[M&A Lounge] (2) M&A Types?
2020. 11. 10. TUE. Los Angeles, CA.
In Korea, LG Chem's physical division has become a topic. The division is stipulated after the merger under Korean Commercial Act, the merger regulations are applied in large, and there is a called the merger after division. So is the division one of the M&A types?
Last time, M&A was simply defined as paying for a new business. This is defined on the basis of M&A's external side. Also, M&A can be defined as a transaction to acquire control rights of company, and, in a broader sense, as all transactions that change the control rights, such as a division for a corporate restructuring, a merger between affiliates, and a joint venture between companies.
A brief look at these typical types of M&A is as follows:
1. Share Purchase
It’s the most common type of M&A. The control premium is considered when determining the transaction price because the shareholder with the control rights of the company becomes Seller. Buyer buys shares of Target company and take over the entire company. If you want to take over only separate businesses of the company, a company made of those businesses should be established before the share purchase, through a division, a business transfer, etc., and then purchase shares of the company. Contingent liabilities cannot be ruled out by taking over the entire company. However, the Buyer shall be held responsible for the limited amount of capital invested to the company in accordance with the principle of limited liability for shareholders. The procedure is relatively simple and does not affect the business of Target company much. However, the M&A transaction may trigger the change of control clause due to the change in control rights, and the change or reacquisition of permits, licenses may be required.
2. New shares issuance and subscription
The biggest feature is that the company (not the shareholder) acquires the consideration for the share issuance and subscription. The control premium may not be considered because the company is the Seller. It is mainly used when the company needs funds, i.e. when M&A or the largest shareholder gives up control rights due to bad financial situation of a company.
It takes over the entire Target company, which cannot rule out contingent liabilities. Basically, the procedures follow the procedures for issuing and subscription shares of the company. It is similar to stock purchase in the change or reacquisition of permits, etc. In some cases, share purchase and new shares issuance and subscription may happen at the same time, if necessary.
It is the process in which one company and other company become one company.
Especially in Korea, a control premium may not be considered because the merger ratio may not be changed by the largest shareholder. In order to merge only some of the company's businesses, the company has to be merged after establishing a company on some of its projects through a merger after division or business transfer before the merger. Contingent liabilities cannot be ruled out by taking over the entire company. The procedures are relatively complex and often conflict of interest, as the merger may require special resolutions of shareholders’ meeting, the appraisal right (the company buys shares of shareholders opposing the merger), and the creditor protection procedures, etc.
The issues related to the merger ratio can happens frequently.
The assets, liabilities and contract of the companies may be transferred without separate transfer procedures.
In terms of permits, it doesn’t have to acquire new permit if there is a succession provision in regulations, but, if not, new acquisitions or changes may be required.
4. Business Transfer
Seller is the company that owns the business, which is the subject of the transaction, and the control premium is not considered for the business transfer. A portion of the entire business may be transferred specifically and, more specifically, only some assets and liabilities may be transferred to exclude contingent liabilities. However, some liabilities related to environment, labor or tax may be not excluded.
The procedure is relatively complex. The business transfer may require special resolutions of shareholders' meetings, the appraisal right, etc. Not like the merger, it requires the subject (assets, liabilities, etc.) of the business transfer to be transferred by separate transfer procedures.
In terms of permits, most of them may be newly acquired. Therefore, it may happen that the buyer cannot do the business transferred by M&A by the time the business permit is issued.
By the way, is the division one of the M&A types?
A division is a procedure in which a particular business part of a company establishes a separate company, which is similar to other types of M&A, but there are some parts that differ significantly from other types of M&A because the division has no counter party and no transaction price. Actually, some M&A reports with legal league tables include the division as one of the M&A types, but some do not.
Based on my experience, I believe that the division has key role when it comes to the establishment of holding companies and corporate restructuring.
See you again at next Lounge.
I remember being frustrated at 4 a.m. by covering my head with still unresolved issues. Unfamiliar M&A terms, complex procedures, and contract contents like passwords. M&A, which can be called "general legal art," seems to start to be seen the whole picture only through a lot of experience and study. Therefore, M&A lawyers always have to study and continue learning. The following "M&A Lounge" is also part of that study and learning. I’d like to rearrange the numerous links in M&A by studying the terms and procedures of M&A.
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