1. INTRODUCTION
In the intricate world of acquisition deals, the journey forward is just as pivotal as the destination. The acquirer stands at a crossroads: Should they acquire the entire company or focus solely on its business assets? Each path brings its own set of questions: Which option yields greater benefits? How can taxes be optimized? And, perhaps most critically, what documents are essential to seal the deal? These decisions shape the foundation of a successful acquisition strategy, balancing financial efficiency with legal precision.
This article focuses on the modes of acquisition namely the acquisition of businesses and the acquisition of shares under its ambit. It brings out the salient features, advantages, and disadvantages of each method with respect to their implications among others, like legal, taxation, and regulation.
2. MODES OF ACQUISITIONS
Acquisitions have now found their way into the strategy of organizations as less strenuous avenues through which they can outgrow and effectively redirect corporate growth and development. Acquisitions can be motivated by various strategic objectives, including expanding market presence, accessing new technologies or product lines, achieving economies of scale, diversifying business operations, or other factors.
An acquisition refers to the process through which one company purchases another, thereby gaining control over its assets, operations, and often its liabilities. The acquisition encompasses two primary forms: business acquisition and share acquisition.
Business Acquisition:
In a business acquisition, also known as an asset purchase or business takeover, one company (the acquiring company or buyer) acquires the tangible and intangible assets or an undertaking of another company (the target company or seller). Depending on the type of transaction, the liabilities are also transferred to the Buyer, either as part of the acquisition or through special negotiation in the agreement. A business acquisition can be further categorized under slump sale and itemized sale, depending upon the way assets and liabilities are transferred in business acquisitions.
Acquisition by way of Itemized Sale
In an itemized sale, specific assets and liabilities of the target company are individually identified and transferred to the acquiring company allowing a more selective transfer of assets and liabilities, with the acquiring company having the flexibility to choose which assets and liabilities it wishes to acquire.
Acquisition by way of Slump Sale
Slump sale is defined under Section 2(42C) of the Income-tax Act, 1961 as “Transfer of one or more undertakings, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.” In a slump sale, all assets and liabilities of the business are transferred as a whole, without segregating individual assets and liabilities. An important requirement for a slump sale is that the transferred undertaking continues its operations seamlessly as a ‘going concern’. The buyer isn’t acquiring specific assets but rather the entire standalone business as a whole.
Share Acquisition:
In a share acquisition, also known as a stock purchase or equity acquisition, the acquiring company purchases a majority or all of the shares of the target company, thereby gaining ownership and control of the target company’s entire operations and assets. Share acquisitions often result in a change of control and ownership structure, with the acquiring company becoming the new owner of the target company. Share acquisition can further be classified into secondary purchases and share swaps.
Secondary Purchase
In a secondary purchase, an acquiring company buys shares directly from the shareholders of the target company, often in exchange for cash or other assets, allowing the acquiring company to gain control and ownership of the target company without involving the target company’s management or board of directors in the transaction.
Share Swap
In a share swap, one company acquires another by offering its own shares to the shareholders of the target company in exchange for their shares. It allows for the combination of two companies without the need for a significant cash outlay. Instead, the acquiring company issues new shares to the shareholders of the target company, effectively making them shareholders of the acquiring company.
3. REGULATORY FRAMEWORK
The legal framework governing acquisitions is a decisive factor for buyers and sellers as it will affect the structure, execution, and compliance of any transaction. The mode of acquisition determines the applicability of legal and regulatory requirements, influencing key aspects such as taxation, stamp duty, valuations, and the scope of due diligence. For instance, stamp duty is levied on the documentation associated with the transaction, with rates depending on the document and the state where the transaction takes place.
In addition, acquisitions are covered by a broad set of regulatory frameworks specific to the transaction including but not limited to tax obligations, securities and competition laws, antitrust regulations, intellectual property rights, environmental and zoning laws, employment and labour regulations, and compliance with sector-specific licensing requirements. If left unaddressed, they may expose the acquiring firm to significant legal, financial, and operational risks.
4. KEY BENEFITS AND CHALLENGES
| S. No. | Mode of Acquisition | Pros | Cons |
| i. | Itemized Sale | a) Selective acquisition of desired assets and liabilities.
b) Opportunity to exclude unwanted assets and liabilities. c) Easier to assign value to individual assets for accounting. |
a) Requires detailed asset valuation and negotiation.
b) May involve multiple transfer agreements for each asset. c) Transfer of contracts and licenses may be time-consuming. d) Applicability of Goods and Services Tax. |
| ii. | Slump Sale | a) Simpler transfer of the entire business with fewer legal implications.
b) Avoids the need for individual transfer of assets and contracts. c) It offers tax benefits related to capital gains and depreciation. |
a) Integrating operations, systems, and cultures of the acquired business.
b) Seller may have potential liabilities after the sale. c) Less flexibility in choosing specific assets and liabilities. |
| iii. | Secondary Purchase | a) Acquire the company as a going concern without the need for major restructuring.
b) Maintain continuity with existing management, employees, and operations. c) Gain significant control over the target company’s operations, strategy, and decision-making. d) Ensure the continuity of employees |
a) The buyer may inherit unforeseen liabilities or legal issues from the target company, including pending lawsuits, regulatory non-compliance, or unresolved tax obligations. |
| iv. | Share Swap | a) Eliminates the need for immediate cash payment, preserving liquidity.
b) Opportunity to leverage the combined strengths and resources of both companies. |
a) The acquirer may inherit unforeseen liabilities or legal issues from the target company, including pending lawsuits, regulatory non-compliance, or unresolved tax obligations. |
5. PREREQUISITE OF DUE DILIGENCE
The process of a company acquisition typically begins with due diligence, where the acquiring company conducts a comprehensive assessment of the target company’s financial, operational, legal, and regulatory standing. The process involves reviewing financial statements, contracts, intellectual property rights, litigation history, and other relevant documents to evaluate the risks and opportunities associated with the acquisition. Conducting thorough due diligence can help prevent any potential legal or regulatory issues that may arise post-acquisition, saving both time and resources in the long run.
Due diligence is a critical component that can significantly impact the success and outcomes of the transaction, by investing time and resources upfront to thoroughly assess the target company, the acquiring company can make more informed decisions, minimize risks, and maximize the value of the acquisition.
6. DRAFTING OF AGREEMENTS
It is pertinent to create legal boundaries and protections before any transaction, thus after completing due diligence, the next critical step is to draft the agreements that will define the terms and conditions of the acquisition. The type of agreements required will depend on the mode of acquisition and may include Share Purchase Agreements (SPAs), Shareholders’ Agreements (SHAs), Business Transfer Agreements (BTAs), Asset Purchase Agreements (APAs), and others. These agreements must comprehensively set out the closing conditions, rights and responsibilities of each party, along with key provisions such as representations and warranties, conditions precedent, indemnity clauses, and other essential terms. Well-structured agreements are vital for mitigating risks, clarifying expectations, drawing legal boundaries and ensuring the transaction is executed smoothly and is legally binding, providing security and clarity for all stakeholders involved.
7. CLOSING OF TRANSACTION/ACQUISITION
The process does not end with the execution of agreements; it is essential to follow up with the necessary filings with the relevant regulatory authorities to ensure compliance and legal validity. These filings may involve submissions to the Registrar of Companies (RoC), the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), or any other relevant authority, depending on the specifics of the acquisition. Ensuring that filings are both timely and accurate is important to avoid potential legal repercussions, penalties, or delays in the transaction.
8. CONCLUSION
In conclusion, the modes of acquisition in M&A transactions, whether through business acquisition or company acquisition, represent critical strategic decisions that can significantly impact the outcome and success of the deal. Each mode offers distinct advantages, challenges, and regulatory considerations for both buyers and sellers. Ultimately, selecting the most appropriate mode of acquisition requires careful consideration of the parties’ objectives, legal requirements, statutory cost, taxation and commercial realities. By prioritizing alignment, transparency, and compliance, companies can position themselves for successful M&A transactions that drive sustainable growth and value generation in the dynamic business landscape.
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Authors: Authored by Abhishek Bansal, Partner (abhishek.bansal@acumenjuris.com), Siddhi Anand, Principal Associate (aastha.chaudhry@acumenjuris.com) and Pulak Bansal, Associate (pulak.bansal@acumenjuris.com) who are associated with Acumen Juris. Acumen Juris is a premier law office with offices in Delhi and Gurugram. Specializing in Mergers & Acquisitions, Transaction Advisory, Corporate Commercial, Startup Advisory, Forensic Due Diligence, and Global Business Setup, the firm offers comprehensive legal services. Contact them at 0124-4239845, via email at info@acumenjuris.com, or visit their website at www.acumenjuris.com.
Disclaimer– This Article is for information purposes only, and the views stated herein are personal to the author, and shall not be rendered as any legal advice or opinion to any person, and accordingly, no legal opinion shall be rendered by implication. The Article does not intend to induce any person to omit, commit or act in any particular manner, and you should seek legal advice before you act on any information or view expressed herein. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this Article.
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