company A to force the minority shareholders to sell alongside If, however, the sale takes place as a business sale, the board of directors of the target company, C, can determine whether to proceed with the sale unilaterally unless such sale amounts to a disposal of the whole or substantially the whole of the target company\'s undertaking of property. If the sale does amount to a disposal of the whole or substantially the whole of target company C\'s undertaking of property, section 160 of the company set the target company to first obtain shareholder approval for such a disposal by the target company. Nonetheless, the shareholder\'s resolution is only required to be passed as an ordinary resolution, that is, more than 50 % votes. So as a practical matter, if the major shareholder is supportive of the transaction, it is still possible to disregard minority shareholders\' objections. The next consideration are certain tax -related points, the first being GST. In a share acquisition, no GST is imposed, whereas in a business or an asset transaction, GST at 9 % may be imposed unless the transfer is of business -as -going concern and certain conditions are set out in the goods and services tax, excluded transactions order can be satisfied. In contrast, Singapore\'s stamp duty will be chargeable at a rate of 0.2 % on the higher of consideration paid or the value of the shares being transferred, which value is typically computed based on net asset value if the target company has been cooperated for more than 18 months. For our business acquisition, Singapore\'s duty would only be chargeable if the assets being transferred include any interest in Singapore and moveable properties and shares in Singapore companies or companies which maintain a share register in Singapore. Andrew Yip (14:34.827) The last feature I will touch on relates to employees of the target company. Where a transaction takes the form of an acquisition of shares in a company with employees, there are unlikely to be significant employment law issues. As the underlying employment contract and employee benefits generally between the target and its employees remain as is, given that the acquisition is taking place above the target company at shareholder level. However, In a business or asset sales scenario, employees as an asset class will have to be transferred from the target company to the buyer. In a sale of a business as a going concern, the parties can rely on the statutory transfer provisions provided for in Section 18A of the Employment Act. This provision sets out certain notification and consultation requirements, as well as statutory terms of transfer of employment of the affected employees engaged in the business. If, however, the sale is that of only selected assets and employees, such that Section 18A of the Employment Act does not apply, the target company would then be required to terminate the employment of such employees and then have the buyer re -employ such employees on and from completion of the asset acquisition. In the next section of this lecture, we will turn to consider the typical pre -acquisition actions that are usually undertaken in an &A transaction. Andrew Yip (16:13.653) A confidentiality agreement or non -disclosure agreement is usually negotiated as a preliminary agreement prior to the exchange of any information. Indeed, this is always the case whether in bilateral process, where there is a seller and an identified buyer, or in the context of competitive auction process where there may be multiple potential buyers. This is to allow parties to conduct discussions over the potential transaction in confidence and to ensure that confidential information provided by the parties and or the target company is protected and not disclosed to third parties. This is particularly relevant for the purposes of enabling the potential buyers to receive confidential documents and information on the target company for the purposes of undertaking the due diligence investigations. The typical provisions would include clauses stipulating the permitted use of information. For example, only to consider and further the proposed transaction and not for any other purpose? The term or duration that the confidentiality obligations remain binding on the party receiving the confidential information? For this, we typically see durations of around two to three years. But if you are acting for the seller, you should discuss with the seller an appropriate timeframe for which it is likely that the information being provided will become stale or out of date, such that it is no longer commercially sensitive. in considering the appropriate term of the confidentiality covenant. In addition, you would also need to consider the persons and circumstances in which disclosure of such confidential information is permitted. For example, if you are acting for the buyer who needs to obtain third -party financing for the acquisition, it would be important to obtain an upfront carve -out to permit disclosures to such third -party financiers. On the fourth bullet In certain circumstances, it may also be important to require that the information provided must be returned or destroyed. For example, if a competitor of the target company was a potential buyer and chose not to proceed with their transaction, a practical way of mitigating any information usage to the detriment of the target company would be to require that any information provided be returned or destroyed so that the competitor no longer has access to such information. Andrew Yip (18:39.455) It may also be appropriate in certain circumstances to impose a non -solicitation covenant on the party receiving the confidential information. For example, using the competitor illustration again, if it is envisaged that it\'s part of the due diligence process, potential buyers could have access to key management, including to discuss and interview them about the business. The seller and the target company may wish to ensure that the competitor cannot then poach any such key management. whom the competitor has met during the process for its own business. Due diligence investigations is an essential tool for assessing and reducing the risk inherent in an &A transaction. On the buyer side, due diligence investigations give the prospective buyer an opportunity to assess the legal, financial, and operational state of affairs of the target. Firstly, to determine whether there are any showstoppers or if the buyer can in fact proceed with the transaction. Secondly, to consider what mechanisms or contractual protections might be required to deal with negative revelations in order to allocate the risk appropriately between the parties. As an example, for the legal due diligence exercise, it is very common for &A lawyers on the buy side to review contracts, licenses, etc. to identify change of control provisions or restrictions on change of shareholders or assignment provisions that might be triggered by the potential transaction, so these might then have to flow into the sale and purchase agreement as consents will be obtained from the third parties or regulators. On the seller side, it is also possible and in fact quite common in competitive auction processes to conduct a vendor due diligence exercise. This is for example, to tidy up the target company for sale and to pre -plan Andrew Yip (20:38.759) potential pitfalls that buyers may flag in the course of the transaction, such as by incorporating any such issues discovered during the ban on due diligence as disclosures against the warranties in the disclosure letter to be issued by the seller to the buyer. There will be a separate lecture focusing on due diligence and I will therefore not go into detail on the matters set out in this Andrew Yip (21:04.735) Moving on to the next slide on pre -acquisition actions. In a bilateral transaction, it is also quite common to prepare a Memorandum of Understanding or MOU or Letter of Attempt, LOI, before parties enter the definitive agreements in respect of a proposed transaction. The purpose of these documents are to identify the principal elements of a transaction, record the agreement in principle, and assist the development of the appropriate acquisition Essentially, it is meant to be a high -level, short -form document that is typically not binding on the parties except for certain provisions such as those relating to exclusivity and confidentiality. The advantages of having such documents are that these documents may cement moral or commercial commitments, identify agreed key commercial terms and parties\' intentions, and flesh out major commercial differences or gaps in the party\'s expectations at an early stage. On the other hand, they add a layer of negotiation with consequent delay and cost and might also constrain negotiating positions as the deal evolves. For example, a party may point to the morally agreed position in the term sheet and refusing to commercially allow the other party to deviate from the agreed position at the definitive documentation stage. There will also typically be certain commercial terms which may be binding in a MOU or LOI which are subject to negotiations. The first one is that some buyers will require an exclusivity commitment from the seller whereby the seller agrees not to negotiate with or deal with other parties for a stated period of time. This may be required before the purchaser commits significant time, resources or expenditure to your transaction. for example, on due diligence and negotiations. The second one is inclusion of a brick fee payable by the seller to the buyer if the seller consummates a transaction with another buyer during an exclusivity period. The brick fee is less common in private &A transactions. Andrew Yip (23:22.423) So, assuming that due diligence results are satisfactory and parties decide to proceed with the transaction, the next stage will be to negotiate a definitive agreement for private &A. In the case of a share acquisition, the document will be a share purchase agreement, and in the case of a business acquisition, the document will be a business transfer of business purchase agreement. For the purpose of this section in this lecture, we will focus more on the share purchase Acquisition Structure type document, although number of the principles and provisions will apply equally to a business transfer. Andrew Yip (24:01.141) Of course, one of the very first questions is who should be parties to the SBA? On the sales side, of course, the actual party holding the sale asset. So a shareholder in a share sale and the target company in a business sale should be a party to the SBA. But you will see in the latest slides that the seller has set a covenants and obligations in the SBA. If the seller is merely a special purpose vehicle. and you know or think it is likely that the seller will upstream the sale proceeds to its ultimate controllers so that it would no longer be an entity of substance after completion, then all of those covenants and obligations are of no use practically, as even if there is a breach by the seller that is discovered only after completion when the buyer has taken control of the target company, the buyer will not have any recourse, as there is no point in getting a paper judgement against the seller which no longer has any assets to satisfy the judgement. So in a scenario like this, the buyer may wish to mitigate the risk by requesting that the ultimate controller will provide a guarantee of the obligations of the seller under the SPA or to hold back a portion of the consideration for a period of time, say 12 or 18 months after completion, which any successful claims with a buyer can then be set off against as a kind of self -help remedy. Similar considerations apply on the buy side. The buyer group that you are negotiating with may decide to use a special purpose vehicle to acquire hold the asset. For the buyer, are comparatively lesser obligations on the part of the buyer relative to a seller. And the most important thing for a buyer is to be able to pay the purchase price at completion. So, a seller may request that the buyer be capitalized with funds at the time of signing so that the buyer clearly has the financial resources to make payment at completion. or alternatively again ask for a bio -garant hold. Andrew Yip (26:02.925) The next key thing to draft in an SPA is the consideration structure. This is a commercial decision and the type of pricing mechanism will be driven by the deal specifics. In its most straightforward form, this can take the form of a single fixed consideration amount where the buyer will pay the seller a fixed amount of say, \$100 million in cash or completion in exchange for the shares or business being transferred. Andrew Yip (26:34.549) In a share deal, it could also require a post -completion adjustment or be determined by what we call a lock -to -box mechanism. We will discuss these two concepts in a little bit more detail in the next slide. It is also quite common that a buyer or seller will price in the potential upside of target business in the next couple of years when determining the amount of consideration to be paid. This is obviously because nobody will buy a business which they think will be deteriorating or loss -making in the future. However, such future upside is based only on projections and no one knows how the future performance of the target company will really pan out. In this situation, a buyer might well say to a seller that they are only prepared to pay for such upside if in fact certain financial targets are met. Such payments are typically called earn -out payments and would be structured to be paid by the buyer post -completion perhaps after the first, second or third financial year after completion when the agreed financial milestones are achieved. Turning back now to the pricing methodologies that I referred to in the earlier slide, in practice, given that most target companies are operating companies or are the holding company of the operating group, it is more common to see valuation methods such as a multiple of net asset value or a multiple of enterprise value of the business being used to determine the concentration payable in a private &A transaction. Post Purchase price adjustments are common. These are based on any shortfall or excess in the actual amount of working capital adjustments or cash or debt, etc. as of the completion date versus a pre -agreed target amount of working capital or cash or debt respectively. Given that as a practical matter, the actual level of assets, liabilities, cash, debt, etc. would not be known as at completion. Andrew Yip (28:37.687) What would happen is that a set of completion accounts will be drawn up after the completion date when all these figures have crystallized, and the buyer and seller would then pay or repay any difference arising from the actual amount as determined from the completion accounts versus the initial estimated figures. This is what I mean when I refer to post -completion accounts in these slides. This method is advantageous in that it allows the parties to align the economic risk of the target company with the legal completion date. But the process of drawing up the completion accounts can be a costly and lengthy one, particularly if a third -party accountant is involved to review the completion accounts and can also be open to dispute between the parties. To address some of the shortfalls of the post -completion accounts pricing methodology, particularly in private equity deals where the private equity seller is seeking a quick and clean exit, Or where the buyer is looking to avoid overly onerous post -sale commitments so that they can concentrate on integrating the business immediately after completion, we increasingly see a locked box mechanism being used in deals. Essentially, in concept, a locked box deal is a fixed price deal where the consideration is determined using a set of locked box accounts drawn up as at an agreed pre -signing As this pre -signing date is historical, the amounts of cash, debt, working capital, net asset value, etc. can already be determined by the time the SBA is signed. The buyer and seller will then agree a set of contractual restrictions to prevent any value from being lost or leaked to the seller between the date of lockbox accounts and the completion date. For example, the target company will not be permitted to pay any dividends or other expenses to the seller. The seller will provide an indemnity to the buyer promising to make good any value leakage to the seller. It is therefore important in a locked box construct that the buyer can properly due diligence any value leakages from the locked box accounts and build this into the valuation. Andrew Yip (30:57.015) Conditions precedent or CPs are a list of specific actions or significant points that need to be completed before the actual legal transfer of the shares of business can take place on completion. For deal certainty, the seller will want these conditions to be as few as possible and for the conditions to be drafted narrowly, objectively, and be easily achievable. By way of contrast, a buyer will obviously prefer for conditions precedents to be broad brush and subjective to give it more flexibility. This is because if the conditions precedents are not satisfied, the sale and purchase of the shares of business will not proceed. Typically, the conditions are identified through due diligence process. So going back to the initial example of checking for change of control provisions in contracts and licenses, Once those provisions are identified, the purchaser would want the consent of the counterparties and regulators to be obtained as a condition precedent to completion. If such consents are not obtained and completion proceeds, the target company would technically be in breach of the contracts and licenses, and this would then become a post -completion risk that the buyer, as a new owner of the target company, would have to address. The seller would be less concerned about this, as it would have received the consideration and exited. Other types of CPs could involve obtaining waivers and consents from third parties who might have a right of first refusal to acquire the target company, or in a business transfer to obtain shareholder approval if the proposed sale amounts to disposal of the whole or substantially the whole of the target company\'s undertaking or property under section 160 of the company\'s end. Depending on the final agreed list of The parties can then ascertain what would be a realistic timeframe to satisfy all the CPs. It is quite common to build in a buffer period and then set a long -stop date for the CPs to be satisfied by. What this means is that if the CPs are not satisfied by that long -stop date, typically the SPA would be terminated and the parties would walk away from the deal. Without the long -stop date, the parties would still be legally on the hook. Andrew Yip (33:17.943) sell and buy the target and subject to the contractual covenants under the SPA without any realistic ability to consummate the acquisition unless the parties are prepared to waive the CPS. Andrew Yip (33:32.439) So as I mentioned earlier, if they are a conditions precedent, this means that there will be a time gap between signing of the SPA and completion of the sale and purchase for the CPs to be satisfied. However, since the buyer has a legally binding obligation to acquire the target company from the time it signs the SPA, the buyer has an interest in ensuring that there are no material changes to the target company during this interim period. You will therefore typically see a suite of covenants, both positive and negative covenants, that are imposed on the seller to procure that status quo is maintained for the target company. In particular, the target will want to ensure that other than ordinary cost of business transactions which can continue, big ticket items which might have an impact on the liabilities of assets of the target company must first be agreed to by the buyer before the target company can undertake those. These are, example, if the target intends to strip out cash by way of dividend or other distribution means to the seller or shareholder, or if the target wishes to take on new borrowings or spend material amounts of KPEX. It is also important to tailor the scope of the covenants to cover the actual business and assets of the target company. So, for example, if the target company is a software company, The Bias Council may wish to incorporate more detailed negative covenants covering intellectual property. Andrew Yip (35:05.023) During this interim period between signing and completion, similar things may also arise which may impact the willingness of a buyer or in fact a seller to proceed with the transaction. So take for example COVID. If as a buyer you had signed an SPA to acquire a restaurant business but during that period whilst the conditions precedent was still being satisfied, COVID occurred such that nobody could go out to eat at restaurants. Obviously this would be a material and adverse development for the target company and would directly impact its revenue and financial position. If the SBA contains a termination right for such material adverse change events or MAC for short, the buyer would be able to exercise a termination right and not proceed with the transaction. If, however, there was no such termination right, the risk is entirely on the buyer who would need to complete the transaction once all CPs are satisfied regardless of how the financial position and prospects of the target company has changed. There are also termination rights which can be negotiated between buyer and seller for breaches of warranties or covenants under the SPA. This depends very much on the bargaining position between the two parties, but in general, as a termination event is quite a draconian outcome given that parties would have spent substantial time and cost engaging in discussions and hiring external advisors up to that point. Termination rights for breach are usually only given when the breach is very material or leads to a substantive adverse outcome. So as you can tell from the two examples of termination rights outlined, in general, termination rights are for the benefit of the buyer. Sellers would be keen to minimize any termination of walk -away rights with the buyer in the interest of deal certainty. Moving on to warranties. The legal principle of caveat and toll applies to share of business purchases between parties. There are no statutory or common law protections for buyers and is therefore necessary to provide in the SPA contractual protections such as warranties and indemnities. A warranty is a contractual statement given by the seller to the buyer on the financial Andrew Yip (37:28.053) trading, operational or other aspects of the target company and business. It is usually given by the seller on signing of the SPA and then repeated at completion. I.e. what this means is that the seller promises that those statements are true and accurate at both the time of signing and the time of completion. The warranties are usually one of the sections in the SPA which is the most heavily negotiated. In The warranty schedule can run from a couple of pages long to 30 or 40 over pages for a detailed suite of warranties. The purpose of warranties are broadly twofold. One is to engineer discovery, as the seller would be liable if a warranty turned out to be false. So it would be in the seller\'s interest to disclose any matters which are at odds with the warranties to the buyer. This complements the buyer\'s due diligence which by necessity is limited in time and scope. The other key purpose of having warranties is to apportion risk between the parties. The provision of warranties may also play a part in pricing. If there are no unlimited warranties, such that the purchaser will have to take the risk for any pre -closing issues, it is possible that the purchaser may expect to pay a lower price. If acting for the buyer, Your role as the &A lawyer would be to produce a first draft of the warranties tailored to the transaction. But if you are the seller\'s lawyer, your role would be to negotiate trade -offs. By trade -offs, what I mean is that the seller\'s lawyer would seek to streamline the warranties, make them more general, introduce as many qualifiers as possible, such as materiality or knowledge qualifiers, with a view to limiting the exposure of the seller. This slide sets out examples of the types of warranties that would typically be included in the SPA. I do not propose to go through all of them in detail, except to say that in general, they cover three main buckets. First, the seller\'s ability to undertake the transaction. Second, the seller\'s title to the shares of business being transferred. These two buckets are often referred to as the fundamental Andrew Yip (39:51.105) The third bracket would be the business related warranties covering the various elements of the operations and business of the target Andrew Yip (40:01.201) This slide deals with two separate points. The first is that of indemnities, which is a recovery or reimbursement provision which either reverses liability which would otherwise arise or transfers liability. Most importantly, indemnities can be claimed for on a dollar -for -dollar basis, unlike a claim for damages arising out of a breach of contract, and they also assist in avoiding common law rules or remoteness of damages. or obligation to mitigate that applies to such claims for damages. Indemnities can either be general in that they cover generally any breaches of the warranties of covenants given by the seller under the SBA. Given that indemnities potentially increase the burden and potential liability of the seller for the reasons I just discussed, a general indemnity would be very heavily resisted by the seller and its counsel. On the other hand, There may also be certain issues that are either discovered by the buyer during due diligence or disclosed by a seller against a warranty such that the warranty would not cover such issue. In this situation, it is a question of commercial negotiation between the parties to decide exactly who should bear the risk for such issue. If the seller does agree to do so, this would be couched as a specific indemnity given by the seller to the buyer addressing that specific issue and the liability arising. The second point in this slide is just to note that there is an &A specific insurance product called Warranty and Indemnity of WNI Insurance, which can be taken out to cover liability arising from warranties and indemnities given by a seller under an SPA. As we just discussed, warranties and indemnities essentially allocate the risk between the seller and buyer. There may be certain circumstances where a seller is unwilling to take on the risk. For example, because it is a private equity fund which needs a clean exit in order to return the sale proceeds to its limited partners and wind up the fund. In a situation like this, the parties can put in place a WNI policy to bridge the risk gap between parties. Andrew Yip (42:16.257) We have talked quite a fair bit about covenants imposed on the seller in the form of pre -completion covenants, warranties and indemnities. When you act for a seller in an &A transaction, it is important to also consider how else the seller can be protected in order to reduce its potential liabilities under DSPA. There are generally two key areas of protection that the seller would focus on. The first is this concept of disclosures. I have mentioned this a few times in the earlier slides in passing. And to elaborate, the purpose of disclosures, which are usually set out in a separate document called the disclosure letter, is to qualify the warranties given by the seller, thereby passing the associated risk over to the buyer. So for example, if a seller had warranted that the target company had not been a party to any disputes on litigation in the last five years, but there were in fact certain claims by the target company for debt collection against customers. The seller would seek to disclose this fact relating to such debt collection claims in the disclosure letter as an exception to the no disputes warranty. In such a situation, the buyer would not be able to make a claim against the seller for breach of the no disputes warranty as a result of this particular disclosure. You can therefore see that it is in the seller\'s interest to undertake full and thorough disclosure exercise as it will provide protection from a claim for breach of warranty. In that same vein, a seller would typically try to broaden the scope of its disclosures, including by making general disclosures of all information provided in the course of due diligence, all possible public information, information discoverable from a public search, etc. On the other hand, a buyer would want to keep the disclosures specific and narrow, and would typically request for sufficient information on the disclosures being made in order for the buyer to assess the impact of the disclosures on the target company. The disclosure letter, as you can tell, is also therefore a negotiated document and has to be read together with the SPA. The other key area of protection are the limitations of liability that are included in the Andrew Yip (44:41.517) Again, the seller would try to make these as broad as possible to limit its liability. I would split the limitations up into three main categories for the purposes of this lecture. The first category is the financial limits. These include a minimum claim amount or de minimis and a cap. For the minimum claim amount, the thinking is this. Imagine your M &A transaction has a consideration value of \$500 million. From the seller\'s perspective, they would not want to be troubled by small claims like \$1000 claims, \$500 claims, as these are so de minimis. As such, a seller would seek to provide that only claims, whether on a single or aggregate basket basis, above a certain value, can be brought against the seller. This links with the question of whether there should be a deductible. Assuming the minimum claim amount is in fact reached, should the seller be liable for full amount of all claims from \$1 or should it only be liable for amounts over and above the minimum claim amount? The other main financial limitation would be the maximum amount that the seller can be liable for. Obviously, the lower the cap, the more advantages for the seller. Typically, therefore, parties would seek to differentiate the cap amounts based on the categories of liability. So for fundamental and tax it is quite common to have a higher cap amount. For example, this might be pegged to 100 % of the consideration amount that has been received by the seller. For business warranties, however, it is increasingly common to see lower cap amounts, such as 20 to 50 % of the consideration amount payable to the seller. The second main category would be time limits. That is, how long would the seller be on the hook for? Once the relevant time period or time limit has passed, the seller would no longer be liable to the buyer for any claims. There is a statutory time bar period of six years for contractual claims, but often this is varied by the contractual agreement with the parties as set out in the ESPA. For fundamental and tax warranties again, it is quite common to have six or seven years from the date of completion, but for business warranties, there\'s usually a much shorter period of time, usually between 18 months to three years for a buyer to Andrew Yip (47:08.289) Aside from these, there are some other limitations, such as who might take the risk for any changes in law or accounting standards after signing or completion, which might result in breaches of warranties, or contractual limitations in terms of definition of damages and losses, rather than leaving it up to the court to decide. Ultimately, the limitations of liability are another section in the SPA, which is usually very heavily negotiated, and the final position would depend on the bargaining position of the Andrew Yip (47:42.615) So now we come to the final stage of the &A acquisition process, which is the actual completion itself. The SBA will set up a list of completion deliverables on the part of the seller, and against delivery of such completion deliverables by the seller, the buyer will make payment of the consideration amount. So as a lawyer advising the buyer or seller, you would need to be familiar with the legal formalities to effect legal transfers. For a business transfer, The legal formalities would depend on the actual assets, liabilities and contracts to be transferred, so I won\'t go into any detail on this. In the case of a share transfer, the buyer and seller will need to execute the share transfer instrument and the seller will deliver the original share certificate covering the sale shares to the buyer. The seller will also procure that the board of the target company will pass resolutions to approve the share transfer. as well as to approve any ancillary matters such as the appointment of new directors nominated by the buyer or the changes in any bank signatories. Payment of stamp duty on the transfer of shares will have to be dealt with, usually by the buyer, and then the company secretary of the target company will lodge the share transfer filing with ECRA, which is the Accounting and Corporate Regulatory Authority of Singapore, to update the electronic register of members of the target Under the Companies Act, the share transfer is legally effected when the electronic register of members is updated, which usually takes place instantaneously upon filing. As part of the completion deliverables, sometimes parties may also require certain ancillary agreements to be signed up and delivered at completion. For example, if there is a transition services agreement where the seller might provide certain services for a limited period of time post completion to a target or certainly key management services agreements are required to be signed up if there are certain key management of the target company whom the purchaser wishes to secure continued employment of. These will all have to be discussed with the clients as to what they commercially require. Andrew Yip (49:58.401) So with that, I conclude this lecture on introductions to mergers and acquisitions for private companies. Thank you all very much for your attention and Mergers and Acquisition - Introduction - Methods of acquisition: **[share vs business]** - **[Questions]** that could affect acquisition structure - **[s160 Companies Act]** - shareholder approval needed for disposal of the whole / substantial target - Sale and purchase agreement essentials: - **[Warranties]** - There are no statutory or common law protections for buyers and is therefore necessary to provide in the SPA contractual protections such as warranties and indemnities. (**[Buyer beware]**) Warranties are statement of fact; Disclosure neutralise the warranty - **[Disclosure]** Letter