Introduction to Mergers & Acquisitions for Private Companies PDF

Corporate & Commercial Practice Mergers & Acquisitions Introduction to Mergers & Acquisitions for Private Companies Michelle Fum Partner...

Corporate & Commercial Practice Mergers & Acquisitions Introduction to Mergers & Acquisitions for Private Companies Michelle Fum Partner Allen & Gledhill LLP M&A Road Map Pre-Acquisition Identify the target Preliminary documentation Due diligence Completion Negotiations / Definitive (legal transfer of Documentation shares / business) Sale and purchase agreement Disclosure letter Copyright © 2024, Singapore Institute of Legal Education Methods of Acquisition - Acquisition of Shares Company A Shares Company B (Seller) (Buyer) Pre: Post: 100% 100% Target Company C Target Business Copyright © 2024, Singapore Institute of Legal Education Methods of Acquisition - Acquisition of Business Company A 100% Company B Target Company C (Buyer) (Seller) Target Business Copyright © 2024, Singapore Institute of Legal Education Methods of Acquisition Some questions that could impact deal structure Does the Buyer only want to acquire selected assets? Does Buyer want to assume all, none, or some of target’s liabilities? What is the nature of the target’s actual or contingent liabilities? What is the target’s corporate structure? Consents / approvals required? Execution risks – practical considerations Copyright © 2024, Singapore Institute of Legal Education Methods of Acquisition Features Share Acquisition Business Acquisition 1. Selection of Assets / Liabilities No Yes 2. Business Disruption / Loss of Minimal Probable Goodwill 3. Acquisition Proceeds To Shareholder(s) To Company 4. Minority Shareholder May not avoid (unless there is Can avoid Objections drag-along right) 5. Goods and Services Tax No GST Possible exemption under GST (Excluded Transactions) Order 6. Stamp Duty Yes Depends on assets 7. Employees No change to employer/employee Section 18A of Employment Act relationship 1968 Copyright © 2024, Singapore Institute of Legal Education Pre-Acquisition Steps Confidentiality Agreement Standard form prepared by target’s counsel Typical provisions Use of information Term Permitted disclosures Return of confidential information Non-solicitation / no hire Copyright © 2024, Singapore Institute of Legal Education Due Diligence Types of due diligence Possible methods of dealing Legal with negative revelations Financial / tax Adjust price Business / commercial Restructure transaction Real Property / Environmental Conditions for completion Purpose of conducting due Performance related payments diligence Indemnities Escrow Seller’s perspective Post-completion Buyer’s perspective Walking away Copyright © 2024, Singapore Institute of Legal Education Memorandum of Understanding Purpose of memorandum of understanding / letter of intent Advantages and disadvantages Exclusivity / no-shop Break fee Non-binding, save for (i) exclusivity, (ii) break fee and (iii) certain boilerplates Copyright © 2024, Singapore Institute of Legal Education Sale and Purchase Agreement (SPA) Essentials SPA: Parties Seller Will Seller have the financial resources to pay post-Completion warranty/indemnity claims? Hold-back/escrow part of proceeds Is a Seller guarantor available? Buyer Does Buyer have the financial resources to pay the purchase price? What is the source of funding? Copyright © 2024, Singapore Institute of Legal Education SPA: Consideration Pricing Methodology Fixed consideration amount Post-completion accounts Locked box Contingent value rights (earn-outs) Acquisition structure used to bridge valuation gap. Buyer and Seller share the risk in the future business’ performance Copyright © 2024, Singapore Institute of Legal Education SPA: Consideration Post-Completion Accounts Locked Box Actual level of assets and liabilities not Price to be calculated using recent known as at completion. Price calculated historical balance sheet of target before using estimated level of assets and signing date liabilities as at completion Price certainty through leakage protection, Post-closing adjustment required i.e. transfer or extraction of value from target to Seller or its connected parties Economic benefit/risk of business up until completion Certainty of price at signing of SPA Delay in ascertaining final price Simplicity resulting in cost savings though enhanced due diligence usually required Costs of preparation / review and potential dispute Copyright © 2024, Singapore Institute of Legal Education SPA: Conditions Precedent Purpose of conditions precedent Categories Regulatory approvals / third party approvals – lenders, customers, suppliers, JV partners, etc Right of first refusals / pre-emption waivers Shareholders’ approval – Section 160 of Companies Act 1967 Impact on timing of transaction Consequences if conditions are not satisfied – long-stop date and termination Copyright © 2024, Singapore Institute of Legal Education SPA: Pre-Completion Covenants Purpose “Preserve” target between signing and completion Positive covenants Carry on business in the ordinary course Negative covenants No change in constitution, share capital, distributions (whether by dividends or return of capital) Acquisitions and disposals, Borrowings Capex Specialised areas depending on business: employees, intellectual property, real property, insurance Copyright © 2024, Singapore Institute of Legal Education SPA: Termination Rights Termination for Material Adverse Change (MAC) “If prior to completion, any event shall occur which has or is likely to have a material and an adverse effect on the turnover, profitability, financial or trading position or prospects of the target company, the Purchaser shall be entitled by notice in writing to the Seller to terminate the [SPA]. For the purpose of this Clause, a “material and adverse effect” means …” Gives buyer ability to walk Seller likely to resist inclusion of a MAC clause A risk allocation exercise Termination for breach of warranties / covenants Copyright © 2024, Singapore Institute of Legal Education SPA: Warranties Contractual statements as to a particular state of affairs of the target, business etc. Purpose of warranties Discovery – prompts disclosure Risk allocation – claim for loss arising from breach of warranties Warranties scope Materiality thresholds / qualification Knowledge qualification Bring-down to completion Copyright © 2024, Singapore Institute of Legal Education SPA: Types of Warranties Transaction – due authorisation, no breach, enforceability, etc Title – shares duly authorised, validly issued, fully paid, free from encumbrances, etc Business: Overall: financial statements, no change since last balance sheet date, no undisclosed liabilities, compliance with laws, data room information Specific: financial indebtedness, security, hedges, commitments, contingent liabilities, real property, plant and equipment, intellectual property, IT systems, employees, customers and suppliers, environmental, insurance, tax, anti-bribery, trade sanctions Copyright © 2024, Singapore Institute of Legal Education SPA: Indemnities General indemnities vs specific indemnities Specific indemnities address negative revelations in due diligence Warranties and indemnities are not a substitute for due diligence – rather, they are complementary Warranty & Indemnity (W&I) insurance Insurance which provides cover for losses arising from breach of warranty or under an indemnity Bridge risk allocation gaps Common when seller requires a clean exit Buy-side: buyer is insured and claims directly against policy Sell-side: seller is insured. Buyer claims against seller, seller in turn claims against policy Copyright © 2024, Singapore Institute of Legal Education SPA: Disclosure Letter Disclosure letter Disclosure “neutralises” warranty. Buyer cannot claim for breach of warranty where Seller makes a disclosure against a warranty General (data room, Q&A log, public searches) vs specific disclosure Fair disclosure Copyright © 2024, Singapore Institute of Legal Education SPA: Limitations of Liability Financial limits De minimis – single claim, basket Threshold/deductible – first dollar vs excess only Caps – fundamental warranties, tax warranties, non-tax business warranties Time limits Claim notice period Statutory time bar Other limitations include: No indirect or consequential loss, or loss of profit, etc Change in law, accounting standards, etc Copyright © 2024, Singapore Institute of Legal Education SPA: Completion Share transfer: Share transfer forms and accompanying share certificates Board resolutions of target to approve share transfer, appoint new directors etc Payment of stamp duty Lodgement with ACRA to update electronic register of members Business Transfer: Depends on the category of assets, liabilities, contracts to be transferred (e.g. assignment, novations, physical delivery) Other deliverables, such as ancillary agreements Copyright © 2024, Singapore Institute of Legal Education Notice Copyright © 2024, Singapore Institute of Legal Education. All rights reserved. The Course materials are developed by the Singapore Institute of Legal Education, based on the content, syllabus, and guidance provided by the Chief and Principal Examiners and their teams. No direct or indirect reproduction, publication, communication to the public, adaptation or any other use (that is prohibited and/or proscribed by copyright laws) of the Course materials in whole or in part in any form or medium is allowed without the written permission of the Singapore Institute of Legal Education. Part B Candidates should refer to the Code of Conduct for more information, particularly, the sections on conduct and behaviour, and the use of SILE resources. Copyright © 2024, Singapore Institute of Legal Education