This article is written by Rohan Bishayee, practising corporate lawyer in the ASEAN with DFDL, Legal and Tax Services.

Mergers and acquisitions (“M&A”) and corporate restructuring is one of the most prevalent corporate finance activities of the twenty-first century. We often read about M&A transactions where smaller corporations consolidate and merge to form a larger corporation or get acquired by larger corporations.

While academically, in law school, we have a rough idea of what an M&A is and the theoretical framework of an M&A, the practical aspects of how a transaction is structured is not discussed in law school.

This article briefs the process of an M&A  deal, gives insights on clauses of a share purchase agreement and enumerates closing obligations which must be satisfied before getting through the deal.

Due-diligence phase

Once an M&A deal has been proposed, and the target is willing to negotiate a deal with the buyer, the first activity which the buyer conducts on the target is a due diligence. The due diligence on the target is conducted to ascertain the risks associated with the business and to check if the target has complied with legal, financial, accounting and technical compliances.

Before making a commitment to the transaction, the buyer ensures what it is buying and the obligations it is assuming. To be more particular, the buyer seeks information on the nature and extent of the target’s existing and contingent liabilities, general corporate matters which include the charter or constitution document of the corporation, material contractual hazards, employment or management issues, governmental regulations and filings, environmental issues (if any), insurances, litigation and insolvency risks, intellectual property related issues and other specific issues related to the business vertical. This is true especially if the target is a private company and has not been subject to a scrutiny of securities commissions, public markets and there is not much information on the company available from public sources.

The due diligence report gives an actual reflection of the position of the target and makes the buyer ascertain the potential risks of the transaction and leverages his purchase consideration.

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Share purchase phase

The buyer ascertains the potential risks of the transaction, negotiates and leverages with the target to structure a deal. The transfer of shares and an acquisition process enters into a formal agreement between the parties upon execution of a share purchase agreement. The share purchase agreement is a legal deal reflected through enabling provisions of the deed or agreement to give effect to the share transfer from the target to the buyer. The main purpose of a share purchase agreement is to effect the change in control of the acquired company’s business.

Some of the most important clauses in a share purchase agreement are the following:

• Purpose of the agreement including the share sale clause which definitively sets out the number and the percentage of shares that are going to be transferred.
• The sale price which is the purchase price to be paid by the buyer as consideration for the acquisition of the shares.  
• Undertakings, covenants and declarations which are a set of statements and assertions made by the seller guaranteeing the status and representation of the corporation whose shares are being sold. The inaccuracy and/or falsity of such statements ensues a corresponding obligation on the target to compensate for damages and/or losses caused to the buyer.
• Defaulting circumstances and liability regime which establishes the compensatory amounts due in the event of a possible breach.
• Closing obligations of the respective parties which must be met for the sale and purchase deal to be executed and respective sale shares to be transferred upon signing.
• Warranties, to secure compliance of obligations which are reflected in the agreement such as price retention or granting of bank guarantee.
• Miscellaneous clauses on confidentiality, statutory notifications, notices, assignments, waivers, partial disabilities, governing law, dispute resolution among others.

Signing and Closing phase

Post satisfactory completion of the due diligence phase, the share purchase agreement is executed by the parties; commonly referred to as ‘signing’. However, the finalization of the transaction does not materialize as there is no effective transfer of shares or the ownership of shares in favour of the buyer.

The foremost reason for this is because in most occasions the parties to the transaction agree to give effect to the transaction subject to a series of conditions which must be satisfied or achieved within a specific time frame before the closing of the deal. These would include conditions such as amendments to constitution documents which restrict share transfer, obtaining necessary corporate authorizations to enter into the transaction, prior approval and related administrative authorizations necessary for share transfer, the satisfaction of debts or pending obligations of the target, favourable resolutions passed in favour of share transfer, etc. Therefore, in operation of law, the signing resembles more of an ‘agreement to sell’ or a ‘promise to purchase’, subject to the satisfaction and achievement of the signing obligations and obligatory conditions.

Upon satisfactory fulfilment of conditions stipulated in the agreement, the agreement gains legal perspective and commences legal operation. Subject to jurisdictional qualifications and practices, the parties to the agreement appear before a public notary to restate their consent to the terms and conditions as specified in the agreement. Thereafter, payment of purchase price or sale share consideration takes place and there is a legal transfer and delivery (legal or constructive) of the sale shares takes place. This transfer fulfils and effectively transmits ownership over the sale shares to the buyer or acquirer and is termed as ‘closing’. This share transfer is reflected in a public document which serves for the purposes of evidencing the aforementioned transaction.

While signing is the consummation of execution of the agreement whereby the parties to the transaction give their due consent by affixing signatures, closing is the consummation or fulfilment of all obligatory conditions by the respective parties to ensure terms and conditions of the agreement are met and the legal transaction is completed.

Academically, the signing and closing may take place in the same time, however, in practice, there are very few situations where a deal would have no complexity and no condition to be taken care of by either party prior to the acquisition.

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