Our clients sometimes come to us because they want to scale their businesses quickly and see an M&A as the best way to go. Sometimes they want to acquire a competitor, or expand into a different sector and see a merger as the quickest route to market.
In this guide, we answer the questions we’re most frequently asked about M&As.
Jump to individual FAQs:
- What’s a lawyer’s role in mergers and acquisitions?
- What legal documents are involved in a merger or acquisition?
- What are the benefits of mergers and acquisitions?
- What is a buyout?
- What is a divestiture?
- What’s the difference between a merger and a joint venture (‘JV’)?
- What’s the importance of due diligence in mergers and acquisitions?
- What is the City or Takeover Code?
- How does a merger affect shareholders?
- How does a merger affect employees?
- What restrictions might apply to a merger or acquisition?
- What are the different types of synergies in mergers and acquisitions?
- What is a scheme of arrangement in mergers?
- What’s the difference between a scheme of arrangement and a takeover offer?
- What is the mandatory bid rule in UK mergers?
- What is a ‘squeeze out’ in mergers and acquisitions?
- How do you identify a suitable target company for an acquisition?
- How is a company valued for acquisition?
- What are the tax consequences of a merger?
What’s a lawyer’s role in mergers and acquisitions?
M&As are usually complex and heavily negotiated, so you’ll need a solicitor to act for you. If you’re a seller, you’ll want to reduce the potential for post-transaction liability. If you’re a buyer, you’ll want to keep the seller on the hook for hidden issues that emerge post-sale.
Your lawyers will explain the different types of M&A, help you with due diligence, take care of legal documents, liaise with third parties such as the Takeover Panel, and complete the sale.
What legal documents are involved in a merger or acquisition?
These are the documents that are typically involved in an M&A:
- A letter of intent (where both sides agree to talk)
- A non-disclosure agreement (where they agree to keep those discussions confidential)
- An exclusivity agreement (where they agree not to talk to other third parties)
- A sale and purchase agreement for the shares. This will contain extensive warranties by the seller in favour of the buyer
- A disclosure letter that qualifies the seller’s warranties
- A tax deed where the seller and the buyer agree the amount to be paid to the buyer in respect of tax liabilities due pre-completion
- Board minutes dealing with the changes to the company as a result of the merger
- Stock transfer forms
- Employment and directors’ service contracts if these are to be revised
- Third-party consents
- Banking documents and releases of security
What are the benefits of mergers and acquisitions?
Here are the most common objectives of an M&A:
- To obtain a wider market reach or larger market share
- To increase shareholder value
- To eliminate a competitor
- To gain economies of scale
- To diversify products or services
- To acquire new staff, customers, know-how or technology
- To enable the seller shareholders to exit
For more information see our article: How can mergers or acquisitions affect your company?
What is a buyout?
A buyout is where the management team or employees of a company become its owners by buying its shares, using borrowing to accomplish this. Where newco (the new company created during the merger) uses its assets as security for the loan, this is called a ‘leveraged buyout’.
What is a divestiture?
Divestiture is where newco gets rid of underperforming or unwanted parts of the business.
Divestitures can also be compulsory if newco is considered to be a monopoly.
What’s the difference between a merger and a joint venture (‘JV’)?
In a joint venture, two companies agree to work together for a specific project or period, but continue their individual businesses, as opposed to a merger where the companies’ businesses are combined.
What’s the importance of due diligence in mergers and acquisitions?
Before they commit to a deal, buyers need to understand:
- The state of the seller’s finances
- The seller’s strategic and commercial position
- The seller’s assets including IPR
- The seller’s legal position, including any disputes
- The extent of the seller’s contracts and their terms.
- The seller’s operations including their company structure
The process of acquiring this knowledge is known as ‘due diligence’
What is the City or Takeover Code?
The Takeover Code (also referred to as the City Code) regulates the takeover process for public UK companies and is designed to ensure that shareholders in an M&A transaction are treated fairly. It’s administered by the Takeover Panel.
To whom does the Takeover Code (City Code) apply?
It applies to all listed companies with their registered offices in the UK, the Channel Islands or the Isle of Man, and
unquoted public companies with their registered offices in those jurisdictions if the Takeover Panel believes that this is their place of central management and control.
The Takeover Code does not normally apply to private companies registered in the UK, the Channel Islands or the Isle of Man.
How does a merger affect shareholders?
Normally a merger leads to a higher share price, and if the merger is successful, increased dividends. The merging companies’ shareholders may initially have their voting power diluted due to the increased number of shares released during the merger process.
How does a merger affect employees?
All employees will usually transfer to newco after an M&A, on the same terms and conditions of employment. This is because of the Transfer of Undertakings (Protection of Employment) Regulations, known as TUPE. If the buyer aims to make efficiencies, redundancies often result over the long term. Mergers therefore inevitably create a degree of uncertainty for employees, and you’ll need to consult with them before the deal.
What restrictions might apply to a merger or acquisition?
Sometimes the shareholders of the target company will have special rights, and there may be restrictions on share transfer. In addition, there may be government-imposed restrictions in certain sensitive sectors such as defence, rail, financial services, energy and broadcasting/publications, and companies with large contracts with the public sector.
What are the different types of synergies in mergers and acquisitions?
Synergy is the potential benefit achieved through the combining of companies. Synergy can involve increased productivity, for example, more efficient use of technology or assets, improved customer access, or access to IPR. Alternatively, synergy can mean cost savings, such as shared technology costs, lower purchase costs, tax savings, R&D efficiencies and combining assets like premises.
What is a scheme of arrangement in mergers?
A scheme of arrangement is where a takeover takes place with the agreement of a majority of the target company’s shareholders with the approval of the High Court.
What’s the difference between a scheme of arrangement and a takeover offer?
There are some differences between a scheme of arrangement and a contractual takeover offer:
| Scheme of arrangement | Contractual takeover offer | |
| Flexibility | Less flexible than a takeover offer, as there’s a court-mandated timescale | The buyer has more control over the process and timescale |
| Ownership | If a scheme succeeds, the buyer will be sure of acquiring all the shares as the minority shareholders will be forced to sell (you need 75% consent to succeed) | The offeror will only get 100% of the target company if all shareholders agree (generally, there are situations where a buyer can force a sale) |
| Success rate of hostile bid | Unlikely if the target company’s shareholders are resistant | Possible but more difficult if the target’s shareholders are resistant |
| Effectiveness of stake-building | There’s no point in buying the target’s shares pre-sale, as these aren’t counted towards the 75% target ineffective to purchase shares in the target company in the | Shares owned before an offer can count towards reaching the required percentage to make the takeover effective |
| Control of the offer process | The target company and its directors control the timing and implementation (within the High Court timescales) | The buyer is in control as it is the one making the offer to shareholders, but it may take longer to reach 100% than under a scheme |
What is the mandatory bid rule in UK mergers?
The mandatory bid rule is where a potential buyer can be compelled to make an offer to the remaining shareholders of a target once they (the bidder) have acquired a certain percentage of the target’s shares.
What is a ‘squeeze out’ in mergers and acquisitions?
A ‘squeeze’ out in mergers and acquisitions is where a bidder can acquire the minority shares of a target if they’ve already successfully acquired 90% of the target’s shares (effectively, ‘squeezing them out’).
How do you identify a suitable target company for an acquisition?
Once you’ve identified your needs and budget, you’ll likely turn to a broker to help you find a target. Your choice will largely depend on your objectives (increased customers, access to technology, undervalued target for example).
How is a company valued for acquisition?
There are different ways to value a company. It’s best to consult an accountant, or, if the business is in a particularly niche market, a specialist valuer.
Here are the main valuation methods:
Debt free/cash free
This method values the company under the assumption that there’s no cash or debt in the target company at completion.
The benefit of this valuation is that it makes it easier for the seller to compare offers for the target company. However, this isn’t a popular valuation method for buyers since it doesn’t give a very accurate valuation of the business.
Net asset value
The net asset value (NAV) involves valuing the company using the balance sheet to determine a fair value of the net assets.
The buyer will want to confirm the NAV hasn’t changed since the last accounts, so they’ll do a second valuation after completion. To account for any difference in value, the parties usually agree a price adjustment using completion accounts.
Earning basis
The earning basis reflects the earning potential of the target company. This is common for companies where the net assets don’t reflect the company’s full worth – for example, it’s a start-up or early-stage business.
On an earning basis, the future projected earnings are multiplied by an appropriate multiplier (that is usually related to comparable companies).
Replacement cost
This method is based on the cost of replacing the target company. If the company’s value is its total assets, then this will be the purchase price. The buyer can ask the seller to sell at that price, or the buyer will create a competitor for the same cost.
The disadvantage of this method is that it’s hard to value people and ideas.
Comparative ratios
Comparative ratios involve using different ratios, such as ‘price-earnings ratio’ (calculated by dividing the company’s share price by its earnings per share) and ‘enterprise-value-to-sales ratio’ (compares the total value, as measured by enterprise value of the company, to its sales) to make a comparison between the target’s value and companies in the same industry.
This method allows a bidder to value a target accurately and at the same time get a view of its performance in comparison to competitors in the market.
Combination
You can also combine the above methods, but you should get professional advice to be sure you’re not over paying.
What are the tax consequences of a merger?
Stamp duty is normally payable on the sale of shares, as a percentage of the amount paid. In addition, a corporate seller will pay corporate tax on any increase in value of the shares sold.
For more answers to commonly asked questions and advice on mergers and acquisitions, consult our corporate solicitors. Get in touch on 0800 689 1700 , email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
