Deciphering Acquisition Finance: Key Strategies and Approaches Volume I
This article will provide a detailed overview of Acquisition Finance, diving into the key aspects that drive the strategic decision-making process in the business law landscape. We’ll be exploring three primary types of acquisitions: asset acquisition, share acquisition, and amalgamation, each offering its unique benefits and considerations. Additionally, we will uncover the importance of the target company’s nature in determining the method of acquisition, offering insights into how this can affect the broader acquisition strategy. The comparison between buyouts and strategic acquisitions, two prominent tactics in business acquisitions, will further clarify the landscape, allowing you to make informed decisions in your business operations.
Methods of Acquisition
Asset Acquisition
In an asset acquisition, the purchasing entity acquires specific assets and liabilities outlined in the asset purchase agreement. Post-transaction, both the purchasing and selling corporations preserve their original corporate structures. However, the seller retains any assets not procured by the buyer and any liabilities not assumed by the purchaser. This type of acquisition often leads the selling corporation to change its corporate name.
Consider, for example, a technology company, TechABC, which is interested in another company, DevXYZ, for its proprietary software. TechABC can proceed with an asset acquisition, buying just the software and its related liabilities, leaving the rest of DevXYZ’s assets and liabilities untouched.
Share Acquisition
A share acquisition involves the buyer procuring the shares of the target corporation directly from the shareholders. By acquiring the target’s shares, the buyer indirectly assumes all of the target’s assets, rights, and liabilities, whether they are known or unknown. Following the transaction, the target corporation continues to exist but operates as a subsidiary of the purchasing entity. Frequently, the buyer employs a shell corporation to acquire the target’s shares. Upon or shortly after the acquisition, the shell corporation and the target amalgamate, continuing as a single corporation.
For example, imagine a conglomerate, BigCo, wanting to expand into the retail sector. BigCo might choose to buy all the shares of a thriving retail corporation, RetailInc. Upon acquisition, RetailInc becomes a subsidiary of BigCo, and BigCo indirectly acquires all of RetailInc’s assets and liabilities.
Amalgamation
Amalgamation refers to an acquisition where two corporations merge to form a single legal entity. The newly amalgamated corporation inherits all the assets, rights, and liabilities of each combining corporation by law. This process operates under the jurisdiction laws of the merging corporations, and the ways amalgamation can occur in an acquisition are varied:
Amalgamation Agreement
Think of an amalgamation agreement as a marriage between two companies. Each with their own distinct group of shareholders, they decide to join forces and become one unified entity. This agreement not only blends the two companies but also merges their shareholder groups into one.
For instance, let’s say Companies X and Y, both registered under the Canada Business Corporations Act (CBCA) or the Ontario Business Corporations Act (OBCA), agree to amalgamate. They would join forces to become Company XY, with the shareholders from Companies X and Y now all shareholders of the new Company XY.
Arrangement
An arrangement can be likened to a high-stakes chess game, often used for big-ticket transactions involving public corporations. It requires strategic planning and court approval. This method typically involves the merging (or “amalgamation”) of the company being acquired with the acquiring company, creating a new company with combined shareholders.
Imagine a situation where a large company, MegaCorp, wants to acquire a smaller public company, MiniCorp. They may choose to go through an arrangement, where MegaCorp and MiniCorp merge to form a new company, MegaMiniCorp. This new company has shareholders from both MegaCorp and MiniCorp.
Triangular Amalgamation
A triangular amalgamation works like a three-person relay race. Company A (the ultimate acquirer) first sets up a new company, Company B (a wholly-owned subsidiary), in the same jurisdiction where Company C (the target) operates. Company B and Company C then merge to form a new entity, which is fully owned by Company A. Meanwhile, Company C’s shareholders get shares in Company A.
For example, imagine TechGiant (Company A) wants to acquire innovative StartUp (Company C). To do this, TechGiant first sets up a new company, MergeCo (Company B), in StartUp’s jurisdiction. MergeCo and StartUp then join together to form MergeStart, which is a wholly-owned subsidiary of TechGiant, with the shareholders of MergeStart receiving shares in the capital of TechGiant. This strategy can help TechGiant insulate itself from any potential liabilities of StartUp.
Short-form Amalgamation
Think of ‘vertical’ short-form amalgamation as a parent company and its fully-owned ‘child’ company becoming one. It’s a strategy often used when buying shares because it allows balancing the cost of the acquisition (which is tax-deductible) with the income of the bought company, providing tax benefits. Also, it ensures the investment made to acquire the target’s shares can be returned to shareholders tax-free.
In contrast, ‘horizontal’ short-form amalgamation is like siblings (two companies owned by the same parent) merging into a single company. Both types of amalgamations offer unique advantages and are chosen depending on the specific goals of the acquisition.
Deciding on the Right Method of Acquisition
Choosing the right approach to business acquisition is akin to piecing together a complex puzzle – a range of elements like tax considerations, liability concerns, management matters, statutory needs, and the consent of third parties all play a role. Let’s examine the three main acquisition strategies: share acquisition, asset acquisition, and amalgamation.
Share Acquisition: Simple and Straightforward
Share acquisitions are often the path of least resistance. In this scenario, both parties agree on a share purchase agreement, the terms are laid out, and the vendors transfer their shares to the buyer. It’s a smooth process, typically devoid of contractual complications unless a change of control clauses comes into play, which might impede the acquisition.
Asset Acquisition: Precision and Preparation
Asset acquisition, on the other hand, requires meticulous planning. The buyer essentially handpicks the assets and liabilities they want to acquire from the target business. This approach often results in fewer inherited liabilities, unless there’s a direct assumption of liabilities, an intent to deceive creditors, or certain employment, pension, or environmental liabilities that follow the business.
However, this method is not without its hurdles. Each separate asset and liability necessitates its own transfer, requiring more third-party consents due to the presence of anti-assignment clauses in certain contracts involved in the acquisition.
Amalgamation: A United Front
Amalgamation, the act of merging two entities into one, requires the green light from the target company’s shareholders. Interestingly, this approval rate is lower than the 100% consent needed in a share acquisition, offering an easier path to gaining control.
Specifically, section 194 of the Canada Business Corporations Act (CBCA) permits the squeezing out of minority shareholders of a private corporation with a simple majority approval.
Amalgamation or arrangement transactions may be the optimal choice for buyers intending to acquire a fully-functioning entity with many shareholders, especially when some minority shareholders may not want to sell their shares. However, in both amalgamations and share acquisitions, the law requires the purchaser to assume all of the target corporation’s assets, rights, and liabilities, whether disclosed or not.
Understanding the Acquisition Target and Buyer
Public vs Private Target Corporation
The acquisition target can either be a public or private corporation. Unlike a private corporation, a public corporation usually has multiple shareholders, lists its securities on a stock exchange, and is obligated to disclose the financial performance and file reports as per securities laws.
The acquisition of a public corporation is a bit more complex. It can be done by:
- Making a takeover bid to the shareholders, offering to buy their shares. If the bidder acquires at least 90% of the shares, the bidder can invoke the compulsory acquisition provisions of the target’s corporate statute (such as section 206 of the CBCA and section 188 of the OBCA) to acquire the remaining shares.
- Amalgamating the public corporation with a special purpose acquisition company under a plan of arrangement, which requires at least two-thirds of shareholder votes.
Securing financing for public corporation acquisitions typically takes longer than for private acquisitions, due to the need to comply with various securities laws and gain shareholder approval.
Strategic vs Financial Buyers
Buyers can be strategic purchasers or financial purchasers.
Strategic buyers acquire businesses to enhance their own operations and usually intend to retain the business long-term.
Financial buyers, such as private equity funds, often acquire businesses with the goal of reselling for profit after medium-term ownership (typically 5-7 years). This usually involves streamlining the target business’s operations to add value.
Going Private and Private Equity Transactions
In a ‘going private’ transaction, a public corporation becomes a private corporation. These transactions can involve either a strategic purchaser or a financial purchaser and are often structured as arrangements, while private corporation acquisitions are commonly structured as asset or share acquisitions.
In a typical private equity transaction, the buyer (also referred to as the sponsor) arranges financing from a financial institution and contributes additional equity to fund the acquisition. The sponsor typically forms a shell corporation to purchase the target. This shell corporation often acts as the borrower under the loan agreement, with the target corporation guaranteeing the loan and providing collateral security on its assets.
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Disclaimer
The content provided in this article or blog is for informational purposes only. It is not intended to constitute legal advice or to replace the advice of a qualified legal professional. While we strive to provide accurate and current information, the law is complex and constantly changing, and each person’s circumstances are unique. Therefore, you should not rely on this information as a substitute for professional legal advice. This information does not create an attorney-client relationship between you and our law firm. We strongly recommend that you consult with a qualified attorney in your jurisdiction to understand your legal rights and obligations. Always seek legal advice before making any decisions that may impact your legal rights or obligations.
