Different Methods of Completing Acquisitions M&A Basics Series - Article 5
Acquisitions of another business can be accomplished by a variety of means – asset purchase, share purchase, hybrid transaction, amalgamation, plan of arrangement, take-over bid, etc. And, as discussed in my “Insight” from April 18, 2017, the basic issues and risk allocations dealt with in the governing purchase agreement are common amongst all of these types of acquisition. This “Insight” will briefly discuss when it is appropriate to use each of the different acquisition types to complete a given transaction.
Buyers typically prefer asset purchases. Contrary to a share purchase where the buyer acquires the entire corporation and the acquired corporation therefore maintains all of its pre-tax assets and liabilities, an asset purchase allows the buyer to only purchase the assets that it wants to purchase and avoid the liabilities, including the currently unknown or hidden liabilities, that it wants to avoid as they remain with the selling corporation.
Asset purchases are also typically more tax advantageous to buyers. In a share purchase, the underlying assets remain with the acquired corporation and therefore maintain the cost base that the acquired corporation had in the assets. However, in an asset purchase the cost base of the acquired assets usually rises to a level comparable to the purchase price paid by the buyer.
Sellers typically prefer share purchases. Share sales are typically more tax advantageous for sellers (i.e. the seller may be able to utilize lifetime capital gains exemptions, the selling corporation may avoid transfer taxes on real property, etc.). Also, if the selling corporation sells the assets of the company, the selling company’s shareholder will be left with a corporate shell to deal with and potentially orphaned assets.
However, for simplicity, buyers may also prefer a share purchase to gain comfort that they are acquiring everything they want and need to acquire subject to the caveat that they are also comfortable that they can quantify, or appropriately risk adjust, for the known and unknown liabilities associated with the business to be acquired.
While the Canada Revenue Agency has changed the rules in the last couple of years to make these transactions less available than they used to be, where appropriate, parties can enter in a staged hybrid transaction to give the seller the tax-related advantages of a share purchase and the buyer the tax-related advantages of an asset purchase.
Amalgamations are used to effect the combination of two or more businesses where at least one has a number of shareholders that makes the execution of a share purchase agreement by all shareholders, and the consummation of the transaction amongst the companies involved and all of the affected shareholders, impracticable. An amalgamation allows two or more companies to merge at a specific date and time on specific terms provided that each company has received the requisite shareholder approval at a meeting of shareholders (66 and 2/3% of those that vote).
Plans of Arrangement
Plans of Arrangement are used when it is impracticable to effect the transaction by any other means including by way of an amalgamation or a take-over bid. Note that impracticable is a fairly low threshold and does not mean impossible. Arrangements are often used to implement multi-step transactions that cannot be effected in a simple amalgamation or share purchase agreement. They are also used in transactions involving shareholders in the United States as there is an exemption from the registration requirements of US securities law for securities issued in connection with plans of arrangement approved by a Canadian court. Arrangements require both shareholder approval at a meeting of shareholders (66 and 2/3% of those that vote) and court approval after a finding from the court that the transaction is fair and reasonable to those affected.
A buyer can also make an offer to buy the shares of another company from its shareholders, such offer being open for acceptance for a specified period of time and subject to conditions (i.e. the buyer will not have to acquire the target company shares unless a minimum number of shares are tendered pursuant to the bid). A bid supported by management is usually subject to an “acquisition agreement” and is referred to as a “friendly bid”. A bid not supported by management is referred to as a “hostile bid” and is done without agreement between the two affected companies.
Buyers may choose to make a take-over bid where (i) they do not need to acquire 100% of the target company shares, or at least do need to acquire 100% of the shares on the first closing, in order to proceed with the acquisition, (ii) they want to complete the acquisition faster than they otherwise could via amalgamation or plan of arrangement (i.e. a friendly take-over bid can be done in as few as 35 days whereas amalgamations and plans of arrangement of public companies take a minimum of 45-60 days to hold), and/or (iii) they do not want the transaction to be subject to the risk of either shareholder approval at a meeting of shareholders (66 and 2/3% of those that vote) or court approval.
Invitation for Discussion:
At Shea Nerland LLP, we have a wealth of experience as legal advisors on M&A transactions, both large and small, and understand the process from beginning to end. If you are contemplating buying or selling a business, please do not hesitate to contact one of the lawyers in our business law group. We would be happy to assist you on this exciting journey.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.