If you decide to sell your business and take some of the first steps to achieve this goal (including preparing for a merger and acquisition exit and negotiating a condition sheet), an important step is to determine the structure of the transaction. You may have heard the terms “merger,” “share purchase,” and “asset sale.” Below is a brief introduction and summary of some of the pros and cons of each of these types of transactions. However, keep in mind that this article does not cover tax issues that are complex and vary depending on the transaction (and in some cases may be the main driver of a transaction`s structure), so you should consult your lawyer on these issues. The content of a share purchase agreement depends on the complexity of the transaction. Nevertheless, there are some basic elements that each SPA contains: Advantages: As mentioned above, this is a very simple and straightforward transaction structure. There is no need to form a fusion submarine and, in many cases, this has no impact on the anti-divestiture provisions. If there are a small number of shareholders working in unison, this may be a preferred form of transaction. SPAs also contain detailed information about the buyer and seller. The agreement records all deposits made in the run-up to the negotiations and notes parts of the agreement that have already been completed. The agreement also specifies when the final sale is to take place. Vendor-side companies often begin strategic partnership processes with the goal of entering into a licensing agreement. A traditional licensing structure typically involves an upfront payment and downstream milestones and royalty payments as the licensed product progresses.
For a company with several products in the works, such an agreement often offers an important “hidden cash and”. Although licensing agreements are conventional, we advise sell-side clients to remain flexible in terms of transaction structure and consider trade-offs between an APA and a SPA. It is usually best for a buyer to enter into a licensing agreement for a single asset, as they can choose the desired product and are not responsible for the company`s liabilities. In addition, due to more favorable tax treatment, clear property rights, and easier internal buyback, the buyer may prefer an asset purchase approach. However, there are significant tax implications for corporate licensors who conduct APAs (and most biopharmaceutical companies are traditional C companies). First, the initial licence fee or purchase price is taxable income at the business level (and there may not be enough net operating losses to protect that income). In addition, a second tax bracket is triggered at the level of individual shareholders when these products are distributed (creating the dreaded “double taxation scenario”). For a single product company, this is a big problem and has a significant impact on the value realized.
In addition, the agreement for a purchase of securities is often just as complicated (and sometimes even more complicated) than in a SPA. As a rule, the seller drafts the first share purchase agreement. You upload the draft to the virtual data room towards the end of the second round. This follows several back and forth between lawyers for both sides. Legal due diligence is part of the due diligence phase preceding the submission of the firm offer. It is a comprehensive review of a company`s external and internal legal relationships. All essential contacts, such as supplier and customer agreements, employment contracts as well as ongoing disputes and litigation, are analysed in detail. The share purchase agreement is a legal document that defines the conditions under which the shares of a company are transferred. It distinguishes between the sale of all the shares of a company and the partial sale. There are at least two parties to this Agreement: a selling entity that owns the shares and a buying entity.
As a rule, shares are transferred against payment in cash. However, it is also possible to pay equity with shares, contributions in kind or media. In mergers and acquisitions, lawyers have two main tasks: the execution of legal due diligence and the drafting of purchase contracts. A high degree of detail and care is required in the design of the purchase contract. a single paragraph in the contract can tell the difference between a successful agreement and a failed agreement. The ideal scenario at this stage is an experienced consultant who has a proven track record in successfully drafting business sales contracts. In another example, a PPS is often needed in a transaction where one company acquires another. Since the SPA determines the exact nature of what is being bought and sold, the agreement may allow a company to sell its tangible assets to a buyer without selling the naming rights associated with the company.
Essentially, the company and investors/employees are looking for a clean exit. The advantages of such an approach are as follows: At Locust Walk, we have a team of dedicated specialists who have experience in managing licensing, APA and SPA and merger transactions and, as a registered broker-dealer, have the infrastructure and expertise to help companies of all sizes follow the path that offers the greatest value. Do not hesitate to contact me at firstname.lastname@example.org for a consultation. When you think about the first two options, there are some definite but noticeable differences between licensing or selling a single asset under a license or asset purchase agreement (APA) or selling your entire business under a share purchase or merger agreement (SPA). Teams that ignore these differences will likely do so at their own risk. If a corporation consists of several shareholders, there is usually a shareholders` agreement. These agreements set out the rights and obligations of shareholders. In most cases, they contain certain rights related to the resignation of a shareholder.
If this is the case, lawyers must take these rights into account in the share purchase agreement of the transaction. The first important area indicated in the document is the price and its corresponding conditions: payment methods, forecast or not of deferred payments, variable payments based on the achievement of objectives, currency of payment and circumstances that lead to price adjustments (since the final price is based on the balance at the closing date of the agreement). The contract also includes information if the excess cash is part of the transaction or will be taken by the seller as a dividend, although this is not necessary for that particular transaction. A purchase contract (SPA) is a legally binding contract between two parties that initiates a transaction between a buyer and a seller. SPAs are generally used for real estate transactions, but can be found in all areas of activity. The agreement concludes the terms of the sale and is the result of negotiations between the buyer and the seller. An important advantage of a merger is that it usually only requires the approval of the majority of the target company`s shareholders (subject to additional requirements in a target company`s organizational documents). This makes the merger a good choice (and often the only practical choice) if the target company has many shareholders or has shareholders against the transaction.
Under state law, shareholders of the target company who object to a transaction may have the right to object and exercise judgment rights in order to obtain the “fair value” of their shares as determined by a court. Most public company acquisitions are made through a merger. Depending on whether an acquisition is structured as an asset sale or a share sale (or merger), there will be significant differences in the transaction documents. A substantial part of a purchase agreement is used to identify the assets to be acquired and the liabilities to be assumed by the buyer. As a general rule, the buyer wants the asset purchase agreement to provide for the rejection of all obligations other than liabilities expressly assumed. If the provisions describing the assets acquired and the liabilities assumed are carefully drafted, the seller`s representations and warranties may be limited to focusing on the elements that affect or could affect those assets and liabilities. In addition to a purchase agreement, other sub-agreements are required to transfer assets from the seller to the buyer. This may include a purchase agreement, assignment and takeover agreements, assignments of intellectual property and requests for a change of name of the Company, as well as agreements providing for the hiring of the Company`s employees by the Buyer.
In the case of a sale of shares, the purchase agreement does not describe the specific assets and liabilities of the company to be acquired, as the full range of the company`s assets and liabilities is transferred to the buyer with the acquired company. Therefore, the representations and warranties in a seller-buyer share purchase agreement are generally increasingly broad, covering all aspects of the acquired company and the company`s historical operations. Although a share sale requires additional sub-agreements, often less is needed than an asset sale, and generally the number of third-party approvals required to complete the transaction is much lower. The share purchase agreement is often abbreviated to “SPA”. To avoid misunderstandings, it should be noted that the generic term “purchase agreement” is sometimes abbreviated to SPA. .