Key Aspects In M&A Transactions

One of the key aspects in M&A transactions is structuring to meet the commercial intent of the acquirer and seller. The acquirer and seller always have the same objective, but the perspectives may differ from a risk point of view. De-risking the transaction from the perspective of the acquirer and the seller to achieve the objective becomes key when structuring such transactions. The parameters tend to differ significantly depending on the nature of acquisition, as to whether it is an upfront full acquisition, acquisition in tranches or involves deferred consideration, some of which are discussed below.

Valuation: While a full acquisition may seem easy to structure, it does pose challenges on valuation. While the acquirer may be conservative with the projections, the seller could be quite optimistic. The valuation gap typically is resolved by a deferred consideration built in. 

In cross border transactions, foreign exchange regulations also play a key role in structuring as there are certain checks and balances to be ensured. There are thresholds on quantum of deferred consideration and the timing within which the payment will have to be fully made from the date of the transfer agreement. Also, the final consideration paid must comply with pricing norms. The way the valuation of the business will be computed is critical where deferred consideration is part of the structure since it could impact the acquisition price significantly. Necessary regulatory filings also must be completed for each tranche of payment.

In cases where acquisition is structured over a few tranches, the concerns of timelines and pricing otherwise applicable for deferred consideration structures may not apply in the same manner. The parties could agree that the valuation will be done separately for each tranche basis a pre- agreed methodology, and this can also achieve the intended purpose like a deferred consideration.

While assured return structures and optionality clauses are not ordinarily permitted in favour of non-resident parties, where the understanding is that the consideration will also meet the prevailing fair value even if higher than or equal to the first tranche valuation, it should not be of concern. 

Representations and warranties: In a full acquisition, the acquirer typically seeks extensive R&Ws to safeguard from any potential claims that may arise post closing. In part acquisitions, the acquirer would have the comfort that the seller is a continuing stakeholder in the company and there could be comparatively easier recourse should any claims arise. 

A key aspect is the tenure of the R&Ws – while these may typically get negotiated differently for full and part acquisition transactions, its common to have survival timelines that are specific for fundamental warranties, business warranties and tax warranties. 

R&W insurance is also becoming commonplace in transactions and many a times works as a middle ground, particularly where the acquirer would not want to rely solely on the seller for the full tenure when there could be claims pursuant to the R&Ws. That said, the fine print/ terms of coverage by the insurer requires careful examination to ensure that the claim will be settled and is not an excluded claim. 

Indemnities: One of the key factors that determine the quantum of indemnity is the findings of the due diligence. While an overall cover is not uncommon, there are also specific contractual indemnity matters, tax indemnity matters, ongoing and potential claims which determine the total extent to and the tenure during which indemnities can be claimed. These do not necessarily have to relate to the tenure of the representations and can be negotiated on a case to case basis.

In part acquisitions, while the acquirer may seek that the target company also be the indemnifying party for ease of recovering the loss suffered, grossing up may be sought to the extent of the acquirer’s stake. 

Escrow mechanism: Where the transaction is one which is initially a part acquisition, but will ultimately conclude as a full acquisition, parties typically prefer escrow mechanism to try and ensure that the closing is seamless. Cash escrows and document escrows are quite common, though cross border transactions have conditions attached much like in the case of deferred consideration.

Control vesting and remedies: In full acquisitions, the control would vest with the acquirer immediately on closing. However, when acquisition is in tranches or there is deferred consideration, there could be certain nuances. In the latter, the seller may seek some veto matters to be assured that the outstanding amounts are received as promised, and the valuation of the entity is retained until full pay out. In certain cases, the parties may also have put and call options/ tag and drag rights to ensure that the transaction is fully consummated as originally intended. 

Non-compete and non-solicit: It is common to impose non-compete on the selling shareholder where consideration includes goodwill. The non-compete term and territory would be critical, since this would directly impact the effectiveness/ enforceability of the non-compete. Non-solicit is also agreed by the seller to ensure the acquirer that the business can be carried on consistent with past practice in the foreseeable future.

Regulatory approvals and consents: Without doubt, the necessary regulatory approvals and consents are a pre-requisite to the transaction, including those arising due to change of control. Examining whether a particular transaction would trigger approvals under anti-trust/ competition law, foreign exchange laws, etc., and the timing of initiating these applications and pursuing the same to receive the approvals in a timely manner play a decisive part towards successful closing of a transaction.

In certain cases, the regulatory regime may not be quite clear. In all such cases including for matters that are specific to any transaction structure, it would be important to seek appropriate counsel while proceeding with such transactions.