Different takeover types

Last modified:

Tuesday 7 September 2021

You have three main options if you want to buy a company:

  • Either you buy the shares in a company. Here we are talking about the "transfer of shares".
  • You buy the majority of the tangible and intangible assets. In this case, we are talking about a "transfer of assets".
  • Or you perform a merger-absorption. The absorbed company transfers all of their holdings to the other company: assets, liabilities, ongoing contracts, debts and negotiable securities, etc.

Each of these three options has different legal and fiscal consequences.

Share deal

  • By buying the shares of a company, the buyer also acquires all rights and obligations. The latter must be very cautious and conclude a sales contract offering a maximum number of guarantees.This may seem obvious, but legislation prohibits the purchase of a company’s shares being financed by the company itself.

  • The company changes ownership, but continues to exist in its current form.

  • All assets (licenses, permits, contracts, ...) will automatically be transferred (except in case of ‘change of control’ clauses), as well as all (contingent) liabilities, obligations and possible future claims.

  • The buyer will often conduct a due diligence in order to assess better the risks from the past.

  • A good share purchase agreement with comprehensive representations and warranties regarding the past of the company is often a necessity.

  • The seller will in principle not be taxed on any capital gains, if they fall within the scope of normal management of a private estate.

  • The price paid for the shares is not tax deductible for the buyer.

Asset deal

  • In asset transactions the transferee has the possibility to pick just some assets (e.g. machines or just the operational activities and not the real estate) and not the entire company (“cherry picking”).

  • The transfer of assets is not automatic and often some formal requirements must be observed in view of opposability towards third parties. This may also lead to additional costs (e.g. registration tax on property).

  • The other assets, liabilities, risks and potential claims remain with the seller (no surprises from the past).

  • In case of transfer of business, however, the social liabilities are transferred to the buyer (cao 32bis). As a buyer of a business, you can be held liable, together with the seller, for tax and social security debts up to the purchase price, unless the authorities provide a certificate stating that the seller has no social or tax debts. This fiscal certificate can be requested by sending a written request to SPF Finances, the direct tax administration.

  • The seller will basically pay tax on gains he realized from the sale of a business (offsetting with any tax loss carry forward is possible or spread taxation in case of reinvestment). If, after the transaction, the company that sold the assets would be liquidated (to stream up the sales proceeds), the liquidation tax also plays a role.

  • The buyer can depreciate the acquired assets, including goodwill under certain conditions. The buyer has as a tax benefit, albeit spread over time.

  • The possible tax disadvantage for the seller and tax advantage for the buyer is usually translated into a higher price for an asset deal compared to a share deal.

Summarized, both forms (asset deal or share deal) have their advantages and disadvantages. Depending on the specific context (e.g. environmental or other risks, non-operating real estate, necessary permits, ...) and negotiation between the seller and buyer there will be chosen for a sale of shares or of assets.

Merger by acquisition, consolidation or absorption

One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies.

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place.In practice, however, actual mergers of equals don't happen very often..

Varieties of Mergers

Mergers can be differentiated into various types depending on the following:

  • Integration Form: Mergers can be classified depending on how both the companies physically combine themselves in the transaction to form one entity.
    The mergers can be classified as follows on the basis of forms of integration:

    • Statutory Merger : a statutory merger is one in which all the assets and liabilities of the smaller company is acquired by the bigger (acquiring) company. As a result, the smaller target company loses its existence as a separate entity.

    • Subsidiary Merger : a subsidiary merger is one in which the target company becomes a subsidiary of the bigger acquiring company. This happens because the target company may have a known brand or a strong image which would make sense for the acquiring company to retain.

    • Consolidation Merger : a consolidation merger is one in which both the companies lose their identity as separate entities and become a part of a bigger new company. This is generally the case with both the companies being of the same size.

  • Relatedness of Business Activities: Mergers can be classified depending on how the business activities of both the companies relate to each other. The economic function and the purpose of the transaction define the types of mergers.

    • Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.

    • Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

    • Market-extension merger - Two companies that sell the same products in different markets.

    • Product-extension merger - Two companies selling different but related products in the same market.

    • Conglomeration - Two companies that have no common business areas.

A business combination gets complex not only with the legal issues but also with the type of a merger. A merger can vary according to the way companies come together or their economic functions. It is important to understand the type of merger to appreciate the intricacies involved. Before beginning the mergers and acquisitions sale process, it is best to decide if you wish to sell your business yourself or if you desire to have outside help. At the very least, get the help of competent legal counsel before you take the first step, and unless a buyer has approached you with an offer you can’t possibly say no to, find a competent mergers and acquisitions advisor to help find the best Merger & Acquisition buyers in the market.

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