Legal Aspects of Mergers and Acquisitions in Business - Research Paper Example

Task: Mergers and Acquisitions It is imperative to that mergers and acquisitions symbolize the vital change for a business (Gole & Morris, 114). However, no other event seems difficult, complex, or chaotic as the process. In the present competitive environment, mergers are the surest means for long-term growth. Moreover, the majority of the entrepreneurs no longer set up companies for long-term objectives. This means that they set up companies for the short-term objectives hoping to sell the company for vast profits. It is worth denoting that mergers and acquisitions are still a dominant growth strategy for companies globally. This is partly due to pressure from prime stakeholders heedful in their pursuit of high shareholder values. This paper focuses on the acquisition of three distinct entities and the effects on operational processes. Acquisition of Smith Bicycle Company If ABC wants to acquire Smith Bicycle Company, a private seller, it is vital to consider the two ways of acquiring the company. The first way of acquiring the business is by buying shares in the company that owns the business (Gole & Morris, 115). The second way of acquiring the company is through purchasing the assets of the company, which comprises the business. It is imperative to state that in this situation, the company is the seller, and it will thereby sell some or the entire assets to the buyer. It is worth denoting that share sales structure the majority of the acquisitions. A variety of factors may affect the structure used. Occasionally, it is vital to restructure the business or company before its sale in order to allow for proper acquisition. In the case of Smith Company, it is imperative to state that tax implications tremendously determine the structure of a transaction for both the buyer and sellers. Their interests may conflict particularly when achieving the vast beneficial tax outcome. Moreover, where sellers are individuals, there is likelihood that the sellers will favor a share sale in order to circumvent a latent double tax charge (Gole & Morris, 116). This tax charge comprises of an initial tax charge on the company during the sale of assets to the buyer, and an additional tax charge on the shareholders of the company, when they pull out the sale profits from the company. Since tax immensely proves as a critical determining factor towards the structure of a deal, it is vital for the buyer and seller to obtain specialist tax advice. Based on share sale, the buyer acquires the company together with all its “assets, liabilities, and obligations” (Gole & Morris, 118). This offers the sellers a suitable break, as after the sale of the company, they will cease to have direct conscientiousness for the company. The buyer will thus owe any prevailing liability under the terms of warranties and indemnities agreed upon in the sale and purchase agreement. Based on business sale, there is only acquisition of assets and liabilities purchased by the buyer, implying that everything else remains with the company (Gole & Morris, 118). If the buyer suspects of unknown liabilities within the company, or troubled by any business aspect, the buyer prefers to structure the deal as business sale. It is worth denoting that there exist more realistic and marketable issues to assert with on a business sale other than on share sale. Based on share sale, there is only transfer of ownership of the company shares. It is imperative to state that while there is a change on the shareholders of the company, the assets that are inclusive of business contracts and licenses remain with the company. From the outside, there is minimal change as customers and suppliers will continue dealing with the company. However, certain contracts such as financing contracts in conjunction to other long-term agreements at times require the consent of the other party after planning of change of company’s ownership (Gole & Morris, 120). It is critical to identify such contracts earlier in the acquisition process. Based on business sale, the assets and contracts of the entity under sale ought to move to the buyer (Gole & Morris, 122). However, it requires the consent of parties such as customers, suppliers, and licensors. It is a prerequisite to transfer contracts, agreements, and intellectual property rights formally. In addition, there is the likelihood of enormous disruption of the business compared to share sale. Therefore, the buyer needs to build assurance with customers and suppliers of the entity, in order to maintain prevailing trading relationships (Gole & Morris, 122). It is imperative to state that on a business sale, the employees will routinely transfer to the buyer based on their present terms of employment, implying that the buyer becomes the new employer. It is vital for the buyer and seller to know that they have precise obligations to inform employees, concerning the acquisition plans thus necessitating employees’ consultation before sale completion. However, on share sale it is vital to note that there is no employer change implying that the employees remain employed by the target company. It is imperative to state that buyers and sellers need to ensure that they are sentient of pension implications when buying or selling a target company. Acquisition of Audi Company Based on Audi, a larger private seller, it is critical to consider due diligence before acquisition. It is imperative to say that due diligence is a detail and extensive evaluation of the potential merger. It needs to be broad and deep since the management relies on the establishment of synergy values (Gole & Morris, 125). Since due diligence happens to be a complex undertaking, the ABC management needs to enlist the best people inclusive of outside experts such as investment bankers, auditors and valuation specialist. Moreover, due diligence needs to be aggressive, thus collecting a lot of information concerning the target company. It may require undercover work. The management may send individuals with false identities in order to confirm prime issues. Some of this information includes corporate records, financial records, and tax records (Gole & Morris, 127). The financial records give information such as financial statements for the past few years. The tax records show information such as local tax returns for the past years. It is worth denoting that when a consumer purchases goods or services, the law implies certain conditions, such as satisfactory quality and durability of the goods. However, when ABC acquires Audi shares, there is no implication of such conditions. Therefore, it is imperative to say that a buyer will want to gather substantial information concerning the company in order to understand its operations. Therefore, due diligence is a systematic assessment of the state of the company under acquisition (Gole & Morris, 128). This information is beneficial to the buyer in various ways. The buyer has the capacity of evaluating the weakness of the company, and thus decides on whether to progress with the purchase. In addition, this information will assist the buyer in establishing the precise price, and the strength of bargaining position. This information will still aid the buyer in identifying areas where the company needs protection in the contractual credentials through warranties and indemnities. Acquisition of Public Storage In case of acquisition of public storage, a public seller, it is critical to consider warranties and the necessary documentation for the process of acquisition. It is worth denoting that warranties serve as assurances pertaining to the target company, in this case being Audi Company. In order to protect the buyer from liabilities that may thrive in the company, it is a prerequisite for sellers to give substantial warranties covering all facets of the company under acquisition (Gole & Morris, 130). However, there are various documents needed to make this acquisition a reality. One of the documents is a head of terms. This document clearly outlines the prime commercial terms of the alleged acquisition. Although this document does not bind the transaction legally, it sets the transaction tone. Once agreed upon, it is impossible from a negotiation perspective for one party to go back on a point comprised in this document without a precise reason. There is also inclusion of specific clauses relating to discretion and exceptionality that becomes contractually binding. Another document involved is the confidentiality agreement. It clearly stipulates that the buyer should not reveal any secret information received relating to the target company during the process of negotiation (Gole & Morris, 131). The prime contractual document that comprises of the detailed terms of the sale and purchase is the sale and purchase agreement, drafted by the buyer’s lawyers. This document prescribes on the manner of meeting the purchase price in conjunction to the mode of payments. It also outlines warranties and indemnities in addition to other matters including limitations on the liability of the seller. It is worth concluding that there are copious reasons for acquisition such as increasing market share. However, the ultimate reason behind acquisition is to generate synergy values. Works Cited Gole, William, & Morris, Joseph. Mergers and acquisitions: business strategies for accountants. New York, NY: John Wiley and Sons, 2007. Print. Read More